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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
/X/ Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934.
For the fiscal year ended December 31, 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 charter)
DELAWARE
(State of Incorporation)
ONE KEMPER DRIVE
LONG GROVE, ILLINOIS
(Address of Principal Executive Offices)
36-6169781
(I.R.S. Employer
Identification Number)
60049
(Zip Code)
Registrant's telephone number, including area code: (708) 320-4700
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock ($5 par value)
Preferred Stock Purchase Rights
Name of each exchange on which registered
New York Stock Exchange, Inc.
New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act:
Title of class
Series A Cumulative Convertible Preferred Stock
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 and (2) has been subject to such filing requirements for
the past 90 days. Yes X No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in the definitive proxy statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
At March 15, 1995, 34,506,709 shares of common stock of Kemper Corporation were
outstanding, and based upon the last sale price as reported in The Wall Street
Journal, the aggregate market value of shares of common stock held by
nonaffiliates was approximately $1.4 billion.
DOCUMENT FROM WHICH INFORMATION IS INCORPORATED BY REFERENCE
Portions of the Proxy Statement, scheduled to be mailed on or about April 3,
1995 for the annual meeting of stockholders to be held May 17, 1995, are
incorporated by reference into Part III.
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KEMPER CORPORATION
FORM 10-K
TABLE OF CONTENTS
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PART I.
ITEM 1. BUSINESS
(a) General development of business.................. 1
(b) Financial information about industry segments.... 3
(c) Narrative description of business and general
development of subsidiaries..................... 3
ASSET MANAGEMENT SEGMENT......................... 4
LIFE INSURANCE SEGMENT........................... 8
SECURITIES BROKERAGE SEGMENT..................... 12
REAL ESTATE SEGMENT.............................. 14
OTHER OPERATIONS AND CORPORATE CATEGORY.......... 15
(d) Financial information relating to foreign and
domestic operations and export sales............ 15
ITEM 2. PROPERTIES
Asset management segment............................. 15
Life insurance segment............................... 15
Securities brokerage segment......................... 15
Real estate segment.................................. 15
ITEM 3. LEGAL PROCEEDINGS
Asset management segment............................. 16
Securities brokerage segment......................... 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS.......................... 16
EXECUTIVE OFFICERS OF THE REGISTRANT
AS OF MARCH 1995..................................... 17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER
MATTERS...................................... 18
ITEM 6. SELECTED FINANCIAL DATA....................... 19
ITEM 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Continuing operations.............................. 20
Total operations................................... 21
Asset management................................... 22
Life insurance..................................... 25
Securities brokerage............................... 29
Real estate........................................ 30
INVESTMENTS
Invested assets and cash........................... 32
Fixed maturities................................... 32
Real estate-related investments.................... 33
Real estate concentrations......................... 35
Provisions for real estate-related losses.......... 36
Real estate outlook................................ 37
Net investment income.............................. 39
Realized investment results........................ 40
Interest rates..................................... 40
LIQUIDITY AND CAPITAL RESOURCES
Holding company.................................... 41
Consolidated....................................... 41
Capitalization..................................... 42
Short-term debt.................................... 42
Long-term debt..................................... 43
Long-term debt and insurance company ratings....... 43
Convertible debentures of subsidiary............... 43
Preferred stock.................................... 43
Common stock....................................... 43
Stockholders' equity............................... 44
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ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
Report of independent public accountants............. 45
Consent of independent public accountants............ 45
Consolidated balance sheet........................... 46
Consolidated statement of operations................. 47
Consolidated statement of stockholders' equity....... 48
Consolidated statement of cash flows................. 49
Notes to consolidated financial statements
Summary of significant accounting policies......... 50
Preferred stock.................................... 53
Invested assets and related income................. 54
Discontinued operations............................ 56
Unconsolidated investees........................... 57
Concentration of credit risk....................... 59
Long-term debt and notes payable................... 59
Income tax......................................... 60
Computation of consolidated net income (loss) per
share............................................ 62
Cash flow information.............................. 62
Employee benefit plans............................. 63
Stock option plans................................. 64
Reinsurance........................................ 65
Convertible debentures of subsidiary............... 65
Related-party transactions......................... 66
Commitments and contingent liabilities............. 66
Financial instruments--off-balance-sheet risk...... 67
Derivative financial instruments................... 67
Unaudited interim financial information............ 68
Segment information................................ 69
Fair value of financial instruments................ 70
Stockholders' equity--retained earnings............ 71
Subsequent event................................... 71
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE......................... 72
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT............................ 72
ITEM 11. EXECUTIVE COMPENSATION........................ 72
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND
MANAGEMENT................................... 72
ITEM 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS......................... 73
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES AND REPORTS ON
FORM 8-K
(a)(1) Financial statements.......................... 73
(a)(2) Schedules..................................... 73
(a)(3) Exhibits...................................... 73
(b) Reports on Form 8-K.............................. 73
SIGNATURES............................................. 74
SUPPLEMENTARY SCHEDULES
Schedule I--Summary of investments................... 76
Schedule II--Condensed financial information......... 77
Schedule III--Supplementary insurance information.... 80
Schedule IV--Reinsurance............................. 80
Schedule V--Valuation and qualifying accounts........ 80
INDEX TO EXHIBITS...................................... 81
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PART I
ITEM 1. BUSINESS
(A) GENERAL DEVELOPMENT OF BUSINESS.
COMPANY OVERVIEW
Incorporated in Delaware in 1967 as a nonoperating holding company with
subsidiaries primarily in the property-casualty insurance business, Kemper
Corporation ("Kemper") today is a financial services holding company with
continuing operations in four business segments: asset management, life
insurance, securities brokerage and real estate.
The following chart illustrates the Company's corporate organization as of
December 31, 1994:
[ORGANIZATION CHART]
Kemper Financial Services, Inc. ("KFS") and its affiliates had assets under
management of $62.7 billion at December 31, 1994. INVEST Financial Corporation
("INVEST") distributes mutual funds, annuities and securities through financial
institutions. Kemper's life insurance subsidiaries, Federal Kemper Life
Assurance Company ("FKLA") and Kemper Investors Life Insurance Company
("KILICO"), offer a variety of term and interest-sensitive insurance products as
well as fixed-rate and variable annuity contracts. Kemper's securities brokerage
business, represented primarily by Kemper Securities, Inc. ("KSI") and its
clearing subsidiary, Kemper Clearing Corp. ("KCC"), principally provides retail
brokerage services. The real estate segment includes subsidiaries which act as
general or limited partners in and lenders to various real estate ventures.
At December 31, 1994, Kemper's consolidated assets totaled $13.2 billion, and
its stockholders' equity totaled $1.3 billion. Selected consolidated financial
data of Kemper and its subsidiaries (the "Company") for the last five fiscal
years is provided in ITEM 6 below. Certain financial information by segment is
set forth in ITEM 1(b). The business operations of the Company's four segments
are described in ITEM 1(c).
The Company entered 1995 with approximately 6,000 employees, 5 percent fewer
than one year earlier primarily due to lower KSI headcount. During 1994, the
Company faced industrywide pressures associated with rising interest rates and
related adverse conditions in bond and stock markets. See ITEM 7. The year 1994
was also notable for the corporate control events described on the following
page.
The Company had entered 1994 with approximately 6,330 employees, more than 10
percent fewer than its continuing operations had one year earlier as headcount
was reduced in all three of the Company's core businesses: asset management,
life insurance and securities brokerage. In addition, there were more than 2,200
employees of subsidiaries the Company divested during 1993, as described on the
following page.
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CORPORATE CONTROL EVENTS OF 1994
In the first quarter of 1994, Kemper received and rejected an unsolicited offer
by General Electric Capital Corporation ("GECC") to acquire all outstanding
shares of Kemper common stock for $55 per share. In May 1994, GECC increased its
offer to $60 per share, subject to certain conditions including a full due
diligence review, and the board of directors of Kemper directed that all
appropriate steps be taken to maximize stockholder value. Kemper put itself up
for sale, and a due diligence process began that resulted in Conseco, Inc.'s
cash and stock bid of $67 per share on June 23, 1994. Within hours of Conseco's
announcement, GECC withdrew completely from the process. GECC never completed
its due diligence process and never submitted a firm $60 per share bid for
Kemper. Kemper and Conseco signed a merger agreement on June 26, 1994. On
November 20, Kemper and Conseco announced that the merger agreement was
terminated by mutual consent, since it became clear that the proposed merger
could not be completed. The Kemper board then again directed that all
appropriate steps be taken to maximize stockholder value. Distractions caused by
uncertainties with respect to the Company's ownership had an impact on 1994
performance. See ITEM 7.
SUBSIDIARY DIVESTITURES OF 1993
During 1993, the Company exited the property-casualty insurance, reinsurance and
risk management businesses. These businesses comprise the Company's discontinued
operations. The Company's discontinued property-casualty insurance operations
consisted of two regional companies which write primarily personal automobile
and homeowners insurance, Economy Fire & Casualty Company ("Economy") and
Federal Kemper Insurance Company ("FKI"). In August 1993, Kemper sold Economy to
St. Paul Fire and Marine Insurance Company in a transaction valued at $420
million. In December 1993, Kemper sold FKI to Anthem P&C Holdings, Inc. (part of
the Associated Group) for $95 million in cash. The Company recorded an aggregate
$92.2 million in after-tax gains from these sales in 1993.
Also in August 1993, Kemper exchanged the stock of its reinsurance and risk
management subsidiaries for 17.4 million shares of Kemper's common stock
previously held by Lumbermens Mutual Casualty Company ("Lumbermens"), the
Company's former parent. The exchange transaction was valued at $610.2 million.
The Company recorded a $204.7 million tax-free gain on the exchange. This
transaction reduced the number of common shares outstanding by more than
one-third. It also reduced Lumbermens' ownership of Kemper common stock from
approximately 38 percent to approximately 4 percent.
Lumbermens, its subsidiaries and American Manufacturers Mutual Insurance Company
are known as the Kemper National Insurance Companies ("KNIC"). In 1990, Kemper
and KNIC established differing boards of directors and distinct employee groups.
In connection with the 1993 exchange transaction, Kemper and Lumbermens agreed
that each of the Company and KNIC generally may not, for a period of five years,
compete with each other in their respective primary businesses. The two
organizations are not considered affiliated for securities and insurance law
purposes beginning in August 1993.
STRATEGIC INITIATIVES OF THE EARLY 1990S
In addition to divesting its discontinued operations in 1993, the Company in the
early 1990s took the following actions to streamline management, control costs
and improve profitability. In 1990, the Company consolidated its five regional
securities brokerage subsidiaries into a single firm focused mainly on retail
sales operations.
Since late 1991, the Company intensified its management of real estate-related
investments due to adverse markets and recorded real estate-related reserves,
write-downs and cumulative operating losses totaling in excess of $1.1 billion.
The Company successfully implemented strategies to reduce both its joint venture
operating losses and the level of its real estate-related investments. These
strategies included sales, refinancings and restructurings. Also, effective
January 1, 1993, subsidiaries of Kemper and Lumbermens formed a master limited
partnership to hold the equity real estate interests each of the two
organizations separately held previously in joint ventures with the Company's
largest (now former) joint venture partner, which master limited partnership in
early 1994 acquired the former partner's equity interests.
During 1992, 1993 and 1994, the Company purchased from its life insurance
subsidiaries real estate-related assets for $862.2 million in cash. Also during
1991, 1992 and 1993, the Company contributed $275.8 million to the capital of
the life insurance segment. Focusing on its term life and variable annuity
products, the segment also ceded approximately $900 million of fixed-rate
annuity liabilities in reinsurance transactions effected in 1991 and 1992. In
1992 and 1993, the Company integrated the management, operations and strategic
directions of FKLA and KILICO. Further addressing the quality of the life
companies' investment portfolios, the Company reduced holdings of below
investment-grade securities (excluding real estate-related investments) from
22.0 percent of its total invested assets and cash at year-end 1990 to 2.6
percent at year-end 1994.
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Anticipating the $438 million reduction of Kemper's stockholders' equity from
the acquisition of 17.4 million treasury shares in the 1993 exchange
transaction, Kemper raised $260 million of equity capital through private
placements of preferred stock in the second quarter of 1993. In addition, Kemper
issued $63.0 million of common stock during 1994, as well as an aggregate of
$71.6 million in 1993, 1992 and 1991. These amounts were in addition to $100
million of preferred stock sold to Lumbermens at year-end 1992.
Certain of the above-described divestitures, initiatives and other actions and
developments are further described by segment in the business descriptions in
ITEM 1(c) and in Management's Discussion and Analysis in ITEM 7.
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.
The amounts of revenue, earnings (loss) from continuing operations, before
income tax and cumulative effect of changes in accounting principles, and assets
attributable to each of the Company's segments, as well as the other operations
and corporate category, for the three years ended December 31, 1994 are set
forth in the note captioned "Segment information" on page 69. Certain selected
financial information of the discontinued operations category is included in the
note captioned "Discontinued operations" on page 56.
(C) NARRATIVE DESCRIPTION OF BUSINESS AND GENERAL DEVELOPMENT OF SUBSIDIARIES.
REGULATION
The Company's asset management and securities brokerage subsidiaries, as
investment advisers and broker-dealers, are generally subject to regulation by
the Securities and Exchange Commission (the "SEC"), the Commodity Futures
Trading Commission (the "CFTC"), the National Association of Securities Dealers,
Inc. (the "NASD") and/or the exchanges of which the firms are members, as well
as the securities commissions of the states in which the firms are licensed to
do business. The New York Stock Exchange, Inc. (the "NYSE") is the primary
regulatory body for its member firms, including the Company's securities
brokerage operations. These regulators are charged with assuring that the firms
maintain adequate net capital and comply with a variety of approved sales
practices and operational standards, and the regulators oversee the licensing,
registration and/or approval of the firms' employees, representatives and, in
some circumstances, owners. The regulators make periodic examinations and review
annual, quarterly, monthly and other reports on the financial condition and
operations, including market practices, of each individual firm. In addition,
variable annuities offered and variable universal life products planned to be
offered by one of the Company's life insurance subsidiaries, and the related
separate accounts, are subject to regulation by the SEC.
The Company's two life insurance subsidiaries are generally subject to
regulation and supervision by the insurance departments of Illinois, their
domiciliary state, and the other jurisdictions in which the companies are
licensed to do business. These departments enforce laws and regulations designed
to assure that life insurance companies maintain adequate capital and surplus,
manage investments according to prescribed character, standards and limitations
and comply with a variety of operational standards. The departments also make
periodic examinations of individual companies and review annual and other
reports on the financial condition of each company operating within their
respective jurisdictions. Regulations, which often vary from state to state,
cover most aspects of the insurance business, including market practices, forms
of policies and accounting and financial reporting procedures. In 1992, the
National Association of Insurance Commissioners (the "NAIC") announced, and in
1993 Illinois adopted, risk-based capital requirements for life insurance
companies. See "LIFE INSURANCE SEGMENT--Risk-based capital" below.
Insurance holding company laws enacted in many states grant additional powers to
state insurance commissioners to regulate acquisitions of and by domestic
insurance companies, to require periodic disclosure of relevant information and
to regulate certain transactions with related companies. These laws also impose
prior approval requirements for certain transactions with affiliates and
generally regulate dividend distributions by an insurance subsidiary to its
holding company parent.
Broker-dealer risk assessment rules enacted in 1991 also relate to affiliate
transactions. These rules provide for periodic reporting of certain
relationships among, and financial information regarding, certain of the
Company's asset management and securities brokerage subsidiaries and certain of
their affiliates.
The Company believes it is in compliance in all material respects with all
applicable regulations. For information on regulatory and other dividend
restrictions, see ITEM 5(c).
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ASSET MANAGEMENT SEGMENT
The asset management segment consists of KFS and its subsidiaries, including
INVEST and Kemper Service Company ("KSvC"). The Company's assets under
management totaled $62.7 billion at December 31, 1994. See the discussion
captioned "RESULTS OF OPERATIONS--Asset management" in ITEM 7, including the
table on page 24 setting forth assets under management by category at December
31, 1994, 1993 and 1992.
Kemper Financial Services, Inc.
KFS, founded in 1948, is incorporated in Delaware and headquartered in Chicago,
Illinois. Registered as investment advisers and/or broker-dealers in all fifty
states, KFS and its subsidiaries manage mutual fund, insurance company and other
institutional investment portfolios. On February 1, 1995, KFS transferred all
its duties and responsibilities as principal underwriter and distributor of the
open-end mutual funds it manages to its newly formed subsidiary, Kemper
Distributors, Inc. ("KDI"), a registered broker-dealer. At the same date, KFS
transferred the distribution function with respect to KILICO's variable annuity
products to a broker-dealer subsidiary of KILICO, Investors Brokerage Services,
Inc. KFS will continue to provide investment management services to the open-end
mutual funds and the variable annuity separate accounts. KFS has begun the
process to withdraw as a registered broker-dealer. These actions are designed to
reduce the regulatory capital required to be maintained in the asset management
segment. See "Regulation" above.
KSvC, incorporated in 1986 and located both in Kansas City, Missouri, and at
KFS' Chicago facilities, provides hardware, software and back-office
administrative services, including transfer agent-related functions, for KFS'
mutual fund business. KSvC also provides certain computer service bureau
functions and certain telecommunications services for the Company's asset
management, securities brokerage, life insurance and real estate segments. In
addition, KSvC, through its Kansas City-based subsidiary, Supervised Service
Company, Inc. ("SSC"), has provided transfer agent services to third parties,
primarily smaller asset managers. In March 1995, the Company entered into a
definitive agreement to sell the business operations of SSC to DST Systems, Inc.
("DST"). KSvC and DST also agreed to extend the current contractual agreement
for DST to provide shareholder recordkeeping system services for the mutual
funds managed by KFS. The Company had previously considered internalizing this
function. DST also agreed to purchase related computer systems from KSvC.
Subject to regulatory approval, these transactions are expected to be finalized
in April 1995.
KFS and its subsidiaries generate fee revenue for the Company by providing
investment advisory, portfolio management, transfer agent and administrative
services to the investment companies comprising the bond, stock and money market
mutual funds generally known as the "Kemper Funds" or the "Kemper Mutual Funds."
Such services are provided pursuant to management agreements which would be
terminated automatically in the event of certain changes of control of the
Company or KFS. In connection with the then-planned merger of Kemper and Conseco
in 1994, KFS obtained but ultimately did not need fund trustee/director and
shareholder approvals of new management agreements. The management agreements
are also subject to approval periodically by the independent trustees or
directors of the Kemper Funds in the ordinary course of KFS' business.
KFS and its subsidiaries market the Kemper Funds generally through financial
intermediaries which receive commissions and other fees from KFS and KDI.
Beginning in June 1994, KFS, with fund shareholder approval, established for
most of its bond and stock funds a multiple class structure. This structure
provides investors in the funds with the choice of either (i) a traditional
front-end load option, (ii) a spread load option charging annual 12b-1
distribution fees and redemption (contingent deferred sales) charges (declining
over a six-year period), or (iii) a level load option charging annual service
and 12b-1 fees with no advance commission on the sale. Under this multi-class
structure, KFS offers a broad product line of 22 open-end stock and bond funds,
each in these three configurations. In addition, KFS offers for qualifying
investors (mainly institutions making large investments) a no load and no
distribution fee option. The Company believes the multiple class structure will
encourage additional investment in the funds and help maintain the competitive
position of such funds.
Since 1993, mutual funds with asset-based sales charges (commonly referred to as
Rule 12b-1 plans) have been subject to an NASD rule limiting the combined
front-end load, deferred sales charge and asset-based sales charge to no more
than 6.25 percent or 7.25 percent (depending on whether service fees are also
charged) over the life of the fund. This limitation could effectively restrict
payments to brokers and other distributors in certain circumstances. The
limitation, however, has not adversely impacted KFS or any Kemper Mutual Funds
to date.
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KFS' mutual fund marketing strategies include emphasizing long-term investment
performance, utilizing the "Kemper" brand name and offering a diverse array of
mutual funds designed for virtually every economic environment. The following
table shows both the long-term (bond and stock) and short-term (money market)
mutual fund assets under management by fund name:
ASSETS OF THE KEMPER FUNDS AT DECEMBER 31, 1994
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NET ASSET
YEAR FIRST VALUE % OF
NAME OF FUND OFFERED (IN MILLIONS) TOTAL
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BOND FUNDS
Kemper U.S. Government Securities Fund................................................ 1979 $ 4,764 11.48%
Kemper U.S. Mortgage Fund............................................................. 1984 3,614 8.71
Kemper Municipal Bond Fund............................................................ 1976 3,445 8.31
Kemper High Yield Fund................................................................ 1978 3,197 7.71
Kemper California Tax-Free Income Fund................................................ 1983 1,064 2.57
Kemper Diversified Income Fund........................................................ 1977 714 1.72
Kemper Municipal Income Trust(1)...................................................... 1988 639 1.54
Kemper Income & Capital Preservation Fund............................................. 1974 504 1.22
Kemper Cash Reserves Fund............................................................. 1984 317 .76
Kemper New York Tax-Free Income Fund.................................................. 1985 308 .74
Kemper Intermediate Government Trust(1)............................................... 1988 263 .63
Kemper Short-Intermediate Government Fund............................................. 1987 253 .61
KINF--High Yield Portfolio(2)......................................................... 1982 219 .53
Kemper Multi-Market Income Trust(1)................................................... 1989 199 .48
Kemper Adjustable Rate U.S. Government Fund........................................... 1987 164 .40
Kemper High Income Trust(1)........................................................... 1988 189 .46
Kemper Global Income Fund............................................................. 1989 172 .41
Kemper Strategic Municipal Income Fund(1)............................................. 1989 121 .29
Kemper Florida Tax-Free Income Fund................................................... 1991 121 .29
KINF--Government Securities Portfolio(2).............................................. 1987 96 .23
KINF--Money Market Portfolio(2)....................................................... 1982 84 .20
KML High-Yield Investments............................................................ 1986 59 .14
Kemper Strategic Income Fund(1)....................................................... 1994 40 .10
Kemper Ohio Tax-Free Income Fund...................................................... 1993 26 .06
Kemper Texas Tax-Free Income Fund..................................................... 1991 15 .04
Kemper Intermediate Municipal Bond Fund............................................... 1994 10 .02
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TOTAL BOND FUNDS 20,597 49.65
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STOCK FUNDS
Kemper Total Return Fund.............................................................. 1964 2,724 6.57
Kemper Growth Fund.................................................................... 1966 2,198 5.30
Kemper Technology Fund................................................................ 1948 673 1.62
Kemper Small Capitalization Equity Fund............................................... 1969 644 1.55
KINF--Total Return Portfolio.......................................................... 1982 588 1.42
Kemper International Fund............................................................. 1981 383 .92
KINF--Equity Portfolio(2)............................................................. 1983 323 .78
Growth Fund of Spain(1)(3)............................................................ 1990 196 .47
Kemper Retirement Fund II............................................................. 1990 164 .40
Kemper Blue Chip Fund................................................................. 1987 147 .35
Kemper Retirement Fund IV............................................................. 1993 142 .34
KINF--International Portfolio(2)...................................................... 1992 123 .30
Kemper Retirement Fund III............................................................ 1992 117 .28
Kemper Retirement Fund V.............................................................. 1993 101 .24
Kemper Retirement Fund I.............................................................. 1990 99 .24
Cambridge Growth Fund................................................................. 1992 39 .09
Kemper Worldwide 2004 Fund............................................................ 1994 23 .06
KINF--Small Capitalization Equity Portfolio(2)........................................ 1994 13 .03
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TOTAL STOCK FUNDS 8,697 20.96
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MONEY MARKET FUNDS
Kemper Money Market Fund--Money Market Portfolio...................................... 1974 4,019 9.69
Cash Equivalent Fund--Money Market Portfolio.......................................... 1979 3,420 8.25
Cash Equivalent Fund--Government Securities Portfolio................................. 1981 1,553 3.74
Cash Equivalent Fund--Tax-Exempt Portfolio............................................ 1982 1,015 2.45
Kemper Money Market Fund--Tax Exempt Portfolio........................................ 1987 748 1.80
Kemper Money Market Fund--Government Securities Portfolio............................. 1981 587 1.42
Cash Account Trust--Money Market Portfolio............................................ 1989 376 .91
Investors Cash Trust--Government Securities Portfolio................................. 1990 144 .35
Cash Account Trust--Government Securities Portfolio................................... 1989 118 .28
Tax Exempt California--Money Market Fund.............................................. 1987 87 .21
Cash Account Trust--Tax Exempt Portfolio.............................................. 1989 68 .16
Investors Cash Trust--Tax-Exempt Portfolio............................................ 1991 36 .09
Tax-Exempt New York--Money Market Fund................................................ 1990 13 .03
Investors Money Account............................................................... 1983 6 .01
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TOTAL MONEY MARKET FUNDS 12,190 29.39
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TOTAL MUTUAL FUNDS...................................................................... $41,484 100.00%
========== ======
</TABLE>
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(1) Closed-end fund. Unlike open-end funds which newly issue and redeem their
own shares continuously, the closed-end fund shares are traded between
investors in public securities markets. The Company's seven closed-end funds
are traded on the NYSE.
(2) A funding vehicle for separate account investments. This fund is one of the
portfolios of Kemper Investors Fund ("KINF") which provides investment
options to purchasers of KILICO's variable annuity products. See "LIFE
INSURANCE SEGMENT" below.
(3) Originally introduced jointly by KFS and Banco Santander, one of Spain's
largest banks in terms of assets, pursuant to an arrangement to jointly
develop financial services businesses in the U.S. and Europe. The Growth
Fund of Spain was underwritten by a syndicate which included the Company's
securities brokerage operations in 1990.
Bond mutual funds have comprised the largest category of assets under management
since 1991. (Before then, money market assets were the largest.) Interest rate
changes leading to net asset value depreciation in 1994 and appreciation in 1993
contributed to decreases in the level of bond assets in 1994 and increases in
1993. Moreover, in the 1994 environment, there were redemptions in excess of
sales, reflecting investors' movement away from bonds and the short-term (e.g.,
one-year) performance of KFS' bond mutual funds. In 1994, KFS introduced the
closed-end Kemper Strategic Income Fund and the open-end Kemper Intermediate
Municipal Bond Fund. KFS plans to introduce three additional state municipal
bond funds in 1995.
Early in the 1990s, KFS embarked on a strategy to increase its stock mutual fund
assets under management in order to take advantage of long-term equity
performance and potentially higher reinvestment rates and management fees.
Reflecting this strategy and the interest rate environment, KFS' sales of stock
mutual funds increased to 44 percent of total stock and bond mutual fund sales
in 1994, compared with 35 percent in 1993, 32 percent in 1992 and 18 percent in
1991. In the adverse market conditions of 1994, KFS' stock mutual fund assets
declined 7 percent, compared with a 20 percent decline in its bond mutual fund
assets.
As part of its strategy to increase stock mutual fund assets under management,
KFS has introduced six open-end "target maturity" funds, five investing
primarily in domestic equities (the Kemper Retirement Fund series), and one in
international products. By investing a portion of the original principal in U.S.
government zero coupon bonds, KFS, for limited periods of time, has offered to
investors in these target maturity funds a guarantee of the return of investment
at a certain date for nonredeeming investors with dividend reinvestment. These
six funds accounted for approximately 7 percent of KFS' stock mutual fund assets
at December 31, 1994. International stock mutual fund products are also
contributing to sales. In 1994, KFS expanded its international staff and
introduced the Kemper Worldwide 2004 Fund, one of KFS' target maturity funds.
KFS' international products, primarily institutional investment advisory assets,
accounted for $2.1 billion of assets under management at December 31, 1994, up
from $1.3 billion at December 31, 1993.
Money market funds represented less than 30 percent of mutual fund assets under
management at December 31, 1994, compared with more than 75 percent at December
31, 1984. For many years, KFS has had a strategy to increase its longer term
assets relative to the money funds because KFS earns higher fees (in terms of
basis points) on bond and stock assets managed than the lower margin money fund
assets. Although the amount of money fund assets at year-end 1994 was virtually
unchanged from one year earlier, the level was volatile throughout the year as
investors moved in and out of cash and cash equivalents. The Kemper Money Market
Fund--Money Market Portfolio was the 14th largest money fund in the U.S. at
December 31, 1994 according to Lipper Analytical Services.
While fund families utilize money market funds as "safe haven" exchange vehicles
from long-term funds, the Company also views its money market clients as
persistent investors seeking convenience as well as liquidity and stability.
With respect to convenience, KFS' money funds feature debit cards, automatic
exchange to/from other Kemper Funds and checkwriting. With respect to liquidity
and stability, KFS seeks to invest carefully. In 1994, however, the unforeseen
Orange County bankruptcy could have resulted in certain of the Company's money
funds' net asset values declining below one dollar per share had the Company not
established credit enhancements for the related $198 million of short-term notes
issued by the county. The Company was not legally required to take this action.
INVEST Financial Corporation
INVEST was incorporated in Delaware in 1982. KFS owns approximately 96 percent
of INVEST, and the remaining four percent is held primarily by financial
institutions which subscribe to services offered by INVEST. Headquartered in
Tampa, Florida, and licensed as a broker-dealer in 50 states, the District of
Columbia and Puerto Rico, INVEST has more than 700 registered INVEST centers at
financial institutions in 45 states. INVEST sells through more than 1,100
registered representatives, including licensed sales professionals and bank
personnel who sell annuities, other insurance products, mutual funds, unit
investment trusts, bonds, stocks and options. For over one decade, INVEST has
been one of the largest distributors of annuities, mutual funds and securities
through financial institutions in the U.S. INVEST plans to continue increasing
its sales force and adding new banks to its client list. In 1994, INVEST also
began marketing its "Outsource Services" program to provide financial planning,
market technology, compliance, education and other
6
<PAGE> 9
services to financial institutions and others to supplement existing brokerage
programs. In 1994, INVEST accounted for approximately 16 percent of the revenue
of the asset management segment.
INVEST is a significant distributor of the Company's mutual fund and annuity
products. In 1994, INVEST was the fourth largest distributor of KFS' mutual
funds and the largest distributor of KILICO's annuities. INVEST's securities
trades are executed and cleared by KCC, and certain of INVEST's automated
systems are provided by KSvC.
INSTITUTIONAL BUSINESS
Two of KFS' subsidiaries, Chicago-based Kemper Asset Management Company and
London-based Kemper Investment Management Company Limited, manage most of the
asset management segment's institutional investment business. At December 31,
1994, this business included investment advisory clients (approximately 63
clients and $4.7 billion of assets), Kemper affiliates ($9.6 billion, primarily
assets of the life insurance subsidiaries) and KNIC ($6.9 billion).
Of the $4.7 billion of investment advisory assets, public pension funds account
for 43 percent, corporate ERISA clients 31 percent, foundations and endowments
15 percent and high net worth individuals 11 percent. The Company markets its
services to these clients both directly (especially the public sector retirement
funds) and through investment management consultants. Increasing sales of
investment advisory services in 1994 offset declines in this category's asset
values reflective of adverse market conditions.
Assets managed for Kemper affiliates represented 15 percent of the Company's
total assets under management at year-end 1994 but accounted for only
approximately 3 percent of the segment's investment management fee revenue in
1994. Almost three-fourths of the affiliated companies' assets are bonds.
Assets managed for KNIC represented 11 percent of the Company's total assets
under management but accounted for only approximately 4 percent of the segment's
investment management fee revenue in 1994. Approximately $460 million of the
KNIC assets under management at year-end 1994 were real estate-related assets
that are not being managed by the Company since January 1, 1995. See "REAL
ESTATE SEGMENT" below. Most of the KNIC assets under management are bonds. See
the note captioned "Related-party transactions" on page 66.
OTHER ASSET MANAGEMENT FACILITIES
At December 31, 1994, KFS owned 15.6 percent of Dimensional Fund Advisors, Inc.,
an investment management company offering quantitative or passive investment
products to the tax-exempt institutional investment community. KFS also owned 50
percent of IFTC Holdings, Inc. (which wholly owns Investors Fiduciary Trust
Company, a state-chartered trust company) until January 1995 when KFS sold its
interest, realizing an after-tax gain of approximately $12 million.
COMPETITION
The Company's asset management operations compete with other asset managers,
other brokerage and advisory firms that manage assets or produce financial
products such as mutual funds similar to those produced by KFS, and other
financial institutions such as banks, thrifts and insurance companies that
market other types of investment products.
The Company stresses the relative size and balance between its production and
distribution capabilities and emphasizes diversity among products, services and
income sources. The Company focuses on increasing assets under management,
controlling operational costs, establishing alternative distribution outlets and
matching products and services with economic conditions. Sales of retail mutual
funds were also helped by the Company's offering of "KemFlex", a computerized
account service system. KemFlex facilitates sales and servicing and is being
marketed mainly in the 401(k) qualified plan market to employers with fewer than
1,000 employees.
The asset management industry is becoming increasingly competitive, with banks
and securities brokerage firms offering proprietary products and with the
proliferation of products being offered in the marketplace through multiple
distribution channels. The numbers of competitors and their products have
increased significantly for several years, as barriers to entry, such as capital
requirements, are low relative to other regulated businesses. Individuals are
also assuming greater control over their savings and retirement dollars 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 both affiliated and non-affiliated channels, cost control
and improved service.
One of the segment's marketing strategies is to sell through diverse channels.
Financial intermediaries market most of the segment's products, except for the
Kemper Money Market Fund which KFS sells directly to the public. Although the
largest channel for the segment's open-end mutual fund sales has continued to be
nonaffiliated regional and national securities brokerage firms, in recent years
financial planners, financial institutions, insurance brokerages and other
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<PAGE> 10
specialty distributors of financial products have accounted for increasing
proportions of the segment's sales. In 1994, INVEST and KSI accounted for
approximately 4 percent and 12 percent, respectively, of KFS' open-end mutual
fund sales, compared with 6 percent and 10 percent, respectively, in 1993. See
"SECURITIES BROKERAGE SEGMENT" below.
EMPLOYEES
At December 31, 1994, KFS employed approximately 570 persons, and KSvC employed
1,180. In connection with the expected sale of the business operations of SSC to
DST, the Company anticipates that the number of KSvC employees will decline by
approximately 200 in April 1995. INVEST has approximately 335 employees and also
utilizes the services of approximately 1,100 registered representatives at
subscribing banks, thrifts and credit unions.
LIFE INSURANCE SEGMENT
The Company's life insurance business, produced by FKLA and KILICO, primarily
consists of a variety of term and interest-sensitive (mostly universal) life
insurance products and fixed-rate and variable annuity contracts. Each company
has emphasized different products and distribution methods. Both companies are
licensed in the District of Columbia and all states except New York. In early
1992, the Company named a common chairman and chief executive officer for both
FKLA and KILICO. During 1992 and 1993, the Company integrated the operations and
management of the life insurance companies. This integration encompassed
virtually all aspects of operations, distribution channels and product
development and was designed to promote increased efficiencies and productivity
and to expand the segment's distribution capabilities. See the discussion
captioned "RESULTS OF OPERATIONS--Life insurance" beginning on page 25.
Changing marketplace dynamics affected the life insurance industry in recent
years. To accommodate customers' increased preference for safety over higher
yields, the Company has systematically reduced investment risk and strengthened
the capital position of the life insurance segment. In 1994, the segment's total
net investment income increased for the first time since 1990. Investments are
an integral part of the Company's life insurance business. See the discussion
captioned "INVESTMENTS" beginning on page 32.
The following table shows selected relative contributions of FKLA and KILICO to
the life insurance segment for the three years ended December 31, 1994 (in
millions):
<TABLE>
<CAPTION>
NET INCOME CASH AND INVESTED
SALES REVENUE (LOSS) ASSETS INSURANCE IN-FORCE
--------------- --------------- -------------- -------------------- ---------------------
FKLA KILICO FKLA KILICO FKLA KILICO FKLA KILICO FKLA KILICO
------ ------ ------ ------ ----- ------ -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1994................ $286.5 $465.8 $357.1 $330.4 $63.8 $ 26.4 $2,275.0 $4,916.7 $95,861.0 $1,629.3
1993................ 308.1 510.0 388.4 338.1 65.8 14.0 2,584.0 5,380.7 89,614.3 1,732.9
1992................ 360.5 716.5 334.8 353.6 26.4 (51.9) 2,426.5 5,067.6 82,428.7 1,794.4
</TABLE>
Federal Kemper Life Assurance Company
FKLA, founded in 1905, is incorporated under the insurance laws of Illinois.
FKLA markets a selected range of life insurance and annuity products primarily
through brokerage general agents and other independent distributors.
In 1994, term and ordinary life products together accounted for 53.9 percent of
FKLA's sales, and interest-sensitive life products accounted for 26.8 percent.
The face value of its term, ordinary and interest-sensitive life insurance sold
in 1994 was $17.2 billion, compared with $17.5 billion in 1993 and $21.5 billion
in 1992. FKLA's total life insurance in-force at December 31, 1994 rose $6.2
billion in 1994, $7.2 billion in 1993 and $10.8 billion in 1992, after taking
into account lapses (nonrenewals) of term and ordinary life insurance products
totaling $9.4 billion in 1994, $8.8 billion in 1993 and $9.1 billion in 1992 and
surrenders of interest-sensitive life insurance products totaling $740 million
in 1994, $734 million in 1993 and $686 million in 1992. This combined surrender
and lapse activity resulted in a lapse ratio of 10.9 percent in 1994, 11.1
percent in 1993 and 12.7 percent in 1992.
Although the persistency of interest-sensitive life products suffered in each of
the last three years in large part due to a declining interest rate environment
(through early 1994) and asset quality issues, persistency on term and ordinary
life products in recent years was helped in part by a tightening of agency
requirements and a shift over the past few years to marketing term products with
level premiums and longer premium guarantees. In early 1995, however, the NAIC
adopted a model regulation which would require higher reserves on policies with
longer premium guarantees. The
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<PAGE> 11
regulation would not apply to policies issued prior to its proposed effective
date, January 1, 1996, and in response, the Company and the industry would
likely market most term products with shorter premium guarantees.
To help increase sales and profitability, FKLA continues to design new life
insurance products. In 1995, FKLA plans to introduce a variable universal life
product as well as a new term product to be called Kemper Quick 20 and a new
universal life product to be called Kemper Quick CVT (Cash Value Term). Kemper
Quick 20 is designed as a low-cost term product offering a 20-year level premium
guarantee, and Kemper Quick CVT is a flexible premium, adjustable, universal
life policy offering term-like premiums also guaranteed to remain level for 20
years. Both these products feature a short-form application and a simplified
underwriting process for efficient policy issuance.
In 1994, 1993 and 1992, most of FKLA's new sales came from Kemper Certain-T and
Kemper Super-T, two low-cost term life insurance products offering ten-year and
15-year premium guarantees, and from Kemper CVT, a flexible premium, adjustable,
universal life insurance policy offering term-like premiums guaranteed to remain
level for the first 20 policy years. In 1993, FKLA lowered the minimum face
amount (policy size) requirements on these products to make them more affordable
for more customers and added an accelerated death benefit rider for
policyholders. At December 31, 1994, Kemper Certain-T and Kemper Super-T
accounted for 25.6 percent of total life insurance in-force, and Kemper CVT
accounted for 10 percent of total life insurance in-force. Reflecting the higher
net worth individual marketplace targeted by FKLA, the average face amount of
new issues for FKLA's term products was $247,699 in 1994.
For its mortality-based products, FKLA establishes a measure of protection
through careful underwriting and reinsurance arrangements. The Company believes
FKLA's normal underwriting and reserving practices take into account all known
mortality risks, including the acquired immune deficiency syndrome ("AIDS").
Virtually all new applicants for FKLA's mortality-based policies are tested for
the AIDS virus, and most of FKLA's in-force business has been tested during the
application process.
In recent years, FKLA has tightened agency requirements, reducing the number of
general agents (to 231 at year-end 1994 from 704 ten years earlier) while
increasing sales through these larger, more consistent producers. In addition,
FKLA increasingly utilizes other marketing organizations such as agents
associated with financial institutions, securities brokerage firms and
property-casualty insurance agencies. FKLA has also developed marketing
arrangements with other life insurance companies that do not participate in the
low-cost term marketplace. Such arrangements help FKLA increase sales by
allowing other companies to market its products.
Most of these distribution channels also handle FKLA's annuity products, all of
which are fixed-rate (general account) annuities. Annuities accounted for 19.3
percent of FKLA's 1994 sales, 25.3 percent of its 1993 sales and 38.0 percent of
its 1992 sales. Annuities also accounted for approximately $1.2 billion of
FKLA's invested assets at December 31, 1994, and $1.3 billion at December 31,
1993. FKLA has sold its annuity products primarily through its general agency
force. FKLA has expanded its presence in the bank and thrift market with annuity
products designed to compete with certificates of deposit. In recent years, FKLA
also enhanced its annuity line to focus on sales of products to school districts
and municipalities. The Company is planning to enlarge its life insurance
companies' distribution to this and other marketplaces by utilizing
relationships established by its securities brokerage operations.
In addition to developing innovative, low-cost products, FKLA utilizes advanced
computer systems to provide quality service while keeping expenses at a minimum.
