UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 1994
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from N/A to N/A
Commission file number: 1-10242
KEMPER CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 36-6169781
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
</TABLE>
<TABLE>
<S> <C>
One Kemper Drive
Long Grove, Illinois 60049-0001
(Address of principal executive offices) (Zip Code)
</TABLE>
708-320-4700
(Registrant's telephone number, including area code)
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 the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
As of August 1, 1994, 33,674,552 shares of Kemper Corporation Common Stock,
$5 par value, were outstanding.
Sequentially numbered page 1 of 103 pages (including exhibits)
Exhibit Index on page 41
KEMPER CORPORATION
SECOND-QUARTER 1994
FORM 10-Q
<TABLE>
<CAPTION>
PART I. FINANCIAL STATEMENTS Page
----
<S> <C>
Consolidated Balance Sheet -
June 30, 1994 and December 31, 1993.......................... 3
Consolidated Statement of Operations -
Three months and six months ended June 30, 1994 and 1993..... 4
Consolidated Statement of Cash Flows -
Six months ended June 30, 1994 and 1993...................... 5
Notes to Consolidated Financial Statements...................... 6
Management's Discussion and Analysis -
Results of Operations and Financial Condition................ 9
Investments (continuing operations).......................... 24
Liquidity and Capital Resources.............................. 35
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings..................................... 39
ITEM 5. Other Information..................................... 39
ITEM 6. Exhibits and Reports on Form 8-K...................... 41
Signatures...................................................... 42
Exhibit 10...................................................... 43
</TABLE>
- 2 -
KEMPER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
June 30 December 31
1994 1993
----------- -----------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities available for sale, at market
(cost 1994, $5,503,400; 1993, $5,147,592) $ 5,268,144 $ 5,333,175
Equity securities, at market (cost 1994, $29,526; 1993, $53,366) 34,112 98,968
Short-term investments 431,787 713,401
Joint venture mortgage loans 936,407 1,053,403
Third-party mortgage loans 155,423 153,880
Other real estate-related investments 278,910 272,188
Other loans and investments 444,843 446,717
----------- -----------
Total investments 7,549,626 8,071,732
Cash (restricted 1994, $5,972; 1993, $470) 210,934 253,105
Securities purchased under resale agreements 180,010 204,467
Securities held by brokerage firm subsidiaries, at market 203,414 285,695
Accounts receivable from brokerage firms and customers 832,937 776,971
Other accounts and notes receivable 627,575 617,458
Reinsurance recoverable 801,453 835,975
Deferred insurance acquisition costs 643,771 622,592
Deferred investment product sales costs 181,806 186,931
Other assets 291,639 299,543
Assets of separate accounts 1,826,535 1,883,656
----------- -----------
Total assets $13,349,700 $14,038,125
=========== ===========
LIABILITIES
Life policy benefits $ 8,095,793 $ 8,216,762
Securities sold under repurchase agreements 152,501 181,879
Securities sold, not yet purchased, at market 68,233 77,023
Accounts payable to brokerage firms and customers 333,524 354,998
Other accounts payable and liabilities 723,111 915,954
Notes payable 394,226 349,237
Long-term debt 390,987 393,978
Convertible debentures of subsidiary 40,555 45,651
Liabilities of separate accounts 1,826,535 1,883,656
----------- -----------
Total liabilities 12,025,465 12,419,138
----------- -----------
Commitments and contingent liabilities
STOCKHOLDERS' EQUITY
Preferred stock-no par value (outstanding 1994, 6,686,517; 1993, 6,690,637 shares) 360,497 360,600
Common stock-$5.00 par value (issued 1994, 65,210,992; 1993, 64,620,863 shares) 326,055 323,104
Additional paid-in capital 335,486 313,531
Unrealized loss on foreign currency translations (44,217) (56,878)
Unrealized gain (loss) on investments (231,023) 155,004
Retained earnings 1,600,055 1,549,580
Treasury shares, at cost (1994, 31,612,874; 1993, 31,717,505 shares) (1,022,618) (1,025,954)
----------- -----------
Total stockholders' equity 1,324,235 1,618,987
----------- -----------
Total liabilities and stockholders' equity $13,349,700 $14,038,125
=========== ===========
<F1>
See accompanying notes to consolidated financial statements.
</TABLE>
- 3 -
<TABLE>
<CAPTION>
KEMPER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Six Months Ended Three Months Ended
June 30 June 30
-------------------- ------------------
1994 1993 1994 1993
-------- -------- ------- ------
<S> <C> <C> <C> <C>
Revenue
Asset management income $234,724 $248,147 $113,504 $126,805
Net investment income 222,602 214,469 113,428 107,709
Insurance premium income 75,170 75,213 38,268 41,295
Securities brokerage income 267,408 325,348 124,541 157,701
Realized investment gain (loss) 24,752 (96,526) (4,643) (62,279)
Other income 49,531 37,539 22,831 13,802
-------- -------- -------- --------
Total 874,187 804,190 407,929 385,033
-------- -------- -------- --------
Benefits and expenses
Asset management expenses 132,972 143,150 64,867 70,703
Amortized investment product sales costs 27,495 22,548 14,593 11,268
Insurance claim costs and policyholder benefits 236,285 264,290 116,835 132,750
Amortized policy acquisition costs 40,718 28,889 21,528 13,849
Securities brokerage expenses 259,127 323,289 123,277 172,062
Interest expense 37,651 37,128 19,195 18,618
Other expenses 20,904 25,271 15,606 8,260
-------- -------- -------- --------
Total 755,152 844,565 372,989 427,510
-------- -------- -------- --------
Earnings (loss) from continuing operations before income tax 119,035 (40,375) 34,940 (42,477)
-------- -------- -------- --------
Income tax (benefit)
Current 38,448 58,070 4,938 43,587
Deferred 5,500 (68,830) 9,218 (61,415)
-------- -------- -------- --------
Total income tax (benefit) 43,948 (10,760) 14,156 (17,828)
-------- -------- -------- --------
Income (loss) from continuing operations 75,087 (29,615) 20,784 (24,649)
Income (loss) from discontinued operations, net of tax - 12,709 - (1,926)
Gain on sales of discontinued operations, net of tax 2,477 - - -
-------- -------- -------- --------
Income (loss) before cumulative effect of a change in
accounting principle 77,564 (16,906) 20,784 (26,575)
Cumulative effect of a change in accounting principle, net of tax - 2,545 - -
-------- -------- -------- --------
Net income (loss) $ 77,564 $(14,361) $ 20,784 $(26,575)
======== ======== ======== ========
Net income (loss) applicable to common stockholders $ 65,775 $(21,259) $ 14,877 $(31,099)
======== ======== ======== ========
Net income (loss) per share:
Primary
Income (loss) from continuing operations $ 1.86 $ (.74) $ .43 $ (.59)
Income (loss) from discontinued operations .07 .26 - (.04)
-------- -------- -------- --------
Income (loss) before cumulative effect of a change in
accounting principle 1.93 (.48) .43 (.63)
Cumulative effect of a change in accounting principle, net of tax - .05 - -
-------- -------- -------- --------
Net income (loss) per share $ 1.93 $ (.43) $ .43 $ (.63)
======== ======== ======== ========
Fully diluted
Income (loss) from continuing operations $ 1.78 $ (.74) $ .43 $ (.59)
Income (loss) from discontinued operations .06 .26 - (.04)
-------- -------- -------- --------
Income (loss) before cumulative effect of a change in
accounting principle 1.84 (.48) .43 (.63)
Cumulative effect of a change in accounting principle, net of tax - .05 - -
-------- -------- -------- --------
Net income (loss) per share $ 1.84 $ (.43) $ .43 $ (.63)
======== ======== ======== ========
Cash dividends declared per common share $ .46 $ .46 $ .23 $ .23
======== ======== ======== ========
Cash dividends paid per common share $ .46 $ .46 $ .23 $ .23
======== ======== ======== ========
<F1>
See accompanying notes to consolidated financial statements.
</TABLE>
- 4 -
KEMPER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30
------------------------
1994 1993
--------- --------
<S> <C> <C>
Cash flows from operating activi
Net Income (loss) $ 77,564 $ (14,361)
Reconcilement of net income (loss) to net cash provided:
Realized investment (gain) loss (24,752) 96,526
Gains from sales of discontinued operations (2,478) -
Life policy benefits 183,662 177,421
Accounts payable to brokerage firms and customers (21,474) (220,020)
Deferred federal income tax 78,242 (77,341)
Brokerage firm portfolios 68,570 (36,114)
Accounts receivable from brokerage firms and customers (55,966) 11,243
Deferred insurance acquisition costs (21,179) (19,887)
Deferred investment product sales costs 5,125 (19,653)
Amortization on investments 30,359 448
Other accounts and notes receivable (34,021) 25,930
Other accounts payable and liabilities (112,854) 82,160
Equity income from affiliates 26,775 41,949
Other (19,369) 21,676
----------- ----------
Net cash provided from operating activities 178,204 69,977
----------- ----------
Cash flows from investing activities
Cash from investments sold or matured:
Fixed maturities held to maturity 59,248 98,907
Fixed maturities sold prior to maturity 681,718 1,548,368
Equity securities 63,042 12,027
Mortgage loans, other loans and investments 346,139 151,115
Cost of investments purchased:
Fixed maturities (1,104,975) (1,407,769)
Equity securities (384) (4,545)
Mortgage loans, other loans and investments (204,566) (257,333)
Short-term investments, net 287,384 (284,879)
Net receivable for securities transactions (32,782) (302,009)
Other (51,360) (526)
----------- ----------
Net cash provided from (used in) investing activities 43,464 (446,644)
----------- ----------
Cash flows from financing activities
Policyholder account balances:
Deposits 202,767 228,749
Withdrawals (472,876) (349,345)
Issuance of long-term debt - 1,250
Reduction of long-term debt (905) (1,807)
Issuance of preferred stock - 251,920
Treasury shares acquired (109) (1,022)
Dividends paid to stockholders (27,088) (29,658)
Notes payable, net 42,903 149,616
Other (8,531) 60,647
----------- ----------
Net cash provided from (used in) financing activities (263,839) 310,350
----------- ----------
Net decrease in cash (42,171) (66,317)
Cash, beginning of period 253,105 246,040
----------- ----------
Cash, end of period $ 210,934 $ 179,723
=========== ==========
<F1>
See accompanying notes to consolidated financial statements.
</TABLE>
- 5 -
KEMPER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. In the opinion of management, all necessary adjustments consisting of
normal recurring accruals have been made for a fair statement of
operations for the periods included in these financial statements.
These financial statements should be read in conjunction with the
financial statements and related notes in the 1993 Annual Report.
Certain reclassifications have been made in these financial statements
for 1993 to conform to the 1994 presentation.
2. Net income (loss) per share is based on the weighted average number of
common shares and common share equivalents outstanding during the
periods. Net income (loss) per share reflects the effect of employee
interests in Kemper Financial Companies, Inc. on a fully converted
basis. The calculation of primary net income (loss) per share is as
follows:
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30 June 30
---------------- ------------------
(in thousands, except per share data) 1994 1993 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) reported $77,564 $(14,361) $20,784 $(26,575)
Add back:
Dividends on redeemable securities of subsidiary * * * *
Interest and amortization expense on convertible
debentures of subsidiary, net of tax * * * *
Deduct:
Employee interests in subsidiary, assuming full conversion * * * *
Dividends on preferred stock 11,789 6,898 5,907 4,524
------- -------- ------- --------
Total $65,775 $(21,259) $14,877 $(31,099)
======= ======== ======= ========
Average common and equivalent shares outstanding 34,068 49,538 34,510 49,670
======= ======== ======= ========
Net income (loss) per share $ 1.93 $ (0.43) $ 0.43 $ (0.63)
======= ======== ======= ========
</TABLE>
The calculation of net income per share on a fully diluted basis is as
follows:
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30 June 30
---------------- ------------------
(in thousands, except per share data) 1994 1993 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) reported $77,564 $(14,361) $20,784 $(26,575)
Add back:
Dividends on redeemable securities of subsidiary * * * *
Interest and amortization expense on convertible
debentures of subsidiary, net of tax * * * *
Deduct:
Employee interests in subsidiary, assuming full conversion * * * *
Dividends on preferred stock 4,375 6,898 2,187 4,524
------- -------- ------- --------
Total $73,189 $(21,259) $18,597 $(31,099)
======= ======== ======= ========
Average common and equivalent shares outstanding 39,776 51,348 39,918 53,271
======= ======== ======= ========
Net income (loss) per share $ 1.84 $ ** $ ** $ **
======= ======== ======= ========
<F1>
* The effect of employee interests in Kemper Financial Companies, Inc. is anti-dilutive for the period;
accordingly, net income is not adjusted.
<F2>
** Net income (loss) per share on a fully diluted basis is anti-dilutive; accordingly, net income
per share is not adjusted.
</TABLE>
- 6 -
3. Certain accounts receivable are stated less an allowance for doubtful
accounts of $19.0 million at June 30, 1994.
4. The unrealized gains (losses), net of applicable taxes, on fixed
maturity investments and equity securities not reflected in net income
were $(386.0) million and $129.6 million for the six months ended June
30, 1994 and 1993, respectively.
5. At June 30, 1994, there were 20 million authorized shares of preferred
stock with 19.9 thousand shares of Series A Cumulative Convertible
Preferred Stock issued and outstanding, 2.0 million shares of Series C
Cumulative Preferred Stock issued and outstanding, 66.6 thousand shares
of Series D Index Exchangeable Preferred Stock issued and outstanding,
and 4.6 million shares of Series E Convertible Preferred Stock issued
and outstanding. Of the 200 million shares of authorized common stock,
there were 65.2 million issued, 31.6 million in treasury and 33.6
million outstanding at June 30, 1994.
6. Kemper Corporation (the "Company") defines cash as cash, money market
accounts and certain short-term investments with original maturities of
three months or less. Federal income tax paid for the six months ended
June 30, 1994 was $28.1 million, compared with $33.5 million in the same
period of 1993. Interest payments totaled $34.6 million and $28.9
million for the six months ended June 30, 1994 and 1993, respectively.
7. The Company adopted SFAS 109, "Accounting for Income Taxes," as of
January 1, 1993. SFAS 109 establishes new principles for calculating
and reporting the effects of income taxes in financial statements. SFAS
109 replaced the income statement orientation inherent in the prior
income tax accounting standard with a balance sheet approach. Under the
new approach, deferred tax assets and liabilities are generally
determined based on the difference between the financial statement and
tax bases of assets and liabilities using enacted tax rates in effect
for the year in which the differences are expected to reverse. SFAS 109
allows recognition of deferred tax assets if future realization of the
tax benefit is more likely than not, with a valuation allowance for the
portion that is not likely to be realized.
The implementation of SFAS 109 resulted in a one-time increase to
earnings of $2.5 million in the first quarter of 1993. The cumulative
effect on continuing operations was an expense of $11.9 million and on
discontinued operations a benefit of $14.4 million. Financial
statements prior to 1993 have not been restated to apply the provisions
of SFAS 109.
Upon adoption of SFAS 109, a valuation allowance was established to
reduce the deferred federal tax asset related to real estate and other
investments to the amount that, based upon available evidence, is, in
management's judgment, more likely than not to be realized. Any
reversals of the valuation allowance are contingent upon the recognition
of future capital gains in the Company's federal income tax return or a
change in circumstances which causes the recognition of the benefits to
become more likely than not. During the first six months of 1994, the
valuation allowance was increased by $80.8 million. This increase in
- 7 -
the valuation allowance solely relates to the increase in the net
deferred federal tax asset from unrealized losses on investments.
The tax effects of temporary differences that give rise to significant
portions of the Company's net deferred federal tax asset from continuing
operations are as follows:
<TABLE>
<CAPTION>
June 30 December 31
(in thousands) 1994 1993
--------- -----------
<S> <C> <C>
Deferred federal tax assets:
Real estate-related $282,024 $ 268,699
Life policy reserves 133,496 134,274
Unrealized losses on investments 80,829 -
Accrued expenses 41,821 50,359
Accrued employee benefits 26,884 26,663
Other investment-related 22,697 22,071
Tax capitalization of deferred acquisition costs 21,132 18,100
Other 18,349 17,436
-------- ---------
Total deferred federal tax assets 627,232 537,602
Valuation allowance (132,332) (51,503)
-------- ---------
Total deferred federal tax assets after valuation
allowance 494,900 486,099
-------- ---------
Deferred federal tax liabilities:
Deferred insurance acquisition costs 225,320 217,907
Unrealized gains on investments - 81,065
Deferred investment product sales costs 63,632 65,426
Depreciation and amortization 34,345 33,754
Partnerships 13,705 4,606
Other investment-related 6,755 4,673
Other 13,384 18,112
-------- ---------
Total deferred federal tax liabilities 357,141 425,543
-------- ---------
Net deferred federal tax asset $137,759 $ 60,556
======== =========
</TABLE>
The $77.2 million change in the net deferred federal tax asset for the
first six months of 1994 is primarily attributable to an $81.1 million
increase in the net deferred federal tax asset relating to the change in
unrealized gains on investments. The valuation allowance of $132.3
million is subject to future adjustments, based on, among other items,
the Company's estimates of future operating earnings and capital gains.
The tax returns through the year 1986 have been examined by the Internal
Revenue Service ("IRS"). Changes proposed are not material to the
Company's financial position. The tax returns for the years 1987
through 1990 are currently under examination by the IRS.
8. Effective with first-quarter 1994, the Company adopted SFAS 115,
"Accounting for Certain Investments in Debt and Equity Securities." As
the Company had previously classified its fixed maturities as "available
for sale", no adjustment to the Company's financial statements was
required.
- 8 -
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Recent Development
On June 26, 1994, Kemper Corporation ("Kemper") signed a definitive merger
agreement with Conseco, Inc. ("Conseco"), located in Carmel, IN. In the
merger, Kemper stockholders are expected to receive approximately $67 per
share ($56 in cash and approximately $11 in Conseco stock). The
transaction is subject to financing and certain approvals by the state
insurance regulators, mutual fund boards and shareholders and the
stockholders of both Kemper and Conseco. The transaction is expected to
close in the fourth quarter. (See Part II, ITEM 5 of this Form 10-Q.)
Total operations
Kemper Corporation and its subsidiaries (the "Company") reported net income
(including discontinued operations) of $77.6 million for the first half of
1994, compared with a net loss of $14.4 million for the same period of
1993. Net income for the second quarter of 1994 totaled $20.8 million,
compared with a net loss of $26.6 million in second-quarter 1993. The
improvement in the first half of 1994 was primarily due to realized
investment gains of $18.4 million, compared with realized investment losses
of $54.6 million in first-half 1993. Second-quarter 1994 included realized
investment losses of $3.0 million, compared with losses of $33.8 million in
the same period of 1993. Net income per share for the first half of 1994
was $1.93 primary ($1.84 fully diluted), compared with a net loss of $.43
per share (both primary and fully diluted) in first-half 1993. Net income
per share for the second quarter of 1994 was $.43 (both primary and fully
diluted), compared with a net loss of $.63 per share (both primary and
fully diluted) in second-quarter 1993.
Discontinued operations reported net income of $2.5 million in the first
half of 1994, compared with $27.1 million in the first half of 1993. In
the second quarter of 1993, discontinued operations reported a net loss of
$1.9 million. There were no results for the discontinued operations in
second-quarter 1994.
- 9 -
<TABLE>
<CAPTION>
Summary of Income (Loss) by Category
(in millions)
Six Months Ended June 30
-------------------------------------------------------------------------
1994 1993
--------------------------------- -----------------------------------
Operating
Realized Net earnings(1) Realized Net
Operating Investment Income before SFAS Investment Income
earnings(1) Results(2) (Loss) SFAS 109 109(3) Results(2) (Loss)
----------- --------- ------ ----------- ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Asset management $39.5 $ - $39.5 $ 45.1 $ .9 $ - $ 46.0
Life insurance 58.4 1.4 59.8 37.7 2.7 (6.8) 33.6
Securities brokerage .1 - .1 (6.2) (5.5) - (11.7)
Real estate (20.4) 13.6 (6.8) (28.1) (5.7) (58.8) (92.6)
Other operations and
corporate (18.4) .9 (17.5) (12.5) (4.3) - (16.8)
----- ----- ----- ------ ----- ------- ------
Continuing operations 59.2 15.9 75.1 36.0 (11.9) (65.6) (41.5)
Discontinued operations - 2.5 2.5 1.7 14.4 11.0 27.1
----- ----- ----- ------ ----- ------- ------
Total $59.2 $18.4 $77.6 $ 37.7 $ 2.5 $ (54.6) $(14.4)
===== ===== ===== ====== ===== ======= =======
<F1>
(1) Net income (loss) excluding realized investment results.
<F2>
(2) See following table for realized investment results.
<F3>
(3) Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards
(SFAS) 109, which changed the method of accounting for deferred income taxes.
</TABLE>
Operating earnings for continuing operations improved to $59.2 million in
the first half of 1994, compared with $36.0 million (before the SFAS 109
charge) in the same 1993 period. Operating earnings for the second quarter
of 1994 improved to $23.8 million, compared with $13.7 million in the same
period of 1993. This improvement, in both the six-month and second-quarter
results, was primarily from life insurance results and reduced joint
venture operating losses in the real estate companies. Second-quarter and
first-half 1994 included special charges of $6.9 million after tax ($10.7
million pre tax), primarily in the holding company, principally relating to
a proxy contest initiated by General Electric Capital Corporation.
<TABLE>
<CAPTION>
Realized Investment Gain (Loss)
(in thousands)
Six Months Ended June 30 Three Months Ended June 30
------------------------ --------------------------
1994 1993 1994 1993
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Real estate-related losses:
Decrease (increase) in reserve $ 21,119 $(120,513) $ 43,090 $ (96,367)
Write-downs of real estate-related investments (74,279) (10,407) (59,870) (9,777)
Realized gains on sales or other transfers 53,160 - 16,780 -
-------- --------- -------- ---------
Total real estate-related losses - (130,920) - (106,144)
Fixed maturity write-downs (202) (22,870) - (8,640)
Other gains and losses, net 24,956 57,263 (4,642) 52,503
-------- --------- -------- ---------
Realized investment gains (loss) from
continuing operations 24,754 (96,527) (4,642) (62,281)
Income tax expense (benefit) 8,819 (30,875) (1,624) (23,897)
-------- --------- -------- ---------
Net gain (loss) from continuing operations 15,935 (65,652) (3,018) (38,384)
Realized investment gain from discontinued
operations, net of tax - 8,937 - 2,504
Gain on sale of discontinued operations, net of tax 2,478 2,110 - 2,110
------- --------- ------- ---------
Total $18,413 $ (54,605) $(3,018) $ (33,770)
======= ========= ======== =========
</TABLE>
Revenue from continuing operations totaled $874.2 million for the first
half of 1994, compared with $804.2 million for the same 1993 period. The
- 10 -
increase is due primarily to realized investment gains of $24.8 million in
the first
half of 1994, compared with realized investment losses of $96.5 million in
the first half of 1993. Revenue for the real estate segment improved by
$126.7 million primarily due to reduced realized investment losses as well
as lower joint venture operating losses (see "Real Estate" below). Revenue
from the securities brokerage segment decreased $59.4 million to $283.1
million in the first half of 1994 (see "Securities Brokerage" below). All
other categories of revenue reflected slight variances which aggregated a
net increase of $2.7 million.
Book value per share at June 30, 1994 was $28.68, compared with $38.24 at
year-end 1993, as unrealized loss on investments of $386.0 million, or
$11.49 per share, in the first half of 1994 more than offset improvements
in net income per share.
Net income (loss) per share in the following segment discussions is on a
primary basis.
- 11 -
Asset Management
The asset management segment consists principally of Kemper Financial
Services, Inc. ("KFS") and its subsidiaries, including Kemper Asset
Management Company, Kemper Service Company ("KSvC") and INVEST Financial
Corporation ("INVEST").
<TABLE>
<CAPTION>
Selected Financial Highlights
(in millions)
Six Months Ended Three Months Ended
---------------- ------------------
June 30 June 30
---------------- ------------------
1994 1993 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
STATEMENT OF INCOME
Investment management fees $112.3 $117.9 $ 55.0 $ 59.2
Commission income 40.9 53.2 19.0 26.6
Distribution and redemption fees 36.3 37.3 17.2 18.4
Transfer agent revenue 38.3 36.7 20.1 20.1
Investment and other income 13.0 16.5 7.0 8.2
------ ------ ------ ------
Total revenue 240.8 261.6 118.3 132.5
------ ------ ------ ------
Operating expenses 131.8 146.7 65.5 71.5
Commission expense 42.2 64.8 19.9 33.6
Deferral of mutual fund commissions
and sales expense (22.4) (42.2) (10.3) (22.0)
Amortization of deferred mutual fund
commissions and sales expense 27.5 22.5 14.6 11.2
------ ------ ------ ------
Total expenses 179.1 191.8 89.7 94.3
------ ------ ------ ------
Earnings before income tax and
change in accounting principle 61.7 69.8 28.6 38.2
Income tax expense 22.2 24.7 10.1 13.2
------ ------ ------ ------
Net income before change
in accounting principle 39.5 45.1 18.5 25.0
Cumulative effect of
change in accounting principle - .9 - -
------ ------ ------ ------
Net income $ 39.5 $ 46.0 $ 18.5 $ 25.0
====== ====== ====== ======
Net income per share $ 1.16 $ .93 $ .53 $ .50
====== ====== ====== ======
</TABLE>
The asset management segment's net income for the first six months of 1994
was $6.5 million less than that recorded in the first six months of 1993.
Reduced management fees, lower commission income and higher amortization of
commissions and sales expenses were partially offset by increased transfer
agent revenues and reduced operating and commission expenses.
Total investment management fees in the first half of 1994 decreased to
$112.3 million from $117.9 million in the first half of 1993. Investment
management fees on Kemper mutual funds increased approximately $1.1 million
in the first six months of 1994, compared with the same period of 1993, as
average assets of KFS' stock mutual funds and tax-exempt mutual funds were
higher than in the same period last year. This increase was offset by a
decline in investment management fees of approximately $2.1 million due to
the loss of fees from funds managed by Selected Financial Services, Inc.
("Selected"). A new third-party manager of these funds was appointed
effective May 1, 1993. In addition, beginning January 1, 1994, revenues
- 12 -
from real estate management fees are reported in the real estate segment;
these revenues were approximately $3.7 million through June 30, 1994.