Also, for many years, FKLA has utilized a "team underwriting" approach. By
organizing its underwriters and related personnel into small work groups that
make extensive use of systems technology, FKLA has developed what it believes is
a significant cost advantage in the life insurance marketplace. FKLA also
captures policy information electronically at its source (the producer) and
makes it available to various parties in the process of underwriting and
handling the life insurance business.
Kemper Investors Life Insurance Company
KILICO, founded in 1947, is incorporated under the insurance laws of Illinois.
KILICO's lines of insurance and annuity products complement the offerings of the
Company's asset management segment. KILICO offers both individual fixed-rate
(general account) and individual and group variable (separate account) annuity
contracts, as well as individual universal life and variable life insurance
products, through various distribution channels. KILICO's broad product
selection is designed for diverse economic environments. KILICO structures its
products to offer investment-oriented products, guaranteed returns or a
combination of both to help policyholders meet multiple insurance and financial
objectives.
Financial institutions, nonaffiliated and affiliated securities brokerage firms,
insurance agents and financial planners are important distribution channels for
KILICO products. In 1994, INVEST and KSI accounted for approximately 36 percent
and 20 percent, respectively, of KILICO's first-year sales, compared with 41
percent and 12 percent, respectively, in 1993. Like the Company's asset
management and securities brokerage operations, KILICO is owned by KFC, which in
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<PAGE> 12
turn was approximately 97 percent owned by Kemper on a fully converted basis at
December 31, 1994. The minority interest in KFC is held by certain employees of
KFC's subsidiaries.
Annuities accounted for approximately 99 percent of KILICO's sales in recent
years. KILICO's annuities generally have disappearing surrender charges that are
a specified percentage of policy values and decline as the policy ages. General
account annuity and interest-sensitive life policies are guaranteed to
accumulate at specified interest rates but allow for periodic crediting rate
changes.
In the last four years, in part reflecting the low interest rate environment
through early 1994, and to reduce its exposure to investment risk, KILICO has
placed more emphasis on marketing its separate account products. Unlike the
fixed-rate annuity business where KILICO manages spread revenue, variable
annuities pose minimal investment risk for KILICO and increase administrative
fee revenue. KILICO's separate account assets totaled $1.50 billion at December
31, 1994 and 1993, and $1.14 billion at December 31, 1992. KILICO's sales of its
separate account annuities were $250.7 million in 1994, $263.7 million in 1993,
$275.9 million in 1992 and $113.9 million in 1991. In 1992, KILICO introduced
Kemper PASSPORT, a variable and market value adjusted annuity featuring a choice
of investment portfolios, an increasing estate benefit, tax-free transfers and a
selection of guaranteed rates for a variety of terms. In 1994, KILICO changed
Kemper PASSPORT from a single premium annuity to one with a flexible premium
structure and also added a small capitalization equity subaccount as another
investment portfolio choice for purchasers of the Kemper PASSPORT and certain
other variable annuity products. Separate account annuities represented 53.8
percent of KILICO's total sales in 1994, compared with 51.7 percent in 1993,
38.5 percent in 1992 and 16.8 percent in 1991.
Declines in interest rates in recent years and strategic reductions in crediting
rates lowered general account annuity sales for KILICO over the last four years.
KILICO's sales also were hurt by fixed-rate annuity buyers' focus on investment
risk. In the second half of 1994, KILICO began raising crediting rates on
certain general account products, reflecting both competitive conditions and a
rising interest rate environment. General account annuities represented 46.0
percent of KILICO's total sales in 1994, compared with 47.9 percent in 1993,
60.8 percent in 1992 and 82.0 percent in 1991.
KILICO's sales of interest-sensitive life products decreased again in 1994, to
$0.8 million, from $2.0 million in 1993, $5.0 million in 1992 and $8.0 million
in 1991, for the same reasons its sales of general account annuities declined.
Overall, sales of interest-sensitive life products represented less than 1
percent of KILICO's total sales in each of the last four years.
NAIC RATIOS
The NAIC annually calculates certain statutory financial ratios for most
insurance companies in the United States. These calculations are known as the
Insurance Regulatory Information System ("IRIS") ratios. There presently are
twelve IRIS ratios. The primary purpose of the ratios is to provide an "early
warning" of any negative developments. The NAIC reports the ratios to state
regulators who may then contact the companies if three or more ratios fall
outside the NAIC's "usual ranges".
Based on statutory financial data as of December 31, 1994, FKLA and KILICO each
had only one ratio outside the usual ranges. FKLA's change in capital and
surplus ratio (net and gross) reflected $82.5 million of dividends paid in 1994
which were then contributed to the capital of KILICO. See "LIQUIDITY AND CAPITAL
RESOURCES" on page 41 in ITEM 7. KILICO's change in reserving ratio on
interest-sensitive life products reflected its strategic reductions of general
account business. Other than certain states requesting quarterly financial
reporting and/or explanations of the underlying causes for certain ratios, no
state regulators have taken any action due to FKLA's or KILICO's IRIS ratios for
1994 or earlier years.
GUARANTY ASSOCIATION ASSESSMENTS
From time to time, mandatory assessments are levied on the Company's life
insurance subsidiaries by life and health guaranty associations of most states
in which these subsidiaries are licensed to cover losses to policyholders of
insolvent or rehabilitated insurance companies. These associations levy
assessments (up to prescribed limits) on all member insurers in a particular
state in order to pay claims on the basis of the proportionate share of premiums
written by member insurers in the lines of business in which the insolvent or
rehabilitated insurer engaged. These assessments may be deferred or forgiven in
certain states if they would threaten an insurer's financial strength, and, in
some states, these assessments can be partially recovered through a reduction in
future premium taxes.
In the early 1990s, there were a number of failures of life insurance companies.
The Company's financial statements include provisions for all known assessments
that will be levied against FKLA and KILICO by various state guaranty
associations as well as an estimate of amounts (net of estimated future premium
tax recoveries) that the Company believes will be assessed in the future for
failures which have occurred to date and for which the life insurance industry
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<PAGE> 13
has estimated the cost to cover losses to policyholders. Assessments levied
against the Company's subsidiaries and charged to expense in 1993 and 1992
amounted to $8.1 million and $11.0 million, respectively. Such amounts relate to
accrued guaranty fund assessments of $5.6 million and $13.3 million at December
31, 1994 and 1993, respectively. No additional assessments were charged to
expense during 1994 by FKLA or KILICO as the Company believes it has established
adequate accruals for all known insolvencies where an estimate of the cost to
cover losses to policyholders was available at December 31, 1994.
RISK-BASED CAPITAL
Since the early 1990s, reflecting a recessionary environment and the
insolvencies of a few large life insurance companies, both state and federal
legislators have increased scrutiny of the existing insurance regulatory
framework. While various initiatives, such as a new model investment law, are
being considered for future implementation by the NAIC, it is not presently
possible to predict the future impact of potential regulatory changes on the
Company.
Under asset adequacy and risk-based capital rules adopted in 1993 in Illinois
(the domiciliary state of the Company's life insurance subsidiaries), state
regulators may mandate remedial action for inadequately reserved or inadequately
capitalized companies. The new asset adequacy rules are designed to assure that
reserves and assets are adequate to cover liabilities under a variety of
economic scenarios. The focus of the new capital rules is a risk-based formula
that applies prescribed factors to various risk elements in an insurer's
business and investments to develop a minimum capital requirement designed to be
proportional to the amount of risk assumed by the insurer. FKLA and KILICO have
capital levels substantially exceeding any which would mandate action under the
risk-based capital rules, and both life companies are in compliance with
applicable asset adequacy rules.
RESERVES AND REINSURANCE
The following table provides a breakdown of the Company's reserves for life
policy benefits by product type at December 31, 1994, 1993 and 1992 (in
millions):
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
General account annuities.............................................. $5,254.0 $5,508.9 $5,446.7
Life insurance:
Interest-sensitive................................................... 1,595.1 1,628.3 1,619.4
Term and other....................................................... 257.7 243.6 270.9
Ceded life policy benefits............................................. 741.9 836.0 --
-------- -------- --------
Total............................................................. $7,848.7 $8,216.8 $7,337.0
======== ======== ========
</TABLE>
Ceded life policy benefits shown above reflect coinsurance (indemnity
reinsurance) transactions in which KILICO reinsured liabilities of approximately
$500 million in 1992 and $400 million in 1991 with Fidelity Life Association
("FLA"), an affiliated mutual insurance company. FLA shares management,
operations and employees with FKLA and KILICO pursuant to an administrative and
management services agreement. FLA produces whole life policies not produced by
FKLA or KILICO as well as other policies similar to certain FKLA policies. At
December 31, 1994, KILICO's reinsurance recoverable from FLA related to these
coinsurance transactions totaled $642.8 million. KILICO remains primarily liable
to its policyholders for this amount. Utilizing FKLA's employees, KILICO is the
servicing company for this coinsured business and is reimbursed by FLA for the
related servicing expenses. Excluding this coinsurance, KILICO, because it is
primarily an annuity company, reinsures only a very limited portion of its
business. KILICO has immaterial exposure to mortality losses.
FKLA's maximum retention on any single mortality policy risk is $300,000. FLA is
one of FKLA's primary reinsurers of mortality coverages written by FKLA prior to
1992. In 1992, FKLA began to reinsure risks over its $300,000 retention limits
with nonaffiliated insurers. FKLA remains primarily liable to its policyholders
for the face amount of all of its reinsured mortality coverages. At December 31,
1994, FKLA's reinsurance recoverable from FLA for its mortality reinsurance
totaled $43.0 million. See the note captioned "Reinsurance" on page 65.
COMPETITION
The life insurance subsidiaries are in a highly competitive business and compete
with a large number of other stock and mutual life insurance companies, many of
which are larger financially, although none is truly dominant in the industry.
FKLA primarily competes in the low-cost mortality products marketplace, although
annuities have constituted a sizable portion of FKLA's sales and profits in
recent years. KILICO, with its emphasis on annuity products, competes for
savings dollars in many of the same marketplaces as KFS, which has complementary
products. See "ASSET MANAGEMENT SEGMENT--Competition" above in this ITEM 1(c).
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<PAGE> 14
The life insurance companies' principal methods of competition continue to be
innovative products, often designed for selected distribution channels and
economic conditions, as well as appropriate product pricing, careful
underwriting, expense control and the quality of services provided to
policyholders and agents. Certain of their financial strength ratings and
claims-paying/performance ratings, however, were lower in 1993 and 1994 than in
earlier years and were under review in 1994 and to date in 1995 due to
uncertainty with respect to the Company's ownership. These ratings impacted
sales efforts in certain markets.
To address its competition, the segment has adopted certain business strategies.
These include systematic reduction of investment risk and strengthenings of the
life companies' capital positions; continued focus on existing and new term and
variable annuity products; distribution through diversified channels, with an
emphasis on INVEST's financial institution clients and KSI'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.
RANKINGS AND RATINGS
FKLA ranked 13th in ordinary life insurance issued and 19th in ordinary life
insurance in-force at year-end 1993 of the 100 U.S. life insurance companies
reported in the July 11, 1994 issue of BestWeek--Life/Health. According to
Best's Agents Guide to Life Insurance Companies, 1994, as of December 31, 1993,
FKLA and KILICO, respectively, were ranked 117th and 58th of 1,326 life insurers
by admitted assets; 39th and 452nd of 1,186 by insurance in-force; and 178th and
128th of 1,265 by net premiums written.
A.M. Best Company, an industry analyst, has assigned an A- (excellent) rating to
both FKLA and KILICO; Moody's Investors Service has assigned an insurance
financial strength rating of Baa1 (adequate) to both companies; and Duff &
Phelps Credit Rating Co. has assigned claims-paying ability ratings of AA- (very
high) to FKLA and A+ (high) to KILICO. Each of these ratings is currently under
review, primarily reflecting uncertainty with respect to the Company's
ownership.
EMPLOYEES
At December 31, 1994, FKLA had approximately 340 employees, which it shares with
KILICO and FLA.
SECURITIES BROKERAGE SEGMENT
The Company's securities brokerage business chiefly consists of retail brokerage
(sales, consulting and research) and also includes institutional brokerage,
investment banking and securities underwriting services. Services are provided
to individuals and institutions primarily by KSI, which commenced operations in
the third quarter of 1990 upon the merger and restructuring of the Company's
five regional securities brokerage operations. KSI can trace its foundations
back to 1910.
Kemper Securities, Inc.
Based in Chicago and incorporated in Delaware, KSI is a NYSE member firm
licensed as a broker-dealer in all 50 states, Puerto Rico and the District of
Columbia. KSI is also a registered investment adviser. KSI is primarily retail
oriented, as more than 80 percent of its revenue in each of the last five years
was generated from its retail sales operations. KSI's operations, however,
maintain a measure of diversification in the areas of investment banking,
municipal finance and institutional sales.
At December 31, 1994, KSI's client base of approximately 500,000 accounts
represented about $33 billion of assets. This amount included approximately $1.0
billion of unit investment trust investments primarily originated by KSI as well
as $2.4 billion of money market funds and $2.8 billion of other mutual funds
managed by KFS. Historically, KSI has been one of the largest distributors of
KFS' mutual fund products.
KSI had 21 equity and 11 fixed-income research analysts at year-end 1994. In
addition to tracking certain widely followed companies, these research analysts
follow certain regional companies not usually covered by other large brokerage
firms. KSI's regional focus is marketed to those investors who may prefer to
invest in companies in their own communities. This focus also serves KSI in
providing investment banking services to selected financial institutions and
local governments. In 1994, KSI introduced The Bank Qualifier(TM), a municipal
information research service to provide financial institutions and other
subscribers with on-line credit evaluations of municipal bonds. The Company
believes KSI enjoys close, value-added relationships with its customers.
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<PAGE> 15
According to the Securities Industry Yearbook 1994-1995, published by the
Securities Industry Association, KSI ranked 12th nationwide by number of offices
(163), 11th by number of retail investment consultants (1,245 registered
representatives), 12th by total number of retail and institutional investment
consultants (1,330) and 17th by number of employees (3,805, including employees
of KSI subsidiaries) at December 31, 1993. Although KSI's single largest office
in terms of revenue in 1994 was in New York City, more than two-thirds of KSI's
investment consultants at December 31, 1994 were located in branch offices in
the following six states: California (272 investment consultants), Illinois
(182), Ohio (133), Wisconsin (124), Colorado (98) and Texas (96).
At December 31, 1994, KSI had 150 offices in 27 states and a total of 1,300
investment consultants. The Company believes that despite its recruiting efforts
in both years, the number of investment consultants decreased in 1993 primarily
due to rumors that KSI was for sale and in 1994 primarily due to uncertainties
with respect to the Company's ownership.
KSI was able to improve its results in 1993 because of continued participation
in strong markets, increased productivity of investment consultants, ongoing
focus on KSI's core retail business and a cost reduction program which included
reductions in staff in excess of 10 percent. In 1994, adverse stock, bond and
credit markets, coupled with uncertainties with respect to the Company's
ownership, resulted in a significant decline in revenue and a net loss for the
year. See the discussion captioned "RESULTS OF OPERATIONS--Securities brokerage"
on page 29 in ITEM 7. KSI management in 1994 continued refocusing its business,
including incentivizing investment consultants for increasing client assets and
related non-commission fee revenue. KSI is also reviewing its branch office
operations. KSI has an objective of continuing to reduce its fixed expenses as
much as possible.
Kemper Clearing Corp.
A NYSE member firm, KCC was incorporated in Delaware in 1984 and is based in
Milwaukee, Wisconsin. KCC executes and clears securities trades for KSI and
INVEST. KCC also provides selected services to certain unaffiliated firms. KCC
accounted for $9.0 million of the 1994 revenue of the securities brokerage
segment. To perform its execution and clearing functions, KCC presently
maintains lines of credit totaling $500 million from ten banks. At December 31,
1994, the amount drawn on these lines was $315.1 million. See the discussion
captioned "LIQUIDITY AND CAPITAL RESOURCES--Short-term debt" on page 42 in ITEM
7.
Beta Systems Inc.
Beta Systems Inc. ("Beta"), a sister company of KSI, licenses software and
provides data processing services to affiliated and nonaffiliated securities
firms on a service bureau basis. This company also markets an on-line service,
BETAQUOTE, which combines real time quote data with customer account
information. Beta accounted for $11.4 million of the 1994 revenue of the
securities brokerage segment.
COMPETITION
KSI is in a highly competitive business and competes with a large number of
other brokerage firms, many having greater financial resources. Some are
national firms offering products competing with those of KFS as well as
providing securities brokerage, investment banking and other financial services.
Other competitors include brokerage firms that sell primarily to financial
institution customers as well as financial institutions that increasingly offer
proprietary products such as mutual funds through brokerage subsidiaries. The
Company's subsidiaries in the securities brokerage segment compete using
innovative products, appropriate pricing and quality service to customers. The
segment is also focusing on its retail business strength.
EMPLOYEES
At December 31, 1994, KSI employed approximately 2,980 persons, KCC 410 persons
and Beta 155 persons.
13
<PAGE> 16
REAL ESTATE SEGMENT
Subsidiaries within this segment were part of the Company's other operations and
corporate category in 1992 and 1991 before being reclassified when this segment
was established in 1993. In addition, certain of the Company's equity
investments in real estate were accounted for in the insurance company
subsidiaries before the equity was transferred to the Company's real estate
subsidiaries beginning in 1992. This segment also includes most of the Company's
50 percent ownership interest in a master limited partnership (the "MLP")
between subsidiaries of the Company and subsidiaries of Lumbermens as well as 50
percent of Kemper Real Estate Management Company ("KREMCO").
REAL ESTATE SUBSIDIARIES
The Company's real estate subsidiaries include Kemper Portfolio Corp., which is
wholly owned by Kemper ("KPC"); KPC's wholly owned subsidiary, FKLA Realty
Corporation ("FKLA Realty"); KFC Portfolio Corp., which is wholly owned by KFC
("KFCPC," which, together with KPC, are referred to below as the "portfolio
companies"); and KFCPC's wholly owned subsidiaries including KILICO Realty
Corporation ("KILICO Realty"), Kemper/Cymrot, Inc. and Kemper Real Estate, Inc.
(which subsidiaries, together with FKLA Realty, are referred to below as the
"realty companies"). The realty companies act as general or limited partners in
various real estate joint ventures.
The majority of the Company's real estate loans have been originated on joint
venture properties or projects where the Company or its affiliates had taken
ownership positions with a small number of partners. The Company's balance sheet
classification of "joint venture mortgage loans" consists of loans
(predominately by the life insurance subsidiaries) to partnership and corporate
ventures in which subsidiaries of Kemper (predominately the realty companies)
own equity interests as of the balance sheet date. During 1994, the Company sold
or otherwise transferred to third parties its equity interests in certain
ventures. As a result, the amount of third-party mortgage loans increased
correspondingly with the decrease in joint venture mortgage loans, and operating
losses for the real estate segment declined. See the discussion captioned
"RESULTS OF OPERATIONS--Real estate" on page 30 in ITEM 7.
Historically, the properties or projects in which the Company has owned
interests or to which the Company has made loans have been managed by the
borrowers'/partners' organizations, and most are still so managed today. The
Company, however, intensified its management of real estate investments in the
depressed real estate environment of the last three years. Also, in the third
quarter of 1992, the Company formed KREMCO, and KREMCO then assumed management
of the properties in which the Company, Lumbermens or their respective
affiliates shared interests with Peter B. Bedford or his affiliates ("Bedford").
These properties are located primarily in the Pacific region of the United
States. In connection with the agreement to form the MLP, Lumbermens acquired 50
percent of KREMCO from the Company in March 1993. In January 1994, the MLP
acquired the interests of Bedford in these properties.
In 1992, the Company initiated a strategy to purchase certain real
estate-related assets (subordinated loans and equity investments) out of its
life insurance subsidiaries. This strategy was designed to improve the financial
strength and competitive marketing position of the life companies, separate the
operating results of the real estate from the life companies, and concentrate
the management focus on the real estate segment. During 1994, 1993 and 1992, the
Company contributed a total of $862.2 million in cash to the capital of the
portfolio companies, which then acquired from the Company's insurance
subsidiaries most of the Company's equity interests in real estate and
subordinated real estate loans. Given the subordination of such loans to loans
held by the Company's life insurance segment, the real estate segment recorded
most of the Company's provisions for real estate-related losses. Given its
equity ownership, the segment also recorded most of the real estate operating
losses. For additional real estate disclosures, see the discussion captioned
"INVESTMENTS" beginning on page 41 in ITEM 7, and see the notes captioned
"Summary of significant accounting policies--Invested assets and related income"
on page 51, "Related-party transactions" on page 66, "Invested assets and
related income" on page 54, "Unconsolidated investees" on page 57,
"Concentration of credit risk" on page 59, and "Financial
instruments--off-balance-sheet risk" on page 67.
EMPLOYEES
At December 31, 1994, KREMCO had approximately 200 employees primarily in
California, and the Company's real estate personnel at KFS in Chicago numbered
approximately 65.
14
<PAGE> 17
OTHER OPERATIONS AND CORPORATE CATEGORY
This category primarily consists of holding company overhead.
EMPLOYEES
At December 31, 1994, Kemper had approximately 80 holding company employees in
Long Grove, Illinois. In addition, approximately 290 of KFS' 570 employees, 35
of FKLA's 340 employees, and 60 of KSI's 2,980 employees were in the finance
(including accounting), administration, legal and planning staff groups and the
real estate operating group of the Company at year-end 1994. During 1994, Kemper
organized these groups by function with direct and indirect reporting to holding
company management, not just by discrete subsidiary as in years past.
(D) FINANCIAL INFORMATION RELATING TO FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
SALES.
Information called for by this item of the Form 10-K is not material to the
Company's operations and sales.
ITEM 2. PROPERTIES
As set forth below, Kemper Corporation and certain of its subsidiaries have both
capital leases, for which the financial commitments are not material, and
operating leases. For its holding company headquarters, Kemper Corporation
leases from Lumbermens 32,000 sq. ft. in Long Grove, Illinois. See the two notes
captioned "Related-party transactions" and "Commitments and contingent
liabilities" on page 66. The Company believes its current and planned facilities
are adequate for its present needs.
ASSET MANAGEMENT SEGMENT
KFS leases 530,000 sq. ft. of office space in Chicago, Illinois. Most of this
space is leased through December 31, 1996. In early 1995, KFS executed a 15-year
lease for 300,000 sq. ft. of replacement office space in Chicago effective
January 1, 1997. KSvC leases 230,000 sq. ft. in Kansas City, Missouri. INVEST
leases 38,500 sq. ft. in Tampa, Florida. The companies comprising this segment
also rent office space in various other locations from which they transact
business.
LIFE INSURANCE SEGMENT
FKLA and KILICO lease from Lumbermens 78,000 sq. ft. of office space in Long
Grove, Illinois. KILICO also has utilized 43,000 sq. ft. of office space
presently leased by KFS in Chicago, although virtually all of this space is
expected to be eliminated in 1997 in connection with KFS' recently executed
lease.
SECURITIES BROKERAGE SEGMENT
KSI leases 241,000 sq. ft. of office space (and an additional 36,000 sq. ft. of
warehouse space) in Chicago, Illinois; 115,000 sq. ft. in one location in
Houston, Texas; 41,000 sq. ft. in two locations in Cleveland, Ohio; 30,000 sq.
ft. in one location in Los Angeles, California; 118,000 sq. ft. in two locations
in Milwaukee, Wisconsin; 38,000 sq. ft. in two locations in New York City; and
705,000 sq. ft. in 137 other locations nationwide. KSI owns a 153,000 sq. ft.
building in Denver, Colorado. KCC shares office space with KSI in Milwaukee.
Beta leases 44,000 sq. ft. in Milwaukee.
REAL ESTATE SEGMENT
The real estate subsidiaries utilize portions of KFS' facilities in Chicago.
KREMCO leases 29,000 sq. ft. from MLP ventures primarily in LaFayette,
California.
(All sq. ft. figures in this ITEM 2 are approximate.)
15
<PAGE> 18
ITEM 3. LEGAL PROCEEDINGS
As previously reported, in 1992 the Staff of the SEC commenced an investigation
into certain of the Company's real estate-related accounting practices and
related disclosures. The Company fully cooperated throughout the Staff's
investigation which has now concluded. The Company and the Staff have had
settlement discussions respecting this matter, and the Company currently
anticipates that this matter will be resolved with respect to the Company in the
second quarter of 1995 with the filing of an administrative proceeding.
ASSET MANAGEMENT SEGMENT
In the first quarter of 1995, the Company reached an agreement to settle the
previously reported class action styled Tabankin, et al. v. Kemper Short-Term
Global Income Fund, et al., which was originally filed in 1993 in federal court
in the Northern District of Illinois on behalf of various investors in the
Kemper Short-Term Global Income Fund and the Short-Term Global Income Portfolio
of Kemper Investment Portfolios. The settlement is subject to court approval.
SECURITIES BROKERAGE SEGMENT
In December 1993, a federal district court in Portland, Oregon entered judgment
on a May 1993 jury verdict against Boettcher & Company, a predecessor firm of
KSI, in a class action lawsuit filed in 1988 by persons who purchased securities
of Melridge, Inc. between November 1983 and 1987. If upheld on appeal, the
judgment could result in liability of up to approximately $57 million, depending
on various factors including the amount of written claims filed by class members
and allowed by the court, exclusive of any interest and attorneys' fees that may
be awarded on certain claims. In its verdict, the jury found Boettcher 30
percent at fault for violations of federal and state securities laws in
connection with certain public offerings of Melridge common stock and
convertible debentures, as well as secondary market transactions in both
securities. Certain former Melridge executives were found 30 percent at fault
for the violations, and other defendants who had settled with the plaintiffs
were found 40 percent at fault. KSI has appealed the judgment and intends to
vigorously pursue all available legal remedies.
In the opinion of the Company's management, based on the advice of legal
counsel, the resolution of the preceding and other pending legal proceedings is
not expected to have a material adverse effect on the Company and its
subsidiaries taken as a whole.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1994, the Company held its previously postponed
1994 annual meeting of stockholders. At the meeting on December 23, 1994, the
stockholders reelected management's four nominees to the board of directors and
ratified the appointment of KPMG Peat Marwick LLP as the Company's independent
auditors for 1994. See the section captioned "Annual Meeting of Stockholders" in
Kemper's Current Report on Form 8-K/A filed February 6, 1995 and incorporated
herein by reference.
16
<PAGE> 19
EXECUTIVE OFFICERS OF THE REGISTRANT
AS OF MARCH 1995
<TABLE>
<CAPTION>
NAME, AGE AND
PRESENT POSITIONS WITH PRESENT OFFICER POSITIONS WITH
KEMPER CORPORATION PRINCIPAL KEMPER SUBSIDIARIES PRIOR BUSINESS EXPERIENCE
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
DAVID B. MATHIS (56) President and Chief Operating
Chairman of the Board and Chief Officer of Kemper from May 1990 to
Executive Officer since February September 1992. Executive Vice
1992 and Director since January President of Kemper from May 1989
1989. to May 1990.
--------------------------------------------------------------------------------------------------------------------
STEPHEN B. TIMBERS (50) Chairman of the Board, President Chief Investment Officer of Kemper
President and Chief Operating and Chief Executive Officer of KFC from May 1991 to May 1993. Senior
Officer since September 1992 and since March 1995. Chairman and Executive Vice President of KFS
Director since May 1992. Chief Executive Officer of KFS from March 1990 to November 1993,
since February 1995. and Chief Investment Officer of
KFS from March 1990 to May 1993.
--------------------------------------------------------------------------------------------------------------------
JOHN H. FITZPATRICK (38) Executive Vice President and Chief Senior Vice President of Kemper
Executive Vice President since May Financial Officer of KFC since from May 1990 to May 1993. Vice
1993, Chief Financial Officer January 1994. Senior Vice President of FKLA and KILICO from
since May 1990 and Director President and Chief Financial March 1993 to May 1994. Vice
since May 1990. Officer of FKLA and KILICO since President of Kemper from July 1986
May 1994. to May 1990.
--------------------------------------------------------------------------------------------------------------------
JAMES R. BORIS (50) Chairman of the Board and Chief Chairman of the Board and Chief
Executive Vice President since Executive Officer of KSI since Executive Officer of INVEST from
January 1994. August 1990. Executive Vice May 1989 to July 1991.
President of KFC since March 1990.
--------------------------------------------------------------------------------------------------------------------
JOHN B. SCOTT (50) Chairman of the Board and Chief
Executive Vice President since Executive Officer of FKLA since
January 1994. April 1988 and of KILICO since
February 1992. President of FKLA
since May 1987 and of KILICO since
November 1993. Executive Vice
President of KFC since January
1994.
--------------------------------------------------------------------------------------------------------------------
ALAN J. BALTZ (58) Controller of Lumbermens from
Senior Vice President since May November 1980 to May 1990.
1990.
--------------------------------------------------------------------------------------------------------------------
KATHLEEN A. GALLICHIO (40) Corporate Counsel of KFC since May Corporate Counsel of Kemper from
Senior Vice President since 1990 and of FKLA and KILICO since May 1990 to May 1991. Assistant
January 1994, General Counsel May 1992. Corporate Secretary of General Counsel of Lumbermens from
since May 1991 and Corporate KFC and FKLA since May 1990 and of April 1989 to May 1990.
Secretary since May 1990. KILICO since May 1992.
--------------------------------------------------------------------------------------------------------------------
JOSEPH R. SITAR (49) Chief Accounting Officer of KFC Vice President and Comptroller of
Senior Vice President and Chief since January 1994. Principal American Life Insurance Company
Accounting Officer since January Accounting Officer of FKLA and from October 1989 to January 1994.
1994. KILICO since May 1994.
--------------------------------------------------------------------------------------------------------------------
JOHN W. BURNS (43) Treasurer of KFC since January Principal Accounting Officer of
Treasurer since May 1990. 1994, of FKLA since May 1990 and Kemper from May 1990 to January
of KILICO since May 1992. 1994. Assistant Treasurer of
Kemper from January 1989 to May
1990. Chief Accounting Officer of
KFC from January 1993 to January
1994. Accounting Officer of Kemper
from October 1986 to January 1989.
--------------------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
(A) MARKET INFORMATION.
The common stock of Kemper is traded on the NYSE under the symbol KEM. The
following table shows the range of high and low sales prices for each quarterly
period during 1994, 1993 and 1992:
<TABLE>
<CAPTION>
1994 1993 1992
------------- ------------- -------------
HIGH LOW HIGH LOW HIGH LOW
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
4th Quarter............................................... $ 61 $35 3/4 $41 5/8 $33 1/8 $30 1/8 $21 1/2
3rd Quarter............................................... 62 1/2 58 1/8 42 1/4 32 7/8 27 1/4 20 3/4
2nd Quarter............................................... 64 5/8 55 5/8 42 3/4 32 1/4 30 7/8 23 1/4
1st Quarter............................................... 62 1/8 35 3/8 43 26 1/8 46 1/8 30 3/4
</TABLE>
(B) HOLDERS.
At March 1, 1995, there were approximately 12,200 holders of record of Kemper
common stock. This number includes approximately 6,000 persons who hold shares
only through the Kemper Corporation Dividend Reinvestment and Stock Purchase
Plan.
(C) DIVIDENDS.
Kemper has paid quarterly cash dividends on its common stock since 1968. The
annual dividend paid in each of 1994, 1993 and 1992 was $.92 per share, or $.23
per quarter. While it is the intention of the directors to continue quarterly
cash dividends, future declarations and the amounts of such dividends will be
dependent upon, among other factors, the earnings of the Company, its financial
condition, its capital requirements and general business conditions.
RESTRICTIONS ON DIVIDENDS
The Second Restated Certificate of Incorporation, as amended, of Kemper
restricts its ability to pay cash dividends on its common stock by requiring the
prior payment of all cumulative and current cash dividends on the outstanding
shares of its preferred stock. See the note captioned "Preferred stock" on page
53.
As a Delaware corporation, Kemper may only declare and pay dividends from its
surplus or from its net profits for the fiscal year in which the dividends are
declared and/or the preceding year.
Dividend distributions to stockholders from an insurance company are restricted
by state insurance laws. In Illinois, where Kemper's life insurance subsidiaries
are domiciled, if such dividend, together with other distributions during the 12
preceding months, would exceed the greater of (a) ten percent of the insurer's
surplus as regards policyholders as of the preceding December 31, or (b) the
statutorily adjusted net income for the preceding calendar year, then such
proposed dividend must be reported to the director of insurance at least 30 days
prior to the proposed payment date and may be paid only if not disapproved. In
Illinois, insurance laws also permit payment of dividends only out of earned
surplus, exclusive of most unrealized capital gains.
Dividend distributions from securities brokerage and asset management firms are
restricted by federal and state securities laws, the rules or regulations
thereunder and/or the rules and regulations of exchanges of which the firms are
members. The Company's registered broker-dealer and investment adviser
subsidiaries cannot lawfully pay dividends that would either reduce their
respective net capital amounts below the minimum amounts required or cause
certain net capital decreases without prior regulatory approval.
Additional information relative to dividend restrictions may be found in the
note captioned "Stockholders' equity-- retained earnings" on page 71.
18
<PAGE> 21
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial information for the Company
for the five years ended December 31, 1994. Such information should be read in
conjunction with the consolidated financial statements and notes thereto of the
Company included in ITEM 8 of this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
REVENUE BY CATEGORY
Asset management................................ $ 429,551 $ 515,702 $ 525,058 $ 492,390 $ 476,693
Life insurance.................................. 687,584 726,518 688,448 803,378 824,641
Securities brokerage............................ 529,970 673,732 677,464 663,721 620,708
Real estate..................................... (9,547) (338,077) (309,274) (57,479) (21,446)
Other operations and corporate.................. 14,108 31,937 12,946 12,753 27,288
Eliminations.................................... (49,845) (60,638) (90,918) (98,920) (98,621)
----------- ----------- ----------- ----------- -----------
Total revenue............................ $ 1,601,821 $ 1,549,174 $ 1,503,724 $ 1,815,843 $ 1,829,263
========== ========== ========== ========== ==========
NET INCOME (LOSS) BY CATEGORY,
EXCLUDING REALIZED INVESTMENT GAIN (LOSS)
Asset management................................ $ 69,334 $ 99,087 $ 88,288 $ 85,000 $ 58,072
Life insurance.................................. 139,199 90,171 44,943 92,748 93,382
Securities brokerage............................ (2,238) (3,640) (38,433) 6,233 (181,657)
Real estate..................................... (32,030) (59,330) (34,193) (19,357) (16,324)
Other operations and corporate.................. (35,414) (30,014) (29,962) (17,552) (9,439)
----------- ----------- ----------- ----------- -----------
Total continuing operations.............. $ 138,851 $ 96,274 $ 30,643 $ 147,072 $ (55,966)
========== ========== ========== ========== ==========
Primary per share............................... $ 3.34 $ 1.81 $ .63 $ 3.06 $ (1.16)
========== ========== ========== ========== ==========
Fully diluted per share......................... $ 3.34 $ 1.88 $ .63 $ 3.06 $ (1.16)
========== ========== ========== ========== ==========
NET INCOME (LOSS) BY CATEGORY
Asset management................................ $ 50,029 $ 99,087 $ 88,288 $ 85,000 $ 58,072
Life insurance.................................. 90,182 79,777 (25,451) 45,795 74,581
Securities brokerage............................ (2,238) (3,640) (38,433) 6,233 (181,657)
Real estate..................................... (18,021) (257,753) (209,117) (40,789) (16,324)
Other operations and corporate.................. (34,239) (18,755) (29,962) (20,176) (4,530)
----------- ----------- ----------- ----------- -----------
Total continuing operations.............. 85,713 (101,284) (214,675) 76,063 (69,858)
Discontinued operations......................... 5,727 336,771 11,275 128,476 81,735
----------- ----------- ----------- ----------- -----------
Net income (loss)........................ $ 91,440 $ 235,487 $ (203,400) $ 204,539 $ 11,877
========== ========== ========== ========== ==========
Average common and equivalent
shares outstanding.............................. 34,488 42,830 48,840 48,094 48,431
========== ========== ========== ========== ==========
NET INCOME (LOSS) PER SHARE
Primary
Continuing operations........................... $ 1.80 $ (2.80) $ (4.39) $ 1.58 $ (1.44)
Discontinued operations......................... 0.17 7.86 .23 2.67 1.69
----------- ----------- ----------- ----------- -----------
Net income (loss)........................ $ 1.97 $ 5.06 $ (4.16) $ 4.25 $ .25
========== ========== ========== ========== ==========
Fully diluted
Continuing operations........................... $ 1.80 $ (2.36) $ (4.39) $ 1.58 $ (1.44)
Discontinued operations......................... 0.17 7.23 .23 2.67 1.69
----------- ----------- ----------- ----------- -----------
Net income (loss)........................ $ 1.97 $ 4.87 $ (4.16) $ 4.25 $ .25
========== ========== ========== ========== ==========
FINANCIAL SUMMARY
Total assets...................................... $13,153,967 $14,038,125 $13,176,275 $13,104,581 $12,163,954
========== ========== ========== ========== ==========
Total long-term obligations and redeemable
securities...................................... $ 392,004 $ 439,798 $ 265,467 $ 320,018 $ 245,238
========== ========== ========== ========== ==========
Stockholders' equity.............................. $ 1,257,357 $ 1,618,987 $ 1,766,114 $ 1,838,526 $ 1,625,909
========== ========== ========== ========== ==========
Book value per common share....................... $ 26.06 $ 38.24 $ 33.77 $ 37.92 $ 34.20
========== ========== ========== ========== ==========
Cash dividends declared and paid per
common share.................................... $ .92 $ .92 $ .92 $ .92 $ .92
========== ========== ========== ========== ==========
</TABLE>
19
<PAGE> 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
During 1994, Kemper faced both an unsolicited suitor and an unsuccessful merger
agreement. The resulting distractions and uncertainties negatively impacted
certain of the Company's operations. The board of directors has directed Kemper
management to take all appropriate actions to maximize value for stockholders.
RESULTS OF OPERATIONS
The following table is a summary of the Company's results by category, for the
three years ended December 31, 1994, 1993 and 1992:
SUMMARY OF INCOME (LOSS) BY CATEGORY
(IN MILLIONS)
<TABLE>
<CAPTION>
1994 1993 1992
--------------------------------- -------------------------------------------- -----------
NET OPERATING NET OPERATING
REALIZED NET EARNINGS(1) REALIZED NET EARNINGS(1)
OPERATING INVESTMENT INCOME BEFORE SFAS INVESTMENT INCOME BEFORE
EARNINGS(1) RESULTS(2) (LOSS) SFAS 109 109(3) RESULTS(2) (LOSS) SFAS 106
----------- ---------- ------ ------------ ------ ---------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Asset management................... $ 69.3 $(19.3) $50.0 $ 98.2 $ 0.9 $ -- $ 99.1 $ 90.3
Life insurance..................... 139.2 (49.0) 90.2 87.5 2.7 (10.4) 79.8 46.2
Securities brokerage............... (2.2) -- (2.2) 1.8 (5.5) -- (3.7) (28.4)
Real estate........................ (32.0) 14.0 (18.0) (53.6) (5.7) (198.4) (257.7) (34.2)
Other.............................. (35.4) 1.1 (34.3) (25.7) (4.3) 11.2 (18.8) (28.8)
------- ------ ----- ------ ----- ------ ------- -------
Continuing operations............. 138.9 (53.2) 85.7 108.2 (11.9) (197.6) (101.3) 45.1
Discontinued operations............ -- 5.7 5.7 4.8 14.4 317.6 336.8 19.2
------- ------ ----- ------ ----- ------ ------- -------
Total....................... $ 138.9 $(47.5) $91.4 $113.0 $ 2.5 $120.0 $ 235.5 $ 64.3
======= ====== ===== ====== ===== ====== ======= =======
<CAPTION>
1992
-----------------------------
NET
REALIZED NET
SFAS INVESTMENT INCOME
106(4) RESULTS(2) (LOSS)
------ ---------- -------
<S> <C> <C> <C>
Asset management................... $ (2.0) $ -- $ 88.3
Life insurance..................... (1.3) (70.4) (25.5)
Securities brokerage............... (10.0) -- (38.4)
Real estate........................ -- (174.9) (209.1)
Other.............................. (1.2) -- (30.0)
------ -------- -------
Continuing operations............. (14.5) (245.3) (214.7)
Discontinued operations............ (12.5) 4.6 11.3
------ -------- -------
Total....................... $(27.0) $ (240.7) $(203.4)
====== ======== =======
</TABLE>
---------------
(1) Net income (loss) excluding realized investment results. See the discussion
captioned "INVESTMENTS--Net investment income" on page 39.
(2) See the table on page 55 in the note captioned "Invested assets and related
income." Also see the discussion captioned "INVESTMENTS--Realized investment
results" on page 40.
(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.
(4) Effective January 1, 1992, the Company adopted SFAS 106, which changed the
method of accounting for certain postretirement benefits.
CONTINUING OPERATIONS
Operating earnings from continuing operations totaled $138.9 million in 1994,
compared with $96.3 million and $30.6 million in 1993 and 1992, respectively. As
reflected in the table above, results for 1993 and 1992 include adjustments to
reflect the cumulative effects of changes in accounting principles. Primary
operating earnings per share from continuing operations rose to $3.34 in 1994,
compared with $1.81 in 1993 and $.63 in 1992.