Commission income decreased $12.3 million in the first half of 1994,
compared with the first half of 1993, due to lower sales of most products.
INVEST is the segment's principal producer of commission revenues.
Commissions on the sale of mutual fund products declined $16.0 million in
the first six months of 1994, compared with the same period last year,
reflecting competitive conditions in the financial institutions
marketplace. INVEST also had commission reductions in stock, bond and unit
investment trust transactions due to lower sales. Partially offsetting
these commission reductions were increased commissions on annuity products
due to increased sales. INVEST's commissions on sales of annuity products
increased $7.0 million in the first six months of 1994, compared with the
same period last year.
Distribution and redemption fees declined $1.0 million in the first six
months of 1994, compared with the same period last year. Distribution fees
based on assets managed in KFS' spread load mutual funds, declined
approximately $5.1 million during the period as spread load assets declined
due to market depreciation, redemptions of mutual fund shares, and a
restructuring of the spread load products discussed below. The decline was
partially offset by receipt of contingent deferred sales charges from
redemption activity.
Transfer agent revenue increased $1.6 million in the first half of 1994,
compared with the first half of 1993, primarily due to increased
shareholder transaction volumes on Kemper mutual funds and increased
transfer agent fees earned by Supervised Service Company ("SSC"), KSvC's
wholly owned subsidiary which provides transfer agent services to
non-affiliated mutual fund groups. Partially offsetting the increase in
transfer agent fees was a reduction of approximately $2.2 million in IRA
fiduciary fee revenues in the first six months of 1994, compared with the
same period last year due to a change in the estimate of when IRA fee
revenues are earned. The decrease will be recovered in the remaining
months of 1994.
Certain affiliates in the securities brokerage segment reduced their use of
the data communications network of KSvC in late 1993. As a result, other
income in the first six months of 1994 decreased approximately $3.4 million
when compared with the first six months of 1993. The decrease was
partially offset by a reduction in related operating expenses. .
Operating expenses decreased $14.9 million in the first half of 1994,
compared with the first half of 1993. Operating expenses declined due to
the above-mentioned KSvC service reductions and lbecause of the transfer of
real estate expenses to the real estate segment. These real estate
expenses approximated the above-mentioned real estate management revenue.
Also, expense reductions of approximately $3.9 million were realized with
the closing of Selected's operations. Excluding the above items, expense
reductions of approximately $6.1 million occurred in advertising,
literature and sales promotion of mutual fund products, and personnel
expenses decreased approximately $2.8 million primarily due to the
reduction of production-related compensation due to lower sales. KFS
incurred approximately $1.0 million in registration and filing fees for the
- 13 -
implementation of the multiple class fund structure (see discussion
below).
Commission expenses were $42.2 million in the first half of 1994, compared
with $64.8 million in the first half of 1993, due to lower sales in 1994.
The reduced commission expense was the primary cause of the $19.8 million
decrease
in the deferral of mutual fund commissions and sales expense. Amortization
of deferred mutual fund commissions and sales expense increased $5.0
million primarily due to increased redemption activity and market value
declines of KFS' 12b-1 spread load mutual fund products, which reduce
future revenue streams and accelerate amortization in the current period.
<TABLE>
<CAPTION>
Assets Under Management (in billions)
6/30/94 3/31/94 12/31/93 9/30/93 6/30/93
------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Mutual funds:
Bond $22.9 $23.9 $25.7 $25.7 $25.9
Stock 8.7 9.2 9.4 9.4 8.7
Money market 12.2 12.7 12.3 14.3 14.2
Investment advisory 4.5 4.6 4.7 4.6 4.3
Kemper Corporation subs 9.9 10.0 9.8 9.9 10.5
Kemper National Insurance
Companies and other 6.9 7.0 7.4 7.4 7.1
----- ----- ----- ----- -----
Total $65.1 $67.4 $69.3 $71.3 $70.7
===== ===== ===== ===== =====
</TABLE>
Bond and stock mutual fund assets under management decreased $3.5 billion
from December 31, 1993 primarily due to net redemptions and market value
declines. Redemptions of stock and bond funds totaled $3.1 billion in the
first half of 1994, compared with $1.8 billion for the same period last
year. Bond funds made up 78 percent of the redemption volume in 1994,
largely caused by sharply rising interest rates. Stock and bond funds had
asset depreciation of approximately $1.7 billion in the first six months of
1994, primarily caused by declines in both the bond and stock markets.
Sales of stock and bond mutual funds in the first six months of 1994 were
$1.7 billion, compared with $2.8 billion in the first six months of 1993.
Sales of stock mutual funds represented 43 percent of total stock and bond
sales in the first half of 1994, compared with 34 percent in the first half
of 1993.
Money market fund assets under management were down $0.1 billion for the
first six months of 1994, primarily due to net redemption activity in the
second quarter.
The asset management industry is becoming increasingly competitive, with a
proliferation of products being offered in the marketplace, including
proprietary products offered by banks and brokerage firms. Individuals are
assuming greater control over their savings and retirement investments and
are placing greater emphasis on asset allocation and controlling risk. The
Company has adopted certain business strategies to address these
competition issues, such as brand name marketing emphasizing long-term
investment performance, distribution through diversified channels, and cost
control and improved service through internalization of its shareholder
accounting system (scheduled for completion in late 1994) and expansion of
its international investment capabilities. The Company is continuing to
expand its product line to satisfy the needs of its customers.
- 14 -
In the second quarter of 1994, with the approval of Kemper mutual fund
shareholders, KFS introduced a multiple class structure to provide fund
shareholders with the choice of (i) the traditional front-end load option,
(ii) a spread load (contingent deferred sales charge) option charging
annual 12b-1 distribution fees (certain of KFS' funds had already provided
a variation of this option), or (iii) a level load option charging annual
service and 12b-1 fees with no advance commission on the sale. Under this
structure, KFS now offers a broad product line with 21 stock and bond
funds,
each in these three configurations. In addition, KFS now offers for
qualifying investors (mainly institutions making large investments) a
no-load and no distribution fee option. The Company believes this multiple
class structure will, among other things, encourage additional investment
in the funds and help maintain the competitive position of such funds in
relation to other funds which may offer such choices.
Subsequent to the end of the second quarter, KFS signed a letter of intent
to sell Investors Fiduciary Trust Company ("IFTC"), KFS's 50% owned
subsidiary, to State Street Boston Corporation ("State Street"). State
Street plans to exchange its common stock with an approximate market value
of $225 million (the Company's share would be $112.5 million) for IFTC and
the other assets of IFTC's holding company, IFTC Holdings, Inc.
Consummation of the transaction is subject to execution of a definitive
agreement and certain regulatory actions and approvals.
- 15 -
Life Insurance
The life insurance segment consists of Federal Kemper Life Assurance
Company ("FKLA") and Kemper Investors Life Insurance Company ("KILICO").
<TABLE>
<CAPTION>
Selected financial highlights
(in millions, except per share data)
Six Months Ended Three Months Ended
June 30 June 30
---------------- ------------------
1994 1993 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
STATEMENT OF INCOME
Investment income $ 245.7 $ 253.8 $ 123.7 $ 128.8
Premium revenue 75.2 75.2 38.3 41.3
Other income 47.0 37.5 23.0 18.5
Realized investment gain (loss) 2.2 (7.5) (13.4) 9.2
------- ------- ------- -------
Total revenue 370.1 359.0 171.6 197.8
------- ------- ------- -------
Benefits to policyholders 236.3 264.3 116.8 132.7
Commissions, taxes, licenses and fees 32.6 38.2 15.6 19.8
Operating expenses 27.5 25.5 14.2 12.2
Deferral of policy acquisition costs (61.9) (48.6) (31.2) (24.3)
Amortization of deferred policy
acquisition costs 40.7 28.9 21.5 13.8
------- ------- ------- -------
Total benefits and expenses 275.2 308.3 136.9 154.2
------- ------- ------- -------
Earnings before income tax and change
in accounting principle 94.9 50.7 34.7 43.6
Income tax expense 35.1 19.8 13.9 12.3
------- ------- ------ -------
Net income before change in
accounting principle 59.8 30.9 20.8 31.3
Cumulative effect of change in
accounting principle - 2.7 - -
------- ------- ------- -------
Net income $ 59.8 $ 33.6 $ 20.8 $ 31.3
======= ======= ======= =======
Realized investment gain (loss),
net of tax $ 1.4 $ (6.8) $ (8.8) $ 8.8
======= ======= ======= =======
Operating earnings $ 58.4 $ 40.4 $ 29.6 $ 22.5
======= ======= ======= =======
Per share:
Operating earnings $ 1.71 $ .82 $ .86 $ .45
======= ======= ======= =======
Net income $ 1.76 $ .68 $ .60 $ .63
======= ======= ======= =======
</TABLE>
The life insurance segment reported improved net income in the first half
of 1994, compared with the first half of 1993. The improvement in 1994 was
primarily the result of realized investment gains, increases in spread
income, favorable mortality results and an increase in other income.
The segment's after-tax realized investment results included real
estate-related losses of $14.5 million and $27.9 million for the six months
ended June 30, 1994 and 1993, respectively, and after-tax write-downs and
restructurings of certain below investment-grade securities totaling $0.1
million, and $16.0 million for the six months ended June 30, 1994 and 1993,
respectively. These losses were offset by other realized investment gains
of $16.0 million and $37.0 million for the six months ended June 30, 1994
and 1993, respectively, primarily from the sale of common stocks in 1994
and fixed maturity investments in 1993. (See INVESTMENTS below.)
Operating earnings for the life insurance segment improved in the first
- 16 -
half of 1994, compared with the first half of 1993, primarily due to
increased spread income as crediting rates declined at a faster rate than
the decline in
investment income. Continuing a strategy implemented during 1992, the life
insurance segment continued to reduce crediting rates on certain existing
blocks of fixed annuity and interest-sensitive life insurance products.
Such reductions in crediting rates occur on a gradual basis and can improve
operating earnings over time. Investment income was negatively impacted in
the first six months of 1994 and 1993 by a continuing shift to
higher-quality, lower-yielding investments and foregone income on
nonperforming investments. Mitigating these factors somewhat were the
benefits from net capital contributions to the segment of $70.0 million in
1993, sales of certain real estate-related assets to the Company's real
estate subsidiaries totaling $164.7 million through the first six months of
1994 and $447.1 million during 1993 and rising investment yields on new
money during 1994.
<TABLE>
<CAPTION>
Life insurance sales
(in millions)
Six Months Ended Three Months Ended
June 30 June 30
----------------- ------------------
1994 1993 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Annuities:
General account $ 146.3 $ 171.6 $ 69.1 $ 71.0
Separate account 146.7 132.1 69.3 65.7
------- ------- ------- -------
Total annuities 293.0 303.7 138.4 136.7
Life insurance:
Term and other 77.3 77.3 40.8 35.7
Interest-sensitive 38.9 39.4 18.6 19.3
------- ------- ------- -------
Total life insurance 116.2 116.7 59.4 55.0
------- ------- ------- -------
Total sales $ 409.2 $ 420.4 $ 197.8 $ 191.7
======= ======= ======= =======
</TABLE>
Sales of term and other life products include both renewal premiums and new
product sales. Despite declining sales of new term life products, premium
revenue remained flat during the first half of 1994, compared with the
first half of 1993, due to increasing renewal premiums. The segment issued
new life insurance business in the first six months of 1994 of $8.0 billion
in face amount, down from $9.0 billion in the first six months of 1993, due
in part to competitive conditions. Total life insurance in force grew to
$94.3 billion at June 30, 1994, compared with $91.3 billion at December 31,
1993. The decreases in general account annuity sales and
interest-sensitive life insurance sales reflect the Company's continuing
strategy to direct its sales efforts toward separate account products,
which pose minimal investment risk for the Company and increase
administrative fees earned. Reflecting this strategy, separate account
sales for the first six months of 1994 increased by approximately 11.1
percent, compared with the same period in 1993.
To address its competition, the Company has adopted certain business
strategies. These include additional reductions of real estate-related
assets, continued focus on existing and new term and variable annuity
products, distribution through diversified channels, with new emphasis on
INVEST's financial institution clients and Kemper Securities, Inc.'s retail
base, and ongoing efforts to continue as a low-cost provider of insurance
products and high-quality services to agents and policyholders through the
use of technology.
- 17 -
Included in other income are administrative fees received from the
segment's separate account (variable annuity) products of $10.3 million in
the first six months of 1994, compared with $8.4 million in the first six
months of 1993. Administrative fee revenue increased in the first half of
1994 due to growth
in separate account assets. Other income also included surrender charge
revenue of $7.8 million in the first six months of 1994, compared with $6.0
million in the first six months of 1993. The higher level of surrender
charge revenue reflected an increase in policyholder withdrawals, primarily
as a result of the planned reductions in crediting rates on fixed
annuities.
Commissions, taxes, licenses and fees were lower in the first half of 1994,
compared with the first half of 1993, reflecting lower annuity and life
insurance sales. The higher level of deferral of policy acquisition costs
reflected an increased level of imputed interest capitalized due to
improvement in projected future revenue streams. The amortization of
policy acquisition costs increased during the first six months of 1994,
compared with the first six months of 1993, primarily as a result of the
level of nonperforming real estate-related assets and improvements in net
income during the first half of 1994. The level of nonperforming real
estate-related assets has reduced the present value of future estimated
gross profits, thereby accelerating the amortization of policy acquisition
costs.
Operating expenses in the first six months of 1994 remained relatively
flat, compared with the first six months of 1993, as a result of expense
control and the integration of the two life insurance subsidiaries'
operations and management. Overall operating expenses in the life
insurance segment have dropped significantly since 1992.
Since year-end 1990, the Company has taken many steps to improve the
financial strength and competitive marketing position of its life insurance
subsidiaries. These steps included adjustments in crediting rates,
reductions in below investment-grade securities, a strategy not to embark
on new real estate projects, additional provisions for real estate-related
losses, sales of $804.1 million of certain real estate-related investments
to the Company's real estate subsidiaries through June 30, 1994,
third-party sales and refinancings of certain mortgage loans, approximately
$900 million in annuity reinsurance transactions with an affiliated mutual
life insurance company, a parental guarantee of any indebtedness, and
capital contributions of $275.8 million through June 30, 1994. The
statutory surplus ratio for the segment improved to 9.7 percent at June 30,
1994 from 9.2 percent at December 31, 1993, 7.9 percent at December 31,
1992 and 1991, and 5.4 percent at year-end 1990.
- 18 -
The following tables reflect selected balance sheet data of the life
insurance segment:
<TABLE>
<CAPTION>
Invested assets and cash
(in millions) June 30 December 31
1994 1993
-------------- --------------
<S> <C> <C> <C> <C>
Cash and short-term investments $ 391 5.3% $ 571 7.2%
Fixed maturities:
Investment-grade:
NAIC(1) Class 1 3,544 47.9 3,548 44.6
NAIC(1) Class 2 1,495 20.2 1,557 19.5
Below investment-grade:(2)
Performing 224 3.0 222 2.8
Equity securities 33 .5 98 1.2
Joint venture mortgage loans(3) 822 11.1 993 12.5
Third-party mortgage loans(3) 155 2.1 145 1.8
Other real estate-related investments(3) 306 4.1 405 5.1
Other 424 5.8 424 5.3
------ ----- ------ -----
Total(4) $7,394 100.0% $7,963 100.0%
====== ===== ====== =====
<F1>
(1) National Association of Insurance Commissioners (NAIC).
- Class 1 = A- and above
- Class 2 = BBB- through BBB+
<F2>
(2) Excludes $75 million, or 1.0%, and $143 million, or 1.8%, at June 30, 1994 and
December 31, 1993, respectively, of bonds carried in other real estate-related
investments.
<F3>
(3) See table captioned "Summary of gross and net real estate investments" on page 28 below.
<F4>
(4) See INVESTMENTS below.
</TABLE>
<TABLE>
<CAPTION>
Other selected balance sheet data
(in millions) June 30 December 31
1994 1993
----------- -------------
<S> <C> <C>
Deferred insurance acquisition costs $ 644 $ 623
Assets of separate accounts 1,827 1,883
Total assets 10,926 11,577
Life policy benefits(1) 7,294 7,381
Stockholders' equity 806 1,136
<F1>
(1) Net of ceded reinsurance
</TABLE>
- 19 -
Securities Brokerage
The securities brokerage segment primarily consists of Kemper Securities,
Inc. ("KSI").
<TABLE>
<CAPTION>
Selected Financial Highlights
(in millions, except per share data)
Six Months Ended June 30 Three Months Ended June 30
------------------------ --------------------------
1994 1993 1994 1993
-------- ------- -------- -------
<S> <C> <C> <C> <C>
STATEMENT OF INCOME
Commissions $197.5 $239.2 $ 86.1 $115.7
Interest and dividend income 34.5 37.6 17.4 19.0
Securities gains, net 6.8 23.1 5.4 9.5
Investment banking fees 10.9 9.3 4.0 4.8
Other income 33.4 33.3 18.8 17.3
------ ------ ------ ------
Total revenue 283.1 342.5 131.7 166.3
------ ------ ------ ------
Production-related compensation 111.5 134.0 49.9 64.3
Other operating expenses 150.9 194.2 75.0 109.9
Interest expense 21.0 24.3 10.8 12.3
------ ------ ------ ------
Total expenses 283.4 352.5 135.7 186.5
------ ------ ------ ------
Loss before income tax
and change in accounting principle (.3) (10.0) (4.0) (20.2)
Income tax benefit (.4) (3.8) (1.4) (7.1)
------ ------ ------ ------
Net income (loss) before change in
accounting principle .1 (6.2) (2.6) (13.1)
Cumulative effect of change in accounting principle - (5.5) - -
------ ------ ------ ------
Net income (loss) $ .1 $(11.7) $ (2.6) $(13.1)
====== ====== ====== ======
Net income (loss) per share $ .00 $ (.24) $ (.07) $ (.26)
====== ====== ====== ======
</TABLE>
The securities brokerage segment had net income of $ .1 million for the six
months ended June 30, 1994, compared with a net loss of $11.7 million for
the same period in 1993. The 1993 results included a pre-tax charge of
$30.0 million, or $19.8 million after tax, for a supplemental addition to
the segment's legal reserve. The supplemental legal reserve addition in
1993 was made based on management's evaluation of pending legal matters at
that time. Subsequently, the segment has settled certain significant
litigation matters within established reserves. The 1993 results also
include a charge of $5.5 million for the adoption of SFAS 109.
The segment had a loss of $2.6 million for the second quarter of 1994
compared with income of $6.7 million, excluding the after-tax impact of the
supplemental addition to legal reserves, for the same period in 1993. The
current quarter loss is attributable primarily to reduced commission
revenues and securities gains which were down by $29.6 million and $4.1
million, respectively, from the second quarter of 1993.
Total securities brokerage revenue for the six months ended June 30, 1994
was $283.1 million, a decrease of $59.4 million from 1993, reflecting lower
than planned production per investment consultant (registered
representative) indicative of the generally weaker credit and equity
markets in 1994. Uncertainty surrounding the Company's ownership during
the second quarter led to reduced investment consultant head count.
Commission revenues decreased $41.7 million to $197.5 million in the first
half of 1994 from $239.2 in the first half of 1993.
- 20 -
To increase revenue both for the segment and from sales of the financial
and insurance products of the asset management and life insurance segments,
the Company adopted certain business strategies. In addition to KSI's
ongoing retail focus, these include more coordination of the Company's
distribution functions at both INVEST and KSI, the Company's plans to
increase the number of investment consultants, and launch of a recruiting
program for producers specializing in sales of packaged products, including
mutual funds.
The decline in securities gains revenue of $16.3 million in the first half
of 1994, compared with the same period in 1993, reflected the volatility in
the credit markets during the current period as rising interest rates have
caused significant market declines. In contrast, the first half of 1993
saw strong credit markets, in particular within the tax-exempt unit
investment trust arena. Investment banking fees increased by $1.6 million,
from $9.3 million in 1993 to $10.9 million in 1994, reflecting management's
refocus on selected corporate finance activities which culminated in senior
manager roles in two equity initial public offerings in 1994. Other income
remained relatively flat between the periodss. Included in other income in
the second quarter of 1994 is an insurance claim settlement totaling $3.5
million.
A decrease in securities interest and dividend income of $3.1 million for
the first six months was offset by a decrease in interest expense of $3.3
million. These reductions are attributable primarily to the disposition of
mortgage-backed securities and related bonds in a special purpose
subsidiary which was liquidated in the fourth quarter of 1993.
Excluding the $30 million supplemental addition to the legal reserve and
interest expense in 1993, expenses decreased $35.8 million, from $298.2
million in the first half of 1993 to $262.4 million in the first half of
1994, largely as a result of decreased production-based compensation and
continued focus on cost containment.
Production-related compensation decreased $22.5 million due to lower
commission expense to investment consultants and reduced production-based
compensation accruals. Other operating expenses decreased $13.3 million as
the benefits of cost containment programs have begun to take effect.
Specifically, when comparing the first halves of 1994 and 1993,
non-production compensation, communication, data processing, professional
services and general administrative expenses have all declined. In
addition, other expenses decreased in part due to lower litigation-related
expenses.
Continued weak markets have had an adverse impact on operating results
since March and, currently, management expects this trend to continue.
This is viewed as a general condition affecting the brokerage industry. If
this condition persists, this segment could incur operating losses. The
Company is currently reducing overhead costs by resizing the organization
to deal with the lower anticipated revenues, but there is no assurance that
this program will deter operating losses in the near term.
- 21 -
Real Estate
This segment consists of the Company's real estate subsidiaries. These
subsidiaries include companies which act as general or limited partners in and
lenders to various joint ventures. These subsidiaries have recourse
obligations in favor of, and hold loans subordinate to, loans made by the
Company's life insurance subsidiaries.
<TABLE>
<CAPTION>
Selected Financial Highlights
(in millions, except per share data)
Six Months Ended June 30 Three Months Ended June 30
------------------------ --------------------------
1994 1993 1994 1993
------- ------- ------- -------
<S> <C> <C> <C> <C>
STATEMENT OF INCOME
Joint venture operating losses $ (29.4) $ (43.6) $ (13.0) $ (23.4)
Investment income and other 7.1 4.7 3.6 2.9
Realized investment gain (loss) 21.0 (89.1) 7.3 (71.5)
------- ------- ------- -------
Total revenue (1.3) (128.0) (2.1) (92.0)
------- ------- ------- -------
Operating expenses 7.2 1.4 3.8 0.7
Interest expense 1.9 2.4 1.0 2.2
------- ------- ------- -------
Total expenses 9.1 3.8 4.8 2.9
------- ------- ------- -------
Loss before income tax and change
in accounting principle (10.4) (131.8) (6.9) (94.9)
Income tax benefit (3.6) (44.9) (2.4) (33.2)
------- ------- ------- -------
Net loss before change in
accounting principle (6.8) (86.9) (4.5) (61.7)
Cumulative effect of change in
accounting principle - (5.7) - -
------- ------- ------- -------
Net loss $ (6.8) $ (92.6) $ (4.5) $ (61.7)
======= ======= ======= =======
Realized investment gain (loss),
net of tax expense (benefit) $ 13.6 $ (58.8) $ 4.8 $ (47.1)
======= ======= ======= =======
Operating loss $ (20.4) $ (33.8) $ (9.3) $ (14.6)
======= ======= ======= =======
Per share:
Operating loss $ (.60) $ (.68) $ (.27) $ (.29)
======= ======= ======= =======
Net loss $ (.20) $ (1.87) $ (.13) $ (1.24)
======= ======== ======= =======
</TABLE>
The joint venture operating loss decline in the first half of 1994 was
primarily due to sales, refinancings and restructurings completed respecting
certain joint ventures which reduced the level of losses the Company was
required to record. In addition, an increased level of joint venture
nonaccrual loans during 1993 reduced the Company's share of joint venture
interest expense. This in turn reduced the level of losses recorded by the
Company, since the Company makes an adjustment to its joint venture operating
losses to reflect nonaccrual loans on these same ventures.
Effective January 1, 1994, real estate management fee income and expenses are
recorded in the real estate segment, whereas previously they were included in
the asset management segment.
In the first six months of 1994, sales and other transfers to third parties
of certain equity investments in real estate, which had negative carrying
values, generated realized gains in excess of the segment's additions to
reserves and write-downs.
- 22 -
The following table reflects selected balance sheet data of the real estate
segment. See INVESTMENTS below.
<TABLE>
<CAPTION>
Selected balance sheet data
(in millions)
June 30 December 31
1994 1993
-------- -----------
<S> <C> <C>
Cash and short-term investments $ 15 $ 13
Joint venture mortgage loans(1) 114 60
Third-party mortgage loans(1) - 9
Other real estate-related investments(1) (27) (135)
Other 4 4
---- ----
Total invested assets and cash $106 $(49)
==== ====
Net deferred federal tax asset $164 $168
Total assets 351 187
Long-term debt 13 13
Stockholder's equity 323 163
<F1>
(1) See table captioned "Summary of gross and net real estate investments" on page 28 below.
</TABLE>
Other operations and corporate
This category consists of the holding company income and expenses of both
Kemper Corporation and Kemper Financial Companies, Inc., a 96 percent-owned
downstream holding company.
Other operations and corporate reported a net loss of $17.5 million for the
first half of 1994, compared with a net loss of $16.8 million for the same
period in 1993. Results for 1993 include a charge of $4.3 million for the
adoption of SFAS 109, which changed the method of accounting for deferred
income taxes. Interest income increased primarily due to higher average
short-term investments for the 1994 period. This increase was
substantially offset by increased interest expense and operating expenses.
The increase in interest expense is primarily due to the $200 million in
bonds issued in September 1993. Net income for 1994 also included special
charges totaling $6.2 million of the total $6.9 million after tax
principally relating to a proxy contest initiated by General Electric
Capital Corporation.
Discontinued operations
Discontinued operations primarily include the Company's former primary
property-casualty insurance, reinsurance and risk management subsidiaries,
all of which were divested in the second half of 1993. The Company had
recorded net income of $27.1 million from these operations in the first
half of 1993. In first-quarter 1994, the Company recorded an additional
gain on the sales of discontinued operations of $2.5 million as certain
contingent liabilities were settled and more current information became
available to the Company. At June 30, 1994, $29.6 million in reserves
remain for other contingent liabilities related to the dispositions.