In 1994, operating earnings of the asset management segment declined, largely
due to market conditions in a rising interest rate environment which contributed
to a lower level of assets under management. This decline, however, was more
than offset by the substantial earnings increase in the life insurance segment,
primarily reflecting a continuation of improved spreads (between investment
income and benefits credited to policyholders) and better mortality results. The
securities brokerage segment's 1994 operating loss decreased slightly from the
1993 level. This segment too was impacted by adverse market conditions. The real
estate segment's operating loss declined significantly in 1994 as a result of
sales, refinancings and restructurings.
All segments other than real estate showed improvements in 1993 over 1992. The
improved operating results of the asset management and securities brokerage
segments reflected then better stock, bond and credit market conditions,
although securities brokerage results were adversely impacted by
litigation-related expenses in both 1993 and 1992 and tax adjustments in 1992.
In 1993, as in 1994, the life insurance segment accounted for most of the
increase in the Company's operating earnings. Real estate joint venture
operating losses adversely affected the life insurance segment in 1992 and the
real estate segment in 1993 and 1992.
20
<PAGE> 23
The other operations and corporate category consists of the holding company
income and expenses of both Kemper and KFC. This category reported an operating
loss of $35.4 million for 1994, compared with $25.7 million and $28.8 million in
1993 and 1992, respectively, before changes in accounting principles. The 1994
after-tax results included $7.3 million of expenses related to a proxy contest
and a now-terminated merger agreement.
Net income from continuing operations for 1994 totaled $85.7 million, compared
with net losses of $101.3 million and $214.7 million for 1993 and 1992,
respectively. The net realized investment loss of $53.2 million in 1994 included
a $39.7 million loss in connection with a portfolio repositioning in the life
insurance segment and a $19.3 million Orange County-related charge in the asset
management segment. The realized investment losses of $197.6 million and $245.3
million in 1993 and 1992, respectively, were primarily the result of real
estate-related investment losses. (See "INVESTMENTS" on page 32.)
TOTAL OPERATIONS
Including discontinued operations, the Company's net income totaled $91.4
million for 1994, compared with net income of $235.5 million in 1993 and a net
loss of $203.4 million in 1992.
Discontinued operations primarily include the Company's former primary
property-casualty insurance, reinsurance and risk management subsidiaries, all
of which were divested in 1993. Net income from this category for 1994 totaled
$5.7 million, compared with $336.8 million and $11.3 million in 1993 and 1992,
respectively. The 1993 results included $296.8 million of gains on the sales of
discontinued operations. (See the note captioned "Discontinued operations" on
page 56.)
Net income (loss) per share in the following segment discussions is on a primary
basis.
21
<PAGE> 24
ASSET MANAGEMENT
The asset management segment consists of KFS and its subsidiaries, including
INVEST and KSvC.
SELECTED FINANCIAL HIGHLIGHTS
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------
1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
STATEMENT OF INCOME
Investment management fees...................................................... $215.4 $238.3 $223.5
Commission income............................................................... 71.5 99.3 117.7
Distribution and redemption fees................................................ 68.2 75.0 75.6
Transfer agent revenue.......................................................... 74.7 68.8 55.4
Investment and other income..................................................... 29.4 34.3 52.9
Realized investment loss, due to Orange County-related charge................... (29.7) -- --
------ ------ ------
Total revenue......................................................... 429.5 515.7 525.1
------ ------ ------
Operating expenses.............................................................. 263.2 293.8 297.1
Commission expense.............................................................. 73.2 113.5 130.6
Deferral of mutual fund commissions and sales expense........................... (36.7) (71.1) (79.8)
Amortization of deferred mutual fund commissions and sales expense.............. 57.3 48.0 40.0
------ ------ ------
Total expenses........................................................ 357.0 384.2 387.9
------ ------ ------
Earnings before income tax and changes in accounting............................ 72.5 131.5 137.2
Income tax...................................................................... 22.5 33.3 46.9
------ ------ ------
Income before changes in accounting................................... 50.0 98.2 90.3
Changes in accounting........................................................... -- 0.9 (2.0)
------ ------ ------
Net income............................................................ $ 50.0 $ 99.1 $ 88.3
====== ====== ======
Realized investment loss, net of tax, due to Orange County-related charge....... $(19.3) -- --
====== ====== ======
Operating earnings.............................................................. $ 69.3 $ 99.1 $ 88.3
====== ====== ======
Per share:
Operating earnings............................................................ $ 2.01 $ 2.31 $ 1.81
====== ====== ======
Net income.................................................................... $ 1.45 $ 2.31 $ 1.81
====== ====== ======
</TABLE>
The asset management segment's operating earnings in 1994 decreased $29.8
million from the 1993 level. Operating earnings decreased primarily because of
reduced management and distribution fees, lower commission income and higher
amortization of commissions and sales expenses. These income reductions were
partially offset by increased transfer agent revenues and reduced operating and
commission expenses. In addition, the effective tax rate for 1994 was greater
than for 1993, as 1993 benefited from reassessments of certain tax issues
totaling $13.0 million.
In 1994, the segment's net income was $19.3 million less than its operating
earnings due to an Orange County-related charge. Five non-government, taxable,
money market mutual funds managed by KFS hold a total of $198.0 million of
Orange County, California notes which mature July 10, 1995. Orange County filed
for bankruptcy in December 1994. The Company has established a letter of credit
arrangement pursuant to which the Company will bear the risk of loss associated
with the money market mutual funds' investments in these notes. To date, Orange
County has made the monthly interest payments on the notes. In connection with
the credit enhancement of the Orange County notes, the Company recorded a $29.7
million charge in the fourth quarter of 1994 ($19.3 million after tax). (See the
note captioned "Commitments and contingent liabilities" on page 66.) In March
1995, the five Kemper money market funds commenced litigation against the
underwriter of the notes seeking rescission of their purchases and other relief.
In 1993, the segment's net income rose $10.8 million from 1992 because of
increased management and transfer agent fee revenue and lower operating and
commission expenses. These 1993 revenue increases were partially offset by lower
commission income and investment and other income.
The 1994 decrease of $22.9 million in investment management fees was primarily
due to a $4.6 billion reduction in total average assets of KFS' mutual funds,
resulting in a decrease in fees of approximately $11.6 million. The 1994
decrease in such fees also reflects the loss of fees from funds managed by
Selected Financial Services, Inc. ("Selected"). In 1993 and 1992, Selected's fee
revenue was $2.1 million and $6.9 million, respectively, and effective May 1,
1993, a third-party manager was appointed for the Selected funds. In addition,
beginning January 1, 1994, revenue from real estate management fees are reported
in the real estate segment. The real estate management fee revenue was
approximately $9.7 million and $5.3 million in 1993 and 1992, respectively.
22
<PAGE> 25
The 1993 increase of $14.8 million in investment management fee revenue was
primarily attributable to the growth in bond and stock mutual fund assets under
management, which have higher management fee rates (in terms of basis points)
than money market fund assets under management.
In 1994, commission income decreased $27.8 million due to lower sales of most
products. At INVEST, the segment's principal producer of commission revenue,
commissions on sales of mutual fund products declined $30.5 million in 1994 from
1993. In addition, INVEST had reductions in commission revenue during 1994 on
stock, bond and unit investment trust transactions due to lower sales. Partially
offsetting these reductions were increased commissions on annuity products of
$6.9 million in 1994 over 1993 due to increased sales. In 1993, the segment's
commission income decreased $18.4 million compared to 1992, after increasing
$26.3 million in 1992, a year when the asset management operations earned record
commissions from strong sales of traditional load mutual funds.
Distribution and redemption fee revenue decreased $6.8 million in 1994 compared
with 1993. Distribution fees, based on assets managed in KFS' spread load mutual
funds, declined approximately $13.1 million during 1994 as spread load assets
declined due to market depreciation, redemptions of mutual fund shares and
conversions of spread load assets to front-end load shares which are exempt from
distribution fees. Distribution fees were down $2.2 million in 1993 from 1992 as
a larger percentage of spread load assets became exempt from the fees. In both
1994 and 1993, the declines in distribution fees were partially offset by
receipt of contingent deferred sales charges from redemption activity.
In 1994, transfer agent revenue increased $5.9 million primarily due to
increased shareholder transaction volumes on Kemper mutual funds, as well as
from client and account growth at KSvC's wholly owned subsidiary, SSC, which has
provided transfer agent services to non-affiliated mutual fund groups. In March
1995, KSvC executed a definitive agreement to sell the business operations of
SSC. (See "ASSET MANAGEMENT SEGMENT" in ITEM 1(c) on page 4.) SSC accounted for
approximately $8.7 million of the Company's transfer agent revenue in 1994.
In 1993, transfer agent revenue increased $13.4 million primarily due to a rise
in the number of mutual fund shareholder accounts and related transaction
activity. The 1994 and 1993 transfer agent amounts included $5.1 million and
$5.2 million, respectively, in fiduciary fee revenue. Previously, the fiduciary
fees were retained by Investors Fiduciary Trust Company ("IFTC"), formerly a 50
percent-owned investee of KFS. (See the note captioned "Unconsolidated
investees" on page 57.) On January 31, 1995, KFS sold its 50 percent interest in
IFTC to State Street Boston Corporation ("State Street") in exchange for
2,986,111 shares of State Street common stock with a market value of $98.2
million at the date of sale. IFTC accounted for $6.5 million of this segment's
after-tax operating earnings in 1994.
Certain affiliates in the securities brokerage and life insurance segments
reduced their use of data processing and operations services of KSvC beginning
late in 1992. As a result, other income in 1994 and 1993 declined approximately
$6.6 million and $13.6 million, respectively. Such decreases were partially
offset by reductions in related operating expenses.
Operating expenses decreased by $30.6 million in 1994 from the 1993 level.
Expense reductions of approximately $7.2 million occurred in advertising,
literature and sales promotion of mutual fund products, and personnel expenses
decreased approximately $3.5 million, as fixed expense increases were more than
offset by reductions in production-related compensation due to lower sales.
Litigation-related expenses were $17.8 million lower in 1994, primarily due to a
$10.0 million legal settlement in 1993 related to option trading activity in
1987. In addition, operating expenses declined due to the above-mentioned KSvC
service reductions, the accounting for real estate management expenses in the
real estate segment beginning in 1994, and expense reductions realized with the
closing of Selected's operations. In 1994, KFS incurred approximately $1.0
million in registration and filing fees for the implementation of the multiple
class mutual fund structure and approximately $2.4 million in connection with
Kemper's merger agreement which was terminated in November 1994.
Operating expenses decreased by $3.3 million in 1993, compared with 1992,
despite the above-mentioned legal settlement in 1993. The 1993 decrease was
primarily due to the above-mentioned KSvC service reductions, lower data
processing maintenance expenses and reduced advertising and sales promotion
expenses. Advertising and promotional expenses decreased $9.9 million in 1993,
compared with 1992 when the segment was heavily promoting its no-load mutual
fund business managed by Selected. Selected generated approximately $2.0 million
and $6.7 million of net losses in the Company's asset management results during
1993 and 1992, respectively. In 1993, personnel expenses increased approximately
$8.6 million, in part due to increased staffing for transfer agent operations,
real estate investment management and systems development. Overall, however, the
segment reduced its employee head count by 8.3 percent in 1993.
Commission expense decreased in 1994 and 1993, compared with 1992, due to lower
sales, with a related decrease in the deferral of mutual fund commissions and
sales expense. Amortization of deferred mutual fund commission and sales expense
increased in 1994 and 1993, compared with 1992. This increase was due to
increased redemption activity of
23
<PAGE> 26
KFS' 12b-1 spread load mutual fund products in 1994 and 1993, market value
declines of these products in 1994, and increased deferral of commissions and
sales expenses in 1992.
ASSETS UNDER MANAGEMENT
(IN BILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1994 1993 1992
----- ----- -----
<S> <C> <C> <C>
Mutual funds:
Bond.............................................................................. $20.6 $25.7 $24.6
Stock............................................................................. 8.7 9.4 8.4
Money market...................................................................... 12.2 12.3 15.1
Investment advisory.................................................................... 4.7 4.7 4.3
Kemper Corporation affiliates.......................................................... 9.6 9.8 10.7
Kemper National Insurance Companies.................................................... 6.9 7.4 6.2
----- ----- -----
Total assets under management................................................ $62.7 $69.3 $69.3
===== ===== =====
</TABLE>
Bond and stock mutual fund assets under management decreased $5.8 billion from
year-end 1993 to year-end 1994, primarily due to net redemptions and market
value declines. Bond and stock mutual fund assets under management increased
$2.1 billion in 1993 over 1992 due to investment performance and $0.7 billion of
sales, net of redemptions. Redemptions of stock and bond mutual funds totaled
$6.1 billion in 1994, compared with $4.2 billion in 1993 and $3.3 billion in
1992. Bond mutual funds made up 77 percent of the redemption volume in 1994,
largely caused by rising interest rates. Stock and bond mutual funds had asset
depreciation of approximately $1.4 billion in 1994, compared with asset
appreciation of $3.1 billion and $1.1 billion in 1993 and 1992, respectively. In
1994 and 1993, sales of bond mutual funds, particularly taxable bond mutual
funds, and sales of stock mutual funds fell from the record 1992 levels. Sales
of stock mutual funds represented 44 percent of total stock and bond fund sales
in 1994, up from 35 percent in 1993 and 32 percent in 1992. Assets under
management also reflected the 1993 loss of approximately $1.0 billion of assets
(primarily stock mutual funds) previously managed by Selected.
As sales of bond and stock mutual funds declined in 1993 and more so in 1994,
they also represented a smaller percentage of industry wide sales based on
Investment Company Institute ("ICI") data. The Company's share of the industry's
non-money market mutual fund assets was 1.68 percent at December 31, 1994, 2.19
percent at December 31, 1993 and 2.77 percent at December 31, 1992. The decrease
in market share primarily reflects increasing competition from securities
brokerage and advisory firms, as well as from financial institutions, all
emphasizing sales of their proprietary products. In addition, market share was
impacted by mutual fund performance in an environment adverse to KFS' growth
stock investment orientation.
Money market fund assets under management were virtually flat in 1994 compared
with 1993. Movement was volatile in 1994, however, as money fund assets under
management peaked at $12.8 billion in April, decreased to $12.2 billion in June,
returned to the $12.8 billion level in November, and declined back to $12.2
billion in December. During 1993 and 1992, Kemper money market fund assets
decreased because of the lower interest rate environment, and late in 1993, a
non-affiliated broker withdrew its $1.5 billion money market account. Based on
ICI data, the Company's money funds' market share declined to 1.99 percent at
December 31, 1994 from 2.18 percent at December 31, 1993 and 2.72 percent at
December 31, 1992, due in part to the loss of the previously mentioned account
and to increased competition.
In 1994, Kemper Corporation affiliates' and the Kemper National Insurance
Companies' assets under management decreased from 1993 by $0.2 billion and $0.5
billion, respectively. Contributing to these decreases were reductions of real
estate-related assets (managed by the real estate segment) totaling $0.3 billion
for Kemper Corporation affiliates and $0.2 billion for KNIC. The 1993 decline in
assets managed for Kemper Corporation affiliates reflected the transfer of $0.7
billion of the invested assets of reinsurance companies acquired by KNIC from
Kemper and the $0.7 billion of invested assets of primary property-casualty
insurance companies sold by Kemper in 1993 to companies which were not KFS
clients.
24
<PAGE> 27
LIFE INSURANCE
The life insurance segment consists of FKLA, KILICO and their subsidiaries.
SELECTED FINANCIAL HIGHLIGHTS
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------
1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
STATEMENT OF INCOME
Investment income............................................................... $519.1 $500.5 $568.6
Premium revenue................................................................. 151.8 152.6 135.9
Other income.................................................................... 92.0 84.1 79.7
Realized investment loss........................................................ (75.4) (10.7) (95.8)
------ ------ ------
Total revenue......................................................... 687.5 726.5 688.4
------ ------ ------
Benefits to policyholders....................................................... 474.6 514.3 598.1
Commissions, taxes, licenses and fees........................................... 70.3 74.8 98.7
Operating expenses.............................................................. 54.4 52.8 72.7
Deferral of policy acquisition costs............................................ (113.9) (104.5) (124.3)
Amortization of deferred policy acquisition costs............................... 59.2 60.4 66.8
------ ------ ------
Total benefits and expenses........................................... 544.6 597.8 712.0
------ ------ ------
Earnings (loss) before income tax and changes in accounting..................... 142.9 128.7 (23.6)
Income tax...................................................................... 52.7 51.6 0.6
------ ------ ------
Net income (loss) before changes in accounting........................ 90.2 77.1 (24.2)
Changes in accounting........................................................... -- 2.7 (1.3)
------ ------ ------
Net income (loss)..................................................... $ 90.2 $ 79.8 $(25.5)
====== ====== ======
Realized investment loss, net of tax............................................ $(49.0) $(10.4) $(70.4)
====== ====== ======
Operating earnings.............................................................. $139.2 $ 90.2 $ 44.9
====== ====== ======
Per share:
Operating earnings............................................................ $ 4.03 $ 2.10 $ 0.92
====== ====== ======
Net income (loss)............................................................. $ 2.61 $ 1.86 $(0.52)
====== ====== ======
</TABLE>
The life insurance segment reported improved net income in 1994 and 1993. The
improvement in 1994 was primarily the result of increases in spread income,
favorable mortality results, an increase in other income and an increase in the
net deferral of policy acquisition costs. These improvements were partially
offset by higher realized investment losses in 1994, compared with 1993. The
improvement in 1993 net income, compared with 1992, was primarily the result of
lower realized investment losses, increases in spread income, favorable
mortality results and reductions in operating expenses.
The segment's after-tax realized investment results included real estate-related
losses of $25.6 million, $65.8 million and $74.3 million for 1994, 1993 and
1992, respectively, write-downs and restructurings of certain below
investment-grade securities totaling $0.1 million, $17.2 million and $27.5
million for 1994, 1993 and 1992, respectively, and other net realized investment
losses from the sale of fixed maturity investments of $23.3 million in 1994 and
other net realized investment gains of $72.6 million and $31.4 million for 1993
and 1992, respectively. The fixed maturity losses generated in 1994 arose
primarily from the sale of $868.7 million of fixed maturity investments,
consisting of lower yielding investment-grade corporate securities and
collateralized mortgage obligations, related to a repositioning of the segment's
fixed maturity investment portfolio in September 1994. The $810.6 million of
proceeds from the repositioning, together with $325.0 million of cash and
short-term investments, were reinvested into higher yielding U.S. government and
agency guaranteed mortgage pass-through securities issued by the Government
National Mortgage Association and the Federal National Mortgage Association.
(See "INVESTMENTS" on page 32.)
25
<PAGE> 28
Operating earnings for the life insurance segment improved in 1994 and 1993,
compared with 1992, primarily due to increased spread income and favorable
mortality results. Continuing a strategy implemented during 1992, the life
insurance segment improved spread income by reducing crediting rates on certain
existing blocks of fixed annuity and interest-sensitive life insurance products
in 1993 and through most of 1994. Such reductions in crediting rates occurred as
overall interest rates declined. Operating earnings improved as crediting rates
declined at a faster rate than the segment's investment income. Beginning in
late 1994, as a result of rising interest rates and other competitive market
factors, the life insurance segment increased crediting rates on these products.
Although the life insurance segment continues to manage spread revenue, further
increases in crediting rates could adversely impact future operating earnings
but could also help to improve sales and the overall persistency of such
products.
Investment income was positively impacted in 1994 and 1993, compared with 1992,
from the benefits of capital contributions to the segment and reductions in the
level of nonperforming real estate-related investments, primarily from the sales
of certain real estate-related investments to the Company's real estate
subsidiaries. These sales totaled $222.8 million in 1994, $447.1 million in 1993
and $192.3 million in 1992 and resulted in no realized gain or loss to the
segment. Investment income in 1994 also benefited from rising investment yields
on new money, the above-mentioned repositioning of the segment's investment
portfolio and an $8.7 million pre-tax adjustment related to the amortization of
the discount or premium on mortgage-backed securities. Investment income for
1994, 1993 and 1992 has been impacted by a shift over the last several years to
higher-quality, lower yielding investments and foregone income on nonperforming
investments. Investment income in 1993, compared with 1992, was also reduced by
a 1992 reinsurance transaction which transferred $515.7 million of policyholder
liabilities and the related invested assets. (See the note captioned
"Reinsurance" on page 65.)
LIFE INSURANCE SALES
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------
1994 1993 1992
------ ------ --------
<S> <C> <C> <C>
Annuities:
General account................................................................. $269.4 $322.2 $ 572.7
Separate account................................................................ 250.7 263.7 275.9
------ ------ --------
Total annuities......................................................... 520.1 585.9 848.6
Life insurance:
Term and other.................................................................. 154.5 153.0 148.7
Interest-sensitive.............................................................. 77.7 79.2 79.7
------ ------ --------
Total life insurance.................................................... 232.2 232.2 228.4
------ ------ --------
Total sales............................................................. $752.3 $818.1 $1,077.0
====== ====== ========
</TABLE>
Sales of term and other life insurance products include both renewal premiums
and new product sales. Despite a slight decline in the average premium per new
policy for term life products in 1994, premium revenue increased in each of the
last three years due to increasing renewal premiums. The segment issued new life
insurance business in 1994 of $17.2 billion in face amount, down slightly from
$17.5 billion in 1993 and $21.5 billion in 1992, due in part to competitive
conditions in recent years and uncertainty concerning the Company's ownership in
1994. Total life insurance in force grew to $97.5 billion at December 31, 1994,
compared with $91.3 billion and $84.2 billion at December 31, 1993 and 1992,
respectively.
The decreases over the last three years in general account (fixed annuity) sales
and interest-sensitive life insurance sales reflected the Company's continuing
strategy to direct sales efforts toward separate account (variable annuity)
products, which increase administrative fees earned and pose minimal investment
risk for the Company as policyholders invest in one or more of several
underlying investment funds. Despite this strategy, separate account sales
declined in 1994 and 1993, compared with 1992, due to competitive conditions in
certain distribution channels, in part reflecting the life insurance
subsidiaries' financial strength and performance ratings as well as the
underlying investment fund performance, reflecting the economic environment of
rising interest rates and overall poor stock and bond market conditions.
26
<PAGE> 29
Included in other income are administrative fees received from the segment's
separate account products of $20.8 million in 1994, compared with $18.1 million
and $14.3 million in 1993 and 1992, respectively. Administrative fee revenue
increased in each of the last three years due to growth in average separate
account assets. Other income also included surrender charge revenue of $13.4
million in 1994, compared with $11.8 million and $11.5 million in 1993 and 1992,
respectively. 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 and rising interest rates. The segment's
crediting rate increases in 1994 were designed to reduce the level of future
withdrawals. Other income in 1992 also included a $12.0 million ceding
commission resulting from the earlier described reinsurance transaction.
Commissions, taxes, licenses and fees were lower in 1994, compared with 1993 and
1992, primarily reflecting lower annuity sales and reduced guaranty fund
assessments. Expenses for such assessments totaled $0.0, $8.1 million and $11.0
million in 1994, 1993 and 1992, respectively. (See "LIFE INSURANCE
SEGMENT--Guaranty association assessments" in ITEM 1(c) on page 10.)
The higher level of deferral of policy acquisition costs in 1994, compared with
1993, reflected an increase in the amount of imputed interest capitalized due to
improvements in projected future revenue streams primarily as a result of the
decline in the level of nonperforming real estate-related investments. The
amortization of policy acquisition costs was favorably impacted by $13.9 million
pre-tax during 1994 due to the repositioning of the segment's investment
portfolio. The repositioning favorably impacted the amortization of policy
acquisition costs because it resulted in current realized investment losses as
well as an increase in projected future net investment income, which together
are expected to increase the segment's projected future estimated gross profits
in later years. Excluding the effects of the repositioning, the amortization of
policy acquisition costs increased in 1994, compared with 1993 and 1992,
primarily as a result of improved net income during 1994. The amortization in
1992 included approximately $22.5 million of additional amortization as a result
of the above-mentioned reinsurance transaction.
Operating expenses in 1994, compared with 1993, increased only slightly, despite
a 16.1 percent increase in the number of term life insurance policies sold, as a
result of expense control and the integration of the two life insurance
subsidiaries' operations and management beginning in 1992. Primarily as a result
of the integration of the two life companies, operating expenses in 1993
declined by approximately 27 percent, compared with the 1992 level.
Since year-end 1990, the Company has taken many steps to improve the earnings,
financial strength and competitive marketing position of its life insurance
subsidiaries. These steps included adjustments in crediting rates, reductions of
operating expenses, reductions of below investment-grade securities, a strategy
not to embark on new real estate projects, additional provisions for real
estate-related losses, sales of $862.2 million of certain real estate-related
investments to the Company's real estate subsidiaries through December 31, 1994,
third-party sales and refinancings of certain mortgage and other real estate
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 December 31,
1994. The statutory surplus ratio for the segment improved to 10.3 percent at
December 31, 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.
27
<PAGE> 30
The following tables reflect selected balance sheet data of the life insurance
segment:
INVESTED ASSETS AND CASH
(IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------------------
1994 1993
---------------- ----------------
<S> <C> <C> <C> <C>
Cash and short-term investments............................. $ 313 4.4% $ 571 7.2%
Fixed maturities:
Investment-grade:
NAIC (1) Class 1....................................... 3,860 53.7 3,548 44.6
NAIC (1) Class 2....................................... 1,139 15.8 1,557 19.5
Performing below investment-grade (2)..................... 196 2.7 222 2.8
Equity securities........................................... 24 .3 100 1.2
Joint venture mortgage loans (3)(4)......................... 540 7.5 993 12.5
Third-party mortgage loans (3)(4)........................... 397 5.5 145 1.8
Other real estate-related investments (4)................... 297 4.1 405 5.1
Other....................................................... 426 6.0 424 5.3
------ ----- ------ -----
Total (5)......................................... $7,192 100.0% $7,965 100.0%
====== ===== ====== =====
</TABLE>
---------------
(1) National Association of Insurance Commissioners ("NAIC")
-- Class 1 = A- and above
-- Class 2 = BBB- through BBB+
(2) Excludes $57 million, or 0.8 percent, and $143 million, or 1.8 percent, at
December 31, 1994 and 1993, respectively, of bonds carried in other real
estate-related investments.
(3) A joint venture mortgage loan is recharacterized in the current period as a
third-party mortgage loan where the Company has disposed of its related
equity interest in that venture.
(4) See table captioned "Summary of gross and net real estate investments" on
page 33.
(5) See "INVESTMENTS" on page 32.
OTHER SELECTED BALANCE SHEET DATA
(IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1994 1993
------- -------
<S> <C> <C>
Deferred insurance acquisition costs.................................................... $ 697 $ 623
Assets of separate accounts............................................................. 1,871 1,883
Total assets............................................................................ 10,736 11,577
Life policy benefits, net of ceded reinsurance.......................................... 7,129 7,381
Unrealized gain (loss) on investments................................................... (322) 153
Stockholders' equity.................................................................... 738 1,136
</TABLE>
28
<PAGE> 31
SECURITIES BROKERAGE
The securities brokerage segment primarily consists of KSI and KCC.
SELECTED FINANCIAL HIGHLIGHTS
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------
1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
STATEMENT OF INCOME
Commissions..................................................................... $356.1 $467.0 $469.2
Interest and dividend income.................................................... 73.8 74.1 80.9
Securities gains, net........................................................... 17.6 42.6 41.2
Investment banking fees......................................................... 19.6 24.5 28.3
Other income.................................................................... 62.9 65.5 57.9
------ ------ ------
Total revenue......................................................... 530.0 673.7 677.5
------ ------ ------
Production-related compensation................................................. 205.3 262.1 270.8
Other operating expenses........................................................ 292.6 366.2 381.2
Interest expense................................................................ 44.8 46.9 53.0
------ ------ ------
Total expenses........................................................ 542.7 675.2 705.0
------ ------ ------
Loss before income tax.......................................................... (12.7) (1.5) (27.5)
Income tax (benefit)............................................................ (10.5) (3.3) 0.9
------ ------ ------
Income (loss) before changes in accounting............................ (2.2) 1.8 (28.4)
Changes in accounting........................................................... -- (5.5) (10.0)
------ ------ ------
Net loss.............................................................. $ (2.2) $ (3.7) $(38.4)
====== ====== ======
Net loss per share.............................................................. $(0.06) $(0.08) $(0.79)
====== ====== ======
</TABLE>
The securities brokerage segment reported decreasing net losses in 1994 and
1993, compared with 1992. The net losses for 1993 and 1992 include supplemental
additions to the segment's litigation reserves of $19.8 million after tax and
$13.2 million after tax, respectively. These reserve additions were based on
management's evaluation of pending legal matters in light of then-current
information. Subsequently, the segment settled certain significant litigation
matters within established reserves. The 1994 results included benefits of $5.5
million from reevaluation of the segment's tax liabilities. The 1993 results
included a charge of $5.5 million for the adoption of SFAS 109, and the 1992
results included an $11.0 million federal tax expense related to various tax
issues.
Reflective of the generally weak market conditions experienced throughout the
industry in 1994, total securities brokerage revenue for the year decreased
$143.7 million, or 21 percent, from the 1993 level. Market conditions coupled
with uncertainty surrounding the Company's ownership in 1994 led to lower than
anticipated production per investment consultant (registered representative) and
lower revenue related to stock and bond underwriting activities. Commissions
revenue decreased $110.9 million in 1994 from the 1993 level. Commissions in
1993 approximated the 1992 level.
In 1994 and early 1995, the segment has continued reconfiguring its operating
units to focus on key business opportunities. This resizing is planned to
include adjustments to production-related compensation arrangements later in
1995. Despite ongoing ownership uncertainty, the securities brokerage segment
also plans to continue to recruit investment consultants and has initiated a
program to attract producers specializing in sales of packaged products,
including mutual funds managed by KFS.
Securities gains revenue declined approximately $25 million in 1994 from the
1993 and 1992 levels, primarily reflecting the tightening in the credit markets
resulting from rising interest rates as well as significant market volatility.
In contrast, 1993 and 1992 saw generally strong credit markets, particularly
within the tax-exempt and mortgage-backed arenas. Investment banking fees
decreased $4.9 million, from $24.5 million in 1993 to $19.5 million in 1994,
primarily due to reduced municipal underwriting activity. Investment banking
fees were $28.3 million in 1992, a result of increased activity industry wide
and KSI's greater level of participation in both corporate and public finance
offerings.
Interest and dividend income remained relatively flat in 1994 compared with
1993. Due to the market volatility in 1994, the segment reduced its securities
inventory, resulting in reduced interest income, which was offset by increased
earnings from margin accounts due to higher interest rates. Despite higher
rates, interest expense decreased slightly in 1994, due to reduced borrowings
from the parent company due to conversion of debt to equity. The $6.8 million
29
<PAGE> 32
decrease in interest and dividend income in 1993, compared with 1992, was offset
by a corresponding decrease in interest expense of $6.1 million. These
reductions were due to both lower interest rates and the disposition of
mortgage-backed securities and related bonds in a special purpose subsidiary in
1993.
Excluding the $30 million pre-tax supplemental addition to the legal reserve in
1993, total expenses in 1994 decreased $102.5 million from the 1993 level,
largely as a result of decreased production-based compensation and a continued
focus on cost containment. Total expenses declined $29.8 million in 1993 when
compared with 1992, primarily the result of a cost containment program.
Excluding supplemental additions to legal reserves in 1993 and 1992, total
expenses decreased $39.8 million in 1993.
Production-related compensation decreased $56.8 million in 1994 due to lower
commission expense, a direct result of lower commission revenue, and reduced
production-based compensation accruals. Production-related compensation
decreased $8.7 million in 1993, compared with 1992, primarily the result of a
reorganization of investment banking operations. Other operating expenses
declined $43.5 million in 1994 as the benefits of a cost containment program
took effect. Specifically, when comparing 1994 and 1993, non-production
compensation, occupancy, equipment, electronic communication, professional
services and general administrative expenses have all declined. In addition,
other expenses decreased in part due to lower litigation-related expenses.
However, the full savings impact of the above-mentioned resizing is not expected
to be realized until 1995. The decline in other operating expenses of $15.0
million in 1993 compared with 1992 is due in large part to a $7.8 million
reduction in non-production-related compensation and benefits.
Continued weak industry conditions and uncertainty as to the Company's ownership
have had an adverse impact on securities brokerage operating results since March
1994. The Company is proceeding with its cost control program and resizing the
organization. The segment's employee head count decreased 6.9 percent in 1994
and 10.9 percent in 1993.
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. Loans held by these subsidiaries are
subordinate to loans held by the Company's life insurance subsidiaries.
SELECTED FINANCIAL HIGHLIGHTS
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
STATEMENT OF INCOME
Joint venture operating losses..................................... $ (46.2) $ (81.4) $ (56.3)
Investment income and other........................................ 15.0 6.5 10.9
Realized investment gain (loss).................................... 21.6 (263.1) (263.9)
------- ------- -------
Total revenue............................................ (9.6) (338.0) (309.3)
------- ------- -------
Operating expenses................................................. 15.6 4.0 6.7
Interest expense................................................... 2.8 4.1 0.8
------- ------- -------
Total expenses........................................... 18.4 8.1 7.5
------- ------- -------
Loss before income tax benefit..................................... (28.0) (346.1) (316.8)
Income tax benefit................................................. (10.0) (94.1) (107.7)
------- ------- -------
Net loss before changes in accounting.................... (18.0) (252.0) (209.1)
Changes in accounting.............................................. -- (5.7) --
------- ------- -------
Net loss................................................. $ (18.0) $(257.7) $(209.1)
======== ======== ========
Realized investment gain (loss), net of tax expense (benefit)...... $ 14.0 $(198.4) $(174.9)
======== ======== ========
Operating loss..................................................... $ (32.0) $ (59.3) $ (34.2)
======== ======== ========
Per share:
Operating loss................................................... $ (0.93) $ (1.39) $ (0.70)
======== ======== ========
Net loss......................................................... $ (0.52) $ (6.02) $ (4.28)
======== ======== ========
</TABLE>
30
<PAGE> 33
The $35.2 million decline in joint venture operating losses in 1994 was
primarily due to sales, refinancings and restructurings that were completed with
respect to certain joint ventures, reducing the level of operating losses the
Company was required to record. In 1994, such sales included real estate
investment trust ("REIT") transactions (see the real estate portfolio table on
page 34), and such restructurings included a transaction in which the interest
payment terms of certain loans held by Fidelity Life Association and Lumbermens
Mutual Casualty Company and its affiliates were amended, effective January 1,
1994, to make interest payments contingent on cash being available. This
restructuring transaction reduced joint venture operating losses in 1994 by $9.2
million. In this restructuring transaction, the Company similarly amended
interest payment terms on $187.1 million of its nonaccrual loans, and this
amendment had no financial statement impact.
An increased level of joint venture nonaccrual loans also reduced the Company's
share of joint venture interest expense in 1994 versus the 1993 level. 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 of these same ventures.
Equity investments in certain joint ventures were accounted for in the insurance
company subsidiaries in first-half 1992 before the equity was transferred to the
real estate subsidiaries. The segment's acquisition of these assets, along with
the Company's treatment of certain loans as equity investments in real estate
(see "INVESTMENTS--Real estate-related investments" on page 33), accounted for
most of the $25.1 million increase in joint venture operating losses in 1993
over the 1992 level. Also in 1993, the Company began recognizing 100 percent of
the operating results of certain joint ventures.
Investment and other income increased in 1994, with a corresponding increase in
operating expenses, because real estate management fee income and expenses were
recorded in the real estate segment beginning January 1, 1994, whereas
previously they were included in the asset management segment. In 1994, this
segment recorded $1.1 million of real estate management fee revenue from
managing real estate assets of KNIC. Such assets are being managed by a third
party beginning January 1, 1995.
Investment and other income decreased in 1993, with a corresponding decrease in
operating expenses, as Kemper Real Estate Management Company became 50 percent
owned and unconsolidated in connection with the formation of a master limited
partnership with Lumbermens. (See "INVESTMENTS--Real estate concentrations"
beginning on page 35.) This segment's interest expense, which was primarily paid
to the Company's life insurance subsidiaries, decreased in 1994 after increasing
in 1993, reflecting lower settlement costs related to the levels of asset
purchases from the life insurance subsidiaries. (See "LIQUIDITY AND CAPITAL
RESOURCES" on page 41.)
In 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 real estate segment's additions to reserves and
write-downs. In particular, a sale of equity investments in certain multifamily
residential properties to a REIT in the third quarter of 1994 resulted in the
real estate segment recording realized investment gains of $15.0 million
pre-tax. In 1993 and 1992, however, the realized investment losses reflected
greater increases to reserves and write-downs. The segment also realizes a
greater portion of the Company's additions to its provisions for real
estate-related losses, because of the real estate subsidiaries' increased
holdings of loans that are subordinate to loans held by the life insurance
subsidiaries.
The following table reflects selected balance sheet data of the real estate
segment:
SELECTED BALANCE SHEET DATA
(IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31
-------------
1994 1993
---- ----
<S> <C> <C>
Cash and short-term investments............................................................... $ 15 $ 13
Joint venture mortgage loans (1).............................................................. 84 60
Third-party mortgage loans (1)................................................................ 21 9
Other real estate related investments (1)..................................................... 39 (135)
Other......................................................................................... 5 4
---- ----
Total invested assets and cash (2).................................................. $164 $(49)
===== =====
Net deferred federal tax asset................................................................ $ 83 $168
Total assets.................................................................................. 387 187
Long-term debt................................................................................ 13 13
Stockholders' equity.......................................................................... 330 163
</TABLE>
---------------
(1) See the table captioned "Summary of gross and net real estate investments"
on page 33.
(2) See "INVESTMENTS" on the following page.
31
<PAGE> 34
INVESTMENTS
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 the
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.
INVESTED ASSETS AND CASH
(IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------------------
1994 1993
---------------- ----------------
<S> <C> <C> <C> <C>
Cash and short-term investments..................................... $ 581 7.6% $ 967 11.6%
Fixed maturities:
Investment-grade:
NAIC (1) Class 1............................................... 3,861 50.7 3,548 42.6
NAIC (1) Class 2............................................... 1,139 14.9 1,558 18.7
Performing below investment-grade (2)............................. 201 2.6 227 2.7
Equity securities................................................... 25 0.3 99 1.2
Joint venture mortgage loans (3).................................... 616 8.1 1,053 12.6
Third-party mortgage loans (3)...................................... 418 5.5 154 1.8
Other real estate-related investments............................... 336 4.4 272 3.3
Other............................................................... 445 5.9 447 5.5
------ ----- ------ -----
Total (4)................................................. $7,622 100.0% $8,325 100.0%
====== ===== ====== =====
</TABLE>
---------------
(1) National Association of Insurance Commissioners ("NAIC").
-- Class 1 = A- and above
-- Class 2 = BBB- through BBB+
(2) Excludes $168 million, or 2.2 percent, and $171 million, or 2.0 percent, at
December 31, 1994 and 1993, respectively, of bonds carried in other real
estate-related investments.
(3) A joint venture mortgage loan is recharacterized in the current period as a
third-party mortgage loan where the Company has disposed of its related
equity interest in that venture.
(4) See the note captioned "Financial instruments--off-balance-sheet risk" on
page 67.
FIXED MATURITIES
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 within a separate
component of stockholders' equity, net of any applicable income tax effect. The
aggregate unrealized depreciation was $333.9 million, or $9.70 per share, at
December 31, 1994, compared with unrealized appreciation of $120.6 million, net
of tax, or $3.67 per share, at December 31, 1993. The Company has not recorded a
deferred tax benefit for 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 December 31, 1994,
investment-grade fixed maturities and cash and short-term investments accounted
for 73.2 percent of the Company's invested assets and cash, compared with 72.9
percent at December 31, 1993. Approximately 73 percent of the Company's NAIC
Class 1 bonds were rated AAA or equivalent at year-end 1994, up from 62 percent
at year-end 1993.
Approximately 50.2 percent of the Company's investment-grade fixed maturities at
December 31, 1994 were mortgage-backed securities. These investments consist
primarily of marketable mortgage pass-through securities issued by the
Government National Mortgage Association, the Federal National Mortgage
Association or the Federal Home Loan Mortgage Corporation 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, and the markets for these investments have been and are expected
to remain liquid.
32
<PAGE> 35
Future investment income from mortgage-backed securities may be affected by the
timing of principal payments and the yields on reinvestment alternatives
available at the time of such payments. Due to the fact that the Company's
investments in mortgage-backed securities predominately date from recent years,
the current rise in interest rates is not expected to cause any material
unanticipated extension of the average maturities of these investments. With the
exception of the Company's September 1994 purchases of such investments (see
"RESULTS OF OPERATIONS--Life insurance" above), most of these investments were
purchased by the Company at discounts. Prepayment activity on such securities is
not expected to result in any material losses to the Company because prepayment
would generally accelerate the reporting of the discounts as investment income.
Many of the Company's September 1994 purchases were at a premium. Prepayments
resulting from a decline in interest rates would accelerate the amortization of
premiums on such purchases which would result in reductions of investment income
related to such securities. At December 31, 1994, the Company has unamortized
discounts and premiums of $43.8 million and $15.4 million, respectively, related
to mortgage-backed securities. Given the credit quality, liquidity and
anticipated payment characteristics of the Company's investments in
mortgage-backed securities, the Company believes that the associated risk can be
managed without material adverse consequences on its financial statements.
Below investment-grade securities holdings (NAIC classes 3 through 6)
(representing securities of 15 issuers at December 31, 1994) totaled less than
three percent of cash and invested assets at year-end 1994 and 1993. (See the
note captioned "Invested assets and related income" on page 54.) 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 four 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 marketplace. The
Company's below investment-grade holdings decreased through sales, maturities,
restructurings, market value adjustments and write-downs.
REAL ESTATE-RELATED INVESTMENTS
The $1.37 billion real estate portfolio held by the Company's continuing
operations constituted 18.0 percent of cash and invested assets at December 31,
1994, compared with $1.48 billion, or 17.7 percent, at 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 has taken ownership
positions in joint ventures with a small number of partners. (See the notes
captioned "Unconsolidated investees" and "Concentration of credit risk" on pages
57 and 59, respectively.)
SUMMARY OF GROSS AND NET REAL ESTATE INVESTMENTS
(IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------------------------
1994 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......................... $ 687 $ 542 $ 145 $1,306 $ 1,121 $ 185
Third-party mortgage loans........................... 461 440 21 154 145 9
Other real estate-related investments................ 1,163 427 736 1,092 484 608
------ --------- ------- ------ --------- -------
Subtotal................................... 2,311 1,409 902 2,552 1,750 802
Reserves............................................. (183) (55) (128) (446) (89) (357)
Write-downs.......................................... (504) (107) (397) (299) (96) (203)
Foreign currency translation adjustments............. (36) -- (36) (56) -- (56)
Cumulative net operating losses of joint ventures
owned.............................................. (218) (21) (197) (272) (22) (250)
------ --------- ------- ------ --------- -------
Net real estate investments................ $1,370 $ 1,226 $ 144 $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. The future legal commitments
were $510.8 million at December 31, 1994. This amount represented a net
33
<PAGE> 36
decrease of $126.0 million since year-end 1993, largely due to fundings in 1994.
(The commitments also reflect an asset guarantee of $55.8 million related to the
1993 sale of Kemper Reinsurance Company. See the note captioned "Discontinued
operations" on page 56.) As of December 31, 1994, the Company expects to fund
approximately $194.4 million of these 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. (See the note captioned
"Financial instruments--off-balance-sheet risk" on page 67.)
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 continued weakness in real estate markets and fairly restrictive lending
practices by other lenders in this environment, the Company expects that all or
most loans maturing in 1995 will be rolled over, restructured or foreclosed.
Excluding the $78.7 million of real estate owned and the $89.0 million deficit
in the Company's net equity investments in joint ventures, the Company's real
estate loans (including real estate-related bonds) totaled $1,381.0 million at
December 31, 1994, after reserves and write-downs. Of this amount, $847.8
million are on accrual status with a weighted average interest rate of
approximately 7.7 percent. Of these accrual loans, 57.9 percent have terms
requiring current periodic payments of their full contractual interest, 28.8
percent require only partial payments or payments to the extent of cash flow of
the borrowers, and 13.3 percent defer all interest to maturity.
The deficit in equity investments in real estate, at December 31, 1994,
consisted of $110.5 million of loans to Spanish projects (described on page 35),
$67.8 million of unsecured loans to joint ventures treated as equity
investments, a $230.7 million deficit in the Company's other equity investments
in joint ventures and reserves of $36.6 million. The deficit includes the
Company's share of periodic operating results. 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 included $73.6 million of deeds in lieu of
foreclosure and $5.1 million of certain purchased properties at December 31,
1994. Real estate owned was net of $132.6 million of write-downs at December 31,
1994.
REAL ESTATE PORTFOLIO
(IN MILLIONS)
<TABLE>
<CAPTION>
OTHER REAL ESTATE-RELATED INVESTMENTS
MORTGAGE LOANS --------------------------------------------
----------------- REAL
JOINT THIRD- OTHER ESTATE EQUITY
VENTURE PARTY BONDS(4) LOANS(5) 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............................. 48.4 31.3 51.3 60.9 17.4 110.3 319.6
Interest added to principal.......... 1.9 6.8 -- 0.3 -- -- 9.0
Sales/paydowns/distributions......... (98.5) (16.6) (63.4) (31.8) (31.5) (52.5) (294.3)
REIT(2).............................. (93.4) -- (15.9) (11.7) -- (2.4) (123.4)
Maturities........................... (13.1) (18.8) (7.3) (106.8) -- -- (146.0)
Rollovers at maturity:
Principal.......................... 13.1 18.8 7.3 106.8 -- -- 146.0
Interest........................... 1.7 -- -- 4.3 -- -- 6.0
Operating loss....................... -- -- -- -- -- (48.4) (48.4)
Transfers to real estate owned....... (51.0) (19.0) -- (32.7) 102.7 -- --
Realized investment gain (loss)(3)... 63.2 (59.6) 22.8 43.0 (65.5) (19.5) (15.6)
Net transfers from joint venture to
third-party mortgages.............. (281.5) 281.5 -- -- -- -- --
Other transactions, net.............. (28.0) 40.0 1.3 29.4 (22.6) 18.2 38.3
-------- ------ ------- -------- ------ --------- --------
Balance at December 31, 1994......... $ 616.2 $418.3 $170.3 $ 176.2 $ 78.7 $ (89.0) $1,370.7(6)
======== ====== ======= ======== ====== ========= ========
</TABLE>
34
<PAGE> 37
---------------
(1) Net of $744.1 million reserve and write-downs. Excludes $80.7 million of
real estate-related accrued interest.
(2) Reflects the 1994 formation of Prime Retail, Inc., a retail properties REIT
affiliated with the Prime Group, Inc. See "Real estate concentrations"
below.
(3) See the note captioned "Invested assets and related income" on page 54.
(4) 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.
(5) The other real estate loans are notes receivable evidencing financing
primarily to joint ventures, for purposes similar to those funded by real
estate-related bonds.
(6) Net of $686.6 million reserve and write-downs. Excludes $56.3 million of
real estate-related accrued interest.
As reflected in the preceding table, cash received by the Company from
sales/paydowns/distributions and REIT transactions in 1994 exceeded the
Company's cash fundings in 1994 by $98.1 million. Cash received from
sales/paydowns/distributions and refinancings in 1993 exceeded the Company's
cash fundings in 1993 by $181.6 million.
REAL ESTATE CONCENTRATIONS
The Company's real estate portfolio is distributed by geographic location and
property type, as shown in the following two tables:
GEOGRAPHIC DISTRIBUTION
AS OF DECEMBER 31, 1994
Illinois.................................................................. 28.0%
California................................................................. 27.2
Texas...................................................................... 10.0
Spain...................................................................... 7.9
Hawaii..................................................................... 4.6
Ohio....................................................................... 4.6
Colorado................................................................... 2.7
Washington................................................................. 2.5
Florida.................................................................... 2.0
Other(1)................................................................... 10.5
Total................................................................100.0%
DISTRIBUTION BY PROPERTY TYPE
AS OF DECEMBER 31, 1994
Office.................................................................... 26.5%
Land....................................................................... 21.8
Retail..................................................................... 11.8
Industrial................................................................. 11.3
Hotel...................................................................... 9.7
Residential................................................................ 5.9
Apartment.................................................................. 5.2
Mixed use.................................................................. 2.3
Other...................................................................... 5.5
Total................................................................100.0%
---------------
(1) No other single location exceeded 2.0 percent.
Real estate markets have been depressed in recent periods in areas where most of
the Company's real estate portfolio is located. Approximately half of the
Company's real estate holdings are in California and Illinois. Southern
California shows signs of improvement, although real estate market conditions
there have continued to be worse than in many other areas of the country.
Northern California and Illinois currently reflect some stabilization and
improvement.
At December 31, 1994, the Company's real estate portfolio also included $110.5
million of loans carried as equity investments in real estate (net of $196.3
million of cumulative write-downs, $35.9 million of foreign currency
translations and $39.8 million of cumulative operating losses) related to land
for office and retail development and residential projects located in Barcelona,
Spain. Such equity investments in Spain totaled $149.8 million at December 31,
1993, after accounting for fundings by Company subsidiaries of $151.3 million
during 1993. The Spanish projects accounted for $55.5 million of net fundings,
$102.0 million of write-downs, $20.7 million of foreign currency translation
gains, operating losses of $7.8 million and dispositions of $5.7 million during
1994 and represented approximately 7.9 percent of the Company's real estate
portfolio at December 31, 1994. These investments, which began in the late
1980s, accounted for $19.3 million of the December 31, 1994 off-balance-sheet
legal commitments, of which the Company expects to fund approximately $14.1
million.
Undeveloped land, including the Spanish projects, represented approximately 21.8
percent of the Company's real estate portfolio at December 31, 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 (e.g., standby financing arrangements and loan commitments) from
the Company. The values of
35
<PAGE> 38
development projects are dependent on a number of factors, including the
Company's plans with respect thereto, 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 December 31, 1994, the Company's loans to and investments in projects with
the Prime Group, Inc. or its affiliates, based in Chicago, represented
approximately $403.8 million, or 29.5 percent, of the Company's real estate
portfolio (including the previously mentioned Spanish projects, which are Prime
Group-related). (See the note captioned "Unconsolidated investees" on page 57.)
This amount reflects $194.0 million in fundings during 1994 and $261.8 million
in 1993. The Company also received cash, from Prime Group-related
sales/paydowns/distributions and REIT transactions, totaling $204.7 million in
1994 and $64.8 million in 1993. Prime Group-related commitments accounted for
$224.3 million of the off-balance-sheet legal commitments at December 31, 1994,
of which the Company expects to fund $44.7 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 MLP projects. During 1994, the
Company provided $98.4 million of fundings to the MLP projects, compared with
fundings of $103.9 million in 1993. The Company also received cash from
MLP-related sales/paydowns/distributions and refinancings of $166.3 million in
1994 and $215.0 million in 1993. At December 31, 1994, projects in the MLP
accounted for $117.1 million of the Company's off-balance-sheet legal
commitments, of which the Company expects to fund $104.9 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 Company records
50 percent of the operating results of the ventures held by the MLP. Of the
Company's real estate portfolio at December 31, 1994, approximately $422.9
million, or 30.9 percent, represented loans to and investments in MLP-owned
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 been recording 50 percent of the operating results of the
related ventures, this transaction, which simplified the management of the
Company's portfolio, did not have any material adverse impact on the Company's
results of operations or financial condition.
PROVISIONS FOR REAL ESTATE-RELATED LOSSES
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 (both reserves and write-downs) 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. (See the discussion of SFAS 114 on page
51 in the note captioned "Summary of significant accounting policies".) 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 deficit in (i.e., the negative carrying value of) the Company's equity
investments in real estate is considered in the Company's periodic evaluations
of, and serves to reduce the level of, its provisions for real estate-related
losses. In 1994, because certain negative carrying values were eliminated due to
the sales or transfers of the Company's interests in the corresponding joint
ventures, the Company generally added to its provisions for real estate-related
losses an amount equal to most of the gains from such sales and transfers.
36
<PAGE> 39
The Company decreased the net amount of its real estate reserves and writedowns
in 1994, primarily reflecting sales and transfers to third parties. While the
real estate subsidiaries as equity owners recognized gains on sales and other
transactions during 1994, additions to reserves and increases in write-downs
have affected both the life insurance segment (where most of the Company's loans
are held) and the real estate segment. The Company's real estate reserve was
allocated as follows:
REAL ESTATE RESERVE
(IN MILLIONS)
<TABLE>
<CAPTION>
JOINT VENTURE
AND THIRD-PARTY OTHER REAL ESTATE-
MORTGAGE LOANS RELATED 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 12/31/92.................. $ 85.3 $ 16.9 $28.9 $ 217.1 $ 114.2 $ 234.0
1993 change in reserve............... (31.4) 111.7 6.9 10.2 (24.5) 121.9
--------- ------- --------- ------- --------- -------
Balance at 12/31/93.................. 53.9 128.6 35.8 227.3 89.7 355.9
1994 change in reserve............... (28.8) (67.8) (6.0) (159.8) (34.8) (227.6)
--------- ------- --------- ------- --------- -------
Balance at 12/31/94.................. $ 25.1 $ 60.8 $29.8 $ 67.5 $ 54.9 $ 128.3
======= ====== ======= ======= ======= =======
</TABLE>
In addition to the reserve, the Company's provision for real estate-related
losses (on assets held at the respective period end) included cumulative
write-downs (both by the Company and including the Company's share of
write-downs by joint ventures) totaling $503.4 million (life insurance segment,
$106.7 million; real estate segment, $396.7 million) at December 31, 1994, and
$298.5 million (life insurance segment, $96.0 million; real estate segment,
$202.5 million) at December 31, 1993. The 1994 decrease in reserves was
primarily due to write-downs which increased in 1994 as reserves for general
real estate risks were allocated to certain specific loans and equity
investments in real estate, particularly with respect to investments in land
(including the Spanish projects). In 1993, the Company's real estate reserve and
write-downs increased primarily due to declining valuations in the Company's
real estate portfolio. The declining valuations in 1993 reflected the Company's
view, based on economic data then available, that there will be slower than
previously anticipated economic growth in the future and therefore slower
absorption of real estate, particularly undeveloped land. Due to the Company's
assessment for slower economic growth, its plans with respect to certain
projects were changed to reflect deferrals of their commencement or completion.
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
fairly restrictive 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 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 have been adversely affecting the
financial resources of certain of the Company's joint venture partners. Every
partner, however, remains active in the control of its respective joint
ventures. In evaluating a 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 began
recognizing 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.
37
<PAGE> 40
The following table is a summary of the Company's troubled real estate-related
investments:
TROUBLED REAL ESTATE-RELATED INVESTMENTS
(BEFORE RESERVES AND WRITE-DOWNS, EXCEPT FOR REAL ESTATE OWNED)
(IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------------------------------------------------------
1994 1993
-------------------------------- ----------------------------------
LIFE REAL LIFE REAL
INSURANCE ESTATE INSURANCE ESTATE
SEGMENT SEGMENT TOTAL SEGMENT SEGMENT TOTAL
--------- ------- ------ --------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Potential problem loans(1)................ $ 76.8 $ 0.1 $ 76.9 $ 20.2 $ -- $ 20.2
Past due loans(2)......................... -- -- -- 6.1 -- 6.1
Nonaccrual loans(3)....................... 380.9 352.2 733.1 755.8 372.0 1,127.8
Restructured loans(4)
(currently performing).................. 53.0 0.7 53.7 59.1 0.4 59.5
Real estate owned(5)...................... 63.2 15.5 78.7 71.1 7.1 78.2
--------- ------- ------ --------- ------- --------
Total(6)(7)..................... $ 573.9 $ 368.5 $942.4 $ 912.3 $ 379.5 $1,291.8
======= ====== ====== ======= ====== ========
</TABLE>
---------------
(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.
(2) Interest more than 90 days past due but not on nonaccrual status.
(3) The Company does not accrue interest on real estate-related investments when
it judges that the likelihood of collection of interest is doubtful. The
1994 decrease in nonaccrual loans primarily reflected sales and foreclosures
as well as write-offs of certain fully reserved loans.
(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 the 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).
(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 $132.6 million and $29.3 million at December 31, 1994 and 1993,
respectively.
(6) Total reserves and cumulative write-downs on properties owned at December
31, 1994 (excluding fair value adjustments to real estate owned) were 58.8
percent of total troubled real estate-related investments and 28.8 percent
of the Company's total real estate portfolio before reserves and
write-downs.
(7) Equity investments in real estate are not defined as part of, and therefore
are not taken into account in calculating, total troubled real estate
because the negative carrying value of equity investments would reduce the
total. The Company's equity investments also involve real estate risks. See
"Real estate concentrations" above.
Based on the level of troubled real estate-related investments the Company
experienced in 1994 and 1993, the Company anticipates additional foreclosures
and deeds in lieu of foreclosure in 1995 and beyond. 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 continued to devote 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 continues to analyze various potential transactions designed to reduce
both its joint venture operating losses and the amount of its real
estate-related investments. Specific types of transactions under consideration
(and previously utilized) include loan sales, property sales, mortgage
refinancings and real estate investment trusts. However, there can be no
assurance that such efforts will result in continued improvements in the
performance of the Company's real estate portfolio.
38
<PAGE> 41
NET INVESTMENT INCOME
The following table shows each segment's contribution to the Company's net
investment income:
NET INVESTMENT INCOME BEFORE TAXES(1)
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------
1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
Life insurance segment.......................................................... $519.1 $500.5 $568.6
Real estate segment............................................................. (37.5) (74.9) (51.0)
Other and eliminations.......................................................... 3.2 1.2 4.7
------ ------ ------
Consolidated.......................................................... $484.8 $426.8 $522.3
====== ====== ======
Investment yields:
Life insurance................................................................ 6.85% 6.48% 7.58%
====== ====== ======
Consolidated.................................................................. 6.08% 5.39% 6.84%
====== ====== ======
</TABLE>
---------------
(1) See the note captioned "Invested assets and related income" on page 54.
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 losses (excluding write-downs) totaled $48.3 million,
$92.3 million and $72.6 million in 1994, 1993 and 1992, respectively. These
pre-tax 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 total foregone investment income before tax on both nonperforming
fixed maturity investments and nonaccrual real estate-related investments was as
follows:
FOREGONE INVESTMENT INCOME
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------
1994 1993 1992
----- ----- -----
<S> <C> <C> <C>
Fixed maturities:
Life insurance segment........................................................... $ -- $12.9 $35.0
Real estate segment.............................................................. -- 0.9 0.9
Real estate-related investments:
Life insurance segment........................................................... 39.5 45.2 24.5
Real estate segment.............................................................. 13.8 3.0 --
----- ----- -----
Total.................................................................... $53.3 $62.0 $60.4
===== ===== =====
Basis points:
Life insurance segment........................................................... 52 76 80
===== ===== =====
Consolidated..................................................................... 69 81 81
===== ===== =====
</TABLE>
Foregone investment income from the nonaccrual of real estate-related
investments is net of the Company's share of interest expense on these loans
excluded from the Company's share of joint venture operating results. Based on
the level of nonaccrual real estate-related investments at December 31, 1994,
the Company estimates foregone investment income in 1995 will decrease slightly
compared with the 1994 level. Any nonperforming securities, and either worsening
or stagnant real estate conditions, would increase the expected adverse effect
on the Company's future investment income and realized investment results.
Future net investment income, results of operations and cash flow will reflect
the Company's current levels of investments in investment-grade securities, real
estate fundings treated as equity investments, nonaccrual real estate loans and
joint venture operating losses. The Company expects, however, that any 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.
39
<PAGE> 42
REALIZED INVESTMENT RESULTS
Reflected in the results from continuing operations are after-tax realized
investment losses of $53.2 million, $197.6 million and $245.3 million for 1994,
1993 and 1992, respectively. (See the note captioned "Invested assets and
related income" on page 54.) The 1994 realized investment losses were primarily
generated by the life insurance segment's third-quarter repositioning of its
fixed maturity portfolio, which resulted in an after-tax loss of approximately
$39.7 million. The $810.6 million of proceeds from the repositioning, along with
$325.0 million of cash and short-term investments, were reinvested primarily in
higher yielding U.S. government guaranteed mortgage pass-through securities.
Fixed maturity write-downs were insignificant in 1994 due to the increased
quality of the Company's fixed maturity portfolio. Other realized gains of $16.4
million, $72.6 million and $31.4 million in 1994, 1993 and 1992, respectively,
were also taken in the life insurance segment. Also in 1994, in connection with
the December 1994 bankruptcy filing by Orange County, the asset management
segment recorded an after-tax charge of $19.3 million. Real estate-related
losses declined in 1994 because certain real estate markets began to stabilize
and sales and other transfers to third parties of certain equity investments in
real estate, which had negative carrying values, generated realized gains
offsetting most of the Company's additions to real estate-related reserves and
write-downs.
Unrealized gains and losses on fixed maturity investments are not reflected in
the Company's results of operations. These changes in unrealized value are
included within a separate component of stockholders' equity, net of any
applicable income taxes. 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.
A valuation allowance was established upon adoption of SFAS 109 (and is
evaluated as of each reported period end) to reduce the deferred tax asset for
investment losses to the amount that, based upon available evidence, is in
management's judgment more likely than not to be realized. (See the note
captioned "Income tax" on page 60.)
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 1994 saw rapidly rising short-term interest
rates which resulted in a much flatter yield curve as the Federal Reserve Board
raised rates five times during the year.
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.
The interest rate environment contributed both to a reduction in net investment
income of the life insurance segment in 1993 and 1992 and, as interest rates
rose during 1994, to both realized and unrealized fixed maturity investment
losses in 1994. Also, lower renewal crediting rates on annuities, compared with
higher new money crediting rates, 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. Approximately
one-half of the Company's fixed annuity liabilities as of December 31, 1994,
however, are no longer subject to significant surrender fees.
As interest rates rose during 1994, the life insurance subsidiaries' capital
resources were adversely impacted by unrealized loss positions in their fixed
maturity investments. The Company believes, however, that this decline in value
should be offset by a decrease in the present value of the life insurance
subsidiaries' policy liabilities and that their sales of fixed-rate annuity
products could increase in a rising interest rate environment.
40
<PAGE> 43
LIQUIDITY AND CAPITAL RESOURCES
HOLDING COMPANY
As a parent holding company, Kemper regularly reviews the strategic fit of all
its businesses and may consider the acquisition or disposition of its and its
subsidiaries' assets, and the Company may consider entering into joint venture,
reinsurance and other transactions. Since Kemper is a holding company, its
rights and the rights of its creditors to participate in the assets of any
subsidiary upon the latter's liquidation or recapitalization will be subject to
prior claims of the subsidiaries' creditors, including customers of asset
management or securities brokerage subsidiaries, policyholders of insurance
company subsidiaries and lenders with respect to real estate subsidiaries
(except to the extent the Company itself may be a creditor with recognized or
secured claims against the subsidiary). During 1993, the parent received $380.3
million in cash and 17.4 million shares of its common stock from dispositions of
subsidiaries. (See the note captioned "Discontinued operations" on page 56.)
Kemper receives from its subsidiaries interest on loans and dividends of cash
and property. (See the parent only financial statements included in Schedule II
beginning on page 77.) Distributions to the parent are restricted. (See the note
captioned "Stockholders' equity--retained earnings" on page 71.) The parent also
receives from its subsidiaries payments for federal income tax. (See the note
captioned "Income tax" on page 60.) Additionally, from time to time, Kemper
borrows funds and issues securities for cash.
Kemper has used 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. At December 31, 1994, the parent had $55.2 million in cash and
short-term investments. Although not legally committed to do so, Kemper plans to
use a significant portion of these funds for additional purchases of real
estate-related investments from its life insurance subsidiaries to maintain
and/or improve their regulatory capital positions and earnings capabilities. In
1994, the Company purchased $222.8 million of certain real estate-related
investments from the life insurance subsidiaries and contributed $82.5 million
to KILICO's capital, which contribution was 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 such real estate-related
investments and contributing to KILICO's capital $90.0 million, $20.0 million of
which was a dividend from FKLA. The Company's purchases of such investments from
its life insurance subsidiaries were consummated at the carrying values of such
investments at the dates of the purchases.
CONSOLIDATED
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, taxes and customers' account balances. 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" on page 32.)
In the life insurance segment, policyholder deposits decreased to $380.1 million
during 1994 from $412.4 million during 1993, and policyholder withdrawals
increased to $995.4 million during 1994 from $711.3 million during 1993,
primarily due to planned reductions in crediting rates on general account
annuities, increased competition, rising interest rates and uncertainty
regarding the Company's ownership. The life insurance subsidiaries' late 1994
increases in crediting rates are designed to produce new policyholder deposits
and to reduce future withdrawals.
In the first quarter of 1995, KFS sold its 50 percent interest in IFTC and
announced a definitive agreement to sell the business operations of SSC. (See
"RESULTS OF OPERATIONS--Asset management" in this ITEM 7 and "ASSET MANAGEMENT
SEGMENT" in ITEM 1(c).)
41
<PAGE> 44
The following table sets forth the consolidated short-term debt and
capitalization of the Company at the dates indicated:
CAPITALIZATION
(IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------
1994 1993
--------- ---------
<S> <C> <C>
Short-term debt:
Collateralized bank loans of securities brokerage operations................... $ 315.1 $ 325.1
Other short-term debt.......................................................... 54.1 24.1
--------- ---------
Total short-term debt.................................................. 369.2 349.2
--------- ---------
Long-term debt
6.875% Notes Due 2003.......................................................... 200.0 200.0
8.80% Notes Due 1998........................................................... 110.8 110.8
Medium-term notes.............................................................. 35.5 65.5
Other long-term debt........................................................... 12.6 17.7
Convertible debentures of subsidiary........................................... 33.1 45.7
--------- ---------
Total long-term debt................................................... 392.0 439.7
--------- ---------
Total short-term and long-term debt.................................... $ 761.2 $ 788.9
========= =========
Stockholders' equity:
Preferred stock................................................................ $ 360.4 $ 360.6
Common stock................................................................... 331.2 323.1
Additional paid-in capital..................................................... 366.9 313.5
Unrealized loss on foreign currency transactions............................... (35.9) (56.9)
Unrealized appreciation (depreciation) on investments.......................... (323.2) 155.0
Retained earnings.............................................................. 1,586.8 1,549.6
Treasury shares, at cost....................................................... (1,028.8) (1,025.9)
--------- ---------
Total stockholders' equity............................................. 1,257.4 1,619.0
--------- ---------
Total capitalization (excludes total short-term debt).................. $ 1,649.4 $ 2,058.7
========= =========
</TABLE>
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. The level of these borrowings fluctuates daily
depending upon market activity and customer margin activity levels.
The parent company had $20.0 million due to banks at December 31, 1994 and 1993.
Also included in short-term debt at December 31, 1994 are $30.0 million of
medium-term notes due in the fourth quarter of 1995. Kemper Corporation
renegotiated certain of its committed lines of credit with certain banks
effective October 27, 1994. The lines of credit total $317.5 million, with
$155.0 million expiring October 22, 1995 and $162.5 million expiring November 1,
1996. These lines would not be available upon a change of control of the
Company. At December 31, 1994, $110 million of the aggregate amount of these
lines were reserved for the sole purpose of providing funding capability
respecting real estate commitments which the Company does not expect to
ultimately require funding. Additionally, beginning in the first quarter of 1995
and in conjunction with the issuance of letters of credit totaling $205 million
by a third-party bank syndicate to five money market mutual funds managed by KFS
to credit enhance the money funds' investments in certain Orange County notes, a
portion of the committed lines of credit equal to the difference between $205
million and the aggregate cash and marketable securities of the parent and its
non-regulated subsidiaries will be reserved for any future fundings under the
Orange County letters of credit. As of February 28, 1995, approximately $23
million of the committed lines were reserved for this purpose. Interest rates on
the Company's committed lines of credit would generally approximate short-term
bank corporate rates.
42
<PAGE> 45
LONG-TERM DEBT
All of the Company's long-term debt was issued prior to 1994. The majority of
the long-term debt was privately placed in 1993 at an initial interest rate of
6.875 percent. This rate increased to 7.375 percent from March 15, 1994 to
December 12, 1994, when the initial rate was reinstated upon the exchange of
such notes for publicly registered notes. (See the note captioned "Long-term
debt and notes payable" on page 59.)
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.
A credit rating is not a recommendation to buy, sell or hold securities. Each
rating is subject to revision or withdrawal at any time by the assigning
organization and should be evaluated independently of any other rating. In
November 1994, after the termination of a merger agreement between Kemper
Corporation and Conseco, Inc. (see Part I of this Annual Report on Form 10-K),
Standard & Poor's Corporation revised its BBB (adequate) senior debt and BB+
(below average) preferred stock ratings of Kemper Corporation from "CreditWatch
with 'negative' implications" to "CreditWatch with 'developing' implications";
Duff & Phelps Credit Rating Co. revised its A- (high) senior debt rating of
Kemper Corporation, its AA- (very high) claims-paying ability rating of FKLA and
its A+ (high) claims-paying ability rating of KILICO from "Rating Watch-Down" to
"Rating Watch-Uncertain"; Moody's Investors Service indicated that it continues
to review for possible downgrade its Baa2 (adequate) senior debt rating and Baa3
(adequate) preferred stock rating of Kemper Corporation and its Baa1 (adequate)
financial strength ratings of FKLA and KILICO; and A.M. Best did not change its
A- (excellent) "under review" ratings of FKLA and KILICO. The review status of
each of these ratings primarily reflects the fact that the Company is pursuing
alternatives to maximize stockholder value, which alternatives may result in a
change of control of the Company and/or certain of its subsidiaries.
CONVERTIBLE DEBENTURES OF SUBSIDIARY
Convertible debentures of subsidiary represent employee interests in KFC.
Maturities and employee terminations during 1994 accounted for the $12.3 million
reduction of convertible debentures from year-end 1993. Approximately $7.5
million of debentures are scheduled to mature in 1995. The outstanding
debentures bear interest approximating the prime rate. At December 31, 1994,
$24.1 million of the debentures were subject to KFC's right to call, and the
remaining $9.0 million become callable in May 1995. (See the note captioned
"Convertible debentures of subsidiary" on page 65.) KFC is considering calling
all outstanding debentures for redemption by year-end 1995 or in early 1996.
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 December 31,
1994, the Company's outstanding preferred stock totaled $360.4 million.
Dividends paid on the preferred stock during 1994 totaled $23.6 million. (See
the note captioned "Preferred stock" on page 53.)
COMMON STOCK
During 1994, the Company received $34.0 million by issuing common stock through
employee stock option plans and issued $29.0 million of common stock through the
Kemper Corporation Dividend Reinvestment and Stock Purchase Plan. All employee
stock options outstanding on December 31, 1994 are fully exercisable. (See the
note captioned "Stock option plans" on page 64.) The Company expects to continue
to receive proceeds from the exercise of employee stock options.
43
<PAGE> 46
During 1993 and 1994, the quarterly dividend rate was $.23 per common share. The
first-quarter 1995 dividend of $.23 per share was paid February 28, 1995. The
aggregate common stock dividend payment was 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. (See the note
captioned "Discontinued operations" on page 56.)
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.
STOCKHOLDERS' EQUITY
Stockholders' equity totaled $1.26 billion at December 31, 1994, compared with
$1.62 billion and $1.77 billion at December 31, 1993 and 1992, respectively. The
1994 decrease reflects $478.2 million of unrealized losses on investments,
primarily fixed maturities of the life insurance segment, due to rising interest
rates. The 1994 unrealized losses were partially offset by the issuance of $63.0
million of common stock and net income of $91.4 million. The 1993 decrease in
nominal dollar value of stockholders' equity was due to the Company's
acquisition of approximately 17.4 million shares of its common stock valued at
$610.2 million in exchange for the stock of the Company's reinsurance and risk
management subsidiaries. This 1993 acquisition of treasury stock was offset in
part by the issuances of $260.0 million of preferred stock and $29.0 million of
common stock, net income of $235.5 million and an increase in unrealized
appreciation on investments of $40.6 million during 1993.
Book value per common share decreased to $26.06 at December 31, 1994, compared
with $38.24 and $33.77 at December 31, 1993 and 1992, respectively. The decrease
in 1994 from the 1993 level primarily reflected the unrealized loss on
investments during 1994 of $13.89 per share. The increase in 1993, compared with
1992, primarily reflected the reduced number of outstanding common shares and
the Company's net income.
44
<PAGE> 47
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
PAGE(S)
-------
<S> <C>
Selected Financial Data........................................................................... 19
Report of Independent Public Accountants.......................................................... 45
Consolidated Balance Sheet, December 31, 1994 and 1993............................................ 46
Consolidated Statement of Operations, three years ended December 31, 1994......................... 47
Consolidated Statement of Stockholders' Equity, three years ended December 31, 1994............... 48
Consolidated Statement of Cash Flows, three years ended December 31, 1994......................... 49
Notes to Consolidated Financial Statements........................................................ 50-71
Supplementary Schedules........................................................................... 76-80
</TABLE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Kemper Corporation:
We have audited the consolidated balance sheet of Kemper Corporation and
subsidiaries as of December 31, 1994 and 1993, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
years in the three-year period ended December 31, 1994. In connection with our
audits of the consolidated financial statements, we have also audited the
supplementary schedules as listed in the accompanying index. These consolidated
financial statements and supplementary schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and supplementary schedules based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Kemper Corporation
and subsidiaries as of December 31, 1994 and 1993, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1994, in conformity with generally accepted accounting
principles. Also in our opinion, the related supplementary schedules, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly, in all material respects, the information set forth
therein.
As discussed in the notes to the consolidated financial statements, effective
January 1, 1994, the Company changed its method of accounting for investment
securities to adopt the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards ("SFAS") 115, Accounting for Certain
Investments in Debt and Equity Securities. Also, as discussed in the notes,
effective January 1, 1993, the Company changed its method of accounting for
impairment of loans receivable to adopt the provisions of SFAS 114, Accounting
by Creditors for Impairment of a Loan, and changed its method of accounting for
income taxes to adopt the provisions of SFAS 109, Accounting for Income Taxes.
Further, as discussed in the notes, the Company adopted the provisions of SFAS
106, Employers' Accounting for Postretirement Benefits Other than Pensions in
1992.
KPMG PEAT MARWICK LLP
Chicago, Illinois
March 3, 1995
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Kemper Corporation:
We consent to incorporation by reference in the Registration Statements No.
33-50736 on Form S-8 and No. 2-71680 on Form S-3 of Kemper Corporation of our
report dated March 3, 1995, relating to the consolidated balance sheet of Kemper
Corporation and subsidiaries as of December 31, 1994 and 1993, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1994, which report
appears in the December 31, 1994 Annual Report on Form 10-K of Kemper
Corporation.
KPMG PEAT MARWICK LLP
Chicago, Illinois
March 24, 1995
45
<PAGE> 48
KEMPER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------
1994 1993
------------ -----------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities available for sale, at market
(cost 1994, $5,534,864; 1993, $5,147,592)............................... $ 5,200,915 $5,333,175
Equity securities, at market (cost 1994, $25,370; 1993, $53,366).......... 25,118 98,968
Short-term investments.................................................... 349,651 713,401
Joint venture mortgage loans.............................................. 616,192 1,053,403
Third-party mortgage loans................................................ 418,313 153,880
Other real estate-related investments..................................... 336,272 272,188
Other loans and investments............................................... 443,800 446,717
------------ -----------
Total investments.................................................... 7,390,261 8,071,732
Cash (restricted: 1994, $538; 1993, $470).................................... 231,487 253,105
Securities purchased under resale agreements................................. 228,598 204,467
Securities held by brokerage firm subsidiaries, at market.................... 193,414 285,695
Accounts receivable from brokerage firms and customers....................... 730,149 776,971
Other accounts and notes receivable.......................................... 632,924 617,458
Reinsurance recoverable...................................................... 741,867 835,975
Deferred insurance acquisition costs......................................... 696,804 622,592
Deferred investment product sales costs...................................... 166,397 186,931
Other assets................................................................. 270,289 299,543
Assets of separate accounts.................................................. 1,871,777 1,883,656
------------ -----------
Total assets......................................................... $13,153,967 $14,038,125
============= =============
LIABILITIES
Life policy benefits......................................................... $ 7,129,293 $7,380,787
Ceded life policy benefits................................................... 741,867 835,975
Securities sold under repurchase agreements.................................. 225,177 181,879
Securities sold, not yet purchased, at market................................ 70,334 77,023
Accounts payable to brokerage firms and customers............................ 265,823 354,998
Other accounts payable and liabilities....................................... 831,109 915,954
Notes payable................................................................ 369,226 349,237
Long-term debt............................................................... 358,891 393,978
Convertible debentures of subsidiary......................................... 33,113 45,651
Liabilities of separate accounts............................................. 1,871,777 1,883,656
------------ -----------
Total liabilities.................................................... 11,896,610 12,419,138
------------ -----------
Commitments and contingent liabilities
STOCKHOLDERS' EQUITY
Preferred stock
-- no par value, authorized 20,000,000 shares;
outstanding 1994, 6,681,165; 1993, 6,690,637 shares....................... 360,363 360,600
Common stock
-- $5.00 par value, authorized 200,000,000 shares;
issued 1994, 66,229,940; 1993, 64,620,863 shares.......................... 331,150 323,104
Additional paid-in capital................................................... 366,944 313,531
Unrealized loss on foreign currency translations............................. (35,888) (56,878)
Unrealized gain (loss) on investments........................................ (323,201) 155,004
Retained earnings............................................................ 1,586,820 1,549,580
Treasury shares, at cost (1994, 31,812,456; 1993, 31,717,505 shares)......... (1,028,831) (1,025,954)
------------ -----------
Total stockholders' equity........................................... 1,257,357 1,618,987
------------ -----------
Total liabilities and stockholders' equity........................... $13,153,967 $14,038,125
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
46
<PAGE> 49
KEMPER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
REVENUE
Asset management income................................................ $ 447,044 $ 498,153 $ 480,546
Net investment income.................................................. 484,796 426,807 522,293
Insurance premium income............................................... 151,830 157,667 135,922
Securities brokerage income............................................ 500,621 639,991 638,653
Realized investment loss............................................... (81,479) (255,702) (359,761)
Other income........................................................... 99,009 82,258 86,071
---------- ---------- ----------
Total revenue................................................ 1,601,821 1,549,174 1,503,724
---------- ---------- ----------
BENEFITS AND EXPENSES
Asset management expenses.............................................. 259,433 295,785 284,076
Amortized investment product sales costs............................... 57,324 48,011 39,986
Insurance claim costs and policyholder benefits........................ 474,614 514,304 598,128
Amortized policy acquisition costs..................................... 59,169 60,367 66,786
Insurance operating expenses........................................... 10,894 23,133 47,138
Securities brokerage expenses.......................................... 492,708 617,455 630,874
Interest expense....................................................... 80,744 73,201 79,150
Other expenses......................................................... 46,329 26,065 32,457
---------- ---------- ----------
Total benefits and expenses.................................. 1,481,215 1,658,321 1,778,595
---------- ---------- ----------
Earnings (loss) from continuing operations before
income tax (benefit)....................................... 120,606 (109,147) (274,871)
Income tax (benefit)................................................... 34,893 (19,749) (74,690)
---------- ---------- ----------
Income (loss) from continuing operations..................... 85,713 (89,398) (200,181)
Income from discontinued operations, net of tax........................ -- 25,498 23,794
Gain (loss) on sale of discontinued operations to related party, net of
tax.................................................................. (576) 204,668 --
Gain on other sales of discontinued operations, net of tax............. 6,303 92,174 --
---------- ---------- ----------
Income (loss) before cumulative effect of changes in
accounting principles...................................... 91,440 232,942 (176,387)
Cumulative effect of changes in accounting principles, net of tax...... -- 2,545 (27,013)
---------- ---------- ----------
Net income (loss)............................................ $ 91,440 $ 235,487 $ (203,400)
========== ========== ==========
Net income (loss) applicable to common stockholders.................... $ 67,850 $ 216,828 $ (203,400)
========== ========== ==========
NET INCOME (LOSS) PER SHARE:
Primary
Income (loss) from continuing operations............................... $ 1.80 $ (2.52) $ (4.10)
Income from discontinued operations.................................... 0.17 7.52 0.49
---------- ---------- ----------
Income (loss) before cumulative effect of changes in
accounting principles...................................... 1.97 5.00 (3.61)
Cumulative effect of changes in accounting principles, net of tax...... -- 0.06 (0.55)
---------- ---------- ----------
Net income (loss) per share.................................. $ 1.97 $ 5.06 $ (4.16)
========== ========== ==========
Fully diluted
Income (loss) from continuing operations............................... $ 1.80 $ (2.11) $ (4.10)
Income from discontinued operations.................................... 0.17 6.92 0.49
---------- ---------- ----------
Income (loss) before cumulative effect of changes in
accounting principles...................................... 1.97 4.81 (3.61)
Cumulative effect of changes in accounting principles, net of tax...... -- 0.06 (0.55)
---------- ---------- ----------
Net income (loss) per share.................................. $ 1.97 $ 4.87 $ (4.16)
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
47
<PAGE> 50
KEMPER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
PREFERRED STOCK, beginning of year..................................... $ 360,600 $ 100,626 $ 782
Stated value of shares converted to common stock....................... (237) (26) (156)
Issuance of preferred stock............................................ -- 260,000 100,000
---------- ---------- ----------
End of year.................................................. 360,363 360,600 100,626
---------- ---------- ----------
COMMON STOCK, beginning of year........................................ 323,104 318,268 314,485
Par value of shares issued under stock plans:
1994, 1,609.1 shares; 1993, 967.3 shares; 1992, 756.7 shares......... 8,046 4,836 3,783
---------- ---------- ----------
End of year.................................................. 331,150 323,104 318,268
---------- ---------- ----------
ADDITIONAL PAID-IN CAPITAL, beginning of year.......................... 313,531 295,863 281,989
Excess of proceeds over par value of shares issued under stock plans... 54,670 24,159 14,397
Gain (loss) on reissued treasury shares................................ (1,257) 1,111 (499)
Other.................................................................. -- (7,602) (24)
---------- ---------- ----------
End of year.................................................. 366,944 313,531 295,863
---------- ---------- ----------
FOREIGN CURRENCY TRANSLATIONS, beginning of year....................... (56,878) (16,949) (1,366)
Unrealized gain (loss) from foreign currency translations, net of
income tax........................................................... 20,990 (39,929) (15,583)
---------- ---------- ----------
End of year.................................................. (35,888) (56,878) (16,949)
---------- ---------- ----------
UNREALIZED GAIN (LOSS) ON INVESTMENTS, beginning of year............... 155,004 114,399 42,907
Unrealized gain (loss) on revaluation of investments, net of income
tax.................................................................. (478,205) 40,605 71,492
---------- ---------- ----------
End of year.................................................. (323,201) 155,004 114,399
---------- ---------- ----------
RETAINED EARNINGS, beginning of year................................... 1,549,580 1,370,629 1,618,903
Net income (loss)...................................................... 91,440 235,487 (203,400)
Dividends to stockholders:
Preferred............................................................ (23,624) (18,708) (55)
Common............................................................... (30,945) (37,750) (44,896)
(Increase) decrease in redemption value of redeemable securities....... 369 (78) 77
---------- ---------- ----------
End of year.................................................. 1,586,820 1,549,580 1,370,629
---------- ---------- ----------
TREASURY SHARES, beginning of year..................................... (1,025,954) (416,722) (419,174)
Shares acquired........................................................ (6,715) (612,992) (914)
Shares reissued, at average cost....................................... 3,838 3,760 3,366
---------- ---------- ----------
End of year.................................................. (1,028,831) (1,025,954) (416,722)
---------- ---------- ----------
Total stockholders' equity................................... $1,257,357 $1,618,987 $1,766,114
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
48
<PAGE> 51
KEMPER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)................................................ $ 91,440 $ 235,487 $ (203,400)
Reconcilement of net income (loss) to net cash provided:
Realized investment loss...................................... 81,479 255,702 359,761
Gains from sales of discontinued operations................... (5,727) (296,842) --
Life policy benefits.......................................... 363,758 342,710 515,935
Accounts payable to brokerage firms and customers............. (89,175) (265,338) 110,283
Deferred federal income tax................................... 71,448 (52,735) (69,110)
Brokerage firm portfolios..................................... 104,757 13,363 (2,484)
Accounts receivable from brokerage firms and customers........ 46,822 90,636 (155,159)
Deferred insurance acquisition costs.......................... (54,700) (44,110) (57,533)
Deferred investment product sales costs....................... 20,534 (23,052) (39,792)
Amortization on investments................................... 27,600 (6,394) (30,529)
Other accounts and notes receivable........................... (38,984) 107,980 (3,333)
Other accounts payable and liabilities........................ (42,046) (80,933) (22,338)
Equity in loss of affiliates.................................. 39,125 76,636 95,877
Other......................................................... 39,051 (33,654) (12,732)
----------- ----------- -----------
Net cash provided from operating activities.............. 655,382 319,456 485,446
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash from investments sold or matured:
Fixed maturities held to maturity............................. 256,254 332,666 324,375
Fixed maturities sold prior to maturity....................... 1,721,665 2,363,161 4,382,099
Equity securities............................................. 72,635 126,794 24,002
Mortgage loans, other loans and investments................... 503,750 595,347 499,205
Cost of investments purchased:
Fixed maturities.............................................. (2,432,214) (3,348,709) (5,462,844)
Equity securities............................................. (532) (21,048) (22,116)
Mortgage loans, other loans and investments................... (411,453) (542,628) (516,661)
Short-term investments, net...................................... 379,360 (399,737) 863,609
Unsettled investment transactions, net........................... (31,633) 70,960 36,229
Sale of discontinued operations.................................. -- 380,269 --
Other............................................................ (81,176) (1,514) (95,450)
----------- ----------- -----------
Net cash provided from (used in) investing activities.... (23,344) (444,439) 32,448
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits...................................................... 380,107 412,391 645,338
Withdrawals................................................... (995,359) (711,332) (691,863)
Issuance of long-term debt....................................... -- 217,300 289
Reduction of long-term debt...................................... (914) (2,037) (832)
Issuance of preferred stock...................................... -- 251,920 100,000
Treasury shares acquired......................................... (6,715) (2,786) (914)
Dividends paid to stockholders................................... (54,569) (56,458) (44,951)
Notes payable, net............................................... (14,184) (51,284) 121,466
Reinsured life reserves.......................................... -- -- (515,684)
Other............................................................ 37,978 74,334 (84,223)
----------- ----------- -----------
Net cash provided from (used in) financing activities.... (653,656) 132,048 (471,374)
----------- ----------- -----------
Net increase (decrease) in cash.................................. (21,618) 7,065 46,520
CASH, beginning of period........................................ 253,105 246,040 199,520
----------- ----------- -----------
CASH, end of period...................................... $ 231,487 $ 253,105 $ 246,040
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
49
<PAGE> 52
KEMPER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles. The statements include the accounts of
Kemper Corporation and its subsidiaries (the "Company") on a consolidated basis.