- 23 -
INVESTMENTS
(continuing operations)
The Company's invested assets predominately reflect investments of its life
insurance and real estate subsidiaries. The Company's principal investment
strategy is to maintain a balanced, well-diversified portfolio supporting
insurance contracts written by its life insurance subsidiaries. The
Company's subsidiaries make shifts in their investment portfolios depending
on, among other factors, the interest rate environment, liability durations
and changes in market and business conditions.
<TABLE>
<CAPTION>
Invested assets and cash
(in millions) June 30 December 31
1994 1993
------------- -------------
<S> <C> <C> <C> <C>
Cash and short-term investments $ 643 8.3% $ 967 11.6%
Fixed maturities:
Investment-grade:
NAIC(1) Class 1 3,544 45.7 3,548 42.6
NAIC(1) Class 2 1,495 19.3 1,558 18.7
Below investment-grade:(2)
Performing 229 2.9 227 2.7
Equity securities 34 .4 99 1.2
Joint venture mortgage loans(3) 936 12.1 1,053 12.6
Third-party mortgage loans(3) 155 2.0 154 1.8
Other real estate-related investments(3) 279 3.6 272 3.3
Other 446 5.7 447 5.5
------ ----- ------ -----
Total $7,761 100.0% $8,325 100.0%
====== ===== ====== =====
<F1>
(1) National Association of Insurance Commissioners (NAIC).
- Class 1 = A- and above
- Class 2 = BBB- through BBB+
<F2>
(2) Excludes $165 million, or 2.1%, and $171 million, or 2.0%, at June 30, 1994 and December 31,
1993, respectively, of bonds carried in other real estate-related investments.
<F3>
(3) See table captioned "Summary of gross and net real estate investments" on page 28 below.
</TABLE>
The Company is carrying its fixed maturity investment portfolio, which it
considers available for sale, at estimated market value, with the aggregate
unrealized appreciation or depreciation being recorded as a separate
component of stockholders' equity, net of any applicable income tax
expense. The aggregate unrealized depreciation on fixed maturities at June
30, 1994 was $235.2 million, or $7.00 per share, compared with unrealized
appreciation of $120.6 million, net of tax, or $3.67 per share, at December
31, 1993. The Company does not tax benefit the aggregate unrealized
depreciation on investments. Market values are sensitive to movements in
interest rates and other economic developments and can be expected to
fluctuate, at times significantly, from period to period.
During each of the last three years, the Company repositioned its fixed
maturity investments and increased the relative and absolute levels of
investment-grade fixed maturities and cash and short-term investments held. At
June 30, 1994, investment-grade fixed maturities and cash and short-term
investments accounted for 73.3 percent of the Company's invested assets and
cash, compared with 72.9 percent at December 31, 1993. Approximately 65
percent of the Company's NAIC Class 1 bonds were rated AAA or equivalent at
June 30, 1994.
Approximately 40 percent of the Company's investment-grade fixed maturities
at June 30, 1994, were mortgage-backed securities. These investments
consist primarily of marketable mortgage pass-through securities issued by
- 24 -
the Government National Mortgage Association (GNMA), the Federal National
Mortgage Association (FNMA) or the Federal Home Loan Mortgage Corporation
(FHLMC) and other investment-grade securities collateralized by mortgage
pass-through
securities issued by these entities. The Company has not made any material
investments in interest-only or other similarly volatile tranches of
mortgage-backed securities. The Company's mortgage-backed investments are
generally of AAA credit quality.
Markets for the Company's investments in mortgage-backed securities have
been and are expected to remain liquid. Due to the fact that the Company's
investments in mortgage-backed securities predominately date from 1992 and
1993, the current rise in interest rates is not expected to cause any
material extension of the average maturities of these investments.
Inasmuch as most of these investments were purchased by the Company at
discounts, any prepayment activity is not expected to result in any
material losses to the Company because any prepayment would generally
accelerate the reporting of the discounts as investment income. Given the
credit quality, liquidity and anticipated payment characteristics of the
Company's investments in mortgage-backed securities, the Company does not
believe that they present material risks.
Net investment income
The following table shows each segment's contribution to the Company's net
investment income:
<TABLE>
<CAPTION>
Net investment income before taxes
(in millions)
Six Months Ended June 30 Three Months Ended June 30
------------------------ --------------------------
1994 1993 1994 1993
------ ------ ------ ------
<S> <C> <C> <C> <C>
Life insurance $245.7 $253.8 $123.7 $128.8
Real estate (25.6) (38.9) (11.0) (20.5)
Other and eliminations 2.5 (0.4) .7 (0.6)
------ ------ ------ ------
Total $222.6 $214.5 $113.4 $107.7
====== ====== ====== ======
Investment yields:
Life insurance 6.40% 6.75% 6.61% 6.76%
------ ------ ------ ------
Total 5.54% 5.66% 5.77% 5.60%
------ ------ ------- ------
</TABLE>
Included in pre-tax net investment income is the Company's share of the
operating losses from equity investments in real estate. The Company's
share of real estate operating results, which generally has been
50 percent, increased to 100 percent on certain of its equity investments
beginning in 1993. The Company's share of real estate operating losses
(excluding write-downs) totaled $30.3 million and $50.4 million for the six
months ended June 30, 1994 and 1993, respectively. The operating results
consist of rental and other income less depreciation, interest and other
expenses. Such operating results exclude interest expense on loans by the
Company which are on nonaccrual status.
The Company's pre-tax yields on its average invested assets are net of
foregone investment income equal to 72 and 80 basis points for the first
halves of 1994 and 1993, respectively. The Company's total foregone
investment income before tax on nonperforming fixed maturity investments in
- 25 -
1993 and nonaccrual real estate-related investments in both periods was
$28.2 million and $29.3 million at June 30, 1994 and 1993, respectively.
Foregone investment income from the nonaccrual of real estate-related
investments is net of the Company's share of interest expense on those
loans excluded from the Company's share of joint venture operating results.
Based on total
nonperforming investments on nonaccrual status at June 30, 1994, the
Company estimates foregone investment income in 1994 will decrease slightly
compared with the 1993 level. Any increase in nonperforming securities,
and either worsening or stagnant real estate conditions, would increase the
expected adverse effect on the Company's 1994 investment income and
realized investment results.
The Company believes that future net investment income, results of
operations and cash flow can be affected by the Company's current
investment policy emphasizing investment-grade, lower-yielding securities,
as well as by real estate fundings treated as equity investments,
nonaccrual real estate loans and joint venture operating losses. The
Company expects, however, that such adverse effects should be offset to
some extent by certain advantages that it expects to realize over time from
its other investment strategies, its life insurance product mix and its
continuing cost control measures. Other mitigating factors include
marketing advantages that could result from the Company having lower levels
of investment risk and earnings improvements from its life insurance
operations' ability to adjust crediting rates on annuities and
interest-sensitive life products over time.
Realized investment results
Reflected in the results from continuing operations are after-tax realized
investment gains of $15.9 million for the first six months of 1994,
compared with realized investment losses of $65.6 million for the first six
months of 1993. Fixed maturity write-downs decreased due to the increased
quality of the Company's fixed maturity portfolio. Other realized gains of
$16.1 million (primarily from the sale of equities) and $36.9 million
(primarily from the sale of fixed maturities) in the first six months of
1994 and 1993, respectively, were also taken in the life insurance
segment.
Unrealized gains and losses on fixed maturity investments are not reflected
in the Company's results of operations. If and to the extent a fixed
maturity investment suffers an other-than-temporary decline in value,
however, such security is written down to net realizable value, and the
write-down adversely impacts net income.
The Company regularly monitors its investment portfolio and as part of this
process reviews its assets for possible impairments of carrying value.
Because the review process includes estimates, there can be no assurance
that current estimates will prove accurate over time due to changing
economic conditions and other factors.
For mortgage loans and other real estate-related investments, reserves are
established when declines in collateral values, estimated in light of
current economic conditions and calculated in conformity with SFAS 114,
"Accounting by Creditors for Impairment of a Loan," indicate a likelihood
of loss. Changes to the provision for real estate-related losses include
- 26 -
increases to reserves on loans, write-downs to fair value of certain real
estate-related assets and the Company's share of write-downs by joint
ventures.
A valuation allowance was established upon adoption of SFAS 109 to reduce
the deferred tax asset for real estate-related and other investment losses
to the amount that, based upon available evidence, is, in management's
judgment, more likely than not to be realized.
Below investment-grade securities
(excluding real estate-related bonds)
At June 30, 1994, below investment-grade securities holdings (NAIC classes
3 through 6) was 2.9 percent of cash and invested assets, compared with 2.7
percent at December 31, 1993.
Below investment-grade securities are generally unsecured and often
subordinated to other creditors of the issuers. These issuers may have
relatively higher levels of indebtedness and be more sensitive to adverse
economic conditions than investment-grade issuers. Over the last three
years, the Company significantly reduced its exposure to below
investment-grade securities. This strategy takes into account the more
conservative nature of today's consumer and the resulting demand for
higher-quality investments in the life insurance and annuity marketplace.
At June 30, 1994, below investment-grade securities of approximately 14
issuers were held by the Company. Write-downs and restructurings on below
investment-grade securities for first-half 1994 totaled $.2 million pretax,
compared with $22.9 million for first-half 1993.
Real estate-related investments
The $1.4 billion real estate portfolio held by the Company's continuing
operations constituted 17.7 percent of cash and invested assets at both
June 30, 1994 and December 31, 1993. The real estate portfolio consists of
joint venture and third-party mortgage loans and other real estate-related
investments. The majority of the Company's real estate loans are on
properties or projects where the Company, Lumbermens Mutual Casualty
Company ("Lumbermens") or their respective affiliates have taken ownership
positions in joint ventures with a small number of partners.
- 27 -
<TABLE>
<CAPTION>
Summary of gross and net real estate investments
(in millions)
June 30, 1994 December 31, 1993
-------------------------------- -----------------------------
Life Real Life Real
insurance estate insurance estate
Total segment segment Total segment segment
------ ---------- --------- ----- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Investments before
reserves, write-downs, foreign
currency translation adjustments
and net joint venture operating
losses:
Joint venture mortgage loans $1,080 $ 859 $ 221 $1,306 $1,121 $ 185
Third-party mortgage loans 194 194 - 154 145 9
Other real estate-related
investments 1,169 445 724 1,092 484 608
------ ------ ------ ------ ------ -----
Subtotal 2,443 1,498 945 2,552 1,750 802
Reserves (425) (97) (328) (446) (89) (357)
Write-downs (357) (98) (259) (299) (96) (203)
Foreign currency translation
adjustments (44) - (44) (56) - (56)
Cumulative net operating losses
of joint ventures owned (246) (20) (226) (272) (22) (250)
------ ------ ------ ------ ------ -----
Net real estate investments $1,371 $1,283 $ 88 $1,479 $1,543 $ (64)
====== ====== ====== ====== ====== =====
</TABLE>
As reflected in the table on the following page, the Company has continued
to fund both existing projects and legal commitments. Total future legal
commitments were $570.2 million at June 30, 1994. This amount represented
a net decrease of $66.6 million since December 31, 1993, largely due to
fundings in first-half 1994. As of June 30, 1994, the Company expects to
fund approximately $268.7 million of these legal commitments, along with
providing capital to existing projects. The disparity between total legal
commitments and the amount expected to be funded relates principally to
standby financing arrangements that provide credit enhancements to certain
tax-exempt bonds, which the Company does not presently expect to fund. The
total legal commitments, along with estimated working capital requirements,
are considered in the Company's evaluation of reserves and write-downs.
Generally, at the inception of a real estate loan, the Company anticipated
that it would roll over the loan and reset the interest rate at least one
time in the future, although the Company is not legally committed to do so.
As a result of the current weakness in the real estate markets and fairly
restrictive lending practices by other lenders in this environment, the
Company expects that all or most loans maturing in 1994 will be rolled
over, restructured or foreclosed.
Excluding the $69.4 million of real estate owned and the $88.2 million
deficit in the Company's net equity investments in joint ventures, the
Company's real estate loans (including real estate-related bonds) totaled
$1,389.5 million at June 30, 1994, after reserves, write-downs and foreign
currency translation adjustments. Of this amount, $852.8 million are on
accrual status. Of these accrual loans, 56.1 percent have terms requiring
current periodic payments of their full contractual interest, 30.2 percent
require only partial payments or payments to the extent of cash flow of the
borrowers, and 13.7 percent defer all interest to maturity.
- 28 -
<TABLE>
<CAPTION>
Real estate portfolio
(in millions) Mortgage loans Other real estate-related investments
-------------- -------------------------------------
Real
Joint Third Other estate Equity
venture party Bonds loans owned investments Total
-------- ------ ------ ----- ------ ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 $1,053.4 $153.9 $174.2 $114.5 $78.2 $(94.7) $1,479.5(1)
Additions (deductions):
Fundings 41.1 2.1 39.4 33.3 10.7 30.7 157.3
Interest added to principal 0.2 - - - - - 0.2
Sales/Paydowns/Distributions (40.4) (3.4) (41.5) (8.5) (16.7) (22.2) (132.7)
REIT(2) (93.4) - (15.9) (11.7) - (2.4) (123.4)
Maturities (29.4) - (2.1) (13.2) - - (44.7)
Rollovers at maturity:
Principal 29.4 - 2.1 13.2 - - 44.7
Interest 1.7 - - 1.1 - - 2.8
Joint venture operating loss - - - - - (30.3) (30.3)
Transfers to real estate owned (10.9) (19.1) - (32.7) 62.7 - -
Realized investment gain (loss) 30.5 (0.7) 11.9 (21.3) (39.3) 18.9 -
Other transactions (45.8) 22.6 (0.3) 55.2 (26.2) 11.8 17.3
------- ------ ------ ------ ----- ------ --------
Balance at June 30, 1994 $ 936.4 $155.4 $167.8 $129.9 $69.4 $(88.2) $1,370.7(3)
======= ====== ====== ====== ===== ====== ========
<F1>
(1) Net of $744.1 million reserve and write-downs. Excludes $80.7 million of real estate-related
accrued interest.
<F2>
(2) Reflects the first-quarter 1994 formation of a real estate investment trust ("REIT") with
Prime Group, Inc.
<F3>
(3) Net of $781.4 million reserve and write-downs. Excludes $69.1 million of real estate-related
accrued interest.
</TABLE>
Other real estate-related investments
The Company's real estate-related bonds, all of which are presently rated
below investment-grade, are generally unsecured and were issued to the
Company by real estate finance or development companies generally to
provide financing for the Company's joint ventures for such purposes as
land acquisition, construction/development, refinancing debt, interest and
other operating expenses.
The other real estate loans are notes receivable that provide financing to
joint ventures for purposes similar to those funded by real estate-related
bonds.
The deficit in equity investments in real estate at June 30, 1994, consists
of $149.7 million of loans to Spanish projects (described below), $60.4
million of unsecured loans to joint ventures treated as equity investments,
a $224.5 million deficit in the Company's net equity investments in joint
ventures and reserves of $73.8 million. The deficit includes the Company's
share of periodic operating results. The deficit is considered in the
Company's evaluation of reserves and write-downs. The Company, as an
equity owner, has the ability to fund, and historically has elected to
fund, operating requirements of certain joint ventures.
The Company's real estate owned at June 30, 1994, includes $62.5 million of
deeds in lieu of foreclosure and $6.9 million of certain purchased
properties. Real estate owned at June 30, 1994, is net of $96.4 million of
write-downs.
Real estate concentrations
The Company's portfolio is distributed by property type and geographic
location. Real estate markets have been depressed in recent periods in
areas where most of the Company's real estate portfolio is located.
- 29 -
Approximately half of the Company's real estate holdings are in California
and Illinois. In California, real estate market conditions have continued
to be worse than in many other areas of the country.
The Company's real estate portfolio at June 30, 1994, also included $149.7
million of loans carried as equity investments in real estate (net of
write-downs, foreign currency translations and cumulative operating losses)
related to land for office and retail development and residential projects
located in Spain. The Spanish projects accounted for $24.4 million of
fundings during the first half of 1994 and represented approximately 10.9
percent of the Company's real estate portfolio at June 30, 1994. These
investments, which began in the late 1980s, accounted for $37.9 million of
the June 30, 1994, off-balance-sheet legal commitments, which the Company
expects to fund.
Undeveloped land, including the Spanish projects, represented approximately
21.1 percent of the Company's real estate portfolio at June 30, 1994. To
maximize the value of certain land and other projects, additional
development is proceeding or is planned. Such development of existing
projects may continue to require substantial funding, either from the
Company or third parties. In the present real estate markets, third-party
financing can require credit enhancing arrangements from the Company. The
values of development projects are dependent on a number of factors,
including obtaining necessary permits and market demand for the permitted
use of the property. There can be no assurance that such permits will be
obtained as planned or at all, nor that such expenditures will occur as
scheduled, nor that the Company's plans with respect to such projects may
not change substantially.
At June 30, 1994, the Company's loans to and investments in projects with
the Prime Group, Inc. or its affiliates, based in Chicago, represented
approximately $527.5 million, or 38.5 percent, of the Company's real estate
portfolio (including the previously mentioned Spanish projects, which are
Prime Group-related). This amount reflects the first-quarter formation of
a REIT (see preceding table) and includes $100.2 million in fundings during
the first half of 1994. Prime Group-related commitments accounted for
$373.8 million of the off-balance-sheet legal commitments at June 30, 1994,
of which the Company expects to fund $121.2 million.
Effective January 1, 1993, the Company formed a master limited partnership
(the "MLP") with Lumbermens and its subsidiaries. The assets of the MLP
consist of the equity interests each partner or its subsidiaries previously
owned in projects with Peter B. Bedford or his affiliates ("Bedford"), a
California-based real estate developer. As MLP partners, the Company and
Lumbermens have participated in funding certain cash needs of the
Bedford-related projects. During the first six months of 1994, the Company
provided $36.4 million of fundings to projects in the MLP. At June 30,
1994, these projects accounted for $136.5 million of the Company's
off-balance-sheet legal commitments, of which the Company expects to fund
$113.8 million. The Company's equity interests in real estate that were
affected by formation of the MLP are held almost entirely in the Company's
real estate segment. The MLP has reduced the Company's share of the
operating losses from Bedford-related ventures that the Company would
otherwise have recorded. The Company records 50 percent of the operating
results of the ventures held by the partnership. Of the Company's real
estate portfolio at June 30, 1994, approximately $462.6 million, or 33.7
- 30 -
percent, represented loans to and investments in MLP-owned joint ventures.
Pursuant to agreements entered into in January 1994, Bedford transferred to
the MLP and a Kemper affiliate all of Bedford's ownership interests in
ventures in which Bedford, the Company, Lumbermens and their respective
subsidiaries previously shared ownership interests. Bedford was released
from certain recourse liabilities owed to the MLP, the ventures,
Lumbermens, the Company and certain of their respective subsidiaries.
Because the Company's reserve methodology does not take any credit for such
recourse and because the Company in 1993 had already began recording 50
percent of the operating results of the related ventures, this transaction,
which simplifies the management of the Company's portfolio, does not have
any material adverse impact on the Company's results of operations or
financial condition.
Real estate reserve and troubled real estate
The Company monitors its real estate portfolio and identifies changes in
the relevant real estate marketplaces, the economy and each borrower's
circumstances. The Company establishes its provisions for real
estate-related losses on the basis of its valuations of the related real
estate, estimated in light of current economic conditions and calculated in
conformity with SFAS 114. The adoption of SFAS 114 in 1993 had no material
effect on the Company's financial statements. The Company evaluates its
real estate-related assets (including accrued interest) by estimating the
probabilities of loss utilizing various projections that include several
factors relating to the borrower, property, term of the loan, tenant
composition, rental rates, other supply and demand factors and overall
economic conditions. Because the Company's real estate review process
includes estimates, there can be no assurance that current estimates will
prove accurate over time due to changing economic conditions and other
factors.
The Company increased the net amount of its real estate reserves and
writedowns in the first half of 1994 primarily to match the elimination of
negative (the deficit in) carrying values of certain equity investments in
real estate, which investments the Company sold or transferred to third
parties during the first half. As described under "Other real
estate-related investments" above, the Company's deficit in equity
investments in real estate is considered in the Company's evaluation of
reserves and write-downs. While the real estate subsidiaries as equity
owners recognized gains on the first-half 1994 transactions, the additions
to the reserves also affected the life insurance segment where most of the
Company's loans are held. The Company's real estate reserve was allocated
as follows:
- 31 -
<TABLE>
<CAPTION>
Real estate reserve
(in millions)
Joint venture Other real
mortgage estate-related
loans investments Total
------------------ ------------------ ------------------
Life Real Life Real Life Real
insurance estate insurance estate insurance estate
segment segment segment segment segment segment
--------- ------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance at 12/31/93 $53.9 $128.6 $35.8 $227.3 $89.7 $355.9
Asset transfer - - (2.5) 2.5 (2.5) 2.5
Change in reserve (16.5) (22.6) 26.2 (8.2) 9.7 (30.8)
----- ------ ----- ------ ----- ------
Balance at 6/30/94 $37.4 $106.0 $59.5 $221.6 $96.9 $327.6
===== ====== ===== ====== ===== ======
</TABLE>
In addition to the reserve, the Company's provision for real estate-related
losses included cumulative write-downs totaling $356.9 million (life
insurance segment, $98.3 million; real estate segment, $258.6 million) at
June 30, 1994, and $298.5 million (life insurance segment, $96.0 million;
real estate segment, $202.5 million) at December 31, 1993.
The following table is a summary of the Company's troubled real
estate-related investments:
<TABLE>
<CAPTION>
Troubled real estate-related investments
(before reserves and write-downs)
(in millions) June 30 December 31
1994 1993
-------- -----------
<S> <C> <C>
Potential problem loans (1) $ 32.9 $ 20.2
Past due loans (2) - 6.1
Nonaccrual loans (3)
Life insurance segment 537.8 755.8
Real estate segment 420.8 372.0
Restructured loans (4)
(currently performing) 59.5 59.5
Real estate owned (5) 69.4 78.2
-------- --------
Total $1,120.4(6) $1,291.8
======== ========
<F1>
(1) These are real estate-related investments where the Company, based on known information, has
serious doubts about the borrowers' abilities to comply with present repayment terms and which
the Company anticipates may go into nonaccrual, past due or restructured status.
<F2>
(2) Interest more than 90 days past due but not on nonaccrual status.
<F3>
(3) The Company does not accrue interest on real estate-related investments when the likelihood of
collection of interest is doubtful.
<F4>
(4) The Company defines a "restructuring" of debt as an event whereby the Company, for economic or
legal reasons related to the debtor's financial difficulties, grants a concession to the debtor
it would not otherwise consider. Such concessions either stem from an agreement between the
Company and debtor or are imposed by law or a court. By this definition, restructured loans do
not include any loan that, upon the expiration of its term, both repays its principal and pays
interest then due from the proceeds of a new loan that the Company, at its option, may extend
(roll over).
<F5>
(5) Real estate owned is carried at fair value and includes deeds in lieu of foreclosure and
certain purchased property. Cumulative write-downs to fair value were $96.4 million and $29.3
million at June 30, 1994 and December 31, 1993, respectively.
<F6>
(6) Total reserves and cumulative write-downs (excluding fair value adjustments to real estate
owned) are 61.1 percent of total troubled real estate-related investments and 33.3
percent of the Company's total real estate portfolio before reserves and write-downs at
June 30, 1994.
</TABLE>
Real estate outlook
The Company's real estate experience could continue to be adversely
affected by overbuilding and weak economic conditions in certain real
estate markets and by tight lending practices by banks and other lenders.
Stagnant or worsening economic conditions in the areas in which the Company
has made loans, or additional adverse information becoming known to the
- 32 -
Company through its regular reviews or otherwise, could result in higher
levels of problem
loans or potential problem loans, reductions in the value of real estate
collateral and adjustments to the real estate reserve. The Company's net
income and stockholders' equity could be materially reduced in future
periods if real estate market conditions remain stagnant or worsen in areas
where the Company's portfolio is located.
Current conditions in the real estate markets are adversely affecting the
financial resources of certain of the Company's joint venture partners.
Each partner, however, remains active in the control of its respective
joint ventures. In evaluating the partner's ability to meet its financial
commitments, the Company considers the amount of all applicable debt and
the value of all properties within that portion of the Company's portfolio
consisting of loans to and investments in joint ventures with such partner.
In 1993, the Company decided to recognize 100 percent of the operating
results of certain joint ventures. The additional operating results are
being recorded primarily by the Company's real estate subsidiaries which
are the equity holders in such ventures.
Based on the increased level of troubled real estate-related investments
the Company experienced in 1993, the Company anticipates additional
foreclosures and deeds in lieu of foreclosure in 1994. Any consolidation
accounting resulting from foreclosures would add the related ventures'
assets and senior third-party liabilities to the Company's balance sheet
and eliminate the Company's loans to such ventures.
Due to the adverse real estate environment affecting the Company's
portfolio in recent years, the Company has devoted significant attention to
its real estate portfolio, enhancing monitoring of the portfolio and
formulating specific action plans addressing nonperforming and potential
problem credits. Since 1991, the Company has intensified its attention to
evaluating the asset quality, cash flow and prospects associated with each
of its projects.
The Company is analyzing various potential transactions designed to reduce
the level of real estate-related investments on the Company's balance
sheet. Specific types of transactions under consideration include loan
sales, property sales, mortgage refinancings and real estate investment
trusts.
Interest rates
Interest rate fluctuations primarily affect the life insurance segment.
The 1993 interest rate environment was characterized by very low short-term
rates and a steeply sloped yield curve while the first half of 1994 saw
rising short-term and long-term interest rates as the Federal Reserve Board
raised rates.
When maturing or sold investments are reinvested at lower yields in a low
interest rate environment, the Company's life insurance subsidiaries can
adjust their crediting rates on fixed annuities and other interest-bearing
liabilities. However, competitive conditions and contractual commitments
do not always permit the reduction in crediting rates to fully or
immediately reflect reductions in investment yield, which can result in
narrower spreads.
- 33 -
The lower interest rate environment contributed to a reduction in net
investment income of the life insurance segment over the last few years.
Also, lower crediting rates on annuities have influenced certain clients to
seek alternative products. The Company mitigates this risk somewhat within
its life insurance segment by charging decreasing surrender fees when
annuity holders withdraw funds prior to maturity on certain annuity
products.