Unconsolidated companies between 20 percent and 50 percent owned are generally
accounted for utilizing the equity method of accounting. The Company's share of
earnings on such investments is recorded in revenue. All significant
intercompany balances and transactions have been eliminated. Certain
reclassifications have been made in the financial statements for the years 1993
and 1992 to conform to 1994 reporting.
Asset management
Revenue for the asset management segment principally consists of investment
management fees and distribution fees from mutual funds, commission revenue from
the sale of mutual fund and annuity products, and transfer agent fees for
shareholder recordkeeping. Revenue from investment management, transfer agent
and distribution fees is recognized when earned. Commission revenue is
recognized on the trade date.
Commissions and certain operating expenses related to the sales of certain
mutual funds have been deferred. These costs are being amortized in relation to
projected revenue to be earned on these mutual funds. Revenue assumptions are
periodically reviewed and updated.
Life insurance
Revenue for annuities and interest-sensitive life products consists of
investment income and policy charges such as mortality, expense and surrender
charges. Expenses consist of benefits and interest credited to contracts, policy
maintenance costs and amortization of deferred policy acquisition costs.
Premiums for life policies, except for annuities and interest-sensitive life
products, are reported as earned when due. Profits for such policies are
recognized over the duration of the insurance policy by matching benefits and
expenses to premium income. This matching involves a provision for future policy
benefits and the deferral and subsequent amortization of policy acquisition
costs.
The costs of acquiring new life insurance business, principally commission
expense and certain policy issuance and underwriting expenses, have been
deferred to the extent they are recoverable from estimated future gross profits
on the related contracts and policies. Except for annuities and
interest-sensitive life products, these deferred acquisition costs are being
amortized over the premium paying period of the related policies. Such costs are
amortized in proportion to the ratio of the annual premium revenue to the
anticipated total premium revenue. Such anticipated premium revenue was
estimated using the same assumptions as were used for computing liabilities for
future policy benefits. For general account annuities, separate account business
and certain interest-sensitive life products, these deferred acquisition costs
are being amortized over the contract life in relation to the present value of
estimated gross profits. Beginning in 1994, deferred insurance acquisition costs
reflect the estimated impact of unrealized gains or losses on available for sale
securities in the investment portfolio, through a credit or charge to
stockholders' equity, net of income tax.
The assets and liabilities of the separate accounts represent segregated funds
administered and invested by the life insurance companies for purposes of
funding variable annuity and variable life insurance contracts (for the
exclusive benefit of variable annuity and life insurance contract holders) and
the pension plans of Lumbermens Mutual Casualty Company ("Lumbermens"), Kemper
Corporation and certain of their subsidiaries. The Company receives
administrative and investment advisory fees for managing such funds. The assets
and liabilities of the separate accounts are carried at market value.
Liabilities for future life policy benefits, except annuities and
interest-sensitive life products, have been computed principally by a net level
premium method. Anticipated rates of mortality are based principally on the
1975-1980 Select and Ultimate Table for 1988-1994 plans, the 1965-1970 Select
and Ultimate Table for 1979-1987 plans and the 1955-1960 Select and Ultimate
Table for other plans, all of which are modified by Company experience,
including withdrawals. Estimated future investment yields by issue year are as
follows: 1994 and 1993, generally 8 percent graded to 6 percent over 5 years;
1989-1992, generally 10 percent graded to 6 percent over 7 years; 1986-1988,
generally 9 percent graded to 6 percent in 16 years; 1977-1985, 7 percent graded
to 5 percent in 20 years; 1976 and prior, 4.5 percent to 5.0 percent.
50
<PAGE> 53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Liabilities for life policy benefits related to annuities and interest-sensitive
life contracts reflect net premiums received plus interest credited during the
contract accumulation period and the present value of future payments for
contracts that have annuitized. Current interest rates credited during the
contract accumulation period range from 4 percent to 8.75 percent. Future
minimum guaranteed interest rates vary from 4 percent to 8.75 percent for
periods ranging from a portion of 1995 up to a portion of 1999 and are generally
3 percent to 4.5 percent thereafter. For contracts that have annuitized,
interest rates that are used in determining the present value of future payments
range principally from 3 percent to 11.25 percent.
Securities brokerage
Securities transactions and related commission revenue and expense are recorded
on a trade-date basis. Underwriting and investment banking revenues are
recognized as earned, which is generally the settlement date of the underlying
securities issue.
Repurchase and resale agreements are carried at the amounts at which the
securities will be subsequently reacquired or resold as specified in the
respective agreements.
Securities held by securities brokerage firms are carried at market value.
Realized and unrealized gains or losses on revaluation of these securities are
included in net income. Investment income on these securities is included in
"Securities brokerage income."
Accounts receivable from and payable to brokerage firms and customers include
amounts due on cash and margin transactions. Securities owned by customers are
held as collateral for receivables. Such collateral is not reflected in the
consolidated financial statements.
Invested assets and related income
Investments in fixed maturities (bonds and redeemable preferred stocks) are
carried at market value at December 31, 1994 and 1993, as they are currently
considered available for sale.
Short-term investments are carried at cost, which approximates market value.
Equity securities of nonrelated companies are generally carried at market value
using the closing prices as of the balance sheet date derived from either a
major securities exchange or the National Association of Securities Dealers
Automated Quotations system.
Mortgage loans are carried at their unpaid balance net of unamortized discount
and any applicable reserve. Other real estate-related investments net of any
applicable reserves and write-downs include certain bonds issued by real estate
finance or development companies; notes receivable from real estate ventures;
investments in real estate ventures carried at cost, adjusted for the equity in
the operating income or loss of such ventures; and real estate owned carried
primarily at fair value.
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. Real estate reserves are established when declines
in collateral values, estimated in light of current economic conditions and
calculated in conformity with SFAS 114 (see next paragraph), indicate a
likelihood of loss. Generally, the reserve is based upon the excess of the loan
amount over the estimated future cash flows from the loan discounted at the
loan's contractual rate of interest. Changes in the Company's real estate
reserves and write-downs are included in revenue as realized investment gain or
loss. (See "Real estate-related investments" on page 33.)
The Company adopted SFAS 114, Accounting by Creditors for Impairment of a Loan,
in the fourth quarter of 1993. SFAS 114 defines "impaired loans" as loans in
which it is probable that a creditor will be unable to collect all amounts due
according to the contractual terms of the loan agreement. In the fourth quarter
of 1994, the Company adopted SFAS 118, Accounting by Creditors for Impairment of
a Loan -- Income Recognition and Disclosures. SFAS 118 amends SFAS 114,
providing clarification of income recognition issues and requiring additional
disclosures relating to impaired loans. The adoption of SFAS 118 had no effect
on the Company's financial position or results of operations at or for the year
ended December 31, 1994.
At December 31, 1994 and 1993, total impaired loans amounted to $414.5 million
and $547.7 million, respectively. Impaired loans with reserves were $282.6
million and $360.6 million, with corresponding reserves of $111.9 million and
$216.3 million, at December 31, 1994 and 1993, respectively. In determining
reserves relative to impaired loans, the
Company also considered the deficit in equity investments in real estate of
$125.9 million and $138.3 million at
51
<PAGE> 54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1994 and 1993, respectively. (See the discussion captioned
"INVESTMENTS -- Provisions for real estate-related losses" on page 36.)
The Company had an average balance of $522.7 million and $479.2 million in
impaired loans for 1994 and 1993, respectively. Cash payments received on
impaired loans are generally applied to reduce the outstanding loan balance. At
December 31, 1994 and 1993, loans on nonaccrual status amounted to $733.1
million and $1,127.8 million, respectively, before reserves and write-downs.
Impaired loans are generally included in the Company's nonaccrual loans. The
additional amount of nonaccrual loans in excess of impaired loans represents the
Company's consideration of market risks associated with its real estate
portfolio.
Upon adoption of SFAS 114, the Company determined that its previous disclosures
relating to impaired loans and recorded real estate reserves were adequate. As
such, restating prior quarters' operating results for the impact of SFAS 114 was
not considered necessary.
Other loans and investments principally include policy loans carried at their
unpaid balance.
Realized gains or losses on sales of investments, determined on the basis of
identifiable cost on the disposition of the respective investment, recognition
of other-than-temporary declines in value and changes in real estate-related
reserves and write-downs are included in revenue. Unrealized gains or losses on
revaluation of investments are credited or charged to stockholders' equity net
of deferred income tax.
The amortized cost of fixed maturities is adjusted for amortization of premiums
and accretion of discounts to maturity, or in the case of mortgage-backed
securities, over the estimated life of the security. Such amortization is
included in net interest income. Amortization of the discount or premium from
mortgage-backed securities is recognized using a level effective yield method
which considers the estimated timing and amount of prepayments of the underlying
mortgage loans and is adjusted to reflect differences which arise between the
prepayments originally anticipated and the actual prepayments received and
currently anticipated. To the extent that the estimated lives of mortgage-backed
securities change as a result of changes in prepayment rates, the adjustment is
also included in net investment income. The Company does not accrue interest
income on fixed maturities deemed to be impaired on an other-than-temporary
basis, or on mortgage loans, real estate-related bonds and other real estate
loans where the likelihood of collection of interest is doubtful.
Income tax
Kemper Corporation files a consolidated federal income tax return with its
subsidiaries. Consolidated income tax is allocated among the subsidiaries
participating in the consolidated return based on the tax that would be incurred
if each filed a separate tax return. Subsidiaries that have losses generally
receive tax benefit to the extent such losses can be utilized in the
consolidated tax return.
Upon adoption of SFAS 109, Accounting for Income Taxes, effective January 1,
1993, deferred taxes are provided on the temporary differences between the tax
and financial statement basis of assets and liabilities. Deferred income tax
previously was provided on the tax effects of timing differences between
financial statement and taxable income. Foreign subsidiaries are taxed under
applicable foreign statutes.
Foreign exchange
Generally, the Company's currency translations to the respective functional
currency are charged or credited to net income. Translation adjustments for
financial reporting in U.S. dollars are direct charges or credits, net of
deferred income tax, to a separate component of stockholders' equity. Foreign
exchange results included in net income for 1994, 1993 and 1992 were not
material.
Earnings per share
Primary earnings per share is based on net income available to common
stockholders divided by the weighted average number of common shares and common
share equivalents outstanding for the period. Fully diluted earnings per share
is based on net income available to common stockholders (adjusted to add back
dividends on convertible preferred stock), divided by the weighted average
number of common shares and common share equivalents adjusted to reflect the
conversion of the convertible preferred stock (when not anti-dilutive). (See the
note captioned "Computation of consolidated net income (loss) per share" on page
62.)
52
<PAGE> 55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PREFERRED STOCK
At December 31, 1994, the Company had outstanding 14,526 shares of Series A
Cumulative Convertible Preferred Stock, certain rights to purchase up to 500,000
shares of Series B Junior Participating Preferred Stock, 2,000,000 shares of
Series C Cumulative Preferred Stock, 66,638.5 shares of Series D Index
Exchangeable Preferred Stock and 4,600,000 shares of Series E Cumulative
Convertible Preferred Stock.
Each Series A share was originally issued in 1982; has a stated value of $25.00;
accrues annual dividends of $2.00, payable on a semiannual basis; is presently
convertible into 2.24718 common shares; and, beginning in May 1997, is
redeemable by the Company for its stated value plus any accrued and unpaid
dividends.
The Company issued Series B preferred stock purchase rights pursuant to a
stockholder rights plan adopted in 1990. One right is attached to each share of
common stock currently outstanding or issued prior to the rights becoming
exercisable. The rights become exercisable and trade separately from the common
stock only upon the occurrence of certain events related to a change in control
of the Company, which is generally defined as when a person accumulates 20
percent or more, or begins a tender or exchange offer for 30 percent or more, of
the Company's common stock. Once exercisable, each right would entitle the
holder (other than the acquiring person) to purchase 1/200th of a share of the
Company's Series B Junior Participating Preferred Stock or, in certain
circumstances, including a merger or major asset sale, the Company's or the
acquiring person's securities or other property having a value of twice the $220
exercise price per right. If issued, each full share of such preferred stock is
nonredeemable, ranks junior to all other preferred stock of the Company and is
approximately equal in dividend and voting rights to 200 shares of common stock.
The Company has reserved 500,000 preferred shares for issuance upon exercise of
the rights. All rights expire July 29, 2000, unless redeemed earlier.
The Company issued the Series C Cumulative Preferred Stock in 1992 to
Lumbermens. Lumbermens has certain rights to request the Company to register its
Series C shares. Each Series C share has a stated value of $50.00; accrues
annual dividends of $4.375 through January 1, 1996, $4.625 from January 2, 1996
through January 1, 1998, and $5.00 thereafter, payable on a quarterly basis; and
is redeemable by the Company upon certain conditions, for its stated value plus
any accrued and unpaid dividends, from and after December 31, 1995, if held by
Lumbermens, and December 31, 1997, if held by any other holder.
The Company completed a private placement of 66,638.5 shares of its Series D
Index Exchangeable Preferred Stock totaling $30 million in 1993. Each Series D
share has a stated value of $450.19; accrues dividends, payable monthly, in an
amount per share presently equal to the sum of (i) the aggregate amount of
dividends paid on one unit of the S&P 500 Index the calendar month preceding the
applicable monthly dividend date plus (ii) an amount equal to $0.94; is
exchangeable at the option of Kemper Corporation or the holder, subject to
certain limitations, for shares of the Company's common stock based on the
closing price on the exchange date of the S&P 500 Index relative to the closing
price of the Company's common stock on that date; and is redeemable for cash at
the option of the Company beginning December 1, 1995.
The Company completed a private placement of 4.6 million shares of its Series E
Cumulative Convertible Preferred Stock totaling $230 million in 1993. Each
Series E share has a stated value of $50.00; accrues dividends, payable
quarterly, at an annual rate of 5.75 percent; and is convertible by holders
thereof into approximately 4.8 million shares of Kemper Corporation common stock
in the aggregate at a conversion price of $48.36 per share. Beginning May 31,
1996, the Series E preferred stock is redeemable at the option of the Company
upon certain conditions for such number of shares of Kemper Corporation common
stock as are issuable at a conversion rate of 1.0339 shares of common stock for
each share of Series E preferred stock. The Series E preferred stock ranks on a
parity with the outstanding Series A, Series C and Series D preferred stock with
respect to the payment of dividends and amounts upon liquidation, dissolution or
winding up.
53
<PAGE> 56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INVESTED ASSETS AND RELATED INCOME
Fixed maturities are considered available for sale, depending upon certain
economic and business conditions. The Company is carrying its fixed maturity
investment portfolio 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 effect. The carrying value
(estimated market value) of fixed maturities compared with amortized cost,
adjusted for other-than-temporary declines in value, at December 31, 1994 and
1993, is as follows:
<TABLE>
<CAPTION>
ESTIMATED UNREALIZED
CARRYING AMORTIZED ---------------------
(IN THOUSANDS) VALUE COST GAINS LOSSES
------------------------------------------------------------- ---------- ---------- -------- ---------
<S> <C> <C> <C> <C>
1994
U.S. treasury securities and obligations of U.S. government
agencies and authorities................................... $ 12,928 $ 13,381 $ 24 $ (477)
Obligations of states and political subdivisions, special
revenue and nonguaranteed.................................. 33,378 34,167 52 (841)
Debt securities issued by foreign governments................ 137,253 152,594 50 (15,391)
Corporate securities......................................... 2,407,199 2,576,412 13,399 (182,612)
Mortgage-backed securities................................... 2,610,157 2,758,310 220 (148,373)
---------- ---------- -------- ---------
Total fixed maturities................................ $5,200,915 $5,534,864 $ 13,745 $(347,694)
========== ========== ======== =========
1993
U.S. treasury securities and obligations of U.S. government
agencies and authorities................................... $ 14,155 $ 13,924 $ 251 $ (20)
Obligations of states and political subdivisions, special
revenue and nonguaranteed.................................. 24,376 22,543 1,833 --
Debt securities issued by foreign governments................ 186,029 181,381 5,980 (1,332)
Corporate securities......................................... 3,119,142 2,991,574 144,091 (16,523)
Mortgage-backed securities................................... 1,989,473 1,938,170 60,756 (9,453)
---------- ---------- -------- ---------
Total fixed maturities................................ $5,333,175 $5,147,592 $212,911 $ (27,328)
========== ========== ======== =========
</TABLE>
Upon default or indication of potential default by an issuer of fixed maturity
securities, the Company-owned issue(s) of such issuer would be placed on
nonaccrual status and, since declines in market value would no longer be
considered by the Company to be temporary, would be analyzed for possible
write-down. Any such issue would be written down to its net realizable value,
determined in the manner described in the following paragraph, during the fiscal
quarter in which the impairment was determined to have become other than
temporary, unless such net realizable value exceeded the Company's carrying
value for such issue. Thereafter, each issue on nonaccrual status is regularly
reviewed, and additional write-downs may be taken in light of later
developments.
The Company's computation of net realizable value involves judgments and
estimates, so such value should be used with care. Such value determination
considers such factors as the existence and value of any collateral security;
the capital structure of the issuer; the level of actual and expected market
interest rates; where the issue ranks in comparison with other debt of the
issuer; the economic and competitive environment of the issuer and its business;
the Company's view on the likelihood of success of any proposed issuer
restructuring plan and the timing, type and amount of any restructured
securities that the Company anticipates it will receive.
The Company's $1.4 billion real estate portfolio consists of joint venture and
third-party mortgage loans and other real estate-related investments. (See "Real
estate-related investments" on page 33.) At December 31, 1994, the Company had
$898.6 million of mortgage loans and other real estate-related investments (net
of reserves and write-downs) that were non-income producing for the preceding 12
months.
At December 31, 1994, securities of the life insurance subsidiaries, carried at
approximately $8.3 million, were on deposit with governmental agencies as
required by law. Policy loans, which are included in "Other loans and
investments," were $383.5 million and $364.9 million at December 31, 1994 and
1993, respectively.
Proceeds from sales of investments in fixed maturities prior to maturity were
$1.7 billion, $2.4 billion and $4.6 billion during 1994, 1993 and 1992,
respectively. Gross gains of $12.8 million, $119.7 million and $98.7 million and
gross losses of $98.2 million, $52.6 million and $150.4 million were realized on
sales of fixed maturities in 1994, 1993 and 1992, respectively. Gross unrealized
gains and gross unrealized losses on equity securities at December 31, 1994,
were $1.1 million and $1.4 million, respectively.
54
<PAGE> 57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table sets forth the maturity aging schedule of fixed maturity
investments at December 31, 1994:
<TABLE>
<CAPTION>
CARRYING AMORTIZED
(IN THOUSANDS) VALUE COST
------------------------------------------------------------------------------------ ---------- ----------
<S> <C> <C>
One year or less.................................................................... $ 1,338 $ 1,339
Over one year through five.......................................................... 491,201 502,905
Over five years through ten......................................................... 1,384,090 1,482,709
Over ten years...................................................................... 714,129 789,601
Securities not due at a single maturity date(1)..................................... 2,610,157 2,758,310
---------- ----------
Total fixed maturities.................................................... $5,200,915 $5,534,864
========== ==========
</TABLE>
---------------
(1) Weighted average maturity of 7.6 years.
The sources of net investment income from continuing operations were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1994 1993 1992
---------------------------------------------------------------------------- -------- -------- --------
<S> <C> <C> <C>
Interest and dividends on fixed maturities.................................. $422,138 $337,051 $308,413
Dividends on equity securities.............................................. 2,510 5,193 1,089
Income from short-term investments.......................................... 18,689 21,164 31,339
Income from mortgage loans.................................................. 54,521 112,016 181,136
Loss from other real estate-related investments............................. (35,898) (76,381) (54,181)
Income from other loans and investments..................................... 31,002 38,998 68,262
-------- -------- --------
Total investment income........................................... 492,962 438,041 536,058
Investment expense.......................................................... (8,166) (11,234) (13,765)
-------- -------- --------
Net investment income............................................. $484,796 $426,807 $522,293
========= ========= =========
</TABLE>
Unrealized gains (losses) are computed below as follows: fixed maturities--the
difference between market and amortized cost, adjusted for other-than-temporary
declines in value; equity securities and other--the difference between market
value and cost. The realized and change in unrealized investment gains (losses)
by class of investment for the years ended December 31, 1994, 1993 and 1992 were
as follows:
<TABLE>
<CAPTION>
REALIZED GAINS (LOSSES)
-------------------------------------
(IN THOUSANDS) 1994 1993 1992
---------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Real estate-related................................................... $ (15,510) $(360,763) $(369,378)
Fixed maturities...................................................... (84,150) 59,690 11,367
Equity securities..................................................... 44,107 50,333 (428)
Orange County-related charge (1)...................................... (29,700) -- --
Other................................................................. 3,774 (4,962) (1,322)
--------- --------- ---------
Realized investment loss before income tax benefit.................. (81,479) (255,702) (359,761)
Income tax benefit.................................................... (28,341) (58,145) (114,442)
--------- --------- ---------
Net realized investment loss from continuing operations............. (53,138) (197,557) (245,319)
Realized investment gain from discontinued operations, net of tax..... -- 20,726 4,572
Gain on sale of discontinued operations, net of tax................... 5,727 296,842 --
--------- --------- ---------
Total.......................................................... $ (47,411) $ 120,011 $(240,747)
========== ========== ==========
</TABLE>
---------------
(1) See the note captioned "Commitments and contingent liabilities" on page 66.
<TABLE>
<CAPTION>
CHANGE IN UNREALIZED GAINS (LOSSES)
-------------------------------------
(IN THOUSANDS) 1994 1993 1992
---------------------------------------------------------------------- --------- -------- --------
<S> <C> <C> <C>
Fixed maturities...................................................... $(523,311) $105,523 $144,954
Equity securities..................................................... (45,854) 27,309 21,904
Adjustment to deferred insurance acquisition costs.................... 19,513 -- --
--------- -------- --------
Unrealized gain (loss) before income tax............................ (549,652) 132,832 166,858
Income tax (benefit).................................................. (71,447) 44,935 34,794
--------- -------- --------
Net gain (loss) from continuing operations.......................... (478,205) 87,897 132,064
Net unrealized loss from discontinued operations, net of tax.......... -- (47,292) (26,626)
--------- -------- --------
Total.......................................................... $(478,205) $ 40,605 $105,438
========== ========= =========
</TABLE>
55
<PAGE> 58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DISCONTINUED OPERATIONS
Discontinued operations primarily include the Company's property-casualty
insurance, reinsurance and risk management subsidiaries. These subsidiaries were
divested in 1993.
On August 2, 1993, Kemper Corporation closed a stock exchange transaction with
Lumbermens. Under the tax-free exchange transaction, Kemper Corporation received
approximately 17.4 million shares of Kemper Corporation common stock previously
owned by Lumbermens. In exchange, Lumbermens received Kemper Reinsurance Company
and its subsidiaries as well as National Loss Control Service Corporation, with
a combined book value of $409.2 million. The tax-free exchange transaction was
valued at $610.2 million, resulting in a net gain of $204.7 million. The gain
includes $32.4 million of after-tax realized investment gains from disposition
of investments in connection with the exchange transaction. The shares received
from Lumbermens became treasury shares, reducing Kemper Corporation's book value
by $437.9 million. Book value per common share increased approximately $5.46, or
15.5 percent, as a result of this transaction. The transaction reduced Kemper
Corporation's common stock then outstanding to approximately 32.5 million shares
from 49.9 million shares. Lumbermens' ownership of Kemper Corporation common
stock is now approximately 1.25 million shares, or less than 4 percent. In
connection with the stock exchange transaction, certain assets (primarily real
estate-related) of the reinsurance subsidiary, with a carrying value of
approximately $136.3 million at December 31, 1992, were guaranteed by Kemper
Corporation. By August 2, 1996, the Company and Lumbermens will make a final
settlement with respect to such assets based on the above-stated value, taking
into account any dispositions of such assets during the three-year period and
the gains or losses realized thereon. At December 31, 1994, the guarantee has
decreased to $70.1 million ($61.3 million in real estate-related investments)
due to dispositions.
On August 31, 1993, the Company sold Economy Fire & Casualty Company ("Economy")
to St. Paul Fire and Marine Insurance Company in a transaction valued at $420
million, receiving approximately two-thirds in cash and one-third in assets
(primarily real estate-related) distributed from Economy's investment portfolio.
The book value of Economy was $305.1 million at the closing date, and an
after-tax net gain of $82.9 million was recorded. This gain included $10.6
million of after-tax realized investment gains from disposition of investments
in connection with the sale.
On December 31, 1993, the Company sold Federal Kemper Insurance Company ("FKI")
to Anthem P&C Holdings, Inc. The Company received $100 million in the
transaction, approximately $95 million in cash and the balance in the form of a
property dividend. The book value of FKI was $83.0 million at the closing date,
and an after-tax net gain of $9.2 million was recorded. This gain included $5.1
million of after-tax realized investment gains from the disposition of
investments in connection with the sale.
The following table sets forth selected financial information regarding the
divested companies:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
(IN THOUSANDS) 1994 1993 1992
----------------------------------------------------------------------------- ------ -------- ----------
<S> <C> <C> <C>
Revenue...................................................................... $ -- $755,252 $1,186,806
====== ========= ==========
Income, net of tax........................................................... $ -- $ 25,498 $ 23,794
Gain on sale, net of tax..................................................... 5,727 296,842 --
Cumulative effect of changes in accounting principles, net of tax............ -- 14,430 (12,519)
------ -------- ----------
Net income.............................................................. $5,727 $336,770 $ 11,275
====== ========= ==========
<CAPTION>
DECEMBER
31
----------
1992
----------
<S> <C>
Total investments............................................................ $1,713,253
Total assets................................................................. 2,385,994
Losses and adjusting expenses................................................ 1,058,786
Total liabilities............................................................ 1,601,629
Net assets................................................................... 784,365
</TABLE>
56
<PAGE> 59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
UNCONSOLIDATED INVESTEES
At December 31, 1994, subsidiaries of the Company directly held partnership
interests in a number of real estate joint ventures and a 50 percent ownership
in IFTC Holdings, Inc. ("IFTC"). (See discussion of the 1995 sale of IFTC in the
note captioned "Subsequent event" on page 71.) Also, subsidiaries of each of the
Company and Lumbermens are partners in a master limited partnership (the "MLP")
formed, effective January 1, 1993, to hold the equity interests each partner's
organization separately held previously in joint ventures with Peter B. Bedford
or his affiliates ("Bedford"), and in January 1994, the MLP acquired
substantially all of Bedford's interests in such joint ventures. The Company and
Lumbermens each own 50 percent of the MLP.
The Company's direct and indirect real estate joint venture investments are
accounted for utilizing the equity method, with the Company recording its share
of the operating results of the respective partnerships. Beginning in 1993, the
Company recorded 100 percent of the operating results of certain non-MLP
partnerships and 50 percent of the MLP's results (although the Company's
indirect ownership of the MLP-owned ventures was generally 25 percent from
January 1, 1993 until January 1994). The Company, as an equity owner, has the
ability to fund, and historically has elected to fund, operating requirements of
certain of the joint ventures. Consolidation accounting methods are not utilized
as the Company, in most instances, does not own more than 50 percent, and, in
any event, major decisions of the partnerships must be made jointly by all
partners.
Selected financial information, as of December 31, 1994 and 1993, is presented
below separately for the MLP, ventures with the Prime Group, Inc. or its
affiliates ("Prime"), other real estate-related partnerships and IFTC. (See the
note captioned "Concentration of credit risk" on page 59.) Such real
estate-related information for 1994 and 1993 was based on unaudited financial
information received by the Company from the respective entities.
SELECTED FINANCIAL INFORMATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
REAL ESTATE-RELATED
-------------------------------------------------------
PRIME-RELATED
-------------------------
MLP SPANISH DOMESTIC OTHER
VENTURES PROJECTS PARTNERSHIPS PARTNERSHIPS IFTC
---------- --------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C>
1994
Revenue............................................ $ 107,243 $ 22,095 $ 70,973 $163,627 $ 67,756
Expenses........................................... 194,903 45,256 93,412 175,136 54,821
---------- --------- ------------ ------------ --------
Operating income (loss)............................ (87,660) (23,161) (22,439) (11,509) 12,935
Asset write-downs(1)............................... (23,536) (102,031) (4,088) (17,037) --
---------- --------- ------------ ------------ --------
Net income (loss).................................. $ (111,196) $(125,192) $(26,527) $(28,546) $ 12,935
========== ========== ========= ========= =========
The Company's share of operating income
(loss)(1)........................................ $ (28,035) $ (7,840) $ (5,638) $ (6,835) $ 6,467
========== ========== ========= ========= =========
The Company's share of net income (loss)(1)........ $ (39,664) $(109,871) $ (7,682) $(23,872) $ 6,467
========== ========== ========= ========= =========
Properties at cost, net of depreciation............ $ 879,259 $ 338,923 $314,965 $426,125 $ --
Other investments.................................. -- -- -- -- 762,819
Total assets....................................... $1,049,078 $ 373,637 $424,320 $663,085 $817,449
========== ========== ========= ========= =========
Mortgages, notes payable and related accrued
interest payable to:
The Company...................................... $ 625,876 $ 431,370 $158,429 $246,837 $ --
Lumbermens....................................... 181,325 92,592 18,299 97,307 --
Fidelity Life Association........................ 46,036 -- -- 13,654 --
Other third parties.............................. 416,285 98,076 247,534 316,299 --
Total liabilities.................................. $1,359,181 $ 660,557 $458,057 $720,528 $711,602
========== ========== ========= ========= =========
The Company's net equity investment(1)............. $ (158,789) $ 110,463 $ (8,219) $(32,429) $ 52,923
========== ========== ========= ========= =========
</TABLE>
---------------
(1) Excluded from the Company's share of operating and net losses and related
net equity investment in real estate-related entities is interest expense
related to loans by the Company which are on nonaccrual status and
write-downs taken directly by the Company. Included in the Company's share
of current year results are immaterial prior year audit adjustments by the
respective entities.
57
<PAGE> 60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Included in the immediately preceding and immediately following tables are real
estate loans to partnerships or corporations in which the Company holds equity
interests. At December 31, 1994, the Company had other joint venture-related
loans totaling $197.9 million before reserves, not included in the table above,
to partnerships in which the Company has options to acquire equity interests or
has made loans with additional interest features. These joint venture-related
loans totaled $257.1 million at December 31, 1993. Also, at December 31, 1994,
the Company had joint venture-related loans totaling $72.3 million before
reserves, not included in the table above, to partnerships in which Lumbermens
and Fidelity Life Association, an affiliated mutual life insurance company
("FLA"), had equity interests. These joint venture-related loans totaled $113.4
million before reserves at December 31, 1993. (See the note captioned "Financial
instruments--off-balance-sheet risk" on page 67.)
SELECTED FINANCIAL INFORMATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
REAL ESTATE-RELATED
------------------------------------------------------
PRIME-RELATED
------------------------
MLP SPANISH DOMESTIC OTHER
VENTURES PROJECTS PARTNERSHIPS PARTNERSHIPS IFTC
---------- -------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C>
1993
Revenue............................................. $ 102,204 $ 36,607 $ 72,217 $170,574 $ 62,917
Expenses............................................ 230,503 76,449 88,355 195,729 53,383
---------- -------- -------- -------- --------
Operating income (loss)............................. (128,299) (39,842) (16,138) (25,155) 9,534
Asset write-downs(1)................................ (120,163) (39,274) -- -- --
---------- -------- -------- -------- --------
Net income (loss)................................... $ (248,462) $(79,116) $(16,138) $(25,155) $ 9,534
========== ======== ======== ======== ========
The Company's share of operating income (loss)(1)... $ (41,004) $(26,000) $(12,448) $(12,932) $ 4,767
========== ======== ======== ======== ========
The Company's share of net income (loss)(1)......... $ (113,175) $(65,274) $(12,448) $(12,932) $ 4,767
========== ======== ======== ======== ========
Properties at cost, net of depreciation............. $1,183,848 $253,321 $424,681 $456,952 $ --
Other investments................................... -- -- -- -- 806,437
Total assets........................................ $1,445,662 $292,825 $551,041 $716,904 $837,444
========== ======== ======== ======== ========
Mortgages, notes payable and related accrued
interest payable to:
The Company....................................... $ 830,950 $337,206 $175,602 $246,999 $ --
Lumbermens........................................ 245,890 51,423 17,262 96,352 --
Fidelity Life Association......................... 65,691 -- -- 14,251 --
Other third parties............................... 760,093 88,558 285,423 327,967 --
Total liabilities................................... $1,945,642 $539,728 $565,139 $772,859 $736,975
========== ======== ======== ======== ========
The Company's net equity investment(1).............. $ (221,622) $149,849 $(18,598) $ (4,372) $ 50,235
========== ======== ======== ======== ========
</TABLE>
---------------
(1) Excluded from the Company's share of operating and net losses and related
net equity investment in real estate-related entities is interest expense
related to loans by the Company which are on nonaccrual status and
write-downs taken directly by the Company. Included in the Company's share
of current year results are immaterial prior year audit adjustments by the
respective entities.
58
<PAGE> 61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONCENTRATION OF CREDIT RISK
The Company generally strives to maintain a diversified invested asset
portfolio; however, certain concentrations of credit risk exist, including
mortgage-backed securities and real estate. These concentrations are discussed
in "INVESTMENTS" beginning on page 32.
The Company had $390.1 million (5.1 percent of invested assets and cash), $379.8
million (5.0 percent of invested assets and cash), $139.4 million (1.8 percent
of invested assets and cash) and $110.5 million (1.5 percent of invested assets
and cash) of mortgage loans and other real estate investments in Illinois,
California, Texas and Spain, respectively, at December 31, 1994. The majority of
the Illinois and all of the Spanish loans and other investments are
Prime-related. The majority of the California loans and other investments are
MLP-related. (See the preceding note captioned "Unconsolidated investees.")
The Company had $369.1 million (4.8 percent of invested assets and cash) of
below investment-grade securities (including real estate-related bonds) at
December 31, 1994.
The following table shows the amounts of the Company's real estate portfolio at
December 31, 1994, which consisted of loans to or investments in joint ventures
with the MLP and Prime:
<TABLE>
<CAPTION>
(IN MILLIONS) MLP PRIME
----------------------------------------------------------------------------------------- ------- -------
<S> <C> <C>
Mortgage loans........................................................................... $ 351.5 $ 303.3
Real estate-related bonds................................................................ 114.6 54.2
Other real estate loans.................................................................. 143.1 35.6
Real estate owned........................................................................ 159.8 --
Equity investments....................................................................... (16.2) 314.5
Reserves................................................................................. (85.0) (69.7)
Write-downs.............................................................................. (244.9) (198.3)
Foreign currency translation............................................................. -- (35.8)
------- -------
Total.................................................................................. $ 422.9 $ 403.8
======= =======
</TABLE>
LONG-TERM DEBT AND NOTES PAYABLE
Long-term debt (which consists primarily of the Company's $200.0 million of
6.875% Notes Due 2003, $110.75 million of 8.80% Notes Due 1998 and $35.5 million
of medium-term notes), maturity and annual weighted average interest rate at
December 31, 1994 were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) PRINCIPAL INTEREST RATE
------------------------------------------------------------------------------------- --------- --------------
<S> <C> <C>
Maturity
1996............................................................................... $ 5,255 6.9%
1997............................................................................... 6,839 6.9
1998............................................................................... 120,839 8.8
1999............................................................................... 89 10.0
2003............................................................................... 200,000 6.9
Later.............................................................................. 25,869 8.9
---------
Total........................................................................... $ 358,891 7.7%
========= ====
</TABLE>
The Company has outstanding short-term loans with banks and other creditors.
Kemper Corporation previously had an $80 million line of credit with Lumbermens,
which at December 31, 1993, was unused. On January 12, 1994, the Company and
Lumbermens mutually agreed to cancel this line of credit.
Kemper Corporation renegotiated the short-term portion of its committed lines of
credit with certain banks effective October 27, 1994. The lines of credit total
$317.5 million, with $155.0 million expiring October 22, 1995 and $162.5 million
expiring November 1, 1996. These lines would not be available upon a change in
control of the Company. At December 31, 1994, $110 million of these lines are
reserved for the sole purpose of funding certain real estate commitments which
the Company does not expect to fund. Interest rates on the Company's committed
lines of credit would generally approximate short-term bank corporate rates. See
"LIQUIDITY AND CAPITAL RESOURCES--Short-term debt" on page 42.
59
<PAGE> 62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INCOME TAX
Income tax (benefit) was as follows for the years ended December 31, 1994, 1993
and 1992:
<TABLE>
<CAPTION>
(IN THOUSANDS) CURRENT DEFERRED TOTAL
--------------------------------------------------------------------------- -------- --------- --------
1994
---------------------------------
<S> <C> <C> <C>
Federal.................................................................... $(81,902) $ 110,284 $ 28,382
State...................................................................... 7,052 (541) 6,511
-------- --------- --------
Total continuing operations.............................................. (74,850) 109,743 34,893
Discontinued operations.................................................... -- 3,394 3,394
-------- --------- --------
Total.................................................................... $(74,850) $ 113,137 $ 38,287
========= ========== =========
1993
---------------------------------
Federal.................................................................... $ 63,302 $ (76,982) $(13,680)
State...................................................................... (6,718) 649 (6,069)
-------- --------- --------
Total continuing operations.............................................. 56,584 (76,333) (19,749)
Discontinued operations.................................................... 43,213 26,862 70,075
SFAS 109 adoption.......................................................... -- (2,545) (2,545)
-------- --------- --------
Total.................................................................... $ 99,797 $ (52,016) $ 47,781
========= ========== =========
1992
---------------------------------
Federal.................................................................... $ 18,894 $(100,063) $(81,169)
State...................................................................... 3,624 2,855 6,479
-------- --------- --------
Total continuing operations.............................................. 22,518 (97,208) (74,690)
Discontinued operations.................................................... 14,335 (13,897) 438
SFAS 106 adoption.......................................................... -- (13,916) (13,916)
-------- --------- --------
Total.................................................................... $ 36,853 $(125,021) $(88,168)
========= ========== =========
</TABLE>
The actual income tax (benefit) for 1994, 1993 and 1992 differed from the
"expected" tax (benefit) for those years as displayed below. "Expected" tax
(benefit) was computed by applying the U.S. federal corporate tax rate of 35
percent for 1994 and 1993 and 34 percent for 1992 to earnings (loss) from
continuing operations before income tax (benefit).
<TABLE>
<CAPTION>
(IN THOUSANDS) 1994 1993 1992
----------------------------------------------------------------------------- ------- -------- --------
<S> <C> <C> <C>
Computed "expected" tax (benefit)............................................ $42,212 $(38,201) $(93,456)
Differences between "expected" and actual tax (benefit):
State taxes................................................................ 4,233 (7,920) 4,878
Change in valuation allowance.............................................. 176 31,378 --
Tax adjustments............................................................ (7,810) (1,600) 11,000
Tax-exempt investment income............................................... (2,599) (2,423) (2,524)
Unutilized capital losses.................................................. -- -- 8,286
Other, net................................................................. (1,319) (983) (2,874)
------- -------- --------
Total actual tax (benefit)......................................... $34,893 $(19,749) $(74,690)
======== ========= =========
</TABLE>
The Company adopted SFAS 109, Accounting for Income Taxes, as of January 1,
1993. SFAS 109 established new principles for calculating and reporting the
effects of income taxes in financial statements. SFAS 109 replaced the income
statement orientation inherent in APB Opinion 11 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. Under SFAS 109, the effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. 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. Prior years' financial statements 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
60
<PAGE> 63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 1994, the valuation allowance was increased by $129.9 million.
This increase in the valuation allowance is primarily attributable 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 (included in "Other assets" in
the consolidated balance sheet) from continuing operations were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
(IN THOUSANDS) 1994 1993
-------------------------------------------------------------------------------------- --------- --------
<S> <C> <C>
Deferred federal tax assets:
Real estate-related................................................................. $ 169,555 $264,093
Unrealized losses on investments.................................................... 129,700 --
Life policy reserves................................................................ 128,339 134,274
Accrued employee benefits........................................................... 33,374 26,663
Accrued expenses.................................................................... 30,311 50,359
Other investment-related............................................................ 25,505 22,071
Tax capitalization of deferred acquisition costs.................................... 24,046 18,100
Other............................................................................... 19,840 17,436
--------- --------
Total deferred federal tax assets.............................................. 560,670 532,996
Valuation allowance................................................................. (181,379) (51,503)
--------- --------
Total deferred federal tax assets after valuation allowance.................... 379,291 481,493
--------- --------
Deferred federal tax liabilities:
Deferred insurance acquisition costs................................................ 243,882 217,907
Unrealized gains on investments..................................................... -- 81,065
Deferred investment product sales costs............................................. 58,239 65,426
Depreciation and amortization....................................................... 32,325 33,754
Other investment-related............................................................ 6,672 4,673
Other............................................................................... 16,031 18,112
--------- --------
Total deferred federal tax liabilities......................................... 357,149 420,937
--------- --------
Net deferred federal tax asset........................................................ $ 22,142 $ 60,556
========== =========
</TABLE>
The valuation allowance of $181.4 million is subject to future adjustments,
based on, among other items, the Company's estimates of future operating
earnings and capital gains.
Pursuant to the deferred method under APB Opinion 11, deferred income taxes were
recognized for income and expense items that were reported in different years
for financial reporting purposes and income tax purposes using the tax rate
applicable for the year of the calculation. Under the deferred method, deferred
taxes were not adjusted for subsequent changes in tax rates. The sources of
deferred tax (benefit) on continuing operations and their tax effect were as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
-----------
(IN THOUSANDS) 1992
------------------------------------------------------------------------------------------------ -----------
<S> <C>
Conversion to generally accepted accounting principles.......................................... $ 2,321
Deferred investment product sales costs......................................................... 13,529
Tax capitalization of policy acquisition costs.................................................. (4,201)
Life policy benefit reserves tax adjustment..................................................... 4,005
Special charges and arbitration award........................................................... 5,659
Unrealized gain on securities owned by securities brokerage operations.......................... 687
Leasing transactions............................................................................ 6,220
Losses of Kemper/Bedford Properties, Inc. ...................................................... (18,490)
Unutilized capital losses....................................................................... 8,286
Impairment losses on investments................................................................ (7,761)
Real estate reserves............................................................................ (108,879)
Tax adjustments................................................................................. 11,000
Other, net...................................................................................... (9,584)
-----------
Total...................................................................................... $ (97,208)
==========
</TABLE>
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.
61
<PAGE> 64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COMPUTATION OF CONSOLIDATED NET INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1993 1992
--------- ---------
1994
-------
<S> <C> <C> <C>
Primary
Net income (loss) from continuing operations.................................. $85,713 $(101,284) $(214,675)
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......................................... 23,590 18,659 --
------- --------- ---------
Adjusted net income (loss) from continuing operations......................... 62,123 (119,943) (214,675)
Net income from discontinued operations....................................... 5,727 336,771 11,275
------- --------- ---------
Net income (loss) applicable to common stockholders.................... $67,850 $ 216,828 $(203,400)
======== ========== ==========
Weighted average common shares outstanding.................................... 33,697 42,519 48,840
Weighted average convertible preferred shares expressed as common share
equivalents outstanding..................................................... 791 311 *
------- --------- ---------
Weighted average common and equivalent shares outstanding.............. 34,488 42,830 48,840
======== ========== ==========
Net income (loss) per share:
Income (loss) from continuing operations.................................... $ 1.80 $ (2.52) $ (4.10)
Income from discontinued operations......................................... 0.17 7.52 0.49
------- --------- ---------
Income (loss) before cumulative effect of changes in accounting
principles............................................................ 1.97 5.00 (3.61)
Cumulative effect of changes in accounting principles, net of tax........... -- 0.06 (0.55)
------- --------- ---------
Net income (loss) per share............................................ $ 1.97 $ 5.06 $ (4.16)
======== ========== ==========
Fully diluted
Net income (loss) applicable to common stockholders (from above).............. $67,850 $ 216,828 $(203,400)
Add back: Dividends on convertible preferred stock............................ * 9,909 --
------- --------- ---------
Net income (loss) applicable to common stockholders on a fully
converted basis....................................................... $67,850 $ 226,737 $(203,400)
======== ========== ==========
Weighted average common and equivalent shares outstanding (from above)........ 34,488 42,830 48,840
Add back: Weighted average convertible preferred shares expressed as common
shares outstanding.................................................. * 3,756 --
------- --------- ---------
Weighted average common and equivalent shares outstanding on a fully
converted basis....................................................... 34,488 46,586 48,840
======== ========== ==========
Net income (loss) per share:
Income (loss) from continuing operations.................................... $ 1.80 $ (2.11) $ (4.10)
Income from discontinued operations......................................... 0.17 6.92 0.49
------- --------- ---------
Income (loss) before cumulative effect of changes in accounting
principles............................................................ 1.97 4.81 (3.61)
Cumulative effect of changes in accounting principles, net of tax........... -- 0.06 (0.55)
------- --------- ---------
Net income (loss) per share............................................ $ 1.97 $ 4.87 (4.16)
======== ========== ==========
</TABLE>
---------------
* The effect of these items is antidilutive; accordingly, no adjustment is
required.
CASH FLOW INFORMATION
The Company defines cash as cash and money market accounts, and certain highly
liquid short-term investments with original maturities of three months or less
held by the brokerage firm subsidiaries.
Not reflected in the statement of cash flows are rollovers of mortgage loans,
other loans and investments totaling $146.0 million, $213.4 million and $240.8
million in 1994, 1993 and 1992, respectively. Also not reflected in the
statement of cash flows for 1993 is the acquisition of 17.4 million treasury
shares valued at $610.2 million. (See the note captioned "Discontinued
operations" on page 56.)
Reflected in the statement of cash flows is the 1992 sale of $515.7 million of
reinsured life reserves for which the Company delivered an investment portfolio
that included $151.4 million of mortgage loans, $294.8 million of fixed
maturities and $69.5 million of other investments.
Federal income tax paid for the years ended December 31, 1994, 1993 and 1992
amounted to $17.8 million, $94.5 million and $95.0 million, respectively.
Interest payments for the same three years totaled $77.2 million, $67.8 million
and $81.1 million, respectively.
62
<PAGE> 65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
EMPLOYEE BENEFIT PLANS
Prior to November 30, 1994, Kemper Corporation and certain of its subsidiaries
actively maintained several defined benefit pension plans. The plans were
noncontributory, and benefits were based upon an employee's career average
benefit accrual, with an alternative minimum benefit formula based upon years of
participation and final average pay. Vesting occurred after five years of
service. The Company's funding policy for qualified pension plans was to
contribute, at a minimum, the equivalent of the amount required under the
Employee Retirement Income Security Act of 1974 and the Internal Revenue Code.
At November 30, 1994, for Kemper Corporation and Federal Kemper Life Assurance
Company ("FKLA"), and as of the 1993 divestiture dates for Economy and FKI, the
retirement plans for each respective company ceased accruing benefits and all
employees participating in the plans became fully vested.
The assets of the plans are held in various separate accounts which are invested
primarily in government bonds and bonds of other entities unrelated to Kemper
Corporation. Upon settlement of the plans, it is expected that nonparticipating
annuity contracts of an unrelated party will be purchased. The Company will fund
any additional amounts necessary to provide benefits accrued up to the
curtailment dates. In determining the accumulated benefit obligation as of
December 31, 1994, it was assumed that the earnings rate of such annuity
contracts will be 7.5 percent.
In determining the December 31, 1993 accumulated benefit obligation, the
following assumptions were made: an 8.5 percent expected long-term rate of
return on plan assets, a 7.0 percent discount rate and rate of increase in
future compensation levels, and a salary scale of 9.0 percent, 7.5 percent and
6.0 percent dependent on age group, respectively.
No gain or loss was recognized upon curtailment of the Kemper Corporation and
FKLA plans. An immaterial loss associated with the Economy and FKI plans was
included in the 1993 gain from the sales of the businesses. The liability for
the pension plans of other divested operations was transferred with the
companies. (See the note captioned "Discontinued operations" on page 56.)
Expenses of other employee benefit plans, excluding postretirement benefits, for
the three years ended December 31, 1994, were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1994 1993 1992
------------------------------------------------------------------------------- ------- ------- -------
<S> <C> <C> <C>
Profit-sharing plans........................................................... $24,024 $23,817 $20,005
Health care and life insurance................................................. 22,940 22,242 24,421
------- ------- -------
Total continuing operations.................................................. $46,964 $46,059 $44,426
======== ======== ========
</TABLE>
Components of pension expense were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------
(IN THOUSANDS) 1994 1993 1992
---------------------------------------------------------------------------------- ------ ------- -----
<S> <C> <C> <C>
Service costs..................................................................... $ 922 $ 755 $ 707
Interest costs on projected benefit obligations................................... 791 676 585
Actual return on assets........................................................... (673) (1,445) 300
Net amortization and deferral..................................................... (40) 799 (913)
------ ------- -----
Net pension expense for continuing operations................................... $1,000 $ 785 $ 679
====== ======== ======
</TABLE>
The funded status of the plans at December 31, 1994 and 1993 was as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1994 1993
------------------------------------------------------------------------------------------ ------ -------
<S> <C> <C>
Continuing operations:
Actuarial present value of vested benefit obligations................................... $9,068 $ 6,948
Actuarial present value of accumulated benefit obligations.............................. 9,068 7,253
====== ========
Plan assets at fair value................................................................. $8,736 $ 8,642
Actuarial present value of projected benefit obligations.................................. 9,068 10,543
------ -------
Projected benefit obligations in excess of assets......................................... (332) (1,901)
Unamortized net assets existing at the date of initial application of SFAS 87............. -- (465)
Unrecognized net loss from actuarial experience since initial application of SFAS 87...... -- 447
------ -------
Accrued pension expense for continuing operations....................................... $ (332) $(1,919)
====== ========
</TABLE>
63
<PAGE> 66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company sponsors welfare plans that provide medical and life insurance
benefits to its retired and active employees. The Company is self insured with
respect to medical benefits, and the plan is not funded except with respect to
certain disability-related medical claims. The medical plan provides for medical
insurance benefits at retirement, with eligibility based upon age and the
participant's number of years of participation attained at retirement. The plan
is contributory for pre-Medicare retirees, and will be contributory for all
retiree coverage for most current employees, with contributions generally
adjusted annually. Postretirement life insurance benefits are noncontributory
and are limited to $10,000 per participant.
The discount rate used in determining the postretirement benefit obligation was
8 percent and 7 percent for 1994 and 1993, respectively. The assumed health care
trend rate used was based on projected experience for 1994 and 1995, 10 percent
in 1996, gradually declining to 6 percent by the year 1999 and remaining at that
level thereafter.
The status of the plan as of December 31, 1994 and 1993, was as follows:
Accumulated postretirement benefit obligation:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1994 1993
----------------------------------------------------------------------------------------- ------- -------
<S> <C> <C>
Retirees................................................................................. $12,798 $13,781
Fully eligible active plan participants.................................................. 5,113 6,488
Other active plan participants........................................................... 5,860 7,918
Unrecognized gain (loss) from actuarial experience....................................... 5,864 (1,353)
------- -------
Accrued liability...................................................................... $29,635 $26,834
======= =======
</TABLE>
Components of the net periodic postretirement benefit cost:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1994 1993
------------------------------------------------------------------------------------------- ------ ------
<S> <C> <C>
Service cost-benefits attributed to service during the period.............................. $1,487 $1,253
Interest cost on accumulated postretirement benefit obligations............................ 2,052 1,850
Amortization of unrecognized actuarial gain................................................ (85) --
------ ------
Total continuing operations........................................................... $3,454 $3,103
====== ======
</TABLE>
A one percentage point increase in the assumed health care cost trend rate for
each year would increase the accumulated postretirement benefit obligation as of
December 31, 1994 and 1993, by $3.2 million and $4.7 million, respectively, and
the net postretirement health care interest and service costs for the years
ended December 31, 1994 and 1993 by $0.6 million and $0.7 million, respectively.
During 1994, the Company adopted certain severance-related policies to provide
benefits, generally limited in time, to former or inactive employees after
employment but before retirement. The effect of adopting these policies was
immaterial.
STOCK OPTION PLANS
Stock option prices are not less than the fair market value at the date of
grant. Generally, shares underlying the options had been subject to exercise in
installments of one-third or one-fourth beginning with the first anniversary of
the grant. However, in June 1994, all options became immediately exercisable in
connection with Kemper Corporation's execution of a now-terminated merger
agreement. The options generally expire after ten years. At December 31, 1994,
2.7 million option shares remained available for future grants. If all options
were exercised, Kemper Corporation would receive proceeds of $83.2 million.
<TABLE>
<CAPTION>
OPTION PRICE OPTION
PER SHARE SHARES
------------ ---------
<S> <C> <C>
Outstanding December 31, 1993................................................... $12.88-43.00 3,211,011
Granted......................................................................... $41.00-58.00 1,259,267
Canceled........................................................................ $20.63-58.00 300,405
Exercised....................................................................... $12.88-58.00 998,499
------------ ---------
Outstanding and exercisable December 31, 1994................................... $19.29-58.00 3,171,374
============ =========
</TABLE>
64
<PAGE> 67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
REINSURANCE
In the ordinary course of business, the life insurance subsidiaries enter into
reinsurance agreements for the purpose of limiting their exposure to loss on any
one single insured or to diversify their risk and limit their overall financial
exposure to certain blocks of fixed-rate annuities. For individual life
products, the life insurance subsidiaries have generally retained only the first
$300,000 (face amount) on the life of any one individual, with the excess
portions of life insurance risk ceded to reinsurers. For its fixed-rate annuity
reinsurance agreements, the life insurance subsidiaries generally have ceded 100
percent of the related annuity liabilities. Although these reinsurance
agreements contractually obligate the reinsurers to reimburse the life insurance
subsidiaries, they do not discharge the life insurance subsidiaries from their
primary liabilities and obligations to policyholders. As such, these amounts
paid or deemed to have been paid are recorded on the Company's consolidated
balance sheet as reinsurance recoverables and ceded life policy benefits.
The following is a summary of the reinsurance activities of the Company's life
insurance subsidiaries for the three years ended December 31, 1994:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1994 1993 1992
----------------------------------------------------------------------- -------- -------- --------
<S> <C> <C> <C>
Direct business........................................................ $216,954 $212,055 $198,784
Reinsurance assumed.................................................... 50 115 98
Reinsurance ceded...................................................... (65,174) (54,503) (62,960)
-------- -------- --------
Insurance premium income............................................... $151,830 $157,667 $135,922
========= ========= =========
</TABLE>
The following is a summary of life insurance in force at December 31, 1994, 1993
and 1992:
<TABLE>
<CAPTION>
(IN BILLIONS) 1994 1993 1992
--------------------------------------------------------------------------------- ----- ----- -----
<S> <C> <C> <C>
Direct and assumed............................................................... $97.5 $91.3 $84.2
Ceded............................................................................ 29.0 27.5 25.0
</TABLE>
In 1992 and 1991, Kemper Investors Life Insurance Company ("KILICO") entered
into 100 percent indemnity reinsurance agreements ceding $515.7 million and
$416.3 million, respectively, of its fixed-rate annuity liabilities to FLA. FLA
shares common management with KILICO and FKLA and certain common board members
with the Company. The 1992 reinsurance agreement resulted in the sale to FLA of
approximately $500 million of certain assets, including $151 million of mortgage
loans, while the 1991 agreement was all cash. FLA also has been the primary
reinsurer of the mortality coverages issued by FKLA prior to 1992. As of
December 31, 1994, the reinsurance recoverable related to the fixed-rate annuity
liabilities and the life products ceded to FLA amounted to approximately $643
million and $43 million, respectively.
CONVERTIBLE DEBENTURES OF SUBSIDIARY
The Company had outstanding $33.1 million and $45.7 million of convertible
debentures issued by Kemper Financial Companies, Inc. ("KFC") at December 31,
1994 and 1993, respectively. Debentures bear interest at a fluctuating rate per
annum, which on average approximates prime. Interest on the debentures is
payable quarterly. The debentures mature in the sixth through tenth year from
the date issued. The future maturity payments required based upon debentures
outstanding as of December 31, 1994, are as follows: 1995, $7.5 million; 1996,
$9.3 million; 1997, $5.7 million; 1998-2000, $10.6 million.
At its option, KFC may call the debentures in connection with a public offering
of its common stock or at any time on or after the fifth anniversary of the date
the debentures were issued. At December 31, 1994, $24.1 million of the
debentures are subject to KFC's right to call, and the remainder becomes
callable after May 10, 1995.
65
<PAGE> 68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
RELATED-PARTY TRANSACTIONS
Significant related-party transactions, other than those described elsewhere in
these consolidated financial statements, are described below.
Lumbermens owned approximately 38 percent of the common stock of Kemper
Corporation at December 31, 1992. Lumbermens, American Motorists Insurance
Company, American Protection Insurance Company, and American Manufacturers
Mutual Insurance Company are collectively referred to as the Kemper National
Insurance Companies. As a result of the exchange transaction with Lumbermens
involving the transfer of Kemper Reinsurance Company and its subsidiaries as
well as National Loss Control Service Corporation, Lumbermens' ownership of
Kemper Corporation was reduced to less than 4 percent in August 1993, at which
time Lumbermens ceased being a related party. (See the note captioned
"Discontinued operations" on page 56.)
The Company provides investment services to the Kemper National Insurance
Companies. As compensation for these services, the Company earned revenue of
approximately $9.4 million in 1993 and $8.3 million in 1992.
The Kemper National Insurance Companies have received from the Company's
continuing operations approximately $3.2 million in premiums for various
insurance coverages in each of 1993 and 1992. Kemper Corporation and certain of
its continuing operations lease approximately 110,000 square feet of office
space from Lumbermens. The lease terms, effective late in 1991 for a ten-year
period, approximate market.
Effective January 1, 1993, the Company, Lumbermens and certain of their
respective subsidiaries formed a master limited partnership to hold certain
equity real estate investments. (See the note captioned "Unconsolidated
investees" on page 57.) In connection with the formation, Lumbermens also
acquired from the Company 50 percent of Kemper Real Estate Management Company at
a consideration approximating book value.
On December 30, 1992, the Company issued $100 million of preferred stock to
Lumbermens. (See the note captioned "Preferred stock" on page 53.)
COMMITMENTS AND CONTINGENT LIABILITIES
The Company has operating leases that have initial or remaining noncancellable
lease terms in excess of one year at December 31, 1994. The future minimum
rental payments required under such leases are as follows: 1995, $49.4 million;
1996, $47.9 million; 1997, $35.6 million; 1998, $29.5 million; 1999, $25.7
million; 2000-2005, $111.6 million. Rental expenses associated with operating
leases were $60.9 million, $64.1 million and $60.6 million for 1994, 1993 and
1992, respectively. (See the preceding note captioned "Related-party
transactions".)
The Company is involved in various legal actions for which it establishes
liabilities where appropriate. In the opinion of the Company's management, based
upon the advice of legal counsel, the resolution of such litigation is not
expected to have a material adverse effect on the consolidated financial
statements.
In connection with the December 1994 bankruptcy filing by Orange County,
California, the Company provided credit enhancements for $198 million of Orange
County notes held by five money market mutual funds managed by Kemper Financial
Services, Inc. The Company has therefore assumed the risk of loss associated
with the notes. The notes mature July 10, 1995. The Company recorded a $29.7
million charge ($19.3 million after tax) in the fourth quarter of 1994 and will
include in its results of operations future changes in the estimated market
value of the notes. Although not legally required, the Company took actions to
credit enhance the notes to prevent the money funds' net asset values from
falling below one dollar per share. There can be no assurance that the Company
would or would not take such actions in the future with respect to any other
mutual fund investments.
Although no Company subsidiary or joint venture project has been identified as a
"potentially responsible party" under federal environmental guidelines, inherent
in the ownership of or lending to real estate projects is the possibility that
environmental pollution conditions may exist on or near or relate to properties
owned or previously owned or properties securing loans. Where the Company has
presently identified remediation costs, they have been taken into account in
determining the cash flows and resulting valuations of the related real estate
assets. Based on the Company's receipt and review of environmental reports on
most of the projects in which it is involved, the Company believes its
environmental exposure would be immaterial to its consolidated results of
operations. However, the Company may be required in the future to take actions
to remedy environmental exposures, and there can be no assurance that material
environmental exposures will not develop or be identified in the future. The
amount of future environmental costs is impossible to estimate due to, among
other factors, the unknown magnitude of possible exposures, the unknown timing
and extent of corrective actions that may be required, the determination of the
Company's liability in proportion to others and the extent such costs may be
covered by insurance or various environmental indemnification agreements.
See the note captioned "Financial instruments--off-balance-sheet risk" on the
following page for a discussion regarding the Company's loan commitments and
standby financing agreements.
66
<PAGE> 69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FINANCIAL INSTRUMENTS--OFF-BALANCE-SHEET RISK
At December 31, 1994, the Company had loan commitments and standby financing
agreements totaling $510.8 million to support the financing needs of various
real estate investments. To the extent these arrangements are called upon,
amounts loaned would be secured by assets of the joint ventures, including first
mortgage liens on the real estate. The Company's criteria in making these
arrangements are the same as for its mortgage loans and other real estate
investments. The Company presently expects to fund approximately $194.4 million
of these arrangements. These commitments are included in the Company's analysis
of real estate-related reserves and write-downs. The fair values of loan
commitments and standby financing agreements are estimated in conjunction with
and using the same methodology as the fair value estimates of mortgage loans and
other real estate-related investments.
In the normal course of business, the securities brokerage operations execute
and finance numerous securities and commodities transactions. These activities
may expose the Company to off-balance-sheet risk in the event that the customer
or counterparty is unable to fulfill its contractual obligations. The Company
manages the risks associated with customer business by requiring customers to
maintain margin collateral in compliance with regulatory guidelines. Required
margin levels are monitored daily, and when necessary, customers are required to
deposit additional collateral or to reduce positions. Credit limits are also
employed to manage clients' activities in relation to futures transactions.
Securities sold, not yet purchased, represent obligations of the Company to
deliver a specified security at a contracted price and thereby create a
liability to repurchase such securities in the market at prevailing prices.
Accordingly, these transactions result in off-balance-sheet risk as the
Company's ultimate obligation to satisfy the sale of securities sold, not yet
purchased, may exceed the amount in the consolidated financial statements
reflected at then current values.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company is party to derivative financial instruments in the normal course of
business for trading purposes and other than trading purposes to hedge exposures
to fluctuations in the following risks: (i) interest rate fluctuations related
to unit investment trust product originations and interest-sensitive securities
in the securities brokerage trading inventory, (ii) interest rate fluctuations
related to an office building project to which the Company is a lender, (iii)
foreign currency fluctuations related to foreign securities held by the
Company's life insurance subsidiaries, and (iv) fluctuations in the S&P 500
Index in connection with the Company's $30 million of Series D Preferred Stock
("SPEX"). The following table summarizes various information regarding these
derivative financial instruments as of December 31, 1994 and 1993:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE WEIGHTED AVERAGE
RATE AVERAGE REPRICING
1994 NOTIONAL CARRYING ESTIMATED ---------------- YEARS TO FREQUENCY
(IN THOUSANDS) AMOUNT VALUE* FAIR VALUE RECEIVED PAID EXPIRATION (DAYS)
--------------------------------------------- -------- -------- ---------- -------- ---- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Trading:
Forward and futures contracts.............. $ 33,023 $ 779 $ 779 -- -- .25 1
Non-trading:
Interest rate swap agreements:
Pay 3 month LIBOR versus fixed........... 212,000 -- 8,500 10.00% 4.96% 3.2 30
Receive fixed versus 3 month LIBOR....... 217,000 -- 8,700 4.21 6.57 3.3 30
Foreign exchange forward options........... 34,541 18 18 -- -- .25 30
SPEX futures contracts..................... 47,764 (89) (89) -- -- .21 90
<CAPTION>
1993
(IN THOUSANDS)
---------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Trading:
Forward and futures contracts.............. 227,000 1,145 1,145 -- -- .25 1
Non-trading:
Interest rate swap agreements:
Pay 3 month LIBOR versus fixed........... 191,000 -- 33,500 10.00% 3.95% 4.2 30
Receive fixed versus 3 month LIBOR....... 202,000 -- (12,200) 3.20 6.57 4.3 30
Foreign exchange forward options........... 69,241 2,194 2,194 -- -- .22 30
SPEX futures contracts..................... 48,739 (1,377) (1,377) -- -- .21 90
</TABLE>
---------------
* Positive and negative values represent assets and liabilities, respectively.
The securities brokerage operations use exchange-traded forward and futures
contracts to hedge exposures in trading activities that contain varying degrees
of off-balance-sheet risk whereby changes in the market values of the underlying
securities or other financial instruments may be in excess of the amounts
reflected in the consolidated financial statements. In light of this strategy,
the Company does not expect any material losses relating to such derivative
investments that would not be offset with corresponding gains on the securities
hedged. These securities are carried on the consolidated balance sheet at their
market values. Gains and losses, both realized and unrealized, from both the
derivatives and the hedged securities are included in income currently. Net
trading profits, including from derivatives, during 1994, 1993 and 1992 totaled
$17.6 million, $42.6 million and $41.2 million, respectively.
The Company is party to two separate interest rate swap agreements relating to
the financing of an office building owned by a partnership to which the Company
is a lender. In addition to the loans made by the Company, the partnership
borrowed money from third-party lenders in the form of variable rate debt. Under
the terms of the first swap, this variable rate debt was swapped with the
Company for fixed rate debt. The Company receives a fixed interest rate and pays
a floating interest rate. To offset this position, the Company entered into a
second swap with another institution. Under the terms of the second swap, the
Company receives a floating interest rate and pays a fixed interest rate.
Inasmuch as the nature of the swaps is designed to be offsetting, the market
risk exposure relating to the variable
67
<PAGE> 70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
payments made under the first swap is approximately offset by the market
fluctuations related to the second swap. The Company records realized and
unrealized gains and losses on such investments in net income on a current
basis. The amounts of the gain included in net income during 1994, 1993 and 1992
totaled $0.0 million, $1.5 million and $1.0 million, respectively.
The life insurance subsidiaries' hedges relating to foreign currency exposure
are implemented using forward contracts on foreign currencies. These are
generally short duration contracts with U.S. money-center banks. The Company
records realized and unrealized gains and losses on such investments in net
income on a current basis. The amounts of gain (loss) included in net income
during 1994, 1993 and 1992 totaled $6.4 million, $(2.8) million and $(2.4)
million, respectively.
The SPEX is a convertible security which, depending on the performance of the
Company's common stock relative to the S&P 500 Index, can have varying effects
on fully diluted earnings per share. To mitigate the potential per share impact,
the Company hedges the exposure to the performance of the S&P 500 Index using
exchange-traded futures contracts. The hedge has been implemented with the
expectation that after-tax gain or loss on these investments will approximately
offset changes to the fully diluted earnings per share calculation resulting
from changes in the SPEX conversion ratio caused by changes in the S&P 500
Index. The Company records realized and unrealized gains and losses on such
investments in net income on a current basis. The amounts of gain included in
net income during 1994 and 1993 totaled $0.9 million and $0.7 million,
respectively.
UNAUDITED INTERIM FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
<S> <C> <C> <C> <C>
1994
Total revenue.......................................................... $464,534 $407,929 $ 371,420 $ 357,938
======== ======== ========= =========
Earnings (loss) before income tax...................................... $ 84,096 $ 34,940 $ 20,420 $ (18,850)
Income tax (benefit)................................................... 29,793 14,156 6,149 (15,205)
-------- -------- --------- ---------
Income (loss) from continuing operations............................... 54,303 20,784 14,271 (3,645)
Income from discontinued operations.................................... 2,478 -- 3,249 --
-------- -------- --------- ---------
Net income (loss)................................................ $ 56,781 $ 20,784 $ 17,520 $ (3,645)
======== ======== ========= =========
Net income (loss) per share:
Primary
Income (loss) from continuing operations............................. $ 1.43 $ 0.43 $ 0.24 $ (0.27)
Income from discontinued operations.................................. 0.07 -- 0.10 --
-------- -------- --------- ---------
Net income (loss) per share...................................... $ 1.50 $ 0.43 $ 0.34 $ (0.27)
======== ======== ========= =========
Average common and equivalent shares outstanding..................... 33,621 34,510 34,625 35,025
======== ======== ========= =========
Fully diluted
Income (loss) from continuing operations............................. $ 1.31 $ 0.43 $ 0.24 $ (0.27)
Income from discontinued operations.................................. 0.06 -- 0.10 --
-------- -------- --------- ---------
Net income (loss) per share...................................... $ 1.37 $ 0.43 $ 0.34 $ (0.27)
======== ======== ========= =========
Average common and equivalent shares outstanding on a fully diluted
basis.............................................................. 39,584 39,918 40,048 40,594
======== ======== ========= =========
1993
Total revenue.......................................................... $419,207 $385,034 $ 242,379 $ 502,554
======== ======== ========= =========
Earnings (loss) before income tax...................................... $ 2,179 $(42,477) $(165,124) $ 96,275
Income tax (benefit)................................................... 7,068 (17,828) (46,300) 37,311
-------- -------- --------- ---------
Income (loss) from continuing operations............................... (4,889) (24,649) (118,824) 58,964
Income (loss) from discontinued operations............................. 14,634 (1,926) 281,182 28,450
-------- -------- --------- ---------
Income (loss) before SFAS 109.......................................... 9,745 (26,575) 162,358 87,414
Cumulative effect of SFAS 109.......................................... 2,545 -- -- --
-------- -------- --------- ---------
Net income (loss)................................................ $ 12,290 $(26,575) $ 162,538 $ 87,414
======== ======== ========= =========
Net income (loss) per share:
Primary
Income (loss) from continuing operations............................. $ (0.14) $ (0.59) $ (3.24) $ 1.60
Income (loss) from discontinued operations........................... 0.30 (0.04) 7.29 0.86
-------- -------- --------- ---------
Income (loss) before SFAS 109........................................ 0.16 (0.63) 4.05 2.46
Cumulative effect of SFAS 109........................................ 0.05 -- -- --
-------- -------- --------- ---------
Net income (loss) per share...................................... $ 0.21 $ (0.63) $ 4.05 $ 2.46
======== ======== ========= =========
Average common and equivalent shares outstanding..................... 49,404 49,670 38,557 33,078
======== ======== ========= =========
Fully diluted
Income (loss) from continuing operations............................. $ (0.14) $ (0.59) $ (2.74) $ 1.47
Income (loss) from discontinued operations........................... 0.30 (0.04) 6.37 0.74
-------- -------- --------- ---------
Income (loss) before SFAS 109........................................ 0.16 (0.63) 3.63 2.21
Cumulative effect of SFAS 109........................................ 0.05 -- -- --
-------- -------- --------- ---------
Net income (loss) per share...................................... $ 0.21 $ (0.63) $ 3.63 $ 2.21
======== ======== ========= =========
Average common and equivalent shares outstanding on a fully diluted
basis.............................................................. 49,404 49,670 44,119 38,662
======== ======== ========= =========
</TABLE>
68
<PAGE> 71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEGMENT INFORMATION
Continuing operations include the following segments: asset management, life
insurance, securities brokerage and real estate. The Company's segmentation was
redefined in 1993, and the 1992 presentation has been restated. The principal
products and services of these segments are as follows:
Asset management
Financial products and investment management services.
Life insurance
Variable and fixed-rate annuities and term, interest-sensitive and other life
insurance.
Securities brokerage
Trading, research and investment banking services.
Real estate
Ownership, development and management of real estate-related investments.
Other operations and corporate
The other operations and corporate category primarily includes Kemper
Corporation's and KFC's holding company net expenses.
Summarized financial information for these segments is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1994 1993 1992
------------------------------------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Revenue
Asset management........................................... $ 429,551 $ 515,702 $ 525,058
Life insurance............................................. 687,584 726,518 688,448
Securities brokerage....................................... 529,970 673,732 677,464
Real estate................................................ (9,547) (338,077) (309,274)
Other operations and corporate............................. 14,108 31,937 12,946
Eliminations............................................... (49,845) (60,638) (90,918)
------------ ------------ ------------
Total.............................................. $ 1,601,821 $ 1,549,174 $ 1,503,724
============ ============ ============
Earnings (loss) from continuing operations, before income tax
and cumulative effect of changes in accounting principles
Asset management........................................... $ 72,574 $ 131,491 $ 137,225
Life insurance............................................. 142,907 128,714 (23,605)
Securities brokerage....................................... (12,775) (1,476) (27,562)
Real estate................................................ (28,133) (346,197) (316,813)
Other operations and corporate............................. (53,967) (21,679) (44,116)
------------ ------------ ------------
Total.............................................. $ 120,606 $ (109,147) $ (274,871)
============ ============ ============
Assets
Asset management........................................... $ 566,167 $ 581,215 $ 510,133
Life insurance............................................. 10,735,846 11,576,647 10,003,714
Securities brokerage....................................... 1,560,037 1,645,058 2,017,562
Real estate................................................ 386,711 186,900 (16,529)
Other operations and corporate............................. 264,211 423,113 186,805
Net assets of discontinued operations...................... -- -- 784,365
Eliminations............................................... (359,005) (374,808) (309,775)
------------ ------------ ------------
Total.............................................. $ 13,153,967 $ 14,038,125 $ 13,176,275
============ ============ ============
</TABLE>
69
<PAGE> 72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value disclosures are required under SFAS 107. Such fair value estimates
are made at specific points in time, based on relevant market information and
information about the financial instruments. These estimates do not reflect any
premium or discount that could result from offering for sale at one time the
Company's entire holdings of a particular financial instrument. A significant
portion of the Company's financial instruments are carried at fair value. (See
the note captioned "Invested assets and related income" on page 54.) Fair value
estimates for financial instruments not carried at fair value are generally
determined using discounted cash flow models and assumptions that are based on
judgments regarding current and future economic conditions and the risk
characteristics of the investments. Although fair value estimates are calculated
using assumptions that management believes are appropriate, changes in
assumptions could significantly affect the estimates, and such estimates should
be used with care.
Fair value estimates are determined for existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and certain liabilities that are not
considered financial instruments. Accordingly, the aggregate fair value
estimates presented do not represent the underlying value of the Company. For
example, the Company's subsidiaries are not considered financial instruments,
and their value has not been incorporated into the fair value estimates. In
addition, tax ramifications related to the realization of unrealized gains and
losses can have a significant effect on fair value estimates and have not been
considered in any of the estimates.
The following methods and assumptions were used by the Company in estimating the
fair value of its financial instruments:
Fixed maturities: Fair values for fixed maturity securities carried at market
value were determined by using market quotations, or independent pricing
services that use prices provided by market makers or estimates of market values
obtained from yield data relating to instruments or securities with similar
characteristics, or fair value as determined in good faith by the Company's
portfolio manager, Kemper Financial Services, Inc.
Equity securities: Fair values for equity securities were based upon quoted
market prices.
Cash and short-term investments: The carrying amounts reported in the
consolidated balance sheet for these financial instruments approximate fair
values.
Mortgage loans and other real estate-related investments: Fair values for
mortgage loans and other real estate-related investments were estimated on a
project-by-project basis. Generally, the projected cash flows of the collateral
are discounted using a discount rate of 10 to 12 percent. The resulting
collateral estimates were then used to determine the value of the Company's real
estate-related investments. The estimate of fair value should be used with care
given the inherent difficulty of estimating the fair value of real estate due to
the lack of a liquid quotable market.
Other loans and investments: The carrying amounts reported in the consolidated
balance sheet for these instruments approximate fair values. The fair values of
policy loans were estimated by discounting the expected future cash flows using
an interest rate charged on policy loans for similar policies currently being
issued.
Securities purchased (sold) under agreements to resell (repurchase): As these
securities (obligations) are short-term in nature, the carrying values
approximate fair values.
Securities held by brokerage firm subsidiaries: The carrying amounts reported in
the consolidated balance sheet for these instruments approximate fair values.
Receivables from and payables to brokerage firms and customers: Fair values for
receivables from and payables to brokerage firms and customers approximate the
carrying values presented in the consolidated balance sheet.
Life policy benefits: Fair values of the life policy benefits regarding
investments contracts (primarily deferred annuities) and universal life
contracts were estimated by discounting gross benefit payments, net of
contractual premiums, using the average crediting rate currently being offered
in the marketplace for similar contracts with maturities consistent with those
remaining for the contracts being valued. The Company had projected its future
average crediting rate in 1994 and 1993 to be 5.6 percent and 5.0 percent,
respectively, while the assumed average market crediting rate was 6.5 percent in
1994 and 5.25 percent in 1993.
Securities sold but not yet purchased: The carrying amounts reported in the
consolidated balance sheet for these financial instruments approximate fair
values.
Long-term debt: Fair values for long-term debt were estimated by discounting the
scheduled cash flows using the current rates offered to the Company for debt of
the same remaining maturities.
70
<PAGE> 73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Convertible debentures: The carrying amounts reported in the consolidated
balance sheet for these financial instruments approximate fair value.
Interest rate swaps: Fair values for these financial instruments were estimated
by discounting the projected interest rate spread over the lives of the swaps.
Credit enhancement related to Orange County notes: Fair value was determined to
be the excess of the face amount of the obligation over the estimated market
value of the underlying Orange County securities. Such excess has been recorded
in the consolidated financial statements as a realized loss.