As interest rates rose during 1994, the life insurance subsidiaries'
capital resources were adversely impacted by unrealized loss positions from
their fixed maturity investments. The Company believes, however, that this
decline should be offset by a decrease in the present value of the life
insurance subsidiaries' policy liabilities and their sales of fixed-rate
annuity products could increase in a rising interest rate environment.
Should interest rates continue to rise, the Company would expect its asset
management segment's money market product sales to increase and sales of
stock funds to slow, although not necessarily in offsetting amounts.
- 34 -
LIQUIDITY AND CAPITAL RESOURCES
Kemper Corporation and each of its subsidiaries carefully monitor cash and
short-term money market investments to maintain adequate balances for
timely payment of claims, expenses and taxes. In addition, regulatory
authorities establish minimum liquidity and capital standards for the asset
management, life insurance and securities brokerage companies. The major
ongoing sources of the Company's liquidity are asset management fees,
securities brokerage commissions, collateralized bank borrowings by the
securities brokerage operations, collections of life insurance premium
revenue, deposits for annuities and interest-sensitive life contracts,
investment income, other operating revenue and cash provided from maturing
or sold investments. (See INVESTMENTS above.) Kemper Corporation also,
from time to time, borrows funds and issues securities for cash. During
1993, the Company also received $380.3 million in cash from the sales of
discontinued property-casualty insurance operations.
Kemper Corporation receives interest on loans, dividends and payments for
federal income tax from its subsidiaries. Distributions to the parent can
be restricted by applicable regulatory restraints.
The Company can use its available resources for dividends to stockholders,
corporate interest and other holding company expenses, consolidated federal
income tax payments, common stock repurchases (treasury stock),
acquisitions of subsidiaries and additional investments in, or asset
purchases from, subsidiaries. In the first six months of 1994, the Company
purchased $164.7 million of certain real estate-related investments from
the life insurance subsidiaries and contributed $65.0 million to KILICO's
capital, funded by dividends from FKLA. In 1993, the Company provided
$517.1 million in cash to the life insurance subsidiaries by purchasing
from them $447.1 million of certain real estate-related investments and
contributing to KILICO's capital $90.0 million, $20.0 million of which was
a dividend from FKLA. Through 1996, the Company expects to continue to
make substantial purchases of real estate-related investments from its life
insurance subsidiaries, although it is not obligated to do so and the
Company may choose to modify this strategy in the future.
At June 30, 1994, Kemper Corporation had $45.6 million in cash and
short-term investments. The Company expects to use most of these funds for
the purchases of real estate-related investments from the life insurance
subsidiaries to maintain and improve their regulatory capital positions.
Policyholder deposits decreased to $202.8 million for the first six months
of 1994 from $228.7 million for the first six months of 1993, and
policyholder withdrawals increased to $472.9 million for the first six
months of 1994 from $349.3 million for the first six months of 1993,
primarily due to planned reductions in crediting rates on fixed-rate
annuities as well as increased competition.
<TABLE>
<CAPTION>
Debt
(in millions)
June 30 December 31
1994 1993
-------- -----------
<S> <C> <C>
Short-term debt $394.2 $349.2
Long-term debt 391.0 394.0
Convertible debentures
of subsidiary 40.6 45.7
</TABLE>
- 35 -
Short-term debt
The Company has outstanding short-term loans with banks and other creditors
at interest rates that vary with short-term money market rates. Short-term
notes payable by the securities brokerage operations principally consist of
collateralized bank loans which totaled $370.1 million at June 30, 1994,
compared with $325.1 million at December 31, 1993. The level of these
borrowings fluctuates daily depending upon market activity and customer
margin activity levels.
The Company had $20.0 million due to banks at June 30, 1994 and
December 31, 1993. The Company renegotiated its committed lines of credit
with certain banks effective November 1, 1993. The lines of credit total
$325.0 million, with $162.5 million expiring November 1, 1994, and $162.5
million expiring November 1, 1996. These lines are unused and fully
available. Interest rates would generally approximate short-term bank
corporate rates.
Long-term debt
Included in long-term debt at June 30, 1994, are $200 million of 6.875%
Notes Due 2003, $65.5 million of medium-term notes and $110.75 million of
8.80% Notes Due 1998. The interest rate on the 6.875% notes increased on
March 15, 1994 to 7.375%, but the original rate will be reinstated if and
when the Company effects an exchange of such notes for publicly registered
notes, which the Company expects to occur in the third quarter of 1994.
Long-term debt and insurance company ratings
Ratings have become an increasingly important factor in establishing the
competitive position of life insurance companies. Rating organizations
continue to review the financial performance and condition of life insurers
and their investment portfolios, including those of the Company's life
insurance subsidiaries. Any reductions in the life insurance subsidiaries'
claims-paying ability or financial strength ratings could result in their
products being less attractive to consumers.
Any reductions in Kemper Corporation's senior debt ratings could adversely
impact the Company's financial flexibility by limiting the Company's access
to capital or increasing its cost of borrowings.
Ratings reductions for Kemper Corporation or its subsidiaries and other
financial events can also trigger obligations to fund certain real
estate-related commitments to take out other lenders. In such events,
those lenders can be expected to renegotiate their loan terms, although
they are not contractually obligated to do so. Such circumstances could
accelerate or increase the Company's purchases of real estate-related
assets from its regulated life insurance subsidiaries to further support
their respective statutory capital positions.
In connection with and following the merger agreement signed June 26, 1994
by Kemper Corporation and Conseco, Inc. (see Part II, ITEM 5 below in this
Form 10-Q), Moody's Investors Service placedunder review with "possible
- 36 -
downgrade" its Baa2 senior debt rating and Baa3 preferred stock rating of
Kemper Corporation and its Baa1 financial strength ratings of both of the
Company's life insurance subsidiaries; Standard & Poor's Corporation
placedon CreditWatch with 'negative' implications" its BBB senior debt
rating and BB+
preferred stock rating of Kemper Corporation; Duff & Phelps Credit Rating
Co. placed "on Rating Watch -- Down" Kemper Corporation's A- senior debt
rating, Federal Kemper Life Assurance Company's AA- claims-paying ability
rating and Kemper Investors Life Insurance Company's A+ claims-paying
ability rating; and A.M. Best placed under review its "A-" (Excellent)
Best's Ratings of both of the life insurance subsidiaries.
Convertible debentures of subsidiary
Convertible debentures of subsidiary represent employee interests in Kemper
Financial Companies, Inc. ("KFC"). KFC does not plan to issue any
additional securities to its employees. Maturities and employee
terminations during first-half 1994 accounted for the $5.1 million
reduction of convertible debentures. The outstanding debentures bear
interest approximating the prime rate.
Common stock
During the first six months of 1994, the Company received $22.5 million by
issuing common stock through the Kemper Corporation Dividend Reinvestment
and Stock Purchase Plan and employee stock option plans. On June 26, 1994,
in conjunction with the signing of the merger agreement with Conseco, Inc.
(see Part II, ITEM 5 of this Form 10-Q), all outstanding employee stock
options became immediately exercisable in full. The Company expects to
continue to receive proceeds from the exercise of employee stock options in
the second half of 1994.
During 1993 and the first six months of 1994, the quarterly dividend rate
was $.23 per common share. The third-quarter 1994 dividend of $.23 per
share was declared in July 1994 and is payable August 31, 1994. The
aggregate common stock dividend payment has been reduced by approximately
35 percent due to the August 1993 acquisition of 17.4 million shares of the
Company's common stock in a stock exchange transaction with Lumbermens.
While the board of directors intends to continue quarterly cash dividends,
future declarations and amounts will depend upon, among other factors, the
earnings of Kemper Corporation, its financial condition, its capital
requirements and general business conditions.
Preferred stock
During 1993 and 1992, Kemper Corporation privately placed preferred stock
in the amounts of $260.0 million and $100.0 million, respectively. At June
30, 1993, the Company's outstanding preferred stock totaled $360.6 million.
Dividends paid on the preferred stock during the first half of 1994 totaled
$11.8 million.
- 37 -
Emerging issues
Effective in 1994, SFAS 112, "Employers' Accounting for Postemployment
Benefits," establishes standards for accounting for benefits provided to
former or inactive employees and their dependents and beneficiaries before
retirement. Benefits covered by SFAS 112 include salary continuation,
severance pay, supplemental unemployment benefits and disability-related
benefits. The impact of implementation is not expected to be material to
the Company.
- 38 -
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Dismissal of Asset Management Litigation
On June 23, 1994, in the class action styled Tabankin, et al. v. Kemper
Short-Term Global Income Fund, et al., the federal court in the Northern
District of Illinois entered an order granting the defendant's motion to
dismiss and entering final judgment in favor of the Company. As of the
date of filing this Form 10-Q, plaintiffs have not appealed the order.
ITEM 5. Other Information
A. Merger Agreement
The Company, Conseco, Inc., an Indiana corporation ("Conseco"), and KC
Acquisition, Inc, a Delaware corporation and a wholly-owned subsidiary of
Conseco ("Acquisition"), have entered into an Agreement and Plan of Merger
dated as of June 26, 1994 (the "Merger Agreement"), pursuant to which
Acquisition will be merged with and into the Company (the "Merger") in a
transaction in which the Company will be the surviving corporation (the
"Surviving Corporation"). As of the effective time of the Merger (the
"Effective Time"), the Surviving Corporation will be a wholly-owned
subsidiary of Conseco.
As of the Effective Time, by virtue of the Merger, each share of common
stock, par value $5.00 per share, of the Company ("Common Stock") issued
and outstanding immediately prior to the Effective Time (other than shares
of Common Stock that are owned by the Company, Conseco or any subsidiary
thereof (excluding shares in trust accounts, managed accounts, custodial
accounts and the like that are beneficially owned by third parties as well
as shares held in the ordinary course of business by subsidiaries of the
Company or Conseco that are insurance companies or broker-dealers and other
than shares of Common Stock held by stockholders of the Company who
exercise their appraisal rights) shall be converted into the right to
receive (i) $56.00 per share, without interest, and (ii) the fraction
(rounded to the nearest ten-thousandth of a share) of a validly issued,
fully paid and nonassessable share of common stock, without par value, of
Conseco ("Conseco Common Stock") determined by dividing $11.00 by the
Average Stock Price. The "Average Stock Price" shall be equal to the
average of the closing prices of Conseco Common Stock on the New York Stock
Exchange Composite Transactions Reporting System, as reported in The Wall
Street Journal, for the 20 trading days immediately preceding the second
trading day prior to the Effective Time (the "Trading Average"); provided,
however, that if the Trading Average is less than $45.50, then the Average
Stock Price shall be $45.50, and if the Trading Average is greater than
$55.50, then the Average Stock Price shall be $55.50.
Each share of (i) Series A Cumulative Convertible Preferred Stock of the
Company, (ii) Series C Cumulative Preferred Stock of the Company, (iii)
Series D Index Exchangeable Preferred Stock of the Company and (iv) Series
E Cumulative Convertible Preferred Stock of the Company issued and
outstanding immediately prior to the Effective Time (other than shares held
by preferred stockholders of the Company who exercise their appraisal
- 39 -
rights) will remain outstanding as one validly issued, fully paid and
nonassessable share of preferred stock of the Surviving Corporation
subsequent to the Effective Time,
subject to the respective terms and covenants thereof.
The closing of the Merger is subject to certain conditions set forth in the
Merger Agreement, including but not limited to the approval of the Merger
by the affirmative vote of stockholders of the Company entitled to cast at
least a majority of the votes which all stockholders of the Company are
entitled to cast thereon, the approval of the issuance of shares of Conseco
Common Stock in the Merger by the affirmative vote of the holders of a
majority of the shares present or represented by proxy and entitled to vote
thereon at a meeting of stockholders of Conseco, the receipt of all
required governmental and regulatory consents, the receipt of certain
approvals with respect to the registered investment companies for which any
of the Company's subsidiaries act as investment advisor or sub-advisor, the
receipt of certain consents from the noninvestment company advisory clients
of the asset management subsidiaries of the Company and the obtaining by
Conseco of all financing necessary to pay the aggregate cash consideration
payable in connection with the Merger. The Merger is presently expected to
close in December 1994.
Under certain circumstances, the board of directors of the Company may
terminate the Merger Agreement and accept a proposal made by another party,
upon payment to Conseco of $100 million and reimbursement of its documented
out-of-pocket fees and expenses.
Prior to the Effective Time, Conseco Capital Partners II, L.P., an
affiliate of Conseco ("CCP II"), will organize CCP II Holdings Corp., a
Delaware corporation ("CCP II Holdings"), to acquire an existing life
insurance company ("Life Insurance Holdings") and to organize one or more
real estate acquisition subsidiaries. Simultaneously with or immediately
following the Effective Time, it is anticipated that the Surviving
Corporation will sell all of the issued and outstanding shares of capital
stock of each of the Company's life insurance subsidiaries to Life
Insurance Holdings, and each of the Company's real estate subsidiaries will
be merged with and into one or more of the real estate acquisition
subsidiaries.
A copy of the Merger Agreement is filed as Exhibit 10 to this Form 10-Q and
is incorporated herein by reference.
In light of the proposed merger which will require approval by the
Company's stockholders and therefore the preparation and distribution to
the stockholders of the necessary materials describing the transaction, the
Company's board of directors has determined that the interests of the
stockholders are best served by postponing the annual meeting of
stockholders previously scheduled for August 22, 1994. The annual meeting
is now expected to be held in late October or the first part of November
1994 in order that stockholders may vote at one time on the proposed merger
as well as certain general corporate matters. Stockholders will receive
further information with respect to the matters to be voted upon at, as
well as the date, time and place of, and the record date for, the annual
meeting.
In connection with the proposed merger and the postponement of the annual
- 40 -
meeting, General Electric Capital Corporation informed the Company that it
has withdrawn both its unsolicited offer to acquire the Company and its
proposed slate of directors previously nominated for election to the
Company's board of directors and has no intention of soliciting proxies for
the rescheduled annual meeting.
B. Director Retirement
After the June 26, 1994 board meeting at which the Merger Agreement was
unanimously approved, Joseph E. Luecke retired from the board of directors
to pursue more of a full-time retirement and to attend to various personal
and family matters. Including his two years of board service since his
February 1992 retirement from the positions of the Company's Chairman of
the Board and Chief Executive Officer (roles he served for 13 years), Mr.
Luecke dedicated almost 43 years to the Kemper organizations.
ITEM 6. Exhibits and Reports on Form 8-K
(a) EXHIBIT INDEX.
<TABLE>
<CAPTION>
EXHIBIT NUMBER
--------------
Page
----
<S> <C>
10 Agreement and Plan of Merger dated as of June 26,
1994 among Conseco, Inc., KC Acquisition, Inc.
and Kemper Corporation.............................. 43
</TABLE>
(b) No current reports on Form 8-K were filed during the quarter
ended June 30, 1994. The Company filed one current report on
Form 8-K on July 1, 1994 which reported, under Item 5 thereof,
that on June 26, 1994, the Company had signed, the Merger
Agreement described under ITEM 5 of this Form 10-Q.
- 41 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KEMPER CORPORATION
(Registrant)
Date: August 12, 1994
/S/ J. H. FITZPATRICK
--------------------
J. H. Fitzpatrick
Executive Vice President and
Chief Financial Officer
Date: August 12, 1994
/S/ J. R. SITAR
--------------------
J. R. Sitar
Senior Vice President and
Chief Accounting Officer
- 46 -
AGREEMENT AND PLAN OF MERGER
DATED AS OF JUNE 26, 1994,
AMONG
CONSECO, INC.,
KC ACQUISITION, INC.
AND
KEMPER CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
ARTICLE I
THE MERGER
<S> <C>
SECTION 1.1. The Merger . . . . . . . . . . . . . . . . . . . 1
SECTION 1.2. Closing . . . . . . . . . . . . . . . . . . . . 1
SECTION 1.3. Effective Time . . . . . . . . . . . . . . . . . 2
SECTION 1.4. Effects of the Merger . . . . . . . . . . . . . 2
SECTION 1.5. Certificate of Incorporation; By-laws . . . . . 2
SECTION 1.6. Directors . . . . . . . . . . . . . . . . . . . 3
SECTION 1.7. Officers . . . . . . . . . . . . . . . . . . . . 3
ARTICLE II
EFFECT OF THE MERGER ON THE SECURITIES OF THE CONSTITUENT
CORPORATIONS
SECTION 2.1. Effect on Capital Stock . . . . . . . . . . . . 3
SECTION 2.2. Stock Option Plans . . . . . . . . . . . . . . . 6
SECTION 2.3. Exchange of Certificates . . . . . . . . . . . . 7
ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION 3.1. Representations and Warranties of the
Company . . . . . . . . . . . . . . . . . . . 11
SECTION 3.2. Representations and Warranties of the
Parent and Sub . . . . . . . . . . . . . . . . 23
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS PRIOR TO
MERGER
SECTION 4.1. Conduct of Business of the Company . . . . . . . 31
SECTION 4.2. Other Actions . . . . . . . . . . . . . . . . . 35
ARTICLE V
ADDITIONAL AGREEMENTS
SECTION 5.1. Preparation of Form S-4 and the Joint
Proxy Statement . . . . . . . . . . . . . . . 35
SECTION 5.2. Meetings of Stockholders . . . . . . . . . . . . 36
SECTION 5.3. Letters of Company's Accountants . . . . . . . . 36
SECTION 5.4. Letter of Parent's Accountants . . . . . . . . . 36
SECTION 5.5. Access to Information; Confidentiality . . . . . 37
SECTION 5.6. Best Efforts . . . . . . . . . . . . . . . . . . 37
SECTION 5.7. Benefit Plans and Employment Agreements . . . . 37
SECTION 5.8. Indemnification and Insurance. . . . . . . . . . 40
SECTION 5.9. Public Announcements . . . . . . . . . . . . . . 41
SECTION 5.10. Acquisition Proposals . . . . . . . . . . . . . 41
SECTION 5.11. Fiduciary Duties . . . . . . . . . . . . . . . . 42
SECTION 5.12. Consents, Approvals and Filings . . . . . . . . 43
SECTION 5.13. Company Satisfactions of the Conditions of
Section 15 of the 1940 Act . . . . . . . . . . 43
SECTION 5.14. Advisory Contract Consents . . . . . . . . . . . 44
SECTION 5.15. Certain Fees and Expenses . . . . . . . . . . . 44
SECTION 5.16. Compliance with Section 15(f) of the
1940 Act by Parent . . . . . . . . . . . . . . 45
SECTION 5.17. Affiliates and Certain Stockholders . . . . . . 46
SECTION 5.18. NYSE Listing . . . . . . . . . . . . . . . . . . 46
SECTION 5.19. Stockholder Litigation . . . . . . . . . . . . . 46
SECTION 5.20. Financing . . . . . . . . . . . . . . . . . . . 46
SECTION 5.21. Board Action Relating to Stock Option
Plans . . . . . . . . . . . . . . . . . . . . 46
ARTICLE VI
CONDITIONS PRECEDENT
SECTION 6.1. Conditions to Each Party's Obligation to
Effect the Merger . . . . . . . . . . . . . . 47
SECTION 6.2. Conditions to Obligations of Parent and Sub . . 49
SECTION 6.3. Conditions to Obligations of the Company . . . . 50
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
SECTION 7.1. Termination . . . . . . . . . . . . . . . . . . 50
SECTION 7.2. Effect of Termination . . . . . . . . . . . . . 51
SECTION 7.3. Amendment . . . . . . . . . . . . . . . . . . . 52
SECTION 7.4. Extension; Waiver . . . . . . . . . . . . . . . 52
SECTION 7.5. Procedure for Termination, Amendment,
Extension or Waiver . . . . . . . . . . . . . 52
ARTICLE VIII
GENERAL PROVISIONS
SECTION 8.1. Nonsurvival of Representations and
Warranties . . . . . . . . . . . . . . . . . . 52
SECTION 8.2. Fees and Expenses . . . . . . . . . . . . . . . 53
SECTION 8.3. Definitions . . . . . . . . . . . . . . . . . . 53
SECTION 8.4. Notices . . . . . . . . . . . . . . . . . . . . 53
SECTION 8.5. Interpretation . . . . . . . . . . . . . . . . . 54
SECTION 8.6. Counterparts . . . . . . . . . . . . . . . . . . 55
SECTION 8.7. Entire Agreement; Third-Party Beneficiaries . . 55
SECTION 8.8. Governing Law . . . . . . . . . . . . . . . . . 55
SECTION 8.9. Assignment . . . . . . . . . . . . . . . . . . . 55
SECTION 8.10. Enforcement . . . . . . . . . . . . . . . . . . 55
SECTION 8.11. Severability . . . . . . . . . . . . . . . . . . 56
</TABLE>
Exhibit A - Affiliate Letter
AGREEMENT AND PLAN OF MERGER
DATED AS OF JUNE 26, 1994
AMONG
CONSECO, INC.,
AN INDIANA CORPORATION ("PARENT"),
KC ACQUISITION, INC.
A DELAWARE CORPORATION AND A WHOLLY OWNED SUBSIDIARY OF
PARENT ("SUB"),
AND
KEMPER CORPORATION,
A DELAWARE CORPORATION (THE "COMPANY").
WHEREAS, the Board of Directors of each of Parent,
Sub and the Company has adopted resolutions approving this
Agreement, pursuant to which Sub shall be merged with and
into the Company and the Company shall become a wholly owned
direct subsidiary of Parent (the "Merger"); and
WHEREAS, Parent, Sub and the Company desire to
make certain representations, warranties, covenants and
agreements in connection with the Merger and also to
prescribe various conditions to the Merger;
NOW, THEREFORE, in consideration of the
representations, warranties, covenants and agreements
contained in this Agreement, the parties agree as follows:
ARTICLE I
THE MERGER
SECTION 1.1. The Merger. Upon the terms and
subject to the conditions set forth in this Agreement, and
in accordance with the Delaware General Corporation Law (the
"DGCL"), Sub shall be merged with and into the Company at
the Effective Time (as hereinafter defined). Upon the
Effective Time, the separate existence of Sub shall cease,
and the Company shall continue as the surviving corporation
(the "Surviving Corporation").
SECTION 1.2. Closing. Unless this Agreement
shall have been terminated and the transactions herein
contemplated shall have been abandoned pursuant to
Section 7.1 and subject to the satisfaction or waiver of the
conditions set forth in Article VI, the closing of the
Merger (the "Closing") will take place at 1:00 p.m. on the
second business day following the date on which the last to
be fulfilled or waived of the conditions set forth in
Section 6.1 and subsections (c) and (d) of Section 6.2 shall
be fulfilled or waived in accordance with this Agreement
(the "Closing Date"), at the offices of Cravath, Swaine &
Moore, 825 Eighth Avenue, New York, New York, unless another
date, time or place is agreed to in writing by the parties
hereto.
SECTION 1.3. Effective Time. The parties hereto
will file with the Secretary of State of the State of
Delaware (the "Delaware Secretary of State") on the date of
the Closing (or on such other date as Parent and the Company
may agree) a certificate of merger or other appropriate
documents, executed in accordance with the relevant
provisions of the DGCL, and make all other filings or
recordings required under the DGCL in connection with the
Merger. The Merger shall become effective upon the filing
of the certificate of merger with the Delaware Secretary of
State, or at such later time as is specified in the
certificate of merger (the "Effective Time").
SECTION 1.4. Effects of the Merger. The Merger
shall have the effects set forth in Section 259 of the DGCL.
Without limiting the generality of the foregoing, and
subject thereto, at the Effective Time, all the properties,
rights, privileges, powers and franchises of the Company and
Sub shall vest in the Surviving Corporation, and all debts,
liabilities and duties of the Company and Sub shall become
the debts, liabilities and duties of the Surviving
Corporation.
SECTION 1.5. Certificate of Incorporation; By-
laws. (a) The Second Restated Certificate of Incorporation
of the Company (the "Charter"), as in effect immediately
prior to the Effective Time, shall be amended as of the
Effective Time so that Article FOURTH of the Charter reads
in its entirety as follows: "The total number of shares of
all classes of capital stock which the corporation shall
have authority to issue is 7,000,100 shares which shall be
divided into two classes as follows: 7,000,000 shares of
Preferred Stock, without par value, and 100 shares of Common
Stock, par value $1.00 per share." and, as so amended the
Charter shall, from and after the Effective Time, be the
Certificate of Incorporation of the Surviving Corporation
until thereafter changed or amended as provided therein or
by applicable law.
(b) The By-laws of the Company as in effect at
the Effective Time shall, from and after the Effective Time,
be the By-laws of the Surviving Corporation until thereafter
changed or amended as provided therein or by applicable law.
SECTION 1.6. Directors. The directors of the
Company at the Effective Time shall, from and after the
Effective Time, be the directors of the Surviving
Corporation, until the earlier of their resignation or
removal or until their respective successors are duly
elected and qualified, as the case may be.
SECTION 1.7. Officers. The officers of the
Company at the Effective Time shall, from and after the
Effective Time, be the officers of the Surviving
Corporation, until the earlier of their resignation or
removal or until their respective successors are duly
elected and qualified, as the case may be.
ARTICLE II
EFFECT OF THE MERGER ON THE SECURITIES OF THE CONSTITUENT
CORPORATIONS
SECTION 2.1. Effect on Capital Stock. As of the
Effective Time, by virtue of the Merger and without any
action on the part of the holder of (i) any shares of common
stock, par value $5.00 per share, of the Company (the
"Common Stock") or any other shares of capital stock of the
Company or (ii) any shares of capital stock of Sub:
(a) Common Stock of Sub. Each share of common
stock of Sub issued and outstanding immediately prior to the
Effective Time shall be converted into and become one
validly issued, fully paid and nonassessable share of Common
Stock, par value $1.00 per share, of the Surviving
Corporation.
(b) Cancellation of Treasury Stock and Parent-
Owned Common Stock. Each share of Common Stock issued and
outstanding immediately prior to the Effective Time that is
owned by the Company or by any subsidiary of the Company or
by Parent, Sub or any other subsidiary of Parent (other than
shares in trust accounts, managed accounts, custodial
accounts and the like that are beneficially owned by third
parties and shares held in the ordinary course of business
by subsidiaries of the Company or Parent that are insurance
companies or broker-dealers) shall automatically be
cancelled and retired and shall cease to exist, and no cash
or other consideration shall be delivered or deliverable in
exchange therefor.