The carrying values and estimated fair values of the Company's financial
instruments at December 31, 1994 and 1993 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------------
1994 1993
------------------------ ------------------------
CARRYING FAIR CARRYING FAIR
(IN THOUSANDS) VALUE VALUE VALUE VALUE
----------------------------------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial instruments recorded as assets:
Fixed maturities......................................... $5,200,915 $5,200,915 $5,333,175 $5,333,175
Equity securities........................................ 25,118 25,118 98,968 98,968
Cash and short-term investments.......................... 581,138 581,138 966,506 966,506
Mortgage loans and other real estate-related assets...... 1,370,777 1,277,710 1,479,471 1,539,193
Other loans and investments.............................. 443,800 443,800 446,717 446,717
Securities purchased under resale agreements............. 228,598 228,598 204,467 204,467
Securities held by brokerage firm subsidiaries, at
market................................................ 193,414 193,414 285,695 285,695
Accounts receivable from brokerage firms and customers... 730,149 730,149 776,971 776,971
Financial instruments recorded as liabilities:
Life policy benefits excluding term and ordinary life.... 6,893,089 6,540,900 7,077,126 7,007,153
Securities sold under repurchase agreements.............. 225,177 225,177 181,879 181,879
Securities sold, not yet purchased, at market............ 70,334 70,334 77,023 77,023
Accounts payable to brokerage firms and customers........ 265,823 265,823 354,998 354,998
Long-term debt........................................... 369,226 300,707 349,237 423,639
Convertible debentures of subsidiary..................... 33,113 33,113 45,651 45,651
Liability for off-balance sheet financial instruments:
Interest rate swaps...................................... -- 9,682 -- 12,635
Credit enhancement related to Orange County notes........ -- 29,700 -- --
</TABLE>
STOCKHOLDERS' EQUITY--RETAINED EARNINGS
Retained earnings includes $47.0 million in gross undistributed income of
unconsolidated companies, net of income tax, at December 31, 1994.
Dividend distributions to Kemper Corporation from subsidiaries are restricted as
to the amounts that may be paid without prior notice or approval by regulatory
authorities in the asset management, securities brokerage and life insurance
industries. The aggregate maximum dividend distribution that can be made by
regulated subsidiaries during 1995 without prior approval is $153.4 million. The
amount of dividends actually paid in cash by subsidiaries to Kemper Corporation
during 1994 was $127.5 million.
Net income (loss) and stockholder's equity as determined in accordance with
statutory accounting principles for the Company's life insurance subsidiaries
are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1994 1993 1992
--------------------------------------------------------------------------- -------- -------- ---------
<S> <C> <C> <C>
Net income (loss).......................................................... $117,751 $ 5,020 $(155,380)
======== ======== =========
Statutory surplus.......................................................... $595,719 $538,733 $ 444,460
======== ======== =========
</TABLE>
SUBSEQUENT EVENT
On January 31, 1995, Kemper Financial Services, Inc. completed the sale of its
50 percent ownership interest in IFTC to State Street Boston Corporation ("State
Street") in exchange for 2,986,111 shares of State Street common stock, subject
to certain resale restrictions. The Company recorded an after-tax gain of
approximately $12.0 million in the first quarter of 1995 from the sale.
71
<PAGE> 74
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(A) IDENTIFICATION OF DIRECTORS.
The section captioned ELECTION OF DIRECTORS of Kemper Corporation's Proxy
Statement scheduled to be mailed on or about April 3, 1995 for the annual
meeting of stockholders to be held May 17, 1995 is incorporated herein by
reference.
(B) IDENTIFICATION OF EXECUTIVE OFFICERS.
The section captioned EXECUTIVE OFFICERS OF THE REGISTRANT included in Part I at
page 17 of this Annual Report on Form 10-K is incorporated herein by reference.
(C) IDENTIFICATION OF CERTAIN SIGNIFICANT EMPLOYEES--not applicable.
(D) FAMILY RELATIONSHIPS--none.
(E) BUSINESS EXPERIENCE--see ITEMS 10(a) and 10(b).
(F) INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS--none.
(G) PROMOTERS AND CONTROL PERSONS--not applicable.
ITEM 11. EXECUTIVE COMPENSATION
The sections captioned COMPENSATION OF EXECUTIVE OFFICERS and COMPENSATION OF
DIRECTORS of Kemper Corporation's Proxy Statement scheduled to be mailed on or
about April 3, 1995 for the annual meeting of stockholders to be held May 17,
1995 are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(A) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS.
The section captioned GENERAL INFORMATION of Kemper Corporation's Proxy
Statement scheduled to be mailed on or about April 3, 1995 for the annual
meeting of stockholders to be held May 17, 1995 is incorporated herein by
reference.
(B) SECURITY OWNERSHIP OF MANAGEMENT.
The section captioned SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS of
Kemper Corporation's Proxy Statement scheduled to be mailed on or about April 3,
1995 for the annual meeting of stockholders to be held May 17, 1995 is
incorporated herein by reference.
(C) CHANGES IN CONTROL.
There are no arrangements, known to the Company, the operation of which may at a
subsequent date result in a change in control of Kemper Corporation.
72
<PAGE> 75
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(A) TRANSACTIONS WITH MANAGEMENT AND OTHERS--none.
(B) CERTAIN BUSINESS RELATIONSHIPS--not applicable.
(C) INDEBTEDNESS OF MANAGEMENT--not applicable.
(D) TRANSACTIONS WITH PROMOTERS--not applicable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A)(1) FINANCIAL STATEMENTS.
A listing of all financial statements filed as part of this Annual Report on
Form 10-K is included on page 45 in ITEM 8.
(A)(2) SCHEDULES.
The following schedules are supplemental to the consolidated financial
statements of Kemper Corporation and subsidiaries and are located in this Annual
Report on Form 10-K on the pages indicated. All other schedules are omitted
because the information required to be stated therein is included in the
financial statements or notes thereto or because they are inapplicable.
<TABLE>
<CAPTION>
PAGE(S)
OF
SCHEDULE TITLE FORM 10-K
-------- ------------------------------------------------------------------------------------------ ---------
<S> <C> <C>
I Summary of investments, other than investments in related parties, at December 31, 1994... 76
II Condensed financial information of Kemper Corporation (registrant only),
at and for the three years ended December 31, 1994........................................ 77-79
III Supplementary insurance information, for the year ended December 31, 1994*................ 80
IV Reinsurance, for the year ended December 31, 1994*........................................ 80
V Valuation and qualifying accounts, for the year ended December 31, 1994*.................. 80
</TABLE>
---------------
* These schedules for the years ended December 31, 1993 and 1992 are
incorporated by reference to Kemper Corporation's Annual Reports on Form 10-K
(file no. 1-10242) already on file with the SEC.
(A)(3) EXHIBITS.
The exhibits listed on the accompanying Index to Exhibits at pages 81 through 85
below are filed as part of this Annual Report on Form 10-K.
(B) REPORTS ON FORM 8-K.
During the three months ended December 31, 1994, Kemper Corporation filed four
Current Reports on Form 8-K, and on February 6, 1995, Kemper Corporation filed
one Current Report on Form 8-K (and an amendment thereto solely to correct an
electronic transmission error), as follows:
<TABLE>
<CAPTION>
DATE OF DATE OF ITEM
FILING REPORT NUMBER(S) ITEMS REPORTED
-------- -------- --------- -----------------------------------------------------------------------------
<S> <C> <C> <C>
10-31-94 10-25-94 5 and 7 The Company's nine-month 1994 earnings; and pro forma financial information
with respect to the Company's then-planned merger.
11-21-94 11-20-94 5 Termination of the merger agreement; and rescheduling of the previously
postponed annual meeting of stockholders.
12-8-94 11-21-94 5 Revisions to the Company's credit ratings.
12-20-94 12-15-94 5 The Company's credit enhancing arrangements with respect to $198 million of
Orange County notes held by five Kemper money market mutual funds.
2-6-95 12-23-94 5 The sale of the Company's 50 percent interest in Investors Fiduciary Trust
Company; revisions to the Orange County credit enhancements; and the results
of the voting at the 1994 annual meeting of stockholders.
</TABLE>
73
<PAGE> 76
POWER OF ATTORNEY
Each person whose signature appears below hereby appoints John H. Fitzpatrick,
Executive Vice President and Chief Financial Officer, and Kathleen A. Gallichio,
Senior Vice President, General Counsel and Corporate Secretary, his true and
lawful attorney-in-fact with authority together or individually to execute in
the name of each such signatory, and with authority to file with the Securities
and Exchange Commission, any and all amendments to this Annual Report on Form
10-K, together with any exhibits thereto and other documents therewith,
necessary or advisable to enable Kemper Corporation to comply with the
Securities Exchange Act of 1934, as amended, and any rules, regulations and
requirements of the Securities and Exchange Commission in respect thereof, which
amendments may make such other changes in the Annual Report on Form 10-K as the
aforesaid attorney-in-fact executing the same deems appropriate.
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, Kemper Corporation has duly caused this Annual Report on Form 10-K for the
fiscal year ended December 31, 1994 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Chicago, State of
Illinois, on the 16th day of March, 1995.
KEMPER CORPORATION
By: /s/ DAVID B. MATHIS
----------------------------------------------------
David B. Mathis
Chairman of the Board
and Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS ANNUAL
REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994 HAS BEEN SIGNED
BELOW BY THE FOLLOWING PERSONS ON BEHALF OF KEMPER CORPORATION IN THE CAPACITIES
INDICATED ON THE TH DAY OF MARCH, 1995.
<TABLE>
<CAPTION>
SIGNATURE TITLE
<S> <C>
/s/ DAVID B. MATHIS Chairman of the Board, Chief Executive Officer and
------------------------------------------------------ Director
David B. Mathis
/s/ STEPHEN B. TIMBERS President, Chief Operating Officer
------------------------------------------------------ and Director
Stephen B. Timbers
/s/ JOHN H. FITZPATRICK Executive Vice President, Chief Financial Officer
------------------------------------------------------ and Director
John H. Fitzpatrick
/s/ JOSEPH R. SITAR Senior Vice President
------------------------------------------------------ and Chief Accounting Officer
Joseph R. Sitar
</TABLE>
74
<PAGE> 77
<TABLE>
<CAPTION>
SIGNATURE CAPACITIES
<S> <C>
/s/ JOHN T. CHAIN JR. Director
------------------------------------------------------
John T. Chain Jr.
/s/ J. REED COLEMAN Director
------------------------------------------------------
J. Reed Coleman
/s/ RAYMOND F. FARLEY Director
------------------------------------------------------
Raymond F. Farley
/s/ PETER B. HAMILTON Director
------------------------------------------------------
Peter B. Hamilton
/s/ GEORGE D. KENNEDY Director
------------------------------------------------------
George D. Kennedy
/s/ RICHARD D. NORDMAN Director
------------------------------------------------------
Richard D. Nordman
/s/ KENNETH A. RANDALL Director
------------------------------------------------------
Kenneth A. Randall
/s/ DANIEL R. TOLL Director
------------------------------------------------------
Daniel R. Toll
</TABLE>
75
<PAGE> 78
SCHEDULE I
KEMPER CORPORATION AND SUBSIDIARIES
SUMMARY OF INVESTMENTS
DECEMBER 31, 1994
(in thousands)
Summary of investments, other than broker-dealer trading accounts, at December
31, 1994 are detailed as follows:
<TABLE>
<CAPTION>
CARRYING AMORTIZED
VALUE(A) COST(B)
---------- ----------
<S> <C> <C>
Fixed maturities:
Government: United States......................................................... $ 12,928 $ 13,381
Foreign........................................................... 27,205 30,262
Obligations of states and political subdivisions, special revenue and
non-guaranteed................................................................. 143,426 156,499
Public utilities.................................................................. 128,525 136,654
Mortgage backed................................................................... 2,610,157 2,758,310
Convertible bonds................................................................. 23,929 23,063
All other corporate............................................................... 2,254,745 2,416,695
---------- ----------
Total fixed maturities.................................................... 5,200,915 5,534,864
---------- ----------
Equity securities:
Common stocks.................................................................. 1,809 2,033
Nonredeemable preferred stocks................................................. 23,309 23,337
---------- ----------
Total equity securities................................................... 25,118 25,370
---------- ----------
Total fixed maturities and equity securities........................................ 5,226,033 5,560,234
---------- ----------
Short-term investments.............................................................. 349,651 349,651
Joint venture mortgage loans........................................................ 616,192 616,192
Third-party mortgage loans.......................................................... 418,313 418,313
Real estate owned................................................................... 78,681 78,681
Other real estate-related investments............................................... 257,591 257,591
Other loans and investments:
Policy loans...................................................................... 383,504 383,504
Other loans and investments....................................................... 60,296 60,296
---------- ----------
Total other loans and investments......................................... 443,800 443,800
---------- ----------
Total investments......................................................... $7,390,261 $7,724,462
========== ==========
</TABLE>
---------------
(a) Investments in fixed maturities (bonds and redeemable preferred stocks) are
carried at market value. For fixed maturity securities, market value is
determined by using market quotations, or independent pricing services that
use prices provided by market makers or estimates of market values obtained
from yield data relating to instruments or securities with similar
characteristics, or fair value as determined in good faith by the Company's
portfolio manager. Equity securities of nonrelated companies are generally
carried at market value using the closing prices as of the balance sheet
date derived from either a major securities exchange or the National
Association of Securities Dealers Automated Quotations system. Mortgage
loans and other real estate-related investments are carried at original
cost, reduced by repayments, write-downs and valuation reserves.
(b) Fixed maturities at original cost reduced by repayments and adjusted for
amortization of premiums or accrual of discounts and other-than-temporary
declines in value.
See notes to consolidated financial statements.
76
<PAGE> 79
SCHEDULE II
KEMPER CORPORATION
CONDENSED BALANCE SHEET (REGISTRANT ONLY)
(dollars in thousands)
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1994 1993
---------- -----------
<S> <C> <C>
ASSETS
Cash.............................................................................. $ 330 $ 1,377
Investment in common stock of affiliates.......................................... 618,023 1,071,936
Notes receivable--affiliates...................................................... 1,091,329 866,914
Short-term investments............................................................ 54,842 162,616
Property and equipment, net....................................................... 2,799 2,269
Accounts receivable and other assets.............................................. 17,459 42,537
---------- -----------
Total assets............................................................ $1,784,782 $ 2,147,649
========== ============
LIABILITIES
Accounts payable and accrued expenses............................................. $ 131,175 $ 132,412
6.875% Notes Due 2003............................................................. 200,000 200,000
8.80% Notes Due 1998.............................................................. 110,750 110,750
Medium-term notes................................................................. 35,500 65,500
Notes payable--other.............................................................. 50,000 20,000
---------- -----------
Total liabilities....................................................... 527,425 528,662
---------- -----------
STOCKHOLDERS' EQUITY
Preferred stock, no par value(a):
Series A Convertible(b)......................................................... 363 600
Series C Perpetual(c)........................................................... 100,000 100,000
Series D Convertible(d)......................................................... 30,000 30,000
Series E Convertible(e)......................................................... 230,000 230,000
Common stock, $5 par value(f)..................................................... 331,150 323,104
Additional paid-in capital........................................................ 366,944 313,531
Unrealized loss on foreign currency translations.................................. (35,888) (56,878)
Unrealized gain (loss) on investments, net of tax................................. (323,201) 155,004
Retained earnings................................................................. 1,586,820 1,549,580
---------- -----------
Subtotal................................................................ 2,286,188 2,644,941
Less treasury shares, at cost(g).................................................. (1,028,831) (1,025,954)
---------- -----------
Total stockholders' equity.............................................. 1,257,357 1,618,987
---------- -----------
Total liabilities and stockholders' equity.............................. $1,784,782 $ 2,147,649
========== ============
</TABLE>
(a) Authorized 20,000,000 shares.
(b) Issued December 31, 1994, 14,526 shares; December 31, 1993, 23,998 shares.
(c) Issued December 31, 1994, 2,000,000 shares; December 31, 1993, 2,000,000
shares.
(d) Issued December 31, 1994, 66,638.53 shares; December 31, 1993, 66,638.53
shares.
(e) Issued December 31, 1994, 4,600,000 shares; December 31, 1993, 4,600,000
shares.
(f) Authorized 200,000,000 shares: issued December 31, 1994, 66,229,940 shares;
December 31, 1993, 64,620,863 shares.
(g) December 31, 1994, 31,812,456 shares of common stock; December 31, 1993,
31,717,505 shares of common stock.
See notes to consolidated financial statements.
77
<PAGE> 80
SCHEDULE II
CONTINUED
KEMPER CORPORATION
CONDENSED STATEMENT OF OPERATIONS (REGISTRANT ONLY)
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------
1994 1993 1992
--------- ---------- ----------
<S> <C> <C> <C>
Dividends from continuing subsidiaries:
Federal Kemper Life Assurance Company................................ $ 95,500 $ 31,683 $ 41,683
Kemper Asset Holdings, Inc........................................... 32,000 -- --
Kemper Financial Companies, Inc...................................... -- -- 23,451
--------- ---------- ----------
Total........................................................... 127,500 31,683 65,134
Interest and other income, net of operating expenses and income tax....... 8,334 (1,175) (12,277)
--------- ---------- ----------
Subtotal, before cumulative effect of changes in accounting
principles..................................................... 135,834 30,508 52,857
Cumulative effect of changes in accounting principles, net of tax......... -- (2,530) (1,226)
--------- ---------- ----------
Subtotal........................................................ 135,834 27,978 51,631
--------- ---------- ----------
Equity in undistributed earnings (loss) of continuing subsidiaries after
deducting dividends received:
Asset management..................................................... 69,334 99,087 88,288
Life insurance....................................................... (5,318) 48,095 (67,133)
Securities brokerage................................................. (2,238) (3,640) (38,433)
Real estate.......................................................... (18,021) (257,753) (209,117)
Other operations..................................................... (93,878) (15,051) (39,912)
--------- ---------- ----------
Total........................................................... (50,121) (129,262) (266,307)
--------- ---------- ----------
Net income (loss) from continuing operations.................... 85,713 (101,284) (214,676)
Income from discontinued operations, net of tax........................... -- 39,929 11,276
Gain (loss) on sale of discontinued operations to related party, net of
tax..................................................................... (576) 204,668 --
Gain on other sales of discontinued operations, net of tax................ 6,303 92,174 --
--------- ---------- ----------
Net income (loss)............................................... $ 91,440 $ 235,487 $ (203,400)
========= ========== ==========
</TABLE>
See notes to consolidated financial statements.
78
<PAGE> 81
SCHEDULE II
CONTINUED
KEMPER CORPORATION
CONDENSED STATEMENT OF CASH FLOWS (REGISTRANT ONLY)
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------------
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).............................................. $ 91,440 $ 235,487 $ (203,400)
Reconcilement of net income (loss) to net cash provided:
Equity in undistributed net loss of continuing
subsidiaries.............................................. 50,121 129,262 266,307
Gains on sales of discontinued operations................... (5,727) (296,842) --
Change in non-cash items:
Accounts receivable and other assets...................... 25,144 (20,639) 2,588
Account payable and accrued expenses...................... 4,490 (28,513) 7,318
Other, net................................................ (4,492) (15,642) 34,674
----------- ----------- -----------
Net cash provided by operating activities.............. 160,976 3,113 107,487
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in notes receivable, net.............................. (224,415) (387,964) (219,100)
Purchase of short-term investments............................. (1,444,012) (3,720,358) (2,183,816)
Sale of short-term investments................................. 1,556,237 3,589,183 2,303,455
Investment in affiliates....................................... (53,055) (110,232) (147,326)
Sale of discontinued operations................................ -- 380,269 --
Other, net..................................................... (575) (780) --
----------- ----------- -----------
Net cash used in investing activities.................. (165,820) (249,882) (246,787)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from common stock issued.............................. 61,459 28,995 18,180
Issuance of 6.875% Notes Due 2003.............................. -- 200,000 --
Issuance of preferred stock.................................... -- 251,920 100,000
Treasury shares acquired....................................... (6,715) (2,786) (914)
Dividends paid to stockholders................................. (54,569) (56,458) (44,951)
Increase (decrease) in notes payable and medium-term
notes, net.................................................. -- (175,390) 66,890
Other, net..................................................... 3,622 960 626
----------- ----------- -----------
Net cash provided by financing activities.............. 3,797 247,241 139,831
----------- ----------- -----------
Net increase (decrease) in cash.................................. (1,047) 472 531
CASH, beginning of year.......................................... 1,377 905 374
----------- ----------- -----------
CASH, end of year...................................... $ 330 $ 1,377 $ 905
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
79
<PAGE> 82
SCHEDULE III
KEMPER CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
YEAR ENDED DECEMBER 31, 1994
(in thousands)
<TABLE>
<CAPTION>
A B C F G H I J
------------------ ----------- ----------- -------- ---------- ------------ ----------- ---------
INSURANCE
DEFERRED CLAIM COSTS AMORTIZED
POLICY LIFE NET AND POLICY OTHER
ACQUISITION POLICY PREMIUM INVESTMENT POLICYHOLDER ACQUISITION OPERATING
SEGMENT COSTS BENEFITS(1) REVENUE INCOME BENEFITS COSTS EXPENSES
------------------ ----------- ----------- -------- ---------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Asset management.............. $ -- $ -- $ -- $ -- $ -- $ -- $ --
Life insurance................ 696,804 7,871,160 151,830 519,139 474,614 59,169 10,894
Securities brokerage.......... -- -- -- -- -- -- --
Real estate................... -- -- -- (37,546) -- -- --
Other operations and
corporate................... -- -- -- 11,493 -- -- --
Eliminations.................. -- -- -- (8,290) -- -- --
---------- ----------- -------- --------- -------- ------- -------
Total.................... $ 696,804 $ 7,871,160 $151,830 $ 484,796 $474,614 $59,169 $10,894
========== =========== ======== ========= ======== ======= =======
</TABLE>
---------------
(1) Includes $741.9 million of ceded life policy benefits.
SCHEDULE IV
KEMPER CORPORATION AND SUBSIDIARIES
REINSURANCE
YEAR ENDED DECEMBER 31, 1994
(dollars in thousands)
<TABLE>
<CAPTION>
PERCENT
OF
CEDED TO ASSUMED AMOUNT
GROSS OTHER FROM OTHER NET ASSUMED
1994 AMOUNT COMPANIES COMPANIES AMOUNT TO NET
------------------------------------------- ----------- ----------- ---------- ----------- -------
<S> <C> <C> <C> <C> <C>
Life insurance in-force.................... $97,463,596 $28,973,662 $ 26,631 $67,516,565 0.0%
=========== =========== ======== =========== ===
Life insurance premium revenue............. $ 216,954 $ 65,174 $ 50 $ 151,830 0.0%
=========== =========== ======== =========== ===
</TABLE>
SCHEDULE V
KEMPER CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31, 1994
(in thousands)
<TABLE>
<CAPTION>
ADDITIONS
----------------------------
BALANCE AT CHARGED TO BALANCE AT
DECEMBER 31, COSTS AND CHARGED TO DECEMBER 31,
DESCRIPTION 1993 EXPENSES OTHER ACCOUNTS DEDUCTIONS 1994
----------------------------------------- ------------ ---------- -------------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Asset valuation reserves:
Joint venture mortgage loans........... $182,557 $ -- $ -- $ (112,158) $ 70,399
Third-party mortgage loans............. -- -- 15,535 -- 15,535
Other real estate-related
investments......................... 263,091 -- -- (165,824) 97,267
-------- ---- -------- ---------- --------
Total............................. $445,648 $ -- $ 15,535(1) $ (277,982)(2) $183,201
======== ==== ======== ========== ========
</TABLE>
---------------
(1) Charged to realized investment gain (loss) in the consolidated statement of
operations.
(2) These deductions represent the net effect on the valuation reserves of
write-downs, sales, foreclosures and restructurings.
80
<PAGE> 83
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO.
<S> <C>
(3) Articles of incorporation and bylaws:
3.1(a) Second Restated Certificate of Incorporation of Kemper Corporation.+
3.1(b) Certificate of Amendment of Second Restated Certificate of Incorporation of Kemper
Corporation.+
3.1(c) Certificate of Correction of Certificate of Amendment of Second Restated Certificate of
Incorporation of Kemper Corporation.+
3.1(d) Certificate of Designations, Preferences and Rights of Series B Junior Participating
Preferred Stock, Without Par Value, of Kemper Corporation.+
3.1(e) Certificate of Designations, Preferences and Rights of Series C Cumulative Preferred
Stock of Kemper Corporation.+
3.1(f) Certificate of Designations, Preferences and Rights of Series D Index Exchangeable
Preferred Stock of Kemper Corporation.+
3.1(g) Certificate of Designations, Preferences and Rights of Series E Cumulative Convertible
Preferred Stock, Without Par Value, of Kemper Corporation.+
3.1(h) Certificate of Correction of Second Restated Certificate of Incorporation of Kemper
Corporation.+
3.2 Bylaws of Kemper Corporation.+
3.3 Amendment to Bylaws.
(4) Instruments defining the rights of security holders, including indentures:
4.1(a) Indenture dated as of January 15, 1987 between Kemper Corporation and the Chase Manhattan
Bank, N.A., defining the rights of holders of certain debt securities of Kemper
Corporation, is incorporated herein by reference to Exhibit No. 4.1 to Kemper
Corporation's Form S-3 Registration Statement No. 33-7780 filed August 5, 1986.
4.1(b) First Supplemental Indenture, dated September 14, 1989, supplemental to the Indenture de-
scribed in Exhibit No. 4.1(a) hereof, is incorporated herein by reference to Exhibit No.
4 to Kemper Corporation's Quarterly Report on Form 10-Q filed November 14, 1989.
4.1(c) Indenture dated as of September 15, 1993 between Kemper Corporation and The First
National Bank of Chicago, defining the rights of holders of certain debt securities of
Kemper Corporation is incorporated herein by reference to the identically numbered
exhibit to Kemper Corporation's Annual Report on Form 10-K filed March 30, 1994.
4.2(a) Form of Rights Agreement, dated as of July 18, 1990, between Kemper Corporation and
Harris Trust and Savings Bank is incorporated herein by reference to Exhibit No. 1 to the
Form 8-A filed by Kemper Corporation on July 20, 1990.
4.2(b) First Amendment to Rights Agreement, dated as of June 26, 1994, between Kemper
Corporation and Harris Trust and Savings Bank is incorporated herein by reference to
Exhibit No. 2 to the Form 8-A/A filed by Kemper Corporation on July 20, 1994.
4.3(a) Form of certificate representing Kemper Corporation's Medium-Term Notes, Series 1, is
incorporated herein by reference to Exhibit No. 4.3 to Kemper Corporation's Annual Report
on Form 10-K filed March 31, 1987.
4.3(b) Form of certificate representing Kemper Corporation's Medium-Term Notes, Series 2, is
incorporated herein by reference to Exhibit No. 4 to Kemper Corporation's Amendment No. 1
to Form S-3 Registration Statement No. 33-31083 filed September 21, 1989.
4.3(c) Form of certificate representing Kemper Corporation's 8.80% Notes Due 1998 is
incorporated herein by reference to Exhibit No. 4.3(c) to Kemper Corporation's Annual
Report on Form 10-K filed March 30, 1992.
4.3(d) Form of certificates representing Kemper Corporation's 6.875% Notes Due 2003 is
incorporated herein by reference to the identically numbered exhibit to Kemper
Corporation's Annual Report on Form 10-K filed March 30, 1994.
4.4 Certificate of Incorporation and Bylaws of Kemper Corporation, defining the rights of
holders of Kemper Corporation's Common Stock and Preferred Stock, are filed as described
in Exhibit No. 3 hereof.
</TABLE>
81
<PAGE> 84
<TABLE>
<CAPTION>
EXHIBIT NO.
<S> <C>
(9) Voting trust agreement--none.
(10) Material contracts:
10.1(a) Credit Agreement dated as of November 1, 1993 among Kemper Corporation, certain banks,
certain co-agents and The First National Bank of Chicago as administrative agent.+
10.1(b) Credit Agreement dated as of November 1, 1993 among Kemper Corporation, certain banks,
certain co-agents and The First National Bank of Chicago as administrative agent.+
10.2 Indemnification Agreement dated as of April 30, 1992 by and among Kemper Corporation and
Lumbermens Mutual Casualty Company, American Motorists Insurance Company and American
Manufacturers Mutual Insurance Company is incorporated herein by reference to Exhibit No.
10.1 to Kemper Corporation's Quarterly Report on Form 10-Q filed May 15, 1992.
* 10.3(a) The Kemper Financial Companies, Inc. 1986 Stock Option Plan is incorporated herein by
reference to Exhibit No. 10.4(a) to Kemper Financial Companies, Inc.'s Form S-4
Registration Statement No. 33-8259 filed August 26, 1986.
* 10.3(b) The Kemper Financial Companies, Inc. 1987 Stock Option Plan is incorporated herein by
reference to Exhibit No. 10.4(b) to Kemper Corporation's Annual Report on Form 10-K filed
March 31, 1987.
* 10.3(c) The Kemper Financial Companies, Inc. 1988 Stock Option Plan is incorporated herein by
reference to Exhibit No. 10.4(c) to Kemper Corporation's Annual Report on Form 10-K filed
March 31, 1987.
10.4(a) Purchase Agreement executed October 24, 1986 by and between Kemper Financial Companies,
Inc. and The First National Bank of Chicago is incorporated herein by reference to
Exhibit No. 10.6 to Kemper Corporation's Annual Report on Form 10-K filed March 31, 1987.
10.4(b) Amendment dated December 23, 1993 to Purchase Agreement executed October 24, 1986 is
incorporated herein by reference to Exhibit No. 10.4(b) to Kemper Corporation's Annual
Report on Form 10-K filed March 30, 1994.
* 10.5(a) The Kemper Financial Services Profit Sharing Plan is incorporated herein by reference to
Exhibit No. 10.5(a) to Kemper Financial Companies, Inc.'s Form S-4 Registration Statement
No. 33-8259 filed August 26, 1986.
* 10.5(b) The Kemper Financial Services Supplemental Benefit Plan is incorporated herein by
reference to Exhibit No. 10.5(b) to Kemper Financial Companies, Inc.'s Form S-4
Registration Statement No. 33-8259 filed August 26, 1986.
10.6(a) Indenture dated as of September 1, 1986 between Kemper Financial Companies, Inc. and
Continental Illinois National Bank and Trust Company of Chicago, defining the rights of
holders of Kemper Financial Companies, Inc. Floating Rate Convertible Subordinated
Debentures is incorporated herein by reference to Exhibit No. 4 to Kemper Financial
Companies, Inc.'s Amendment No. 3 to Form S-4 Registration Statement No. 33-8259 filed
November 6, 1986.
10.6(b) Supplemental Indenture dated December 31, 1986 between Kemper Financial Companies, Inc.
and Continental Illinois National Bank and Trust Company of Chicago, supplemental to the
Indenture described in Exhibit No. 10.6(a) hereof, is incorporated herein by reference to
Exhibit No. 10.8 to Kemper Corporation's Annual Report on Form 10-K filed March 31, 1987.
10.6(c) Supplemental Indenture dated April 20, 1987 between Kemper Financial Companies, Inc. and
Continental Illinois National Bank and Trust Company of Chicago, supplemental to the
Indenture described in Exhibit No. 10.6(a) hereof, is incorporated herein by reference to
Exhibit No. 19 to Kemper Corporation's Quarterly Report on Form 10-Q filed May 15, 1987.
10.6(d) Supplemental Indenture dated April 22, 1988 between Kemper Financial Companies, Inc. and
Continental Illinois National Bank and Trust Company of Chicago, supplemental to the
Indenture described in Exhibit No. 10.6(a) hereof, is incorporated herein by reference to
Exhibit No. 4.1(d) to Kemper Financial Companies, Inc.'s Amendment No. 1 to Form S-1
Registration Statement (No. 33-21271) filed April 26, 1988.
10.6(e) Supplemental Indenture dated May 3, 1989 between Kemper Financial Companies, Inc. and
Continental Bank, N.A., supplemental to the Indenture described in Exhibit No. 10.6(a)
hereof, is incorporated herein by reference to Exhibit No. 4.1(e) to Kemper Financial
Companies, Inc.'s Amendment No. 1 to Form S-1 Registration Statement (No. 33-28793) filed
May 30, 1989.
</TABLE>
82
<PAGE> 85
<TABLE>
<CAPTION>
EXHIBIT NO.
<S> <C>
10.6(f) Supplemental Indenture dated as of April 26, 1990 between Kemper Financial Companies,
Inc. and Continental Bank, National Association, supplemental to the Indenture described
in Exhibit No. 10.6(a) hereof, is incorporated herein by reference to Exhibit No. 4(f) to
Kemper Financial Companies, Inc.'s Amendment No. 1 to Form S-2 Registration Statement No.
33-34556 filed May 7, 1990.
10.7 Investment Agreements between Kemper Financial Services, Inc., including certain of its
subsidiaries, and Lumbermens Mutual Casualty Company, including certain of its
subsidiaries, are incorporated herein by reference to Exhibit No. 10.16 of Kemper
Corporation's Annual Report on Form 10-K filed March 29, 1990.
* 10.8(a) Kemper Corporation 1982 Incentive Stock Option Plan is incorporated herein by reference
to Exhibit No. 10 to Kemper Corporation's Annual Report on Form 10-K filed March 31,
1982.
* 10.8(b) Kemper Corporation 1985 Amended Stock Option Plan is incorporated herein by reference to
Exhibit A to Kemper Corporation's Proxy Statement mailed April 22, 1987 for the annual
meeting of stockholders held May 20, 1987.
* 10.8(c) Kemper Corporation 1990 Stock Option Plan is incorporated herein by reference to Exhibit
B to Kemper Corporation's Proxy Statement mailed April 1, 1991 for the annual meeting of
stockholders held May 15, 1991.
* 10.9 Kemper Corporation Non-Management Director Stock Option Plan is incorporated herein by
reference to Exhibit A to Kemper Corporation's Proxy Statement mailed April 1, 1991 for
the annual meeting of stockholders held May 15, 1991.
* 10.10(a) Kemper Corporation Executive Deferred Compensation Program is incorporated herein by
reference to Exhibit No. 10.10(a) to Kemper Corporation's Annual Report on Form 10-K
filed April 1, 1991.
* 10.10(b) Kemper Corporation Director Deferred Compensation Plan is incorporated herein by
reference to Exhibit No. 10.10(b) to Kemper Corporation's Annual Report on Form 10-K
filed March 31, 1993.
* 10.10(c) Federal Kemper Life Assurance Company Director Deferred Compensation Plan is incorporated
herein by reference to Exhibit No. 10.10(c) to Kemper Corporation's Annual Report on Form
10-K filed March 31, 1993.
* 10.10(d) Kemper Corporation Directors Travel Accident Insurance Plan is incorporated herein by
reference to Exhibit No. 10.10(d) to Kemper Corporation's Annual Report on Form 10-K
filed March 31, 1993.
* 10.10(e) Kemper Corporation Directors' Life Insurance Coverage Plan is incorporated herein by
reference to Exhibit No. 10.10(c) to Kemper Corporation's Annual Report on Form 10-K
filed April 1, 1991.
* 10.11(a) Kemper Corporation Senior Executive Long-Term Incentive Plan is incorporated herein by
reference to Exhibit A to Kemper Corporation's Proxy Statement mailed April 12, 1985 for
the annual meeting of stockholders held May 22, 1985.
* 10.11(b) Kemper Corporation 1989 Senior Executive Long-Term Incentive Plan is incorporated herein
by reference to Exhibit A to Kemper Corporation's Proxy Statement mailed April 27, 1989
for the annual meeting of stockholders held May 17, 1989.
* 10.12(a) Kemper Corporation Supplemental Retirement Plan (as adopted effective May 16, 1990) is
incorporated herein by reference to Exhibit No. 10.12(a) to Kemper Corporation's Annual
Report on Form 10-K filed April 1, 1991.
* 10.12(b) Kemper Director Retirement Plan is incorporated herein by reference to Exhibit No.
10.12(b) to Kemper Corporation's Annual Report on Form 10-K filed March 29, 1990.
* 10.12(c) Kemper Corporation Minimum Retirement Benefit Arrangement is incorporated herein by
reference to Exhibit No. 10.12(c) to Kemper Corporation's Annual Report on Form 10-K
filed April 1, 1991.
* 10.13 Form of Officer/Director Indemnification Agreement is incorporated herein by reference to
Exhibit D to Kemper Corporation's Proxy Statement mailed April 22, 1987 for the annual
meeting of stockholders held May 20, 1987.
</TABLE>
83
<PAGE> 86
<TABLE>
<CAPTION>
EXHIBIT NO.
<S> <C>
10.14(a) Partnership Agreement dated April 1, 1991 between National Loss Control Service
Corporation and Kemper National Services, Inc. is incorporated herein by reference to
Exhibit No. 10.14(a) to Kemper Corporation's Annual Report on Form 10-K filed April 1,
1991.
10.14(b) Sponsors' Agreement dated April 1, 1991 among Lumbermens Mutual Casualty Company, Kemper
Corporation and Kemper Risk Management Services is incorporated herein by reference to
Exhibit No. 10.14(b) to Kemper Corporation's Annual Report on Form 10-K filed April 1,
1991.
10.14(c) First Amendment to the Sponsors' Agreement dated August 2, 1993 by and between Lumbermens
Mutual Casualty Company and Kemper Corporation.+
10.15(a) Stock Rights Agreement dated as of March 31, 1989 by and between Kemper Corporation and
Lumbermens Mutual Casualty Company is incorporated herein by reference to Exhibit No.
10.15(b) to Kemper Corporation's Annual Report on Form 10-K filed March 31, 1989.
10.15(b) First Amendment to Stock Rights Agreement dated as of March 18, 1993 by and between
Lumbermens Mutual Casualty Company and Kemper Corporation is incorporated herein by
reference to Exhibit No. 10.3 to Kemper Corporation's Current Report on Form 8-K filed
March 24, 1993.
10.16(a) Participation Agreement dated as of December 31, 1991 by and among Kemper Investors Life
Insurance Company, Federal Kemper Life Assurance Company and Lumbermens Mutual Casualty
Company is incorporated herein by reference to Exhibit No. 10.17(a) to Kemper
Corporation's Annual Report on Form 10-K filed March 30, 1992.
10.16(b) Guaranty Agreement dated December 31, 1991 by and between Kemper Corporation and
Lumbermens Mutual Casualty Company is incorporated herein by reference to Exhibit No.
10.16(b) to Kemper Corporation's Annual Report on Form 10-K filed March 30, 1992.
10.17 Stock Purchase Agreement dated July 1, 1993 by and between Kemper Corporation and St.
Paul Fire and Marine Insurance Company is incorporated herein by reference to Exhibit No.
10 on Form 8-K filed September 15, 1993.
10.18(a) Stock Exchange Agreement dated March 18, 1993 by and between Kemper Corporation and
Lumbermens Mutual Casualty Company is incorporated herein by reference to Exhibit No.
10.1 to Kemper Corporation's Current Report on Form 8-K filed March 24, 1993.
10.18(b) First Amendment dated August 1, 1993 to Stock Exchange Agreement dated March 18, 1993.+
10.19(a) Agreement to Form Partnership is incorporated herein by reference to Exhibit No. 10.5 to
Kemper Corporation's Current Report on Form 8-K filed March 24, 1993.
10.19(b) Master Limited Partnership Agreement dated as of July 15, 1993.+
10.20 Stock Purchase Agreement dated as of November 23, 1993 by and among Kemper Corporation,
Associated Insurance Companies, Inc. and Anthem P&C Holdings, Inc. is incorporated herein
by reference to Exhibit No. 10 to Kemper Corporation's Current Report on Form 8-K filed
January 18, 1994.
10.21(a) Agreement and Plan of Merger dated as of June 26, 1994 among Conseco, Inc., KC
Acquisition, Inc. and Kemper Corporation is incorporated herein by reference to Exhibit
No. 10 to Kemper Corporation's Quarterly Report on Form 10-Q filed August 12, 1994.
10.21(b) Termination Agreement dated as of November 18, 1994 between Conseco, Inc. and Kemper
Corporation.
10.22(a) Reinsurance Agreement dated as of May 1, 1991 by and between Kemper Investors Life
Insurance Company and Fidelity Life Association.+
10.22(b) Reinsurance Agreement dated as of December 1, 1992 by and between Kemper Investors Life
Insurance Company and Fidelity Life Association.+
10.22(c) Reinsurance Agreement dated March 31, 1989 by and between Federal Kemper Life Assurance
Company and Fidelity Life Association.+
* 10.23 Form of Termination Protection Agreement effective March 17, 1994.+
10.24 Put and Call Agreement and Guaranty dated as of December 15, 1994 is incorporated herein
by reference to Exhibit No. 10 to Kemper Corporation's Current Report on Form 8-K filed
December 20, 1994.
</TABLE>
84
<PAGE> 87
<TABLE>
<CAPTION>
EXHIBIT NO.
<S> <C>
10.25(a) Letter of Credit Agreement dated as of January 26, 1995 among Kemper Asset Holdings,
Inc., the banks party thereto and The Bank of New York, as administrative agent and
issuing bank.
10.25(b) First Amendment to Letter of Credit Agreement dated as of February 27, 1995 among Kemper
Asset Holdings, Inc., the banks party thereto and The Bank of New York, as administrative
agent and issuing bank.
10.25(c) Kemper Corporation Guaranty Agreement dated as of January 26, 1995.