(c) Conversion of Common Stock. Each share of
Common Stock issued and outstanding immediately prior to the
Effective Time (other than shares to be cancelled in
accordance with Section 2.1(b) and other than Dissenting
Common Shares (as defined in Section 2.1(e)) shall be
converted into the right to receive (i) $56.00 per share,
without interest (the "Cash Consideration"), and (ii) the
fraction (rounded to the nearest ten-thousandth of a share)
(the "Conversion Number") of a validly issued, fully paid
and nonassessable share of common stock, without par value,
of Parent ("Parent Common Stock") determined by dividing
$11.00 by the Average Parent Price (as defined below) (the
"Stock Consideration"). The "Average Parent Price" shall be
equal to the average of the closing prices of the Parent
Common Stock on the New York Stock Exchange ("NYSE")
Composite Transactions Reporting System, as reported in The
Wall Street Journal, for the 20 trading days immediately
preceding the second trading day prior to the Effective Time
(the "Trading Average"); provided, however, that if the
Trading Average is less than $45.50, then the Average Parent
Price shall be $45.50, and if the Trading Average is greater
than $55.50, then the Average Parent Price shall be $55.50.
The Cash Consideration, the Stock Consideration and any cash
to be paid in accordance with Section 2.3 in lieu of
fractional shares of Parent Common Stock are referred to
collectively as the "Merger Consideration".
(d) Preferred Stock. Each share of (i) Series A
Cumulative Convertible Preferred Stock of the Company (the
"Series A Preferred Stock"), (ii) Series C Cumulative
Preferred Stock of the Company (the "Series C Preferred
Stock"), (iii) Series D Index Exchangeable Preferred Stock
of the Company (the "Series D Preferred Stock") and
(iv) Series E Cumulative Convertible Preferred Stock of the
Company (the "Series E Preferred Stock") issued and
outstanding immediately prior to the Effective Time (other
than Dissenting Preferred Shares (as defined in
Section 2.1(e))) will remain outstanding as one validly
issued, fully paid and nonassessable share of preferred
stock of the Surviving Corporation subsequent to the
Effective Time, subject to the respective terms and
covenants thereof. The Series A Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock and Series E
Preferred Stock are referred to collectively as the "Company
Preferred Stock".
(e) Dissenting Shares. (i) Notwithstanding
anything in this Agreement to the contrary, shares of Common
Stock issued and outstanding immediately prior to the
Effective Time held by a holder (if any) who has the right
to demand, and who properly demands, an appraisal of such
shares in accordance with Section 262 of the DGCL (or any
successor provision) ("Dissenting Common Shares") shall not
be converted into a right to receive Merger Consideration
unless such holder fails to perfect or otherwise loses such
holder's right to such appraisal, if any. If, after the
Effective Time, such holder fails to perfect or loses any
such right to appraisal, each such share of such holder
shall be treated as a share that had been converted as of
the Effective Time into the right to receive Merger
Consideration in accordance with this Section 2.1. The
Company shall give prompt notice to Parent of any demands
received by the Company for appraisal of shares of Common
Stock, and Parent shall have the right to participate in and
direct all negotiations and proceedings with respect to such
demands. The Company shall not, except with the prior
written consent of Parent, make any payment with respect to,
or settle or offer to settle, any such demands.
(ii) Notwithstanding anything in this Agreement
to the contrary, shares of Company Preferred Stock issued
and outstanding immediately prior to the Effective Time held
by a holder (if any) who has the right to demand, and who
properly demands, an appraisal of such shares in accordance
with Section 262 of the DGCL ("Dissenting Preferred Shares")
shall not be deemed to remain outstanding as of the
Effective Time unless such holder fails to perfect or
otherwise loses such holder's right to such appraisal, if
any. If, after the Effective Time, such holder fails to
perfect or loses any such right to appraisal, such shares
shall be treated as if they had remained outstanding as of
the Effective Time. The Company shall give prompt notice to
Parent of any demands received by the Company for appraisal
of shares of Company Preferred Stock, and Parent shall have
the right to participate in and direct all negotiations and
proceedings with respect to such demands. The Company shall
not, except with the prior written consent of Parent, make
any payment with respect to, or settle or offer to settle,
any such demands.
(f) Cancellation and Retirement of Common Stock.
As of the Effective Time, all certificates representing
shares of Common Stock, other than certificates representing
shares to be cancelled in accordance with Section 2.1(b) or
Dissenting Common Shares, issued and outstanding immediately
prior to the Effective Time, shall no longer be outstanding
and shall automatically be cancelled and retired and shall
cease to exist, and each holder of a certificate
representing any such shares of Common Stock shall cease to
have any rights with respect thereto, except the right to
receive the Merger Consideration upon surrender of such
certificate in accordance with Section 2.3.
(g) Cancellation of Certain Restricted Stock
Grants. Immediately following the execution and delivery of
this Agreement each share of restricted stock granted under
the 1993 Senior Executive Long-Term Incentive Plan shall be
cancelled. In addition, Parent hereby consents to the
adoption by the Company of a plan under which each
individual who has had a share cancelled pursuant to this
Section 2.1(g) may receive immediately prior to the
Effective Time a cash payment up to the sum of (x) the Cash
Consideration plus (y) the Stock Value Amount, multiplied by
the number of shares cancelled. For purposes of this
Agreement, the term "Stock Value Amount" shall mean the
product of (x) the Conversion Number and (y) the Average
Parent Price (determined without regard to the proviso to
the definition thereof).
SECTION 2.2. Stock Option Plans. (a) As of the
date hereof, the unexercisable portion of each outstanding
option to purchase shares of Common Stock (a "Company Stock
Option") issued under the Company's 1990 Stock Option Plan,
1985 Amended Stock Option Plan, 1982 Incentive Stock Option
Plan and Non-Management Director Stock Option Plan
(collectively, the "Company Stock Option Plans") shall
become immediately exercisable in full, subject to all
expiration, lapse and other terms and conditions thereof.
(b) The Company Stock Options set forth on
Section 2.2 of the disclosure schedule (the "Disclosure
Schedule") delivered to Parent by the Company at the time of
execution of this Agreement shall be assumed by Parent (an
"Assumed Option"). Each Assumed Option shall be exercisable
for a number of shares of Parent Common Stock calculated by
multiplying the number of shares of Common Stock subject to
such Company Stock Option as of the Effective Time by a
fraction, the numerator of which is the sum of (1) the Stock
Value Amount and (2) the Cash Consideration and the
denominator of which is the Average Parent Price. The
exercise price for each share of Parent Common Stock under
an Assumed Option shall be calculated by multiplying the
exercise price for one share of Common Stock under the
related Company Stock Option as of the Effective Time by a
fraction, the numerator of which is the Average Parent Price
and the denominator of which is the sum of (1) the Stock
Value Amount and (2) the Cash Consideration.
(c) Each Company Stock Option then outstanding
(other than Assumed Options) shall be cancelled immediately
prior to the Effective Time in exchange for an amount in
cash equal to the product of (i) the number of shares of
Common Stock subject to such Company Stock Option
immediately prior to the Effective Time and (ii) the excess
of (1) the sum of (A) the Stock Value Amount and (B) the
Cash Consideration over (2) the per share exercise price of
such Company Stock Option.
SECTION 2.3. Exchange of Certificates.
(a) Paying Agent. As of the Effective Time, Parent shall
deposit, or shall cause to be deposited, with or for the
account of a bank or trust company designated by Parent,
which shall be reasonably satisfactory to the Company (the
"Paying Agent"), for the benefit of the holders of shares of
Common Stock and the holders of shares of Series A Preferred
Stock and Series E Preferred Stock (together, the
"Convertible Preferred Stock"), cash in an aggregate amount
sufficient to pay the aggregate Cash Consideration and
certificates representing the shares of Parent Common Stock
representing the aggregate Stock Consideration (assuming in
each case the full conversion of all outstanding shares of
Series A Preferred Stock and Series E Preferred Stock) (such
amount and certificates, together with any dividends or
distributions with respect to such certificates, being
hereinafter referred to as the "Payment Fund").
(b) Exchange Procedures. As soon as practicable
after the Effective Time, each holder of an outstanding
certificate or certificates which prior thereto represented
shares of Common Stock shall, upon surrender to the Paying
Agent of such certificate or certificates and acceptance
thereof by the Paying Agent, be entitled to the amount of
cash and a certificate representing that number of whole
shares of Parent Common Stock (and cash in lieu of
fractional shares of Parent Common Stock as contemplated by
this Section 2.3) which the aggregate number of shares of
Common Stock previously represented by such certificate or
certificates surrendered shall have been converted into the
right to receive pursuant to Section 2.1(c) of this
Agreement. The Paying Agent shall accept such certificates
upon compliance with such reasonable terms and conditions as
the Paying Agent may impose to effect an orderly exchange
thereof in accordance with normal exchange practices. If
the consideration to be paid in the Merger (or any portion
thereof) is to be delivered to any person other than the
person in whose name the certificate representing shares of
Common Stock surrendered in exchange therefor is registered,
it shall be a condition to such exchange that the
certificate so surrendered shall be properly endorsed or
otherwise be in proper form for transfer and that the person
requesting such exchange shall pay to the Paying Agent any
transfer or other taxes required by reason of the payment of
such consideration to a person other than the registered
holder of the certificate surrendered, or shall establish to
the satisfaction of the Paying Agent that such tax has been
paid or is not applicable. After the Effective Time, there
shall be no further transfer on the records of the Company
or its transfer agent of certificates representing shares of
Common Stock and if such certificates are presented to the
Company for transfer, they shall be cancelled against
delivery of the Merger Consideration as hereinabove
provided. Until surrendered as contemplated by this
Section 2.3(b), each certificate representing shares of
Common Stock (other than certificates representing shares to
be cancelled in accordance with Section 2.1(b) or Dissenting
Common Shares), shall be deemed at any time after the
Effective Time to represent only the right to receive upon
such surrender the Merger Consideration, without any
interest thereon, as contemplated by Section 2.1. No
interest will be paid or will accrue on any cash payable as
Merger Consideration.
(c) Letter of Transmittal. Promptly after the
Effective Time (but in no event more than 5 days
thereafter), the Surviving Corporation shall require the
Paying Agent to mail to each record holder of certificates
that immediately prior to the Effective Time represented
shares of Common Stock which have been converted pursuant to
Section 2.1, a form of letter of transmittal and
instructions for use in surrendering such certificates and
receiving the consideration to which such holder shall be
entitled therefor pursuant to Section 2.1.
(d) Distributions with Respect to Unexchanged
Shares. No dividends or other distributions with respect to
Parent Common Stock with a record date after the Effective
Time shall be paid to the holder of any certificate that
immediately prior to the Effective Time represented shares
of Common Stock which have been converted pursuant to
Section 2.1, until the surrender for exchange of such
certificate in accordance with this Article II. Following
surrender for exchange of any such certificate, there shall
be paid to the holder of such certificate, without interest,
(i) at the time of such surrender, the amount of dividends
or other distributions with a record date after the
Effective Time theretofore paid with respect to the number
of whole shares of Parent Common Stock into which the shares
of Common Stock represented by such certificate immediately
prior to the Effective Time were converted pursuant to
Section 2.1, and (ii) at the appropriate payment date, the
amount of dividends or other distributions with a record
date after the Effective Time, but prior to such surrender,
and with a payment date subsequent to such surrender,
payable with respect to such whole shares of Parent Common
Stock.
(e) No Further Ownership Rights in Common Stock.
The Merger Consideration paid upon the surrender for
exchange of certificates representing shares of Common Stock
in accordance with the terms of this Article II shall be
deemed to have been issued and paid in full satisfaction of
all rights pertaining to the shares of Common Stock
theretofore represented by such certificates, subject,
however, to the Surviving Corporation's obligation (if any)
to pay any dividends or make any other distributions with a
record date prior to the Effective Time which may have been
declared by the Company on such shares of Common Stock in
accordance with the terms of this Agreement or prior to the
date of this Agreement and which remain unpaid at the
Effective Time.
(f) No Fractional Shares. (i) No certificates
or scrip representing fractional shares of Parent Common
Stock shall be issued upon the surrender for exchange of
certificates that immediately prior to the Effective Time
represented shares of Common Stock which have been converted
pursuant to Section 2.1, and such fractional share interests
will not entitle the owner thereof to vote or to any rights
of a stockholder of Parent.
(ii) Notwithstanding any other provisions of this
Agreement, each holder of shares of Common Stock who would
otherwise have been entitled to receive a fraction of a
share of Parent Common Stock (after taking into account all
certificates delivered by such holder) shall receive, in
lieu thereof, cash (without interest) in an amount equal to
such fractional part of a share of Parent Common Stock
multiplied by the Average Parent Price.
(g) Termination of Payment Fund. Any portion of
the Payment Fund which remains undistributed to the holders
of the certificates representing shares of Common Stock or
Convertible Preferred Stock for 120 days after the Effective
Time shall be delivered to Parent, upon demand, and any
holders of shares of Common Stock who have not theretofore
complied with this Article II shall thereafter look only to
Parent and only as general creditors thereof for payment of
their claim for any Merger Consideration and any dividends
or distributions with respect to Parent Common Stock.
(h) No Liability. None of Parent, Sub, the
Surviving Corporation or the Paying Agent shall be liable to
any person in respect of any cash, shares, dividends or
distributions payable from the Payment Fund delivered to a
public official pursuant to any applicable abandoned
property, escheat or similar law. If any certificates
representing shares of Common Stock shall not have been
surrendered prior to five years after the Effective Time (or
immediately prior to such earlier date on which any Merger
Consideration in respect of such certificate would otherwise
escheat to or become the property of any Governmental Entity
(as defined in Section 3.1(c))), any such cash, shares,
dividends or distributions payable in respect of such
certificate shall, to the extent permitted by applicable
law, become the property of the Surviving Corporation, free
and clear of all claims or interest of any person previously
entitled thereto.
(i) Investment of Payment Fund. The Paying Agent
shall invest the Payment Fund, as directed by Parent, in
(i) direct obligations of the United States of America,
(ii) obligations for which the full faith and credit of the
United States of America is pledged to provide for the
payment of principal and interest or (iii) commercial paper
rated the highest quality by both Moody's Investors
Services, Inc. and Standard & Poor's Corporation, and any
net earnings with respect thereto shall be paid to Parent as
and when requested by Parent; provided that any such
investment or any such payment of earnings shall not delay
the receipt by holders of shares of Common Stock of the
Merger Consideration or holders of shares of Convertible
Preferred Stock of the amounts then due with respect to any
shares of Convertible Preferred Stock theretofore converted
in accordance with the terms thereof or otherwise impair
such holders' respective rights hereunder. In the event the
Payment Fund shall realize a loss on any such investment,
Parent shall promptly thereafter deposit in such Payment
Fund on behalf of the Surviving Corporation cash in an
amount sufficient to enable such Payment Fund to satisfy all
remaining obligations originally contemplated to be paid out
of such Payment Fund.
(j) Conversion of the Convertible Preferred
Stock. Until the Payment Fund is terminated pursuant to
Section 2.3(g), Parent and the Surviving Corporation shall,
and shall require the Paying Agent to, make the Payment Fund
available for the purpose of paying amounts due with respect
to any shares of Convertible Preferred Stock theretofore
converted in accordance with the terms thereof.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION 3.1. Representations and Warranties of
the Company. The Company represents and warrants to Parent
and Sub as follows:
(a) Organization, Standing and Corporate Power.
Each of the Company and each Significant Subsidiary of
the Company (as hereinafter defined) is a corporation
duly organized, validly existing and in good standing
under the laws of the jurisdiction in which it is
incorporated and has the requisite corporate power and
authority to carry on its business as now being
conducted. Each of the Company and each Significant
Subsidiary of the Company is duly qualified or licensed
to do business and is in good standing in each
jurisdiction in which the nature of its business or the
ownership or leasing of its properties makes such
qualification or licensing necessary, other than in
such jurisdictions where the failure to be so qualified
or licensed (individually or in the aggregate) would
not have a material adverse effect on the business,
financial condition or results of operations of the
Company and its subsidiaries taken as a whole. The
Company has delivered to Parent complete and correct
copies of its Charter and By-laws, as amended to the
date of this Agreement. For purposes of this
Agreement, a "Significant Subsidiary" of the Company
means each of Federal Kemper Life Assurance Company,
Kemper Financial Companies, Inc. ("KFC"), Kemper
Financial Services, Inc. ("KFS"), Kemper Investors Life
Insurance Company, Kemper Securities Holdings, Inc. and
Kemper Securities, Inc ("KSI") and any other subsidiary
of the Company that would constitute a Significant
Subsidiary within the meaning of Rule 1-02 of
Regulation S-X of the Securities and Exchange
Commission (the "SEC").
(b) Capital Structure. The authorized capital
stock of the Company consists of (i) 200,000,000 shares
of Common Stock, par value $5.00 per share, and
(ii) 20,000,000 shares of preferred stock, without par
value (the "Preferred Stock"). At the close of
business on May 31, 1994: (i) 33,545,959 shares of
Common Stock were issued and outstanding,
4,060,388 shares of Common Stock were reserved for
issuance pursuant to outstanding Company Stock Options,
53,928 shares of Common Stock were reserved for
issuance upon conversion of shares of Series A
Preferred Stock, 4,755,996 shares of Common Stock were
reserved for issuance upon conversion of shares of
Series E Preferred Stock and 31,611,214 shares of
Common Stock were held by the Company in its treasury;
(ii) 6,690,636.5 shares of Preferred Stock, consisting
of 23,998 shares of Series A Preferred Stock,
2,000,000 shares of Series C Preferred Stock,
66,638.5 shares of Series D Preferred Stock and
4,600,000 shares of Series E Preferred Stock, were
issued and outstanding; and (iii) 500,000 shares of
Series B Junior Participating Preferred Stock were
reserved for issuance upon exercise of the rights (the
"Rights") distributed to the holders of Common Stock
pursuant to the Rights Agreement dated as of July 18,
1990, between the Company and Harris Trust and Savings
Bank, as Rights Agent (the "Rights Agreement"). Except
as set forth above, at the close of business on
May 31, 1994, no shares of capital stock or other
equity securities of the Company were issued, reserved
for issuance or outstanding. All outstanding shares of
capital stock of the Company are, and all shares which
may be issued pursuant to the Company Stock Option
Plans or the Kemper Corporation Stock Purchase and
Dividend Reinvestment Plan (the "Dividend Reinvestment
Plan") or upon the conversion of the Series A Preferred
Stock and the Series E Preferred Stock or the exchange
of the Series D Preferred Stock will be, when issued,
duly authorized, validly issued, fully paid and
nonassessable and not subject to preemptive rights.
Except as set forth in Section 3.1(b) of the Disclosure
Schedule, no bonds, debentures, notes or other
indebtedness of the Company or any Significant
Subsidiary of the Company having the right to vote (or
convertible into, or exchangeable for, securities
having the right to vote) on any matters on which the
stockholders of the Company or any Significant
Subsidiary of the Company may vote are issued or
outstanding. Except as disclosed in Section 3.1(b) of
the Disclosure Schedule, all the outstanding shares of
capital stock of each Significant Subsidiary of the
Company have been validly issued and are fully paid and
nonassessable and are owned by the Company, by one or
more subsidiaries of the Company or by the Company and
one or more such subsidiaries, free and clear of all
pledges, claims, liens, charges, encumbrances and
security interests of any kind or nature whatsoever
(collectively, "Liens"). Except as set forth above or
in Section 3.1(b) of the Disclosure Schedule, neither
the Company nor any Significant Subsidiary of the
Company has any outstanding option, warrant,
subscription or other right, agreement or commitment
which either (i) obligates the Company or any
Significant Subsidiary of the Company to issue, sell or
transfer, repurchase, redeem or otherwise acquire or
vote any shares of the capital stock of the Company or
any Significant Subsidiary of the Company or
(ii) restricts the transfer of Common Stock. The
authorized capital stock of KFC consists of 150,000,000
shares of common stock, par value $.10 per share, which
shares are divided into 135,000,000 shares of Class A
Common Stock and 15,000,000 shares of Class B Common
Stock. At the close of business on March 31, 1994,
43,268,038 shares of Series A Common Stock of KFC and
8,334.6464 shares of Series B Common Stock of KFC were
issued and outstanding, 192,645 shares of Series B
Common Stock of KFC were reserved for issuance pursuant
to outstanding KFC employee stock options, no shares of
Preferred Stock of KFC were outstanding and
$44.2 million aggregate principal amount of KFC's
floating rate convertible subordinated debentures was
outstanding and not subject to mandatory redemption,
which are convertible into an aggregate of
1,690,580.0017 shares of Series B Common Stock of KFC.
$33.7 million aggregate principal amount of KFC's
floating rate convertible subordinated debentures
outstanding and not subject to mandatory redemption is
currently redeemable, and all outstanding KFC floating
rate convertible subordinated debentures will be
redeemable on and after May 10, 1995. If determined as
of March 31, 1994 in accordance with the terms of KFC's
Fourth Restated Certificate of Incorporation, the
formula purchase price per share for repurchases by KFC
of shares of its Series B Common Stock would be
negative $9.25 per share.
(c) Authority; Noncontravention. The
Company has the requisite corporate power and authority
to enter into this Agreement and, subject to the
approval of its stockholders as set forth in
Section 6.1(a) with respect to the consummation of the
Merger, to consummate the transactions contemplated by
this Agreement. The execution and delivery of this
Agreement by the Company and the consummation by the
Company of the transactions contemplated hereby have
been duly authorized by all necessary corporate action
on the part of the Company, subject, in the case of the
Merger, to the approval of its stockholders as set
forth in Section 6.1(a). This Agreement has been duly
executed and delivered by the Company and, assuming
this Agreement constitutes the valid and binding
agreement of Parent and Sub, constitutes a valid and
binding obligation of the Company, enforceable against
the Company in accordance with its terms. Except as
disclosed in Section 3.1(c) of the Disclosure Schedule,
the execution and delivery of this Agreement do not,
and the consummation of the transactions contemplated
by this Agreement and compliance with the provisions
hereof will not, (i) conflict with any of the
provisions of the Charter or By-laws of the Company or
the comparable documents of any Significant Subsidiary
of the Company, (ii) subject to the governmental
filings and other matters referred to in the following
sentence, conflict with, result in a breach of or
default (with or without notice or lapse of time, or
both) under, or give rise to a right of termination,
cancellation or acceleration of any obligation or loss
of a material benefit under, or require the consent of
any person under, any indenture or other agreement,
permit, concession, franchise, license or similar
instrument or undertaking to which the Company or any
of its subsidiaries is a party or by which the Company
or any of its subsidiaries or any of their assets is
bound or affected, or (iii) subject to the governmental
filings and other matters referred to in the following
sentence, contravene any law, rule or regulation of any
state or of the United States or any political
subdivision thereof or therein, or any order, writ,
judgment, injunction, decree, determination or award
currently in effect, which, in the case of clauses (ii)
and (iii) above, singly or in the aggregate, would have
a material adverse effect on the business, financial
condition or results of operations of the Company and
its subsidiaries taken as a whole. No consent,
approval or authorization of, or declaration or filing
with, or notice to, any governmental agency or
regulatory authority (a "Governmental Entity") which
has not been received or made, is required by or with
respect to the Company or any of its subsidiaries in
connection with the execution and delivery of this
Agreement by the Company or the consummation by the
Company of the transactions contemplated hereby, except
for (i) the filing of premerger notification and report
forms under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act")
with respect to the Merger and with respect to the
transactions contemplated by the Citibank Commitment
Letter (as hereinafter defined), (ii) the filings
and/or notices required under the insurance laws of the
jurisdictions set forth in Section 3.1(c)(i) of the
Disclosure Schedule, (iii) the filing with the SEC of
(x) a proxy statement relating to the approval by the
stockholders of the Company of the Merger and certain
other corporate matters (such proxy statement, together
with the proxy statement relating to the approval of
the issuance of Parent Common Stock in the Merger by an
affirmative vote of the holders of a majority of the
shares of the Parent Common Stock present, or
represented, and entitled to vote thereon at the
meeting of holders of Parent Common Stock to be called
therefor (the "Parent Stockholder Approval"), in each
case as amended or supplemented from time to time, the
"Joint Proxy Statement"), and (y) such reports under
the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), as may be required in connection with
this Agreement and the transactions contemplated by
this Agreement, (iv) the filing of the certificate of
merger with the Delaware Secretary of State and
appropriate documents with the relevant authorities of
other states in which the Company is qualified to do
business, (v) the consents, approvals and notices as
are set forth in Sections 5.13 and 5.14 of this
Agreement required under the Investment Company Act of
1940, as amended (the "1940 Act"), and the Investment
Advisers Act of 1940, as amended (the "Advisers Act"),
(vi) such other consents, approvals, authorizations,
filings or notices as are set forth in
Section 3.1(c)(ii) of the Disclosure Schedule and
(vii) any applicable filings under state anti-takeover
laws, or filings, authorizations, consents or approvals
the failure to make or obtain which, in the aggregate,
would not have a material adverse effect on the
business, financial condition or results of operations
of the Company and its subsidiaries taken as a whole.
(d) SEC Documents. (i) The Company has filed all
required reports, schedules, forms, statements and
other documents with the SEC since January 1, 1994
(such reports, schedules, forms, statements and other
documents other than those that were filed by the
Company with the SEC in connection with the proxy
contest initiated by General Electric Capital
Corporation are hereinafter referred to as the "SEC
Documents"); (ii) as of their respective dates, the SEC
Documents complied in all material respects with the
requirements of the Securities Act of 1933, as amended
(the "Securities Act"), or the Exchange Act, as the
case may be, and the rules and regulations of the SEC
promulgated thereunder applicable to such SEC
Documents, and none of the SEC Documents as of such
dates contained any untrue statement of a material fact
or omitted to state a material fact required to be
stated therein or necessary in order to make the
statements therein, in light of the circumstances under
which they were made, not misleading; and (iii) the
consolidated financial statements of the Company
included in the SEC Documents comply as to form in all
material respects with applicable accounting
requirements and the published rules and regulations of
the SEC with respect thereto, have been prepared in
accordance with generally accepted accounting
principles (except, in the case of unaudited
consolidated quarterly statements, as permitted by
Form 10-Q of the SEC) applied on a consistent basis
during the periods involved (except as may be indicated
in the notes thereto) and fairly present the
consolidated financial position of the Company and its
consolidated subsidiaries as of the dates thereof and
the consolidated results of their operations and cash
flows for the periods then ended (subject, in the case
of unaudited quarterly statements, to normal year-end
audit adjustments). Except to the extent that
information contained in any SEC Document has been
revised or superseded by a later Filed SEC Document (as
defined in Section 3.1(f)), none of the SEC Documents
contains any untrue statement of a material fact or
omits to state any material fact required to be stated
therein or necessary in order to make the statements
therein, in light of the circumstances under which they
were made, not misleading.
(e) Information Supplied. None of the
information supplied or to be supplied by the Company
specifically for inclusion or incorporation by
reference in (i) the registration statement on Form S-4
to be filed with the SEC by Parent in connection with
the issuance of Parent Common Stock in the Merger (the
"Form S-4") will, at the time the Form S-4 is filed
with the SEC, at any time it is amended or supplemented
or at the time it becomes effective under the
Securities Act, contain any untrue statement of a
material fact or omit to state any material fact
required to be stated therein or necessary to make the
statements therein not misleading or (ii) the Joint
Proxy Statement will, at the date it is first mailed to
the Company's stockholders or at the time of the
Stockholders Meeting (as defined in Section 5.2),
contain any untrue statement of a material fact or omit
to state any material fact required to be stated
therein or necessary in order to make the statements
therein, in light of the circumstances under which they
are made, not misleading. The Joint Proxy Statement
will comply as to form in all material respects with
the requirements of the Exchange Act and the rules and
regulations thereunder, except that no representation
or warranty is made by the Company with respect to
statements made or incorporated by reference therein
based on information supplied by Parent or Sub
specifically for inclusion or incorporation by
reference in the Joint Proxy Statement.
(f) Absence of Certain Changes or Events. Except
as disclosed in the SEC Documents filed and publicly
available prior to the date of this Agreement (the
"Filed SEC Documents") or in Section 3.1(f) of the
Disclosure Schedule, since the date of the most recent
audited financial statements included in the Filed SEC
Documents, the Company and its subsidiaries have
conducted their business only in the ordinary course,
and there has not been (i) any change which would have
a material adverse effect on the business, financial
condition or results of operations of the Company and
its subsidiaries taken as a whole, (ii) any
declaration, setting aside or payment of any dividend
or other distribution (whether in cash, stock or
property) with respect to any of the Company's
outstanding capital stock (other than regular quarterly
cash dividends of $.23 per share of Common Stock and
regular cash dividends on Company Preferred Stock, in
each case in accordance with usual record and payment
dates and in accordance with the Company's present
dividend policy), (iii) any split, combination or
reclassification of any of its outstanding capital
stock or any issuance or the authorization of any
issuance of any other securities in respect of, in lieu
of or in substitution for shares of its outstanding
capital stock, (iv) (x) any granting by the Company or
any of its subsidiaries to any executive officer or
other employee of the Company or any of its
subsidiaries of any increase in compensation, except in
the ordinary course of business consistent with prior
practice or as was required under employment agreements
in effect as of the date of the most recent audited
financial statements included in the Filed SEC
Documents, (y) any granting by the Company or any of
its subsidiaries to any such executive officer of any
increase in severance or termination pay, except in the
ordinary course of business consistent with prior
practice or as was required under any employment,
severance or termination agreements in effect as of the
date of the most recent audited financial statements
included in the Filed SEC Documents or (z) any entry by
the Company or any of its subsidiaries into any
employment, severance or termination agreement with any
such executive officer except in the ordinary course of
business consistent with prior practice (it being
understood that, as used in this clause (iv), "prior
practice" shall mean the practice of the Company and
its subsidiaries prior to 1994) or (v) any change in
accounting methods, principles or practices by the
Company or any of its subsidiaries materially affecting
its assets, liabilities or business, except insofar as
may have been required by a change in generally
accepted accounting principles. Parent acknowledges
that there may be or have been disruptions to the
Company's business as a result of the anticipation of a
merger or acquisition involving the Company and/or its
subsidiaries, and Parent and Sub agree that such
disruptions and any changes attributable thereto shall
not constitute a breach of clause (i) of this
Section 3.1(f).
(g) Absence of Changes in Benefit Plans. Except
as disclosed in the Filed SEC Documents or in
Section 3.1(g) of the Disclosure Schedule, since the
date of the most recent audited financial statements
included in the Filed SEC Documents, there has not been
any adoption or amendment in any material respect by
the Company or any of its subsidiaries of any
collective bargaining agreement or any Benefit Plan (as
defined in Section 3.1(h)). Except as disclosed in the
Filed SEC Documents or in Section 3.1(g) of the
Disclosure Schedule, there exist no employment,
consulting, severance, termination or indemnification
agreements, arrangements or understandings between the
Company or any of its subsidiaries and any current or
former employee, officer or director of the Company or
any of its subsidiaries.
(h) Benefit Plans. (i) Each "employee pension
benefit plan" (as defined in Section 3(2) of the
Employee Retirement Income Security Act of 1974, as
amended ("ERISA")) (hereinafter a "Pension Plan"),
"employee welfare benefit plan" (as defined in Section
3(1) of ERISA) (hereinafter a "Welfare Plan"), and each
other plan, arrangement or policy (written or oral)
relating to stock options, stock purchases,
compensation, deferred compensation, severance, fringe
benefits or other employee benefits, in each case
maintained or contributed to, or required to be
maintained or contributed to, by the Company and its
subsidiaries for the benefit of any present or former
officers, employees, agents, directors or independent
contractors of the Company or any of its subsidiaries
(all the foregoing being herein called "Benefit Plans")
has been administered in accordance with its terms
except where failure to administer in accordance with
such terms would not have a material adverse effect on
the business, financial condition or results of
operations of the Company and its subsidiaries taken as
a whole. The Company, its subsidiaries and all the
Benefit Plans are in compliance with the applicable
provisions of ERISA, the Internal Revenue Code of 1986,
as amended (the "Code"), all other applicable laws and
all applicable collective bargaining agreements except
where failure to comply would not have a material
adverse effect on the business, financial condition or
results of operations of the Company and its
subsidiaries taken as a whole.
(ii) None of the Company or any other person or
entity that together with the Company is treated as a
single employer under Section 414(b), (c), (m) or (o)
of the Code (each a "Commonly Controlled Entity")
(a) has incurred any liability to a Pension Plan
covered by Title IV of ERISA (other than for
contributions not yet due) or to the Pension Benefit
Guaranty Corporation (other than for the payment of
premiums not yet due) that, when aggregated with other
such liabilities, would result in a material liability
to the Company, which liability has not been fully paid
as of the date hereof.
(iii) No Commonly Controlled Entity is required to
contribute to any "multiemployer plan" (as defined in
Section 4001(a)(3) of ERISA) or has withdrawn from any
multiemployer plan where such withdrawal has resulted
or would result in any "withdrawal liability" (within
the meaning of Section 4201 of ERISA) that has not been
fully paid.
(i) Taxes. (i) Each of the Company and its
subsidiaries has filed all tax returns and reports
required to be filed by it or requests for extensions
to file such returns or reports have been timely filed,
granted and have not expired, except to the extent that
such failures to file or to have extensions granted
that remain in effect individually and in the aggregate
would not have a material adverse effect on the
business, financial condition or results of operations
of the Company and its subsidiaries taken as a whole.
All tax returns filed by the Company and each of its
subsidiaries are complete and accurate except to the
extent that such failure to be complete and accurate
would not have a material adverse effect on the
business, financial condition or results of operations
of the Company and its subsidiaries taken as a whole.
The Company and each of its subsidiaries has paid (or
the Company has paid on the subsidiaries' behalf) all
taxes shown as due on such returns, and the most recent
financial statements contained in the Filed SEC
Documents reflect an adequate reserve for all taxes
payable by the Company and its subsidiaries for all
taxable periods and portions thereof accrued through
the date of such financial statements.
(ii) No deficiencies for any taxes have been
proposed, asserted or assessed against the Company or
any of its subsidiaries that are not adequately
reserved for, except for deficiencies that individually
or in the aggregate would not have a material adverse
effect on the business, financial condition or results
of operations of the Company and its subsidiaries taken
as a whole, and, except as set forth on Section 3.1(j)
of the Disclosure Schedule, no requests for waivers of
the time to assess any such taxes have been granted or
are pending. The Federal and Illinois income tax
returns of the Company and each of its subsidiaries
consolidated in such returns have been examined by and
settled with the United States Internal Revenue Service
or the Illinois Department of Revenue, as the case may
be, or the statute of limitations on assessment or
collection of any Federal or Illinois income taxes due
from the Company or any of its subsidiaries has
expired, for all taxable years of the Company or any of
its subsidiaries through the taxable year ended
December 31, (a) 1983 for Federal income taxes,
(b) 1979 for Illinois insurance unitary income taxes
and (c) 1987 for Illinois non-insurance unitary income
taxes.
(iii) As used in this Agreement, "taxes" shall
include all Federal, state, local and foreign income,
property, sales, excise, employment, payroll,
withholding and other taxes, tariffs or governmental
charges of any nature whatsoever.
(j) No Excess Parachute Payments; Section 162(m)
of the Code. (i) Except as disclosed in
Section 3.1(j) of the Disclosure Schedule, any amount
that could be received (whether in cash or property or
the vesting of property) as a result of any of the
transactions contemplated by this Agreement by any
employee, officer or director of the Company or any of
its affiliates who is a "disqualified individual" (as
such term is defined in proposed Treasury Regulation
Section 1.280G-1) under any employment, severance or
termination agreement, other compensation arrangement
or Benefit Plan currently in effect would not be
characterized as an "excess parachute payment" (as such
term is defined in Section 280G(b)(1) of the Code).
(ii) Except as disclosed in Section 3.1(j) of the
Disclosure Schedule, the disallowance of a deduction
under Section 162(m) of the Code for employee
remuneration will not apply to any amount paid or
payable by the Company or any subsidiary of the Company
under any contract, Benefit Plan, program, arrangement
or understanding currently in effect.
(k) Voting Requirements. The affirmative vote of
a majority of the votes cast by the holders of the
shares of Common Stock entitled to vote thereon at the
Stockholders Meeting with respect to the approval of
the Merger is the only vote of the holders of any class
or series of the Company's capital stock necessary to
approve this Agreement and the transactions
contemplated by this Agreement.
(l) Compliance with Applicable Laws. (i) Each of
the Company and its subsidiaries and the Company Funds
has in effect all Federal, state, local and foreign
governmental approvals, authorizations, certificates,
filings, franchises, licenses, notices, permits and
rights ("Permits") necessary for it to own, lease or
operate its properties and assets and to carry on its
business as now conducted, and there has occurred no
default under any such Permit, except for the lack of
Permits and for defaults under Permits which lack or
default individually or in the aggregate would not have
a material adverse effect on the business, financial
condition or results of operations of the Company and
its subsidiaries taken as a whole. Except as disclosed
in the Filed SEC Documents, the Company and its
subsidiaries and the Company Funds are in compliance
with all applicable statutes, laws, ordinances, rules,
orders and regulations of any Governmental Entity,
except for possible noncompliance which individually or
in the aggregate would not have a material adverse
effect on the business, financial condition or results
of operations of the Company and its subsidiaries taken
as a whole. Except as disclosed in the Filed SEC
Documents and except for routine examinations by state
Governmental Entities charged with supervision of
insurance companies ("Insurance Regulators"), as of the
date of this Agreement, to the knowledge of the
Company, no investigation by any Governmental Entity
with respect to the Company or any of its subsidiaries
or any of the Company Funds is pending or threatened,
other than, in each case, those the outcome of which,
as far as reasonably can be foreseen, will not have a
material adverse effect on the business, financial
condition or results of operations of the Company and
its subsidiaries taken as a whole.
(ii) The Annual Statements (including without
limitation the Annual Statements of any separate
accounts) for the year ended December 31, 1993,
together with all exhibits and schedules thereto, and
financial statements relating thereto, and any
actuarial opinion, affirmation or certification filed
in connection therewith, and the Quarterly Statements
for the periods ended after January 1, 1994, together
with all exhibits and schedules thereto, with respect
to each subsidiary of the Company that is a regulated
insurance company (an "Insurance Company"), in each
case as filed with the applicable Insurance Regulator
of its jurisdiction of domicile, were prepared in
conformity with statutory accounting practices
prescribed or permitted by such Insurance Regulator
applied on a consistent basis ("SAP"), present fairly,
to the extent required by and in conformity with SAP,
the statutory financial condition of such Insurance
Company at their respective dates and the results of
operations, changes in capital and surplus and cash
flow of such Insurance Company for each of the periods
then ended, and were correct in all material respects
when filed and there were no material omissions
therefrom when filed. No deficiencies or violations
material to the financial condition or operations of
any Insurance Company have been asserted in writing by
any Insurance Regulator which have not been cured or
otherwise resolved to the satisfaction of such
Insurance Regulator and which have not been disclosed
in writing to Parent prior to the date of this
Agreement.
(m) Opinion of Financial Advisor. The Company
has received the opinion of Goldman, Sachs & Co., dated
the date hereof, to the effect that, as of such date,
the consideration to be received in the Merger by the
Company's stockholders is fair to the Company's
stockholders.
(n) Article Fifteenth of the Charter. The Board
of Directors of the Company (including a majority of
the "Continuing Directors", as defined in the Charter)
has approved the execution and delivery by the Company
of this Agreement and the consummation of the Merger
and the other transactions contemplated by this
Agreement, and such approval is sufficient to render
inapplicable to this Agreement, the Merger and the
other transactions contemplated by this Agreement the
restrictions contained in Article Fifteenth of the
Charter.
(o) Rights Agreement. The Rights Agreement has
been amended so as to provide that neither Parent nor
Sub will become an "Acquiring Person", and that no
"Stock Acquisition Date" or "Distribution Date" (as
such terms are defined in the Rights Agreement) will
occur, solely as a result of the approval, execution or
delivery of this Agreement or the consummation of the
Merger.
(p) Brokers. No broker, investment banker,
financial advisor or other person, other than Goldman,
Sachs & Co., the fees and expenses of which will be
paid by the Company, is entitled to any broker's,
finder's, financial advisor's or other similar fee or
commission in connection with the transactions
contemplated by this Agreement based upon arrangements
made by or on behalf of the Company.
(q) Ineligible Persons. None of the Company or
any "affiliated person" (as defined in the 1940 Act)
thereof (i) is ineligible pursuant to Section 9(a) of
the 1940 Act to serve as an investment adviser (or in
any other capacity contemplated by the 1940 Act) to a
registered investment company or (ii) to the best
knowledge of the senior officers of the Company as of
the date hereof, has engaged in any of the conduct
specified in Section 9(b) of the 1940 Act or
Section 203(e) of the Advisers Act prior to the date
hereof that would be reasonably likely to result in SEC
action to disqualify the Company or any of its
affiliates as an investment adviser.
SECTION 3.2. Representations and Warranties of
Parent and Sub. Parent and Sub represent and warrant to the
Company as follows:
(a) Organization, Standing and Corporate Power.
Each of Parent and Sub and each Significant Subsidiary
of Parent (as hereinafter defined) is a corporation
duly organized, validly existing and in good standing
under the laws of the jurisdiction in which it is
incorporated and has the requisite corporate power and
authority to carry on its business as now being
conducted. Each of Parent and Sub and each Significant
Subsidiary of Parent is duly qualified or licensed to
do business and is in good standing in each
jurisdiction in which the nature of its business or the
ownership or leasing of its properties makes such
qualification or licensing necessary, other than in
such jurisdictions where the failure to be so qualified
or licensed (individually or in the aggregate) would
not have a material adverse effect on the business,
financial condition or results of operations of Parent
and its subsidiaries taken as a whole. Parent has
delivered to the Company complete and correct copies of
its Articles of Incorporation and By-laws, as amended
to the date of this Agreement. For purposes of this
Agreement, a "Significant Subsidiary" of Parent means
any subsidiary of Parent that would constitute a
Significant Subsidiary within the meaning of Rule 1-02
of Regulation S-X of the SEC.
(b) Capital Structure. The authorized capital
stock of Parent consists of 500,000,000 shares of
Parent Common Stock, without par value, and 20,000,000
shares of preferred stock, without par value. At the
close of business on June 24, 1994, (i) 24,435,774
shares of Parent Common Stock and 5,749,725 shares of
$3.25 Series D Cumulative Convertible Preferred Stock
of Parent were issued and outstanding, (ii) 16,138,366
shares of Parent Common Stock were held by subsidiaries
of Parent or by Parent in its treasury, (iii) 5,986,666
shares of Parent Common Stock were reserved for
issuance pursuant to outstanding options to purchase
shares of Parent Common Stock granted under Parent's
stock option plans (the "Parent Stock Plans") and
(iv) 4,509,509 shares of Parent Common Stock were
reserved for issuance upon conversion of Parent's $3.25
Series D Cumulative Convertible Preferred Stock.
Except as set forth above, at the close of business on
June 24, 1994, no shares of capital stock or other
voting securities of Parent were issued, reserved for
issuance or outstanding. All outstanding shares of
capital stock of Parent are, and all shares which may
be issued pursuant to this Agreement will be, when
issued, duly authorized, validly issued, fully paid and
nonassessable and not subject to preemptive rights.
The authorized capital stock of Sub consists of
1,000 shares of common stock, par value $1.00 per
share, all of which have been validly issued, are fully
paid and nonassessable and are owned by Parent free and
clear of any Lien. No bonds, debentures, notes or
other indebtedness of Parent or any Significant
Subsidiary of Parent having the right to vote (or
convertible into, or exchangeable for, securities
having the right to vote) on any matters on which the
stockholders of Parent or any Significant Subsidiary of
Parent may vote are issued or outstanding. All the
outstanding shares of capital stock of each Significant
Subsidiary of Parent (other than Bankers Life Holding
Corporation) have been validly issued and are fully
paid and nonassessable and are owned by Parent, free
and clear of all Liens. Except as set forth above,
neither Parent nor any Significant Subsidiary of Parent
has any outstanding option, warrant, subscription or
other right, agreement or commitment which either (i)
obligates Parent or any Significant Subsidiary of
Parent to issue, sell or transfer, repurchase, redeem
or otherwise acquire or vote any shares of the capital
stock of Parent or any Significant Subsidiary of Parent
or (ii) restricts the transfer of Parent Common Stock.
(c) Authority; Noncontravention. Parent and Sub
have all requisite corporate power and authority to
enter into this Agreement and, subject to the Parent
Stockholder Approval with respect to the issuance of
Parent Common Stock in the Merger, to consummate the
transactions contemplated by this Agreement. The
execution and delivery of this Agreement by Parent and
Sub and the consummation by Parent and Sub of the
transactions contemplated by this Agreement have been
duly authorized by all necessary corporate action on
the part of Parent and Sub and by the stockholder of
Sub, subject, in the case of the issuance of Parent
Common Stock in the Merger, to the Parent Stockholder
Approval. This Agreement has been duly executed and
delivered by and, assuming this Agreement constitutes
the valid and binding agreement of the Company,
constitutes a valid and binding obligation of each of
Parent and Sub, enforceable against such party in
accordance with its terms. The execution and delivery
of this Agreement do not, and the consummation of the
transactions contemplated by this Agreement and
compliance with the provisions of this Agreement will
not (i) conflict with any of the provisions of the
Articles of Incorporation or By-laws of Parent, the
Certificate of Incorporation or By-laws of Sub or the
comparable documents of any Significant Subsidiary of
Parent, (ii) subject to the governmental filings and
other matters referred to in the following sentence,
conflict with, result in a breach of or default (with
or without notice or lapse of time, or both) under, or
give rise to a right of termination, cancellation or
acceleration of any obligation or loss of a material
benefit under, or require the consent of any person
under, any indenture, or other agreement, permit,
concession, franchise, license or similar instrument or
undertaking to which Parent or any of its subsidiaries
is a party or by which Parent or any of its
subsidiaries or any of their assets is bound or
affected, or (iii) subject to the governmental filings
and other matters referred to in the following
sentence, contravene any law, rule or regulation of any
state or of the United States or any political
subdivision thereof or therein, or any order, writ,
judgment, injunction, decree, determination or award
currently in effect, which, in the case of clauses (ii)
and (iii) above, singly or in the aggregate, would have
a material adverse effect on the business, financial
condition or results of operations of Parent and its
subsidiaries taken as a whole. No consent, approval or
authorization of, or declaration or filing with, or
notice to, any Governmental Entity which has not been
received or made is required by or with respect to
Parent or Sub in connection with the execution and
delivery of this Agreement by Parent or Sub or the
consummation by Parent or Sub, as the case may be, of
any of the transactions contemplated by this Agreement,
except for (i) the filing of premerger notification and
report forms under the HSR Act with respect to the
Merger and with respect to the transactions
contemplated by the Citibank Commitment Letter,
(ii) the filings and/or notices required under the
insurance laws of the jurisdictions set forth in
Section 3.1(c)(i) of the Disclosure Schedule, (iii) the
filing with the SEC of the Form S-4, the Joint Proxy
Statement relating to the Parent Stockholder Approval
and such reports under the Exchange Act as may be
required in connection with this Agreement and the
transactions contemplated hereby, (iv) the filing of
the certificate of merger with the Delaware Secretary
of State, and appropriate documents with the relevant
authorities of other states in which the Company is
qualified to do business, (v) such other consents,
approvals, authorizations, filings or notices as are
set forth in Section 3.1(c)(ii) of the Disclosure
Schedule and (vi) any applicable filings under state
anti-takeover laws, or filings, authorizations,
consents or approvals the failure to make or obtain
which, in the aggregate, would not have a material
adverse effect on the business, financial condition or
results of operations of Parent and its subsidiaries
taken as a whole.
(d) SEC Documents. Parent has filed all required
reports, schedules, forms, statements and other
documents with the SEC since January 1, 1994 (the
"Parent SEC Documents"). As of their respective dates,
the Parent SEC Documents complied in all material
respects with the requirements of the Securities Act or
the Exchange Act, as the case may be, and the rules and
regulations of the SEC promulgated thereunder
applicable to such Parent SEC Documents, and none of
the Parent SEC Documents as of such dates contained any
untrue statement of a material fact or omitted to state
a material fact required to be stated therein or
necessary in order to make the statements therein, in
light of the circumstances under which they were made,
not misleading. The financial statements of Parent
included in the Parent SEC Documents comply as to form
in all material respects with applicable accounting
requirements and the published rules and regulations of
the SEC with respect thereto, have been prepared in
accordance with generally accepted accounting
principles (except, in the case of unaudited
statements, as permitted by Form 10-Q of the SEC)
applied on a consistent basis during the periods
involved (except as may be indicated in the notes
thereto) and fairly present the consolidated financial
position of Parent and its consolidated subsidiaries as
of the dates thereof and the consolidated results of
their operations and cash flows for the periods then
ended (subject, in the case of unaudited statements, to
normal year-end audit adjustments). Except to the
extent that information contained in any Parent SEC
Document has been revised or superseded by a later
Filed Parent SEC Document (as defined in
Section 3.2(f)), none of the Parent SEC Documents
contains any untrue statement of a material fact or
omits to state any material fact required to be stated
therein or necessary in order to make the statements
therein, in light of the circumstances under which they
were made, not misleading.
(e) Information Supplied. None of the
information supplied or to be supplied by Parent or Sub
specifically for inclusion or incorporation by
reference in (i) the Form S-4 will, at the time the
Form S-4 is filed with the SEC, at any time it is
amended or supplemented or at the time it becomes
effective under the Securities Act, contain any untrue
statement of a material fact or omit to state any
material fact required to be stated therein or
necessary to make the statements therein not
misleading, or (ii) the Joint Proxy Statement will, at
the date the Joint Proxy Statement is first mailed to
Parent's stockholders or at the time of the Parent
Stockholders Meeting (as defined in Section 5.2),
contain any untrue statement of a material fact or omit
to state any material fact required to be stated
therein or necessary in order to make the statements
therein, in light of the circumstances under which they
are made, not misleading. The Form S-4 will comply as
to form in all material respects with the requirements
of the Securities Act and the rules and regulations
promulgated thereunder and the Joint Proxy Statement
will comply as to form in all material respects with
the requirements of the Exchange Act and the rules and
regulations promulgated thereunder, except that no
representation or warranty is made by Parent or Sub
with respect to statements made or incorporated by
reference in either the Form S-4 or the Joint Proxy
Statement based on information supplied by the Company
specifically for inclusion or incorporation by
reference therein.
(f) Absence of Certain Changes or Events. Except
as disclosed in the Parent SEC Documents filed and
publicly available prior to the date of this Agreement
(the "Filed Parent SEC Documents"), since the date of
the most recent audited financial statements included
in the Filed Parent SEC Documents, Parent has conducted
its business only in the ordinary course, and there has
not been (i) any change which would have a material
adverse effect on the business, financial condition or
results of operations of Parent and its subsidiaries,
taken as a whole, (ii) any declaration, setting aside
or payment of any dividend or distribution (whether in
cash, stock or property) with respect to any of
Parent's outstanding capital stock (other than regular
quarterly cash dividends of $.125 per share on Parent
Common Stock and regular cash dividends on the Parent's
$3.25 Series D Cumulative Convertible Preferred Stock,
in each case in accordance with usual record and
payment dates and in accordance with the Parent's
present dividend policy), (iii) any split, combination
or reclassification of any of its outstanding capital
stock or any issuance or the authorization of any
issuance of any other securities in respect of, in lieu
of or in substitution for shares of its capital stock,
or (iv) any change in accounting methods, principles or
practices by Parent materially affecting its assets,
liabilities or business, except insofar as may have
been disclosed in the Filed Parent SEC Documents or
required by a change in generally accepted accounting
principles.
(g) Voting Requirements. The affirmative vote of
the holders of a majority of the shares of Parent
Common Stock present, or represented, and entitled to
vote thereon at the Parent Stockholders Meeting with
respect to the issuance of shares of Parent Common
Stock in the Merger is the only vote of the holders of
any class or series of Parent's capital stock necessary
to approve this Agreement and the transactions
contemplated by this Agreement.
(h) Opinion of Financial Advisor. Parent has
received the opinion of Morgan Stanley & Co.
Incorporated, to the effect that, as of the date of
this Agreement, the consideration to be paid to the
Company's stockholders in the Merger is fair to Parent
from a financial point of view.
(i) Benefit Plans. Parent and its subsidiaries
are in compliance in all material respects with the
applicable provisions of ERISA and the Code with
respect to each material "employee benefit plan" (as
defined in Section 3(3) of ERISA) maintained,
contributed to or required to be maintained or
contributed to by Parent or its subsidiaries for the
benefit of any present officers, employees or directors
of Parent or any of its subsidiaries in the United
States.
(j) Taxes. (i) Each of Parent and its
subsidiaries has filed all tax returns and reports
required to be filed by it or requests for extensions
to file such returns or reports have been timely filed,
granted and have not expired, except to the extent that
such failures to file or to have extensions granted
that remain in effect individually or in the aggregate
would not have a material adverse effect on Parent.
All tax returns filed by Parent and each of its
subsidiaries are complete and accurate in all material
respects to the knowledge of Parent. Parent and each
of its subsidiaries have paid (or Parent has paid on
its subsidiaries' behalf) all taxes shown as due on
such returns, and the most recent financial statements
contained in the Filed Parent SEC Documents reflect an
adequate reserve for all taxes payable by Parent and
its subsidiaries for all taxable periods and portions
thereof accrued through the date of such financial
statements.
(ii) No deficiencies for any taxes have been
proposed, asserted or assessed against Parent or any of
its subsidiaries that are not adequately reserved for,
except for deficiencies that individually or in the
aggregate would not have a material adverse effect on
Parent, and no requests for waivers of the time to
assess any such taxes have been granted or are pending.
The Federal and Indiana income tax returns of Parent
and each of its subsidiaries consolidated in such
returns have been examined by and settled with the
United States Internal Revenue Service or the Indiana
Department of Revenue, as the case may be, or the
statute of limitations for the assessment or collection
of Federal or Indiana income taxes due from Parent or
its subsidiaries has expired, for all taxable years of
Parent or any of its subsidiaries through and
including, the taxable year ended December 31, 1989,
for Federal income taxes and December 31, 1991, for
Indiana income taxes.
(k) Compliance with Applicable Laws. Each of
Parent, its subsidiaries and any other entity
controlled by or under common control with Parent the
business, financial condition or results of operations
of which is material to Parent and its subsidiaries,
taken as a whole (a "Material Parent Entity") has in
effect all Permits necessary for it to own, lease or
operate its properties and assets and to carry on its
business as now conducted, and there has occurred no
default under any such Permit, except for the lack of
Permits and for defaults under Permits which lack or
default individually or in the aggregate would not have
a material adverse effect on the business, financial
condition or results of operations of Parent and its
subsidiaries taken as a whole. Except as disclosed in
the Filed Parent SEC Documents, Parent, its
subsidiaries and the Material Parent Entities are in
compliance with all applicable statutes, laws,
ordinances, rules, orders and regulations of any
Governmental Entity, except for possible noncompliance
which individually or in the aggregate would not have a
material adverse effect on the business, financial
condition or results of operations of Parent and its
subsidiaries taken as a whole.
(l) Commitment Letters. True and correct copies
of the Senior Facilities Commitment Letter dated
June 21, 1994, from Citibank, N.A., and Citicorp
Securities, Inc. to Parent (the "Citibank Commitment
Letter"), the letter dated June 22, 1994, from Morgan
Stanley & Co. Incorporated to Parent (the "Morgan
Stanley Highly Confident Letter") and the letter dated
June 23, 1994, from the general partner of Conseco
Capital Partners II, L.P. to the Chairman of the Board
of the Company (the "CCP II Letter") have been
delivered to the Company.
(m) No Prior Activities. Sub has not incurred,
and will not incur, directly or through any subsidiary,
any liabilities or obligations for borrowed money or
otherwise, except incidental liabilities or obligations
not for borrowed money incurred in connection with its
organization and except in connection with obtaining
financing in connection with the Merger. Except as
contemplated by this Agreement, Sub (i) has not
engaged, directly or through any subsidiary, in any
business activities of any type or kind whatsoever,
(ii) has not entered into any agreements or
arrangements with any person or entity, and (iii) is
not subject to or bound by any obligation or
undertaking.
(n) Ineligible Persons. None of Parent or any
"affiliated person" (as defined in the 1940 Act)
thereof (i) is ineligible pursuant to Section 9(a) of
the 1940 Act to serve as an investment adviser (or in
any other capacity contemplated by the 1940 Act) to a
registered investment company or (ii) to the best
knowledge of the senior officers of Parent as of the
date hereof, has engaged in any of the conduct
specified in Section 9(b) of the 1940 Act or
Section 203(e) of the Advisers Act prior to the date
hereof that would be reasonably likely to result in SEC
action to disqualify Parent or any of its affiliates as
an investment adviser.
(o) Brokers. No broker, investment banker,
financial advisor or other person, other than Morgan
Stanley & Co. Incorporated, the fees and expenses of
which will be paid by Parent, is entitled to any
broker's, finder's, financial advisor's or other
similar fee or commission in connection with the
transactions contemplated by this Agreement based upon
arrangements made by or on behalf of Parent.
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS PRIOR TO
MERGER
SECTION 4.1. (a) Conduct of Business of the
Company. Except as contemplated by this Agreement, during
the period from the date of this Agreement to the Effective
Time, the Company shall, and shall cause its subsidiaries
to, act and carry on their respective businesses in the
ordinary course of business and, to the extent consistent
therewith, use reasonable efforts to preserve intact their
current business organizations, keep available the services
of their current key officers and employees and preserve the
goodwill of those engaged in material business relationships
with them. Without limiting the generality of the
foregoing, during the period from the date of this Agreement
to the Effective Time, the Company shall not, and shall not
permit any of its subsidiaries to, without the prior consent
of Parent:
(i) (x) declare, set aside or pay any dividends
on, or make any other distributions (whether in cash,
stock or property) in respect of, any of the Company's
outstanding capital stock (other than regular quarterly
cash dividends not in excess of $.23 per share of
Common Stock and regular cash dividends on Company
Preferred Stock, in each case with usual record and
payment dates and in accordance with the Company's
present dividend policy), (y) split, combine or
reclassify any of its outstanding capital stock or
issue or authorize the issuance of any other securities
in respect of, in lieu of or in substitution for shares
of its outstanding capital stock, or (z) purchase,
redeem or otherwise acquire any shares of outstanding
capital stock or any rights, warrants or options to
acquire any such shares except, in the case of
clause (z), for the acquisition of shares of Common
Stock from holders of Company Stock Options and
Director Options in full or partial payment of the
exercise price payable by such holder upon exercise of
Company Stock Options or Director Options outstanding
on the date of this Agreement, any mandatory redemption
of the securities of KFC in accordance with the terms
thereof and as contemplated by Section 2.2(c);
(ii) issue, sell, grant, pledge or otherwise
encumber any shares of its capital stock, any other
voting securities or any securities convertible into,
or any rights, warrants or options to acquire, any such
shares, voting securities or convertible securities
other than (w) pursuant to the Dividend Reinvestment
Plan, (x) upon the exercise of Company Stock Options
and Director Options outstanding on the date of this
Agreement, (y) upon the conversion of shares of
Preferred Stock outstanding on the date of this
Agreement or (z) in accordance with their respective
terms, upon the conversion of any floating rate
convertible subordinated debentures of KFC or the
exercise of any stock options respecting the common
stock of KFC;
(iii) amend its articles of organization, by-laws
or other comparable charter or organizational
documents;
(iv) acquire any business or any corporation,
partnership, joint venture, association or other
business organization or division thereof, except as
disclosed in Section 4.1(a)(iv) of the Disclosure
Schedule;
(v) sell, mortgage or otherwise encumber or
subject to any Lien or otherwise dispose of any of its
properties or assets that are material to the Company
and its subsidiaries taken as a whole, except in the
ordinary course of business, as disclosed in
Section 4.1(a)(v) of the Disclosure Schedule or as
contemplated by Section 6.1(g) hereof;
(vi) (x) incur any indebtedness for borrowed money
or guarantee any such indebtedness of another person,
other than indebtedness owing to or guarantees of
indebtedness owing to the Company, KFC or any direct or
indirect wholly-owned subsidiary of the Company or KFC
or (y) make any loans or advances to any other person,
other than to the Company, to KFC or to any direct or
indirect wholly-owned subsidiary of the Company or KFC
and other than routine advances to employees, except in
the case of either (x) or (y) as disclosed in
Section 4.1(a)(vi) of the Disclosure Schedule or, with
respect to Kemper Clearing Corp., in the ordinary
course of business;
(vii) make any tax election or settle or compromise
any income tax liability that could reasonably be
expected to be material to the Company and its
subsidiaries taken as a whole;
(viii) except as disclosed in Section 4.1(a)(viii) of
the Disclosure Schedule, pay, discharge, settle or
satisfy any claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent
or otherwise), other than the payment, discharge or
satisfaction, in the ordinary course of business
consistent with past practice or in accordance with
their terms, of liabilities reflected or reserved
against in, or contemplated by, the most recent
consolidated financial statements (or the notes
thereto) of the Company included in the Filed SEC
Documents or incurred since the date of such financial
statements in the ordinary course of business
consistent with past practice;
(ix) except in the ordinary course of business,
modify, amend or terminate any material agreement,
permit, concession, franchise, license or similar
instrument to which the Company or any subsidiary is a
party or waive, release or assign any material rights
or claims thereunder; or
(x) authorize any of, or commit or agree to take
any of, the foregoing actions.
(b) Conduct of Business by Parent. During the
period from the date of this Agreement to the Effective
Time, Parent shall, and shall cause its subsidiaries to,
carry on their respective businesses in the usual, regular
and ordinary course in substantially the same manner as
heretofore conducted and, to the extent consistent
therewith, use all reasonable efforts to preserve intact
their current business organizations, keep available the
services of their current officers and employees and
preserve their relationships with customers, suppliers,
licensors, licensees, distributors and others having
business dealings with them to the end that their goodwill
and ongoing businesses shall be unimpaired at the Effective
Time. Without limiting the generality of the foregoing,
during the period from the date of this Agreement to the
Effective Time, Parent shall not, and shall not permit any
of its subsidiaries to:
(i) (x) declare, set aside or pay any dividends
on, or make any other distributions (whether in cash,
stock or property) in respect of, any outstanding
capital stock of Parent (other than regular quarterly
cash dividends of $.125 per share of Parent Common
Stock and regular cash dividends on the Parent's $3.25
Series D Cumulative Convertible Preferred Stock, in
each case with usual record and payment dates and in
accordance with Parent's present dividend policy) or
(y) split, combine or reclassify any of its outstanding
capital stock or issue or authorize the issuance of any
other securities in respect of, in lieu of or in
substitution for shares of Parent's outstanding capital
stock (other than exchanges in the ordinary course
under Parent's employee stock plans);
(ii) issue, sell, grant, pledge or otherwise
encumber any shares of its capital stock, any other
voting securities or any securities convertible into,
or any rights, warrants or options to acquire, any such
shares, voting securities or convertible securities, in
each case if any such action could reasonably be
expected to (A) delay materially the date of mailing of
the Joint Proxy Statement or, (B) if it were to occur
after such date of mailing, require an amendment of the
Joint Proxy Statement;
(iii) acquire any business or any corporation,
partnership, joint venture, association or other
business organization or division thereof, in each case
if any such action could reasonably be expected to
(A) delay materially the date of mailing of the Joint
Proxy Statement or, (B) if it were to occur after such
date of mailing, require an amendment of the Joint
Proxy Statement; or
(iv) authorize any of, or commit or agree to take
any of, the foregoing actions.
SECTION 4.2. Other Actions. The Company and
Parent shall not, and shall not permit any of their
respective subsidiaries to, take any action that would, or
that could reasonably be expected to, result in (i) any of
the representations and warranties of such party set forth
in this Agreement that are qualified as to materiality
becoming untrue, (ii) any of such representations and
warranties that are not so qualified becoming untrue in any
material respect or (iii) any of the conditions of the
Merger set forth in Article VI not being satisfied.
ARTICLE V
ADDITIONAL AGREEMENTS
SECTION 5.1. Preparation of Form S-4 and the
Joint Proxy Statement. (a) As soon as practicable
following the date of this Agreement, the Company and Parent
shall prepare and file with the SEC the Joint Proxy
Statement and Parent shall prepare and file with the SEC the
Form S-4, in which the Joint Proxy Statement will be
included as a prospectus. Each of the Company and Parent
shall use its best efforts to have the Form S-4 declared
effective under the Securities Act as promptly as
practicable after such filing. The Company will use its
best efforts to cause the Joint Proxy Statement to be mailed
to the Company's stockholders, and Parent will use its best
efforts to cause the Joint Proxy Statement to be mailed to
Parent's stockholders, in each case as promptly as
practicable after the Form S-4 is declared effective under
the Securities Act. Parent shall also take any action
(other than qualifying to do business in any jurisdiction in
which it is not now so qualified) required to be taken under
any applicable state securities laws in connection with the
issuance of Parent Common Stock in the Merger and the
Company shall furnish all information concerning the Company
and the holders of the Common Stock as may be reasonably
requested in connection with any such action.
SECTION 5.2. Meetings of Stockholders. The
Company will take all action necessary in accordance with
applicable law and its Charter and By-laws to convene a
meeting of its stockholders (the "Stockholders Meeting") to
consider and vote upon the approval of the Merger. Parent
will take all action necessary in accordance with applicable
law and its Articles of Incorporation and By-laws to convene
a meeting of its stockholders (the "Parent Stockholders
Meeting") to consider and vote upon the approval of the
issuance of Parent Common Stock in the Merger. Subject to
Section 5.11 hereof in the case of the Company, the Company
and Parent will, through their respective Boards of
Directors, recommend to their respective stockholders
approval of the foregoing matters. Without limiting the
generality of the foregoing, the Company agrees that,
subject to its right to terminate this Agreement pursuant to
Section 5.11, its obligations pursuant to the first sentence
of this Section 5.2 shall not be affected by (i) the
commencement, public proposal, public disclosure or
communication to the Company of any Acquisition Proposal (as
defined in Section 5.10) or (ii) the withdrawal or
modification by the Board of Directors of the Company of its
approval or recommendation of this Agreement or the Merger.
Parent and the Company will use reasonable efforts to hold
the Stockholders Meeting and the Parent Stockholders Meeting
on the same day and use their best efforts to hold such
Meetings as soon as practicable after the date hereof.
SECTION 5.3. Letter of the Company's Accountants.
The Company shall use its best efforts to cause to be
delivered to Parent a letter of KPMG Peat Marwick, the
Company's independent public accountants, dated a date
within two business days before the date on which the
Form S-4 shall become effective and a letter of KPMG Peat
Marwick, dated a date within two business days before the
Closing Date, each addressed to Parent, in form and
substance reasonably satisfactory to Parent and customary in
scope and substance for letters delivered by independent
public accountants in connection with registration
statements similar to the Form S-4.
SECTION 5.4. Letter of Parent's Accountants.
Parent shall use its best efforts to cause to be delivered
to the Company a letter of Coopers & Lybrand, Parent's
independent public accountants, dated a date within two
business days before the date on which the Form S-4 shall
become effective and a letter of Coopers & Lybrand, dated a
date within two business days before the Closing Date, each
addressed to the Company, in form and substance reasonably
satisfactory to the Company and customary in scope and
substance for letters delivered by independent public
accountants in connection with registration statements
similar to the Form S-4.
SECTION 5.5. Access to Information;
Confidentiality. Each of the Company and Parent shall, and
shall cause each of its respective subsidiaries to, afford
to the other party and to the officers, employees, counsel,
financial advisors and other representatives of such other
party reasonable access during normal business hours during
the period prior to the Effective Time to all its
properties, books, contracts, commitments, personnel and
records and, during such period, each of the Company and
Parent shall, and shall cause each of its respective
subsidiaries to, furnish as promptly as practicable to the
other party such information concerning its business,
properties, financial condition, operations and personnel as
such other party may from time to time reasonably request.
Except as required by law, Parent will hold, and will cause
its respective directors, officers, partners, employees,
accountants, counsel, financial advisors and other
representatives and affiliates to hold, any nonpublic
information obtained from the Company in confidence to the
extent required by, and in accordance with, the provisions
of the letter dated May 25, 1994, between Parent and the
Company. Except as required by law, the Company will hold,
and will cause its directors, officers, partners, employees,
accountants, counsel, financial advisors and other
representatives and affiliates to hold, any nonpublic
information obtained from Parent in confidence to the extent
required by, and in accordance with, the provisions of the
letter dated June 23, 1994, between Parent and the Company.
SECTION 5.6. Best Efforts. Upon the terms and
subject to the conditions and other agreements set forth in
this Agreement, each of the parties agrees to use its best
efforts to take, or cause to be taken, all actions, and to
do, or cause to be done, and to assist and cooperate with
the other parties in doing, all things necessary, proper or
advisable to consummate and make effective, in the most
expeditious manner practicable, the Merger and the other
transactions contemplated by this Agreement.
SECTION 5.7. Benefit Plans and Employment
Agreements. (a) Parent currently intends to cause the
Surviving Corporation and each of its subsidiaries to
maintain employee benefit plans which provide aggregate
benefits to Continuing Employees (as defined below) that are
comparable to those currently provided by Parent to its
employees.
(b) Notwithstanding the provisions of
Section 5.7(a):
(i) Each benefit plan made available to
Continuing Employees after the Effective Time shall be
offered to Continuing Employees (and, if applicable,
their dependents) without any waiting period and the
Surviving Corporation and, if applicable, Parent shall
cause any restrictions and limitations for pre-existing
conditions or insurability to be waived (other than any
pre-existing conditions of lack of insurability that
constituted a restriction or limitation with respect
the benefits available to a Continuing Employee
immediately prior to the Effective Time).
(ii) Each Continuing Employee shall be given full
credit for his or her pre-Effective Time service with
the Company or any of its subsidiaries (and, to the
extent such service is recognized under any Benefit
Plan of the Company or any of its subsidiaries as of
the Effective Time, service with any predecessor
employer) for all purposes (other than for benefit
accrual under any defined benefit Pension Plan) under
any benefit plan offered to Continuing Employees on or
after the Effective Time.
(iii) As of the Effective Time, Continuing
Employees participating in the defined contribution
Benefit Plans (including any non-contributory
supplemental benefit plans) of the Company and each of
its subsidiaries shall be fully vested as to all
amounts contributed or accrued through the Effective
Time or, if later, as a result of the following
sentence. In addition, Parent shall cause the
Surviving Corporation and each of its subsidiaries or
affiliates, as appropriate, to contribute to each of
such Benefit Plans (or in the case of an unfunded
Benefit Plan, shall credit) for the benefit of
individuals who are Eligible Employees (as defined
below) on December 31, 1994, (x) all matching and
salary based contributions for 1994 currently provided
for in such Benefit Plan not made prior to the
Effective Time and (y) all discretionary contributions
for 1994 provided for in such Benefit Plans, subject in
the case of this clause (y) to achievement of the
performance goals set forth in Section 5.7(b)(iii) of
the Disclosure Schedule.
(iv) Parent shall cause the Surviving Corporation
and each of its subsidiaries or affiliates, as
appropriate, not later than February 28, 1995, to pay
each bonus eligible individual who is an Eligible
Employee on date of payment an incentive cash bonus for
1994 not less than a Target Bonus (or, in the case of
an Eligible Employee whose employment is terminated
prior to December 31, 1994, a pro rata Target Bonus)
subject to the achievement of the performance goals set
forth in Section 5.7(b)(iii) of the Disclosure
Schedule. Target Bonus means (x) an individual's
current target bonus under the incentive compensation
program in which such individual participates, or (y)
if no such specific target currently exists, two-thirds
of the incentive cash bonus received by such individual
for 1993 (or if such individual was not employed until
after January 1, 1993, the bonus received by similarly
situated individuals for 1993).
(v) Parent shall cause the Surviving Corporation
and each of its subsidiaries and affiliates to maintain
severance benefits after the Effective Time for each
Continuing Employee that are no less favorable to such
Continuing Employee than those provided under the
severance plans included in Section 5.7(b)(v) of the
Disclosure Schedule, until the first anniversary of the
Effective Time (or until the second anniversary of the
Effective Time in the case of the Kemper Corporation
Change of Control Severance Program).
(vi) Parent shall cause the Surviving Corporation
and each of its subsidiaries and affiliates to
continue, after the Effective Time, to make medical
expense benefits available to each individual retired
as of the Effective Time and then participating in the
various retiree medical expense benefits programs and
plans currently sponsored by the Company and its
subsidiaries, that are no less favorable to such
individuals than the medical expense benefits provided
under such programs or plans as of the date hereof.
(c) As used in Sections 5.7(a) and 5.7(b):
(i) "Continuing Employees" means all employees of
Company or a subsidiary of the Company as of the
Effective Time.
(ii) "Eligible Employees" at any date means all
Continuing Employees other than employees who have
resigned voluntarily prior to such date or whose
employment has been terminated for "Cause" prior to
such date.
(iii) "Cause" means (x) willful breach of,
willful neglect of or willful refusal to perform the
duties associated with a Continuing Employee's
employment or (y) commission of a felony, or a
misdemeanor involving dishonesty, fraud, theft, larceny
or embezzlement.
(d) The Surviving Corporation agrees to honor and
shall not challenge the validity and enforceability of the
termination protection agreements between the Company and
the individuals listed in Section 5.7(d) of the Disclosure
Schedule.
(e) The Surviving Corporation agrees to honor
all, and shall not challenge the validity and enforceability
of any, obligations of the Company and its subsidiaries to
non-management directors, including, without limitation, the
obligations under the Kemper Corporation Director Deferred
Compensation Program and the Kemper Corporation Director
Retirement Plan.
SECTION 5.8. Indemnification and Insurance.
Parent and Sub agree that all rights to indemnification and
exculpation from liability for acts or omissions occurring
prior to the Effective Time now existing in favor of the
current or former directors, officers or employees of the
Company and its subsidiaries as provided in their respective
certificates of incorporation or by-laws shall survive the
Merger and shall continue in full force and effect in
accordance with their terms for a period of not less than
six years from the Effective Time. Parent will cause to be
maintained for a period of not less than six years from the
Effective Time the Company's current directors' and
officers' insurance and indemnification policy to the extent
that it provides coverage for events occurring prior to the
Effective Time (the "D&O Insurance") for all persons who are
directors, officers or employees of the Company or any
subsidiary on the date of this Agreement, so long as the
annual premium therefor would not be in excess of 200% of
the last annual premium paid prior to the date of this
Agreement (200% of such premium, the "Maximum Premium");
provided, however, that Parent may, in lieu of maintaining
such existing D&O Insurance as provided above, cause
comparable coverage to be provided under any policy
maintained for the benefit of the directors and officers of
Parent or any of its subsidiaries, so long as (i) the issuer
thereof has at least an equal claims-paying rating and
(ii) the material terms thereof are no less advantageous
than the existing D&O Insurance to the extent commercially
available. If the existing D&O Insurance expires, is
terminated or cancelled during such six-year period, Parent
will use all reasonable efforts to cause to be obtained as
much D&O Insurance as can be obtained for the remainder of
such period for an annualized premium not in excess of the
Maximum Premium, on terms and conditions no less
advantageous than the existing D&O Insurance to the extent
commercially available. The Company represents to Parent
that the Maximum Premium is $1,840,000.
SECTION 5.9. Public Announcements. Parent and
Sub, on the one hand, and the Company, on the other hand,
will consult with each other before issuing, and provide
each other the opportunity to review and comment upon, any
press release or other public statements with respect to the
transactions contemplated by this Agreement, including the
Merger, and shall not issue any such press release or make
any such public statement prior to such consultation, except
as may be required by applicable law, court process or by
obligations pursuant to any listing agreement with any
national securities exchange.
SECTION 5.10. Acquisition Proposals. From and
after July 6, 1994, the Company shall not, nor shall it
permit any of its subsidiaries to, nor shall it authorize or
permit any officer, director or employee of, or any
investment banker, attorney or other advisor or
representative of, the Company or any of its subsidiaries
to, directly or indirectly, (i) solicit, initiate or
encourage the submission of any Acquisition Proposal (as
hereinafter defined) or (ii) participate in any discussions
or negotiations regarding, or furnish to any person any
information with respect to, or take any other action to
facilitate any inquiries or the making of any proposal that
constitutes, or may reasonably be expected to lead to, any
Acquisition Proposal. Prior to July 6, 1994, the Company,
any of its subsidiaries or any officer, director or employee
of, or any investment banker, attorney or other advisor or
representative of, the Company or any of its subsidiaries
may do any of the foregoing. On or after July 6, 1994, the
Company, its subsidiaries and all officers, directors,
employees of, and all investment bankers, attorneys and
other advisors and representatives of, the Company and its
subsidiaries shall cease doing any of the foregoing;
provided, however, that on or after July 6, 1994,
notwithstanding the provisions of the first sentence of this
Section 5.10, the Company, any of its subsidiaries or any
officer, director or employee of, or any investment banker,
attorney or other advisor or representative of, the Company
or any of its subsidiaries may, following the receipt of an
Acquisition Proposal by the Company that the Board of
Directors of the Company determines in good faith, following
consultation with outside counsel, would permit the Board of
Directors to take any of the actions referred to in the
first sentence of Section 5.11, participate in negotiations
regarding such Acquisition Proposal. Notwithstanding
anything in this Agreement to the contrary, from and after
July 6, 1994, the Company shall promptly advise Parent
orally and in writing of the receipt by it (or any of the
other entities or persons referred to above) after the date
hereof of any Acquisition Proposal, or any inquiry which
could lead to any Acquisition Proposal, the material terms
and conditions of such Acquisition Proposal or inquiry, and
the identity of the person making any such Acquisition
Proposal or inquiry. The Company will keep Parent fully
informed of the status and details of any such Acquisition
Proposal or inquiry. Without limiting the foregoing, it is
understood that any violation of the restrictions set forth
in the first sentence of this Section 5.10 by any officer,
director or employee of the Company or any of its
subsidiaries or any investment banker, attorney or other
advisor or representative of the Company or any of its
subsidiaries, whether or not such person is purporting to
act on behalf of the Company or any of its subsidiaries or
otherwise, shall be deemed to be a breach of this
Section 5.10 by the Company. For purposes of this
Agreement, "Acquisition Proposal" means any proposal with
respect to a merger, consolidation, share exchange or
similar transaction involving the Company or any Significant
Subsidiary of the Company, or any purchase of all or any
significant portion of the assets of the Company or any
Significant Subsidiary of the Company, or any equity
interest in the Company or any Significant Subsidiary of the
Company, other than the transactions contemplated hereby or
by the Citibank Commitment Letter.
SECTION 5.11. Fiduciary Duties. The Board of
Directors of the Company shall not (i) withdraw or modify,
or propose to withdraw or modify, in a manner adverse to
Parent or Sub, the approval or recommendation by such Board
of Directors of this Agreement or the Merger, (ii) approve
or recommend, or propose to approve or recommend, any
Acquisition Proposal or (iii) enter into any agreement with
respect to any Acquisition Proposal, unless the Company
receives an Acquisition Proposal and the Board of Directors
of the Company determines in good faith, following
consultation with outside counsel, that in order to comply
with its fiduciary duties to stockholders under applicable
law it is necessary for the Board of Directors to withdraw
or modify its approval or recommendation of this Agreement
or the Merger, approve or recommend such Acquisition
Proposal, enter into an agreement with respect to such
Acquisition Proposal or terminate this Agreement. In the
event the Board of Directors of the Company takes any of the
foregoing actions, the Company shall, concurrently with the
taking of any such action, pay to Parent the Section 5.15(a)
Fee or the Section 5.15(b) Fee, as applicable, plus all
Expenses pursuant to Section 5.15. Nothing contained in
this Section 5.11 shall prohibit the Company from taking and
disclosing to its stockholders a position contemplated by
Rule 14e-2(a) promulgated under the Exchange Act or from
making any disclosure to the Company's stockholders which,
in the good faith reasonable judgment of the Board of
Directors of the Company based on the advice of outside
counsel, is required under applicable law; provided that the
Company does not withdraw or modify, or propose to withdraw
or modify, its position with respect to the Merger or
approve or recommend, or propose to approve or recommend, an
Acquisition Proposal. Notwithstanding anything contained in
this Agreement to the contrary, any action by the Board of
Directors permitted by this Section 5.11 shall not
constitute a breach of this Agreement by the Company.
SECTION 5.12. Consents, Approvals and Filings.
(a) The Company and Parent will make and cause their
respective subsidiaries to make all necessary filings, as
soon as practicable, including, without limitation, those
required under the HSR Act, the Securities Act, the Exchange
Act, the 1940 Act, the Advisers Act and applicable state
insurance laws in order to facilitate prompt consummation of
the Merger and the other transactions contemplated by this
Agreement. In addition, the Company and Parent will each
use their best efforts, and will cooperate fully with each
other (i) to comply as promptly as practicable with all
governmental requirements applicable to the Merger and the
other transactions contemplated by this Agreement and
(ii) to obtain as promptly as practicable all necessary
permits, orders or other consents of Governmental Entities
and consents of all third parties necessary for the
consummation of the Merger and the other transactions
contemplated by this Agreement. Each of the Company and
Parent shall use reasonable efforts to provide such
information and communications to Governmental Entities as
such Governmental Entities may reasonably request.
(b) Each of the parties shall provide to the
other party copies of all applications in advance of filing
or submission of such applications to Governmental Entities
in connection with this Agreement.
SECTION 5.13. Company Satisfaction of the
Conditions of Section 15 of the 1940 Act. (a) The Company
shall, and shall cause each of KFS and the applicable
subsidiaries of KFS (collectively, with KFS, the "Asset
Management Subsidiaries") to, use their best efforts to
cause the boards of trustees/directors of the Company Funds
to approve, and to solicit their respective shareholders as
promptly as practicable with regard to the approval of, new
investment advisory agreements with the Asset Management
Subsidiaries acting as investment advisers for such funds,
to be effective on or as promptly as practicable after the
Effective Time, pursuant to the provisions of Section 15 of
the 1940 Act, and consistent with all requirements of the
1940 Act applicable thereto, provided that such agreements
are identical in all respects to the existing agreements
other than the term of the agreement. For purposes of this
Agreement, "Company Funds" shall mean the registered
investment companies for which the Company or any subsidiary
acts as investment adviser or sub-adviser. Each Company
Fund is identified in Section 5.13 of the Disclosure
Schedule.
(b) The Company shall, and shall cause each of
the Asset Management Subsidiaries to, use their best efforts
to ensure the satisfaction of the conditions set forth in
Section 15(f) of the 1940 Act with respect to each of the
Company Funds.
SECTION 5.14. Advisory Contract Consents. As
promptly as practicable, the Company shall cause the non-
investment company advisory clients of the Asset Management
Subsidiaries to be informed of the transactions contemplated
by this Agreement and shall give such clients an opportunity
to terminate their advisory contracts with such Asset
Management Subsidiaries or any of their affiliates. Parent
agrees that the Company may satisfy this obligation insofar
as it relates to noninvestment company advisory clients by
providing them with the notice contemplated by the first
sentence of this Section 5.14 and obtaining such clients'
consent in the form of actual or implied consent by way of
informing such clients of the Asset Management Subsidiaries'
intention to continue the advisory services, pursuant to the
Asset Management Subsidiaries' existing contracts with such
clients, subject to such clients' right to terminate such
contracts within 60 days of receipt of such notice, and that
each such client's consent will be implied if it continues
to accept the services without rejection during such
specified 60 day period.
SECTION 5.15. Certain Fees and Expenses. (a)
The Company shall pay to Parent upon demand $25 million (the
"Section 5.15(a) Fee"), payable in same-day funds, plus all
Expenses (as defined below), if an Acquisition Proposal is
commenced, publicly proposed, publicly disclosed or
communicated to the Company (or the willingness of any
person to make an Acquisition Proposal is publicly disclosed
or communicated to the Company) and the Board of Directors
of the Company prior to July 6, 1994, in accordance with
Section 5.11, withdraws or modifies its approval or
recommendation of this Agreement or the Merger, approves or
recommends such Acquisition Proposal, enters into an
agreement with respect to such Acquisition Proposal,
terminates this Agreement, approves any transaction pursuant
to Section 11(a)(ii)(B) or 13(d) of the Rights Agreement or
amends or waives any provision of the Rights Agreement or
redeems the Rights issued thereunder.
(b) The Company shall pay to Parent upon demand
$100 million (the "Section 5.15(b) Fee"), payable in same-
day funds, plus all Expenses, if a bona fide Acquisition
Proposal is commenced, publicly proposed, publicly disclosed
or communicated to the Company (or the willingness of any
person to make such an Acquisition Proposal is publicly
disclosed or communicated to the Company) and (i) the Board
of Directors of the Company on or after July 6, 1994, in
accordance with Section 5.11, withdraws or modifies its
approval or recommendation of this Agreement or the Merger,
approves or recommends such Acquisition Proposal, enters
into an agreement with respect to such Acquisition Proposal,
terminates this Agreement, approves any transaction pursuant
to Section 11(a)(ii)(B) or 13(d) of the Rights Agreement or
amends or waives any provision of the Rights Agreement or
redeems the Rights issued thereunder or (ii) the requisite
approval of the Company's stockholders for the Merger is not
obtained at the Stockholders Meeting and the Section 5.15(a)
Fee did not and has not become due and payable.
(c) For purposes of this Section, "Expenses"
shall mean all documented out-of-pocket fees and expenses
incurred or paid by or on behalf of Parent in connection
with the Merger or the consummation of any of the
transactions contemplated by this Agreement, including all
bank fees, financing fees, printing costs and fees and
expenses of counsel, investment banking firms, accountants,
experts and consultants to Parent; provided, however, that
prior to July 6, 1994, Expenses shall not exceed
$15.0 million.
SECTION 5.16. Compliance with Section 15(f) of
the 1940 Act by Parent. Parent shall use its best efforts
to assure the satisfaction of the conditions of
Section 15(f) of the 1940 Act with respect to each of the
Company Funds.
SECTION 5.17. Affiliates and Certain
Stockholders. Prior to the Closing Date, the Company shall
deliver to Parent a letter identifying all persons who are,
at the time the Merger is submitted for approval to the
stockholders of the Company, "affiliates" of the Company for
purposes of Rule 145 under the Securities Act. The Company
shall use its best efforts to cause each such person to
deliver to Parent on or prior to the Closing Date a written
agreement substantially in the form attached as Exhibit A
hereto. Parent shall not be required to maintain the
effectiveness of the Form S-4 or any other registration
statement under the Securities Act for the purposes of
resale of Parent Common Stock by such affiliates and the
certificates representing Parent Common Stock received by
such affiliates in the Merger shall bear a customary legend
regarding applicable Securities Act restrictions and the
provisions of this Section 5.17.
SECTION 5.18. NYSE Listing. Parent shall use its
best efforts to cause the shares of Parent Common Stock to
be issued in the Merger to be approved for listing on the
NYSE, subject to official notice of issuance, prior to the
Closing Date.
SECTION 5.19. Stockholder Litigation. The
Company shall give Parent the opportunity to participate in
the defense or settlement of any stockholder litigation
against the Company and its directors relating to the
transactions contemplated by this Agreement; provided,
however, that no such settlement shall be agreed to without
Parent's consent, which consent shall not be unreasonably
withheld.
SECTION 5.20. Financing. Parent will use its
best efforts to obtain the financing referred to in the
Citibank Commitment Letter, the Morgan Stanley Highly
Confident Letter and the CCP II Letter. The Company will,
and will cause its subsidiaries to, cooperate with Parent
and take all reasonable actions necessary in order to assist
Parent in obtaining such financing.
SECTION 5.21. Board Action Relating to Stock
Option Plans. As soon as practicable following the date of
this Agreement, the Board of Directors of the Company (or,
if appropriate, any committee administering a Company Stock
Option Plan) shall adopt such resolutions or take such
actions as may be required to adjust the terms of all
outstanding Company Stock Options in accordance with
Section 2.2 and shall make such other changes to the Company
Stock Option Plans as it deems appropriate to give effect to
the Merger (subject to the approval of Parent, which shall
not be unreasonably withheld).
ARTICLE VI
CONDITIONS PRECEDENT
SECTION 6.1. Conditions to Each Party's
Obligation To Effect the Merger. The respective obligation
of each party to effect the Merger is subject to the
satisfaction or waiver on or prior to the Closing Date of
the following conditions:
(a) Stockholder Approval. This Agreement and the
Merger shall have been approved and adopted by the
affirmative vote of the stockholders of the Company
entitled to cast at least a majority of the votes which
all stockholders of the Company are entitled to cast
thereon and the Parent Stockholder Approval shall have
been obtained.
(b) Governmental and Regulatory Consents. All
filings required to be made prior to the Effective Time
with, and all consents, approvals, permits and
authorizations required to be obtained prior to the
Effective Time from, Governmental Entities, including,
without limitation, those set forth in
Section 3.1(c)(i) of the Disclosure Schedule, in
connection with the execution and delivery of this
Agreement and the consummation of the transactions
contemplated hereby by the Company, Parent and Sub will
have been made or obtained (as the case may be);
provided, however, that such consents, approvals,
permits and authorizations may be subject to
(i) conditions customarily imposed by insurance
regulatory authorities or (ii) other conditions that
would not reasonably be expected to have a material
adverse effect on the business, financial condition or
results of operations of Parent and its subsidiaries
taken as a whole (after giving effect to the
consummation of the Merger).
(c) HSR Act. The waiting period (and any
extension thereof) applicable to the Merger under the
HSR Act shall have been terminated or shall have
otherwise expired.
(d) No Injunctions or Restraints. No temporary
restraining order, preliminary or permanent injunction
or other order issued by any court of competent
jurisdiction or other legal restraint or prohibition
preventing the consummation of the Merger shall be in
effect; provided, however, that the parties invoking
this condition shall use reasonable efforts to have any
such order or injunction vacated.
(e) Company Fund Approvals. In accordance with
Section 15 of the 1940 Act, the respective boards of
trustees/directors of the Company Funds, including in
each case a majority of trustees/directors who are not
parties to the investment advisory contracts of such
Company Funds or "interested persons" (as such term is
defined in the 1940 Act) of any such party (the "Non-
Interested Directors"), and holders of a majority of
the outstanding voting securities (as such term is
defined in the 1940 Act) of Company Funds which, as of
May 31, 1994, represented at least 90% of all of the
net assets of all of the Company Funds as of such date,
shall have approved new investment advisory contracts
with the Asset Management Subsidiaries acting as
investment advisers of such funds upon terms identical
with those of each such Company Fund (other than
changes in the term of the contract); and the board of
trustees/directors, including a majority of the Non-
Interested Directors, of each of the Company Funds
which has approved a new investment advisory contract
shall have approved new underwriting, distribution or
dealer contracts, if any, with the applicable
subsidiaries of the Company that are parties to such
agreements pursuant to Section 15 of the 1940 Act and
any other requirements applicable thereto contained in
the 1940 Act.
(f) Advisory Client Approvals. The Company shall
have obtained, in accordance with Section 5.14, the
consent of non-investment company advisory clients of
the Asset Management Subsidiaries who are not
affiliated with the Company and who, as of May 31,
1994, represent at least 80% of all of the net assets
under management as of such date for all such advisory
clients not affiliated with the Company.
(g) Compliance with Section 15(f) of the 1940
Act. At the time of the Closing: (i) at least 75% of
the members of the board of trustees/directors of each
Company Fund which has approved a new investment
advisory contract shall not be "interested persons" (as
such term is defined in the 1940 Act) of Parent (or
such other entity which will act as adviser to such
Company Funds following the Effective Time), of the
Company or of any affiliate of the Company that was the
investment adviser of any such Company Fund immediately
preceding the Effective Time; and (ii) the requirements
of Section 15(f)(1)(B) of the 1940 Act shall have been
complied with in that no "unfair burden" shall have
been imposed on any of the Company Funds as a result of
this Agreement, the transactions contemplated
hereunder, new investment advisory contracts or
otherwise.
(h) Investors Fiduciary Trust Company. The
Company will have divested its ownership interest in
Investors Fiduciary Trust Company or Parent shall have
obtained all regulatory approvals required in
connection with acquiring the Company's interest in
Investors Fiduciary Trust Company.
(i) NYSE Listing. The shares of Parent Common
Stock issuable to the Company's stockholders pursuant
to this Agreement shall have been approved for listing
on the NYSE, subject to official notice of issuance.
(j) Form S-4. The Form S-4 shall have become
effective under the Securities Act and shall not be the
subject of any stop order or proceedings seeking a stop
order.
SECTION 6.2. Conditions to Obligations of Parent
and Sub. The obligations of Parent and Sub to effect the
Merger are further subject to the following conditions:
(a) Representations and Warranties. The
representations and warranties of the Company set forth
in Section 3.1 that are qualified as to materiality
shall be true and correct and the representations and
warranties of the Company set forth in Section 3.1 that
are not so qualified shall be true and correct in all
material respects, in each case as of the date of this
Agreement and as of the Closing Date as though made on
and as of the Closing Date, except to the extent such
representations and warranties speak as of an earlier
date, and Parent shall have received a certificate
signed on behalf of the Company by the chief executive
officer and the chief financial officer of the Company
to the effect set forth in this paragraph.
(b) Performance of Obligations of the Company.
The Company shall have performed in all material
respects all obligations required to be performed by it
under this Agreement at or prior to the Closing Date,
and Parent shall have received a certificate signed on
behalf of the Company by the chief executive officer
and the chief financial officer of the Company to such
effect.
(c) Affiliates. Parent shall have received from
each affiliate named in the letter referred to in
Section 5.17 an executed copy of an agreement
substantially in the form of Exhibit A hereto.
(d) Financing. Parent shall have obtained all
financing necessary to pay the aggregate Cash
Consideration payable in connection with the Merger.
SECTION 6.3. Conditions to Obligation of the
Company. The obligation of the Company to effect the Merger
is further subject to the following conditions:
(a) Representations and Warranties. The
representations and warranties of Parent and Sub set
forth in Section 3.2 that are qualified as to
materiality shall be true and correct and the
representations and warranties of Parent and Sub set
forth in Section 3.2 that are not so qualified shall be
true and correct in all material respects, in each case
as of the date of this Agreement and as of the Closing
Date as though made on and as of the Closing Date,
except to the extent such representations and
warranties speak as of an earlier date, and the Company
shall have received a certificate signed on behalf of
Parent by the chief executive officer and the chief
financial officer of Parent to the effect set forth in
this paragraph.
(b) Performance of Obligations of Parent and Sub.
Parent and Sub shall have performed in all material
respects all obligations required to be performed by
them under this Agreement at or prior to the Closing
Date, and the Company shall have received a certificate
signed on behalf of Parent by the chief executive
officer and the chief financial officer of Parent to
such effect.
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
SECTION 7.1. Termination. This Agreement may be
terminated and abandoned at any time prior to the Effective
Time, whether before or after approval of matters presented
in connection with the Merger by the stockholders of the
Company:
(a) by mutual written consent of Parent and the
Company;
(b) by either Parent or the Company:
(i) if, upon a vote at a duly held
Stockholders Meeting or Parent Stockholders
Meeting or any adjournment thereof, any required
approval of the stockholders of the Company or
Parent, as the case may be, shall not have been
obtained;
(ii) if the Merger shall not have been
consummated on or before March 31, 1995, unless
the failure to consummate the Merger is the result
of a willful and material breach of this Agreement
by the party seeking to terminate this Agreement;
(iii) if any Governmental Entity shall have
issued an order, decree or ruling or taken any
other action permanently enjoining, restraining or
otherwise prohibiting the Merger and such order,
decree, ruling or other action shall have become
final and nonappealable; or
(iv) if the Board of Directors of the Company
shall have exercised its rights set forth in
Section 5.11 of this Agreement; or
(c) by the Company, if definitive documentation
with respect to the bank financing contemplated by the
Citibank Commitment Letter (or with respect to any
alternative bank financing that provides, in the
aggregate, the same amount of financing) shall not have
been executed by August 31, 1994.
SECTION 7.2. Effect of Termination. In the event
of termination of this Agreement by either the Company or
Parent as provided in Section 7.1, this Agreement shall
forthwith become void and have no effect, without any
liability or obligation on the part of Parent, Sub or the
Company, other than the last two sentences of Section 5.5
and Sections 3.1(p), 3.2(o), 5.15, 7.2 and 8.2. Nothing
contained in this Section shall relieve any party from any
liability resulting from any wilful and material breach of
the representations, warranties, covenants or agreements set
forth in this Agreement.
SECTION 7.3. Amendment. Subject to the
applicable provisions of the DGCL, at any time prior to the
Effective Time, the parties hereto may modify or amend this
Agreement, by written agreement executed and delivered by
duly authorized officers of the respective parties;
provided, however, that after approval of the Merger by the
stockholders of the Company, no amendment shall be made
which reduces the consideration payable in the Merger or
adversely affects the rights of the Company's stockholders
hereunder without the approval of such stockholders. This
Agreement may not be amended except by an instrument in
writing signed on behalf of each of the parties.
SECTION 7.4. Extension; Waiver. At any time
prior to the Effective Time, the parties may (a) extend the
time for the performance of any of the obligations or other
acts of the other parties, (b) waive any inaccuracies in the
representations and warranties of the other parties
contained in this Agreement or in any document delivered
pursuant to this Agreement or (c) subject to Section 7.3,
waive compliance with any of the agreements or conditions of
the other parties contained in this Agreement. Any
agreement on the part of a party to any such extension or
waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party. The failure of any
party to this Agreement to assert any of its rights under
this Agreement or otherwise shall not constitute a waiver of
such rights.
SECTION 7.5. Procedure for Termination,
Amendment, Extension or Waiver. A termination of this
Agreement pursuant to Section 7.1, an amendment of this
Agreement pursuant to Section 7.3 or an extension or waiver
pursuant to Section 7.4 shall, in order to be effective,
require in the case of Parent, Sub or the Company, action by
its Board of Directors or the duly authorized designee of
its Board of Directors.
ARTICLE VIII
GENERAL PROVISIONS
SECTION 8.1. Nonsurvival of Representations and
Warranties. None of the representations and warranties in
this Agreement or in any instrument delivered pursuant to
this Agreement shall survive the Effective Time. This
Section 8.1 shall not limit any covenant or agreement of the
parties which by its terms contemplates performance after
the Effective Time, including, without limitation,
Section 5.16.
SECTION 8.2. Fees and Expenses. Except as
provided otherwise in Section 5.15, whether or not the
Merger shall be consummated, each party hereto shall pay its
own expenses incident to preparing for, entering into and
carrying out this Agreement and the consummation of the
transactions contemplated hereby, except that expenses
incurred in connection with printing and mailing the Joint
Proxy Statement and the S-4, and the costs of preparing and
distributing proxy materials to and of holding the meetings
of the Company Funds' shareholders will be shared equally by
Parent and the Company.
SECTION 8.3. Definitions. For purposes of this
Agreement:
(a) an "affiliate" of any person means another
person that directly or indirectly, through one or more
intermediaries, controls, is controlled by, or is under
common control with, such first person;
(b) "person" means an individual, corporation,
partnership, joint venture, association, trust,
unincorporated organization or other entity; and
(c) a "subsidiary" of any person means another
person 50% of the equity securities of which are owned
directly or indirectly by such first person; provided,
however, that joint ventures or partnerships engaged in
the business of real estate development, management or
ownership shall not be deemed to be subsidiaries unless
such first person owns directly or indirectly 80% of
the equity securities of such joint venture or partner-
ship.
SECTION 8.4. Notices. All notices, requests,
claims, demands and other communications under this Agree-
ment shall be in writing and shall be deemed given if
delivered personally or sent by overnight courier (providing
proof of delivery) to the parties at the following addresses
(or at such other address for a party as shall be specified
by like notice):
(a) if to Parent or Sub, to
Conseco, Inc.
11825 North Pennsylvania Street
Carmel, Indiana 46032
Attention: Lawrence W. Inlow, Esq.
with a copy to:
Cravath, Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, NY 10019
Attention: Allen Finkelson, Esq.
(b) if to the Company, to
Kemper Corporation
One Kemper Drive
Long Grove, Illinois 60049
Attention: David B. Mathis
Chairman of the Board and
Chief Executive Officer
with copies to:
Kemper Corporation
One Kemper Drive
Long Grove, Illinois 60049
Attention: Kathleen A. Gallichio
Senior Vice President,
General Counsel and
Corporate Secretary
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
Attention: Charles I. Cogut, Esq.
SECTION 8.5. Interpretation. When a reference is
made in this Agreement to a Section or Schedule, such
reference shall be to a Section of, or a Schedule to, this
Agreement unless otherwise indicated. The table of contents
and headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Whenever the words
"include", "includes" or "including" are used in this
Agreement, they shall be deemed to be followed by the words
"without limitation".
SECTION 8.6. Counterparts. This Agreement may be
executed in one or more counterparts, all of which shall be
considered one and the same agreement and shall become
effective when one or more counterparts have been signed by
each of the parties and delivered to the other parties.
SECTION 8.7. Entire Agreement; Third-Party
Beneficiaries. This Agreement and the other agreements
referred to herein constitute the entire agreement, and
supersede all prior agreements and understandings, both
written and oral, among the parties with respect to the
subject matter of this Agreement. This Agreement is not
intended to confer upon any person other than the parties
hereto and the third party beneficiaries referred to in the
following sentence any rights or remedies. The parties
hereto expressly intend the provisions of Sections 5.7(b)
and (c), 5.8 and 5.16 to confer a benefit upon and be
enforceable by, as third party beneficiaries of this
Agreement, the third persons referred to in, or intended to
be benefitted by, such provisions.
SECTION 8.8. Governing Law. This Agreement shall
be governed by, and construed in accordance with, the laws
of the State of Delaware, regardless of the laws that might
otherwise govern under applicable principles of conflicts of
laws thereof.
SECTION 8.9. Assignment. Neither this Agreement
nor any of the rights, interests or obligations under this
Agreement shall be assigned, in whole or in part, by
operation of law or otherwise by any of the parties without
the prior written consent of the other parties, and any such
assignment that is not consented to shall be null and void.
Subject to the preceding sentence, this Agreement will be
binding upon, inure to the benefit of, and be enforceable
by, the parties and their respective successors and assigns.
SECTION 8.10. Enforcement. The parties agree
that irreparable damage would occur in the event that any of
the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise
breached. It is accordingly agreed that the parties shall
be entitled to an injunction or injunctions to prevent
breaches of this Agreement and to enforce specifically the
terms and provisions of this Agreement in any court of the
United States located in the State of Delaware, this being
in addition to any other remedy to which they are entitled
at law or in equity. In addition, each of the parties
hereto (a) consents to submit itself to the personal
jurisdiction of any Federal court located in the State of
Delaware in the event any dispute arises out of this
Agreement or any of the transactions contemplated by this
Agreement, (b) agrees that it will not attempt to deny or
defeat such personal jurisdiction or venue by motion or
other request for leave from any such court and (c) agrees
that it will not bring any action relating to this Agreement
or any of the transactions contemplated by this Agreement in
any court other than a Federal court sitting in the State of
Delaware.
SECTION 8.11. Severability. Whenever possible,
each provision or portion of any provision of this Agreement
will be interpreted in such manner as to be effective and
valid under applicable law but if any provision or portion
of any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable
law or rule in any jurisdiction, such invalidity, illegality
or unenforceability will not affect any other provision or
portion of any provision in such jurisdiction, and this
Agreement will be reformed, construed and enforced in such
jurisdiction as if such invalid, illegal or unenforceable
provision or portion of any provision had never been
contained herein.
IN WITNESS WHEREOF, Parent, Sub and the Company
have caused this Agreement to be signed by their respective
officers thereunto duly authorized, all as of the date first
written above.
CONSECO, INC.
/S/ STEPHEN C. HILBERT
---------------------
Name:
Title:
Attest:
/S/ LAWRENCE W. INLOW
---------------------
Name:
Title:
[CORPORATE SEAL]
KC ACQUISITION, INC.
/S/ STEPHEN C. HILBERT
---------------------
Name:
Title:
Attest:
/S/ LAWRENCE W. INLOW
---------------------
Name:
Title:
[CORPORATE SEAL]
KEMPER CORPORATION
/S/ D. B. MATHIS
---------------------
Name:
Title:
Attest:
/S/ KATHLEEN A. GALLICHIO
---------------------
Name:
Title:
[CORPORATE SEAL]