10.25(d) Restated Note Proceeds Transfer Agreement dated as of February 27, 1995 among Kemper
Asset Holdings, Inc., certain Massachusetts business trusts, and Kemper Corporation as
guarantor.
(11) Statement regarding computation of per share earnings--the computation of consolidated
net income (loss) per share for the three years ended December 31, 1994 is included as a
note to the consolidated financial statements of the Company on page 62.
(12) Statement regarding computation of ratios--not applicable.
(13) Annual report to security holders--not applicable.
(18) Letter regarding change in accounting principles--not applicable.
(21) Subsidiaries of the registrant--a list of all of Kemper Corporation's subsidiaries,
except for those which, considered in the aggregate, would not constitute a significant
subsidiary, is filed as Exhibit No. 21 to this Annual Report on Form 10-K.
(22) Published report regarding matters submitted to a vote of security holders--the section
captioned "Annual Meeting of Stockholders" is incorporated herein by reference to Kemper
Corporation's Current Report on Form 8-K/A filed February 6, 1995.
(23) Consents of experts and counsel--the consent of KPMG Peat Marwick LLP is contained in
ITEM 8 of this Annual Report on Form 10-K.
(24) Power of attorney--a power of attorney is included above at the signature page of this
Annual Report on Form 10-K.
(27) Financial Data Schedule.
(28) Information from reports furnished to state insurance regulatory authorities--not
applicable.
(99) Additional exhibits--none.
</TABLE>
* Asterisked exhibits constitute management contracts or compensatory plans or
arrangements.
+ Incorporated herein by reference to the identically numbered exhibit to
Kemper Corporation's Annual Report on Form 10-K filed March 30, 1994.
85
<PAGE> 1
Exhibit 3.3
Resolution adopted by the Board of Directors on July 18, 1994 amending the
bylaws of Kemper Corporation:
RESOLVED, That the first sentence of Bylaw 1 of the Bylaws of Kemper
Corporation shall hereafter be amended to read in its entirety as
follows:
"1. The annual meeting of stockholders shall be held on such date
as shall be determined by the Board of Directors."; and
FURTHER RESOLVED, That, except as set forth above, Bylaw 1 and the
other Bylaws shall remain in full force and effect.
<PAGE> 1
EXHIBIT 10.21(b)
TERMINATION AGREEMENT
TERMINATION AGREEMENT, dated as of November 18, 1994 between
Conseco, Inc., an Indiana Corporation ("Conseco") and Kemper Corporation, a
Delaware corporation ("Kemper").
WHEREAS, Conseco, KC Acquisition, Inc., a Delaware corporation
and a wholly owned subsidiary of Conseco ("Sub"), and Kemper are parties to an
Agreement and Plan of Merger dated as of June 26, 1994 (the "Merger
Agreement");
WHEREAS, Section 7.1(a) of the Merger Agreement provides that
the Merger Agreement may be terminated and abandoned at any time prior to the
Effective Time (as defined in the Merger Agreement) by mutual written consent
of Conseco and Kemper;
WHEREAS, Conseco and Kemper desire to terminate the Merger
Agreement effective immediately;
NOW THEREFORE, in consideration of the premises and for other
valuable consideration, the receipt of which is hereby acknowledged, the
parties hereto hereby agree as follows:
SECTION 1. Pursuant to Section 7.1(a) of the Merger
Agreement, and in accordance with the procedures set forth in Section 7.5
thereof, Kemper and Conseco hereby terminate the Merger Agreement effective
immediately with the effect set forth in Section 2 hereof.
SECTION 2. Effective immediately, the Merger Agreement shall
be void ab initio and have no effect, and neither Conseco nor Kemper shall have
any rights or claims against the other relating to any provision of the Merger
Agreement or any breach of, or the termination of, the Merger Agreement.
Notwithstanding the foregoing, the last two sentences of Section 5.5 and
Sections 3.1(p), 3.2(o) and 8.2 of the Merger Agreement shall be effective as a
binding agreement between Conseco and Kemper from and after the date hereof as
if they were fully set forth in this place.
SECTION 3. This Termination 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 party.
<PAGE> 2
SECTION 4. This Termination 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.
IN WITNESS WHEREOF, Conseco and Kemper have caused this
Termination Agreement to be signed by their respective officers thereunto duly
authorized, all as of the date first written above.
CONSECO, INC.
/s/NGAIRE CUNEO
--------------------------------
Name: Ngaire Cuneo
Title: Executive Vice President
KEMPER CORPORATION
/s/KATHLEEN A. GALLICHIO
--------------------------------
Name: Kathleen A. Gallichio
Title: Senior Vice President,
General Counsel and
Corporate Secretary
<PAGE> 1
EXHIBIT 10.25(a)
$205,000,000
Letter of Credit Agreement
Dated as of
January 26, 1995
among
Kemper Asset Holdings, Inc.,
The Banks Party Hereto,
and
The Bank of New York, AS ADMINISTRATIVE AGENT
AND ISSUING BANK
================================================================================
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Table of Contents
Credit Agreement
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Article I Definitions......................................... 1
Section 1.1. Definitions......................................... 1
Section 1.2. Accounting Matters................................. 10
Article II Letter of Credit Facility.......................... 10
Section 2.1. Issuance of Letters of Credit...................... 10
Section 2.2. Participating Interests............................ 11
Section 2.3. Reimbursement of Payments.......................... 13
Section 2.4. Reimbursement Obligations Unconditional............ 13
Section 2.5. Indemnification.................................... 14
Section 2.6. Limited Liability of the Administrative Agent, the
Issuing Bank and the Banks......................... 14
Section 2.7. Fees............................................... 15
Section 2.8. Interest Rate Determinations....................... 16
Section 2.9. Default Rate....................................... 16
Section 2.10. Evidence of Debt................................... 16
Section 2.11. Credit Amount Terminations......................... 16
Article III Place and Application of Payments.................. 17
Section 3.1. Place and Application of Payments.................. 17
</TABLE>
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<TABLE>
<S> <C> <C>
Article IV Representations and Warranties..................... 18
Section 4.1. Organization and Qualification..................... 18
Section 4.2. Subsidiaries....................................... 18
Section 4.3. Corporate Authority and Validity of Obligations.... 18
Section 4.4. Not an Investment Company.......................... 19
Section 4.5. Margin Stock....................................... 19
Section 4.6. Financial Reports.................................. 19
Section 4.7. No Material Adverse Change......................... 19
Section 4.8. Litigation......................................... 19
Section 4.9. Taxes.............................................. 19
Section 4.10. Approvals......................................... 20
Section 4.11. Liens............................................. 20
Section 4.12. ERISA............................................. 20
Section 4.13. Environmental Compliance.......................... 20
Article V Conditions Precedent.............................. 21
Section 5.1. Effectiveness..................................... 21
Article VI Covenants......................................... 23
Section 6.1. Corporate Existence............................... 23
Section 6.2. Maintenance....................................... 23
Section 6.3. Taxes............................................. 23
</TABLE>
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<TABLE>
<S> <C> <C>
Section 6.4. Insurance......................................... 23
Section 6.5. Financial Statements and Information
to Be Furnished................................... 23
Section 6.6. Mergers or Consolidation.......................... 25
Section 6.7. Benefit Plans..................................... 26
Section 6.8. Conduct of Business............................... 26
Section 6.9. Liens............................................. 26
Section 6.10. Disposition of Assets............................. 26
Section 6.11. Compliance with Laws.............................. 26
Section 6.12. Permitted Indebtedness............................ 26
Article VII Events of Default and Remedies.................... 27
Section 7.1. Events of Default................................. 27
Section 7.2. Non-Bankruptcy Defaults........................... 30
Section 7.3. Bankruptcy Defaults............................... 30
Section 7.4. Expenses.......................................... 30
Section 7.5. Collateral for Undrawn Letters of Credit.......... 31
Article VIII Change in Circumstances........................... 31
Section 8.1. Increased Cost and Reduced Return................. 31
Section 8.2. Lending Offices................................... 33
</TABLE>
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<TABLE>
<S> <C> <C>
Article IX The Administrative Agent.......................... 34
Section 9.1. Appointment and Authorization of Administrative
Agent............................................. 34
Section 9.2. Administrative Agent and its Affiliates........... 34
Section 9.3. Action by Administrative Agent and Issuing Bank... 34
Section 9.4. Consultation with Experts......................... 35
Section 9.5. Liability of Administrative Agent and Issuing Bank;
Credit Decision................................... 35
Section 9.6. Indemnity......................................... 36
Section 9.7. Resignation of Administrative Agent and Successor
Administrative Agent.............................. 36
Article X Miscellaneous..................................... 36
Section 10.1. Withholding Taxes................................. 36
Section 10.2. No Waiver of Rights............................... 38
Section 10.3. Non-Business Day.................................. 38
Section 10.4. Documentary Taxes................................. 38
Section 10.5. Survival of Representations....................... 38
Section 10.6. Survival of Indemnities........................... 38
Section 10.7. Sharing of Set-Off................................ 39
Section 10.8. Notices........................................... 39
Section 10.9. Counterparts...................................... 40
Section 10.10. Successors and Assigns........................... 40
</TABLE>
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<TABLE>
<S> <C> <C>
Section 10.11. Assignments...................................... 40
Section 10.12. Amendments....................................... 40
Section 10.13. Headings......................................... 41
Section 10.14. Legal Fees, Other Costs and Indemnification...... 41
Section 10.15. Set Off.......................................... 41
Section 10.16. Entire Agreement 42
Section 10.17. Governing Law.................................... 42
Section 10.18. Submission to Jurisdiction;
Waiver of Jury Trial............................. 42
Section 10.19. Severability..................................... 42
</TABLE>
EXHIBIT A - FORM OF LETTER OF CREDIT
SCHEDULE 2.1
SCHEDULE 6.5(A)
SCHEDULE 6.5(B)
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Letter of Credit Agreement
To each of the Banks party hereto
Ladies and Gentlemen:
The undersigned, Kemper Asset Holdings, Inc., a Delaware corporation (the
"Applicant"), applies to you for your several commitments, subject to all the
terms and conditions hereof and on the basis of the representations and
warranties hereinafter set forth, to make available letters of credit as more
fully hereinafter set forth. Each of you is hereinafter referred to as a
"Bank," all of you are hereinafter referred to collectively as the "Banks," and
The Bank of New York, in its capacity as administrative agent for the Banks
hereunder is hereinafter referred to as the "Administrative Agent" and The Bank
of New York in its capacity as issuer of said letters of credit hereunder is
hereinafter referred to as the "Issuing Bank."
Article I
Definitions
Section 1.1. Definitions. The following terms when used herein have the
following meanings:
"A Drawing" shall have the same meaning herein as in each Letter of Credit.
"Accumulated Funding Deficiency" has the meaning ascribed to that term in
Section 3.02 of ERISA.
"Administrative Agent" means The Bank of New York and any successor
Administrative Agent appointed pursuant to Section 9.7 hereof.
"Affiliate" means, with respect to a Person, any other Person that,
directly or indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with, such first Person; unless
otherwise specified, "Affiliate" means an Affiliate of either the Applicant or
the Guarantor.
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<PAGE> 8
"Aggregate Credit Amount" means the sum of the Available Amounts of each
Letter of Credit.
"Applicable Law" means (i) all applicable common law and principles of
equity and (ii) all applicable provisions of all (A) constitutions, statutes,
rules, regulations and orders of governmental bodies (including, but not
limited to, guidelines or policies published or imposed by governmental bodies
or other bodies having supervisory authority over the Person subject to such
Applicable Law), (B) Governmental Approvals and (C) orders, decisions,
judgments and decrees of all courts (whether at law or in equity or admiralty)
and arbitrators.
"Applicant" is defined in the introductory paragraph hereof.
"Available Amount" shall mean, with respect to any Letter of Credit, the
"Available Amount" as defined in such Letter of Credit.
"Bank" means each bank signatory hereto or that becomes a Bank hereunder
pursuant to Section 10.11 hereof.
"Bankruptcy Code" means the United States Bankruptcy Code of 1978, as
amended.
"Base Financial Statements" means the most recent, audited, consolidated
balance sheet of the Guarantor and its Consolidated Subsidiaries and the
related statements of income, retained earnings and, as applicable, changes in
financial position or cash flows for the fiscal year ended with the date of
such balance sheet delivered to the Banks.
"Base Rate" means, for any day, a rate per annum equal to the higher of
(i) the Prime Rate for such day and (ii) the sum of the Federal Funds Rate for
such day plus 1/2% per annum.
"Beneficiaries" means, collectively, Kemper Money Market Fund, Cash
Equivalent Fund, Kemper Portfolios, Cash Account Trust and Kemper Investors
Fund, as beneficiaries of the Letters of Credit.
"Beneficiary" means any of the Beneficiaries.
-8-
<PAGE> 9
"Benefit Plan" means, at any time, any employee benefit plan (other than a
Multiemployer Benefit Plan) subject to Title IV of ERISA in respect of which
the Applicant or any ERISA Affiliate is, or at any time within five years
immediately preceding the time in question was, an "Employer" (as defined in
Section 3(5) of ERISA).
"Business Day" means any day other than a Saturday, Sunday or other day on
which banks in New York, New York; Pittsburgh, Pennsylvania or Chicago,
Illinois are authorized or required to close.
"Capital Security" means, with respect to any Person, (i) any share of
capital stock of such Person or (ii) any security convertible into, or any
option, warrant or other right to acquire, any share of capital stock of such
Person.
"Closing Date" means January 26, 1995.
"Code" means the Internal Revenue Code of 1986, as amended, and any
successor statute thereto.
"Collateral" shall have the meaning set forth in the Pledge and Security
Agreement.
"Consolidated Subsidiary" means, with respect to any Person at any time,
any Subsidiary or other Person the accounts of which would, in accordance with
Generally Accepted Accounting Principles, be consolidated with those of such
first Person in its consolidated financial statements as of such time; unless
otherwise specified herein, "Consolidated Subsidiary" means a Consolidated
Subsidiary of the Guarantor.
"Contingent Indebtedness" means (i) all obligations of any Person, whether
or not contingent, on or with respect to letters of credit, banker's
acceptances and other evidences of indebtedness representing extensions of
credit whether or not representing obligations for borrowed money, and (ii) all
Guarantees of such Person.
"Contract" means (i) any agreement (whether bi-lateral or uni-lateral or
executory or non-executory and whether a Person entitled to rights thereunder
is so entitled directly or as a third-party beneficiary), including an
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<PAGE> 10
indenture, lease or license, (ii) any deed or other instrument of conveyance,
(iii) any certificate of incorporation or charter and (iv) any by-law.
"Controlled Group" means all members of a controlled group of corporations
and all trades or businesses (whether or not incorporated) under common control
which, together with the Applicant or any Subsidiary, are treated as a single
employer under Section 414 of the Code.
"Credit Amount" of any Bank means the amount set forth opposite each such
Bank's name on the appropriate signature page hereof or, in the case of a Bank
that becomes a Bank pursuant to an assignment, the amount of the assignor's
Credit Amount assigned to such Bank, in either case as the same may be reduced
from time to time in accordance with the terms of this Agreement.
"Credit Documents" means this Agreement, the Guaranty Agreement, the
Security Documents, each Letter of Credit, and any other document executed in
connection with this Agreement or therewith.
"Debt" means any Liability that constitutes "debt" or "Debt" under Section
101(12) of the Bankruptcy Code or under the Uniform Fraudulent Conveyance Act,
the Uniform Fraudulent Transfer Act or any analogous Applicable Law.
"Default" means any condition or event that constitutes an Event of
Default or that with the giving of notice or lapse of time or both would,
unless cured or waived, become an Event of Default.
"Dollars" and the sign "$" mean lawful money of the United States of
America.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Affiliate" means any Person, including a Subsidiary or other
Affiliate, that is a member of any group of organizations within the meaning of
Code Sections 414(b), (c), (m) or (o) of which the Applicant is a member.
"Event of Default" means any of the events specified in Section 7.1 hereof.
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<PAGE> 12
"Federal Funds Rate" means, for any day, the rate per annum (rounded
upwards, if necessary, to the nearest 1/100 of 1%) equal to the weighted
average of the rates on overnight Federal funds transactions with members of
the Federal Reserve System arranged by Federal funds brokers on such day, as
published by the Federal Reserve Bank of New York on the Business Day next
succeeding such day, provided that (i) if such day is not a Business Day, the
Federal Funds Rate for such day shall be such rate on such transactions on the
next preceding Business Day as so published on the next succeeding Business
Day, and (ii) if no such rate is so published on such next succeeding Business
Day, the Federal Funds Rate for such day shall be the average rate (similarly
rounded) quoted to the Administrative Agent.
"Generally Accepted Accounting Principles" means the accounting principles
followed at the time of the preparation of the Base Financial Statements.
"Governmental Approval" means any authorization, consent, approval,
license or exemption of, registration or filing with, or report or notice to,
any governmental unit.
"Guaranteed Obligations" means all obligations of the Guarantor with
respect to the Guaranteed Indebtedness (as defined in the Guaranty Agreement).
"Guarantor" means Kemper Corporation, a Delaware corporation.
"Guaranty" of any Person means any obligation, contingent or otherwise, of
such Person (i) to pay any Liability of any other person or to otherwise
protect, or having the practical effect of protecting, the holder of any such
Liability against loss (whether such obligation arises by virtue of such Person
being a partner of a partnership or participant in a joint venture or by
agreement to pay, to keep well, to purchase assets, goods, securities or
services or to take or pay, or otherwise) or (ii) incurred in connection with
the issuance by a third Person of a Guaranty of any Liability of any other
Person (whether such obligation arises by agreement to reimburse or indemnify
such third Person or otherwise). The word "Guarantee" when used as a verb has
the correlative meaning.
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<PAGE> 13
"Guaranty Agreement" means the Guaranty Agreement dated as of January 26,
1995 executed by the Guarantor in favor of the Administrative Agent, the
Issuing Bank and the Banks.
"Indebtedness" of any Person means (whether, in each case, such obligation
is with full or limited recourse) (i) any obligation of such Person for
borrowed money, (ii) any obligation of such Person evidenced by a bond,
debenture, note or other similar instrument, (iii) any obligation of such
Person to pay the deferred purchase price of property or services, except a
trade account payable that arises in the ordinary course of business but only
if and so long as the same is payable on customary trade terms, (iv) any
obligation of such Person as lessee under a capital lease, (v) any obligation
of such Person to purchase securities or other Property that arises out of or
in connection with the sale of the same or substantially similar securities or
Property, (vi) any non-contingent obligation of such Person to reimburse any
other Person in respect of amounts paid under a letter of credit or other
Guaranty issued by such other Person, to the extent that such reimbursement
obligation remains outstanding after it becomes non-contingent, (vii) any
obligation with respect to an interest rate or currency swap or similar
obligation obligating such Person to make payments, whether periodically or
upon the happening of a contingency, except that if any agreement relating to
such obligation provides for the netting of amounts payable by and to such
Person thereunder or if any such agreement provides for the simultaneous
payment of amounts by and to such Person, then, in each such case, the amount
of such obligation shall be the net amount thereof, (viii) any Indebtedness of
others secured by (or for which the holder of such Indebtedness has an existing
right, contingent or otherwise, to be secured by) a Lien (other than Liens
incurred in the ordinary course of business in connection with securities
lending activities on any asset of such Person), and (ix) Indebtedness of
others Guaranteed by such Person.
"Indemnified Person" means any Person that is, or at any time was, the
Administrative Agent, a Bank, the Issuing Bank, an Affiliate of the
Administrative Agent, a Bank, or the Issuing Bank or a director, officer,
employee or agent of any such Person and any permitted assignee thereof.
"Issuing Bank" means The Bank of New York, as issuer of the Letters of
Credit hereunder.
"KFS" means Kemper Financial Services, Inc., a Delaware corporation.
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<PAGE> 14
"L/C Obligations" means the aggregate Available Amount of all outstanding
Letters of Credit and all unpaid Reimbursement Obligations.
"Lending Office" is defined in Section 8.2 hereof.
"Letter of Credit" means each of the letters of credit issued by the
Issuing Bank pursuant to the terms hereof substantially in the form of Exhibit
A hereto.
"Liability" of any Person means (in each case whether with full or limited
recourse) any indebtedness, liability, obligation, covenant or duty of or
binding upon, or any term or condition to be observed by or binding upon, such
Person or any of its assets, of any kind, nature or description, direct or
indirect, absolute or contingent, due or not due, contractual or tortious,
liquidated or unliquidated, whether arising under Contract, Applicable Law, or
otherwise, now existing or hereafter arising, and whether or not (i) for the
payment of money or the performance or non-performance of any act or (ii) an
allowable claim under the Bankruptcy Code, and includes any Indebtedness or
Debt of such Person.
"Lien" means, with respect to any Property or asset (or any income or
profits therefrom) of any Person (in each case whether the same is consensual
or nonconsensual or arises by Contract, operation of law, legal process or
otherwise) (i) any mortgage, lien, pledge, attachment, levy or other security
interest of any kind thereupon or in respect thereof or (ii) any other
arrangement, express or implied, under which the same is subordinated,
transferred, sequestered or otherwise identified so as to subject the same to,
or make the same available for, the payment or performance of any Liability in
priority to the payment of the ordinary, unsecured creditors of such Person.
For the purposes of this Agreement, a Person shall be deemed to own subject to
a Lien any asset that it has acquired or holds subject to the interest of a
vendor or lessor under any conditional sale agreement, capital lease or other
title retention agreement relating to such asset.
"Liquidity Support" means the sum of (i) the unused "commitment" under the
Long Term Facility (which shall not include any amounts required to be reserved
pursuant to the terms of the Master Agreement), (ii) the unused "commitment"
under the Short Term Facility, (iii) cash and Marketable Securities of the
Guarantor that are not subject to any Lien or restricted
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for uses inconsistent with payment of the Obligations, and (iv) cash and
Marketable Securities of any Unregulated Subsidiary of the Guarantor that are
not subject to any Lien or restricted for uses inconsistent with payment of the
Obligations.
"Long Term Facility" means the Credit Agreement dated as of November 1,
1993 among the Guarantor, the banks party thereto, Credit Suisse, The First
National Bank of Chicago, Bank of Montreal, The Bank of New York, and Bank of
America Illinois (formerly known as Continental Bank, N.A.), as Co-Agents, and
The First National Bank of Chicago, as Administrative Agent, which agreement
provides for a commitment from the banks thereunder to make advances during a
period not in excess of three (3) years, as in effect on the date hereof.
"Margin Stock" means "margin stock" as defined in Regulation U.
"Marketable Securities" means:
(a) direct obligations of the United States of America or of any
agency or instrumentality thereof whose obligations constitute full
faith and credit obligations of the United States of America;
(b) commercial paper rated at least P-2 by Moody's or at least A-2
by S&P;
(c) certificates of deposit issued by any United States commercial bank
or federal savings bank having capital and surplus of not less than
$50,000,000;
(d) corporate debt securities which have a long-term rating of at least
"A2" or "A" or a short-term rating of at least "P-2" or "A-2" by Moody's or
S&P, respectively; and
(e) mutual funds (including without limitation money market funds)
registered under the Investment Company Act of 1940, as amended,
provided that the portfolio of any such mutual fund is limited to obligations
described in paragraphs (a) through (d) above and to agreements to purchase
such obligations.
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"Master Agreement" means the Master Letter of Credit Agreement dated as of
November 4, 1994 among Kemper Investors Life Insurance Company, Federal Kemper
Life Assurance Company, the banks party thereto, and Credit Suisse, as
Administrative Agent and Issuing Bank as in effect on the date hereof.
"Materially Adverse Effect" means (i) with respect to any Person, an
effect that would result in a material adverse change from the perspective of a
lender under a credit facility substantially similar to that provided for under
this Agreement in any of such Person's business, assets, Liabilities, financial
condition, results of operations or business prospects, (ii) with respect to a
group of Persons "taken as a whole", an effect that would result in a material
adverse change from the perspective of a lender under a credit facility
substantially similar to that provided for under this Agreement in any of such
Persons' business, assets, Liabilities, financial condition, results of
operations or business prospects taken as a whole on, where appropriate, a
consolidated basis in accordance with Generally Accepted Accounting Principles,
and (iii) with respect to this Agreement or any of the other Credit Documents,
any adverse effect, whether or not material, on the ability to perform or the
binding nature, validity or enforceability thereof as obligations of the
Applicant or Guarantor.
"Moody's" means Moody's Investors Service, Inc.
"Multiemployer Benefit Plan" means any employee benefit plan that is a
multiemployer plan as defined in Section 4001(a)(3) of ERISA.
"Note Transfer Agreement" means the Note Transfer Agreement dated as of
January 26, 1995 between the Applicant and the Beneficiaries.
"Notes" means the County of Orange, State of California, 1994-95 Taxable
Notes dated July 8, 1994 and due July 10, 1995 owned by the Beneficiaries.
"Obligations" means all fees payable hereunder, all obligations of the
Applicant to pay Reimbursement Obligations, and all other payment obligations
of the Applicant arising under or in relation to any of the Credit Documents.
"PBGC" means the Pension Benefit Guaranty Corporation, or any successor
thereto.
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"Percentage" means for each Bank, the percentage of the Aggregate Credit
Amount for all the Banks represented by such Bank's Credit Amount or if the
Aggregate Credit Amount is $0, the percentage held by such Bank (including
through participation interests in L/C Obligations) of the aggregate principal
amount of all outstanding Obligations.
"Permitted Lien" means: (i) a Lien securing and only securing the
Obligations of the Applicant under this Agreement; (ii) any Lien securing a
tax, assessment or other governmental charge or levy or the claim of a
materialman, mechanic, carrier, warehouseman or landlord for labor, materials,
supplies or rentals incurred in the ordinary course of business, which is being
contested in good faith by appropriate proceedings which prevent enforcement of
such Lien and for which adequate reserves are maintained, and for which any
foreclosure, distraint, sale or other similar proceedings shall not have been
commenced; and (iii) any Lien consisting of a deposit or pledge made in the
ordinary course of business in connection with, or to secure payment of,
obligations under workers' compensation, unemployment insurance or similar
legislation.
"Person"" means any individual, sole proprietorship, corporation,
partnership, limited liability company, trust, unincorporated organization,
mutual company, joint stock company, estate, union, employee organization,
government or any agency or political subdivision thereof or any court or
arbitrator or, for the purpose of the definition of "ERISA Affiliate", any
trade or business.
"Pledge and Security Agreement" means the Pledge and Security Agreement
dated January 26, 1995 between the Applicant and The Bank of New York, as
Administrative Agent.
"Premises" means any real property (i) to which the Applicant or any of
its Subsidiaries holds title or (ii) of which the Applicant or any of its
Subsidiaries is the lessee.
"Prime Rate" means, at any time, the rate of interest publicly announced
from time to time by The Bank of New York as its U.S. dollar prime commercial
lending rate for borrowers located in the U.S. (which rate may not be such
bank's lowest rate of interest).
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"Prohibited Transaction" means any transaction that is prohibited under
Code Section 4975 or ERISA Section 406 and not exempt under Code Section 4975
or ERISA Section 408, each as amended.
"Property" means any interest in any kind of property or asset, whether
real, personal or mixed, or tangible or intangible, whether now owned or
hereafter acquired.
"Regulation U" means Regulation U issued by the Board of Governors of the
Federal Reserve System, as amended, and any successor regulation.
"Regulation X" means Regulation X issued by the Board of Governors of the
Federal Reserve System, as amended, and any successor regulation.
"Reimbursement Obligations" means the obligations of the Applicant to
reimburse the Issuing Bank for any drawing under a Letter of Credit, as
provided herein.
"Reportable Event" means, with respect to any Benefit Plan (i) the
occurrence of any of the events set forth in ERISA Section 4043(b) (other than
any such event as to which the provision of 30 days' notice to the PBGC is
waived under applicable regulations), or the regulations thereunder with
respect to such Benefit Plan, (ii) the incurrence of liability by the Applicant
or any ERISA Affiliate under Section 4063 of ERISA as a result of the
withdrawal of the Applicant or any ERISA Affiliate from any Benefit Plan during
a plan year in which it is a "substantial employer" as defined in Section
4001(a)(2) of ERISA, including a cessation of operations that is treated as a
withdrawal by a "substantial employer" under Section 4068(f) of ERISA, (iii)
any event requiring the Applicant or any ERISA Affiliate to provide security to
such Benefit Plan under Code Section 401(a)(29) or (iv) any failure by the
Applicant or any ERISA Affiliate to make a payment required by Code Section
412(m) with respect to such Benefit Plan.
"Required Banks" means, at any time, the Banks (which may include the
Issuing Bank) having together at least 66-2/3% of the aggregate amount of the
Percentages.
"S&P" means Standard & Poor's Ratings Group, a division of McGraw-Hill,
Inc.
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"Security Documents" means the Pledge and Security Agreement, the Note
Transfer Agreement, the Subordination Agreement and all security agreements,
and like agreements or instruments delivered by the Applicant or the Guarantor
granting a Lien in any of the Applicant's or the Guarantor's Property to the
Administrative Agent for the benefit of the Banks to secure the Obligations, as
any of the same may be amended, supplemented or otherwise modified from time to
time.
"Short Term Facility" means the Credit Agreement dated as of November 1,
1993 among the Guarantor, the banks party thereto, Credit Suisse, The First
National Bank of Chicago, Bank of Montreal, The Bank of New York, and Bank of
America Illinois (formerly known as Continental Bank, N.A.), as Co-Agents, and
The First National Bank of Chicago, as Administrative Agent, which agreement
provides for a commitment from the banks thereunder to make advances during a
period not in excess of 360 days, as in effect on the date hereof.
"Subordination Agreement" means the Collateral Subordination Agreement
dated as of January 26, 1995 between the Guarantor and the Administrative
Agent.
"Subsidiary" means, with respect to any Person, any other Person (i) the
securities of which having ordinary voting power to elect a majority of the
board of directors (or other persons having similar functions) or (ii) other
ownership interests which ordinarily constitute a majority voting interest, are
at the time, directly or indirectly, owned or controlled by such first Person,
or by one or more of its Subsidiaries, or by such first Person and one or more
of its Subsidiaries; unless otherwise specified, "Subsidiary" means a
Subsidiary of the Applicant.
"Tax" means any Federal, State or foreign tax, assessment or other
governmental charge or levy (including any withholding tax) upon a Person or
upon its assets, revenues, income or profits.
"Termination Date" means July 17, 1995.
"Termination Event" means, with respect to any Benefit Plan (i) any
Reportable Event with respect to such Benefit Plan, (ii) the provision by the
Applicant or any ERISA Affiliate of a notice of intent to terminate such
Benefit Plan in a distress termination under ERISA Section 4041(c), (iii) the
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institution of proceedings to terminate such Benefit Plan under ERISA Section
4042 or (iv) the appointment of a trustee to administer such Benefit Plan under
ERISA Section 4042.
"Unfunded Benefit Liabilities" means, with respect to any Benefit Plan at
any time, the amount of unfunded benefit liabilities of such Benefit Plan at
such time as determined under ERISA Section 4001(a)(18).
"Unregulated Subsidiary" means any Subsidiary of the Guarantor that is not
(i) prohibited by regulatory or contractual limitations from transferring
assets to the Guarantor, or (ii) a life insurance company.
"Welfare Plan" means a "welfare plan" as such term is defined in Section
3(1) of ERISA.
Section 1.2. Accounting Matters;. Unless otherwise specified herein, all
accounting determinations hereunder and all computations utilized by the
Applicant in complying with the covenants contained herein shall be made, all
accounting terms used herein shall be interpreted, and all financial statements
required to be delivered hereunder shall be prepared in accordance with
Generally Accepted Accounting Principles, except, in the case of such financial
statements other than the Base Financial Statements for changes therein or
therefrom (x) that have been certified and approved by the Chief Financial
Officer of the Guarantor and the Applicant and as may from time to time be
approved in writing by the independent certified public accountants who are at
the time, in accordance with Section 6.5(b) hereof, reporting on the
Guarantor's financial statements and (y) as may be required by any governmental
body having supervisory power over the Guarantor or any of its Subsidiaries to
the extent such changes are described therein and have been noted by such
accountants.
Article II
Letter of Credit Facility
Section 2.1. Issuance of Letters of Credit. (a) The Letters of Credit.
Subject to the terms and conditions hereof, the Issuing Bank, in reliance upon
the obligations of the Banks hereunder, agrees to issue the Letters of Credit
on the Closing Date for the account of the Applicant in an aggregate undrawn
face amount up to the amount of the Aggregate Credit Amount. The
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Applicant has advised and directed the Issuing Bank that the Letters of Credit
are to be issued in the amounts set forth in Schedule 2.1 hereto.
(b) Letter of Credit Drawings. Each Beneficiary of a Letter of Credit is
authorized to make drawings under its respective Letter of Credit in accordance
with the terms thereof. The Applicant hereby directs the Issuing Bank to make
payments under each Letter of Credit in the manner therein provided. The
Applicant hereby irrevocably approves of all reductions of the Available Amount
of each Letter of Credit as provided in each respective Letter of Credit. Upon
receipt from any Beneficiary of any demand for payment under such Letter of
Credit, the Issuing Bank shall promptly notify the Applicant, each Bank and the
Administrative Agent as to the amount to be paid as a result of such demand and
the payment date thereof; provided, that the failure to so notify shall not
affect the obligations of the Applicant or any Bank to the Issuing Bank
hereunder once the Applicant and such Banks have received such notice.
Section 2.2. Participating Interests. (a) Each Bank, by its execution and
delivery of this Agreement, severally, and without any notice to or the taking
of any action by such Bank, takes from the Issuing Bank without recourse or
warranty from the Issuing Bank (except as otherwise provided herein), an
undivided participating interest, to the extent of such Bank's Percentage, in
each Letter of Credit issued by the Issuing Bank hereunder and in the
Reimbursement Obligations and the rights of the Issuing Bank hereunder.
(b) Upon (i) any failure by the Applicant to pay any Reimbursement
Obligation in accordance with Section 2.3 hereof if such failure is not cured
by the Guarantor as provided in the Guaranty by the end of the Business Day on
which such Reimbursement Obligation is due, or (ii) in the event the Issuing
Bank is required at any time to return to the Applicant (or, if applicable, the
Guarantor) or to a trustee, receiver, liquidator, custodian or other similar
official thereof any portion of any payment made by or on behalf of the
Applicant (including, if applicable, any payment made by the Guarantor) of any
Reimbursement Obligation, each Bank (other than the Issuing Bank) shall, not
later than the Business Day of receipt of notice from the Issuing Bank (given
directly or through the Administrative Agent) to such effect, if such notice is
received before 1:00 P.M.) (New York time), or not later than the Business Day
following receipt of such notice, if such notice is received after such time,
pay to the Administrative Agent for the account
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of the Issuing Bank an amount equal to such Bank's Percentage of such unpaid or
recaptured Reimbursement Obligation together with interest on such amount
accrued from the date the related payment was made by the Issuing Bank to the
date of such payment by such Bank at a rate per annum equal to (A) from the
date the related payment was made by the Issuing Bank to the date two (2)
Business Days after payment by such Bank is due hereunder, the Federal Funds
Rate for each day and (B) thereafter, the sum of 1% plus the Base Rate for each
day, whether before or after the entry of a judgment thereon. Each such Bank
shall thereafter be entitled to receive its Percentage of each payment in
respect of such Reimbursement Obligation and interest thereon.
(c) The several obligations of the Banks to the Issuing Bank hereunder
shall be absolute, irrevocable and unconditional under any and all
circumstances whatsoever and shall not be subject to any set-off, counterclaim
or defense to payment which any Bank may have or have had against the
Applicant, the Guarantor, the Administrative Agent, the Issuing Bank, or any
other Bank. Without limiting the generality of the foregoing, such obligations
shall not be affected by any Default and each payment shall be made without any
offset, abatement, withholding or reduction whatsoever, including without
limitation the following circumstances:
(i) any lack of validity or enforceability of any of the Credit Documents;
(ii) any amendment or waiver of or any consent to departure from all or
any of the provisions of any of the Credit Documents;
(iii) the existence of any claim, set-off, defense or other rights that
the Applicant or the Guarantor may have at any time against any Beneficiary (or
any Persons or entities for whom such Beneficiary may be acting), the
Administrative Agent, the Issuing Bank, any Bank or any other Person, whether
in connection with the Credit Documents or any unrelated transactions;
(iv) any statement or any other document presented under a Letter of
Credit proving to be forged, fraudulent or invalid in any respect or any
statement therein being untrue, insufficient or inaccurate in any respect
whatsoever, regardless of whether any Bank, the Applicant or any other Person
has provided the Issuing Bank, any other Bank or the Administrative Agent with
notice of the foregoing;
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(v) payment by the Issuing Bank under a Letter of Credit against
presentation of a draft or certificate that does not comply with the terms of
such Letter of Credit, provided that the determination that documents presented
under such Letter of Credit comply with the terms thereof shall not have
constituted gross negligence or willful misconduct of the Issuing Bank;
(vi) the existence of any Default or the exercise of any remedy by reason
thereof;
(vii) errors, omissions, interruptions or delays in the transmission or
delivery of any messages by mail, cable, telegraph, telecopier, telex or
otherwise, whether or not they be in cipher;
(viii) errors in interpretation of technical terms;
(ix) any loss or delay in the transmission or otherwise of any document
required in order to make a drawing under any Letter of Credit or the proceeds
thereof;
(x) the misapplication by the Beneficiary of any Letter of Credit or
the proceeds of any payment of any Letter of Credit;
(xi) any consequences arising from causes beyond the control of the
Issuing Bank, including without limitation, any acts of government; and
(xii) any other act or omission to act or delay of any kind by the
Issuing Bank, any Bank, the Administrative Agent or any other Person or any
other event or circumstance whatsoever that might, but for the provisions of
this Section, constitute a legal or equitable discharge such Bank's obligations
hereunder.
(d) The Banks (other than the Issuing Bank) shall, to the extent of their
respective Percentages, indemnify the Issuing Bank (to the extent not
reimbursed by the Applicant or the Guarantor) against any cost, expense
(including counsel fees and disbursements), claim, demand, action, loss or
liability (except such as result from the Issuing Bank's gross negligence or
willful misconduct) that the Issuing Bank may suffer or incur in connection
with any Letter of Credit issued by it hereunder.
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Section 2.3. Reimbursement of Payments. Reimbursement of Drawings. The
Applicant shall reimburse the Issuing Bank on each date a payment is made under
a Letter of Credit for the full amount of such payment. To the extent that the
Applicant or the Guarantor fails to make such reimbursement on such date, the
Applicant will pay interest, on demand, on the unpaid amount thereof from and
including the date of such payment to but not including the date reimbursement
is made in full at the rate set forth in Section 2.9 hereof.
Section 2.4. Reimbursement Obligations Unconditional. The Reimbursement
Obligations of the Applicant under this Agreement shall be absolute,
unconditional and irrevocable, and shall be performed strictly in accordance
with the terms of this Agreement, under all circumstances whatsoever, including
without limitation the following circumstances:
(a) any lack of validity or enforceability of any of the Credit Documents;
(b) any amendment or waiver of or any consent to departure from all or
any of the provisions of any of the Credit Documents;
(c) the existence of any claim, set-off, defense or other rights that the
Applicant or the Guarantor may have at any time against any Beneficiary (or any
Persons or entities for whom such Beneficiary may be acting), the
Administrative Agent, the Issuing Bank, any Bank or any other Person, whether
in connection with the Credit Documents or any unrelated transactions;
(d) any statement or any other document presented under a Letter of
Credit proving to be forged, fraudulent or invalid in any respect or any
statement therein being untrue, insufficient or inaccurate in any respect
whatsoever, regardless of whether the Applicant, any Bank or any other Person
has provided the Issuing Bank, any Bank or the Administrative Agent with notice
of the foregoing;
(e) payment by the Issuing Bank under a Letter of Credit against
presentation of a draft or certificate that does not substantially comply with
the terms of such Letter of Credit, provided that the determination that
documents presented under such Letter of Credit
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substantially comply with the terms thereof shall not have constituted gross
negligence or willful misconduct of the Issuing Bank;
(f) the existence of any Default or the exercise of any remedy by reason
thereof;
(g) errors, omissions, interruptions or delays in the transmission or
delivery of any messages by mail, cable, telegraph, telecopier, telex or
otherwise, whether or not they be in cipher;
(h) errors in interpretation of technical terms;
(i) any loss or delay in the transmission or otherwise of any document
required in order to make a drawing under any Letter of Credit or the proceeds
thereof;
(j) the misapplication by the Beneficiary of any Letter of Credit or the
proceeds of any payment of any Letter of Credit;
(k) any consequences arising from causes beyond the control of the
Issuing Bank, including without limitation any acts of government; and
(l) any other act or omission to act or delay of any kind by the Issuing
Bank, any Bank, the Administrative Agent or any other Person or any other event
or circumstance whatsoever that might, but for the provisions of this Section,
constitute a legal or equitable discharge of the Applicant's obligations
hereunder.
Section 2.5. Indemnification. The Applicant agrees to indemnify and hold
harmless the Administrative Agent, the Issuing Bank and each Bank from and
against any and all losses, claims, damages, liabilities, and reasonable costs,
charges and expenses whatsoever that the Administrative Agent, the Issuing Bank
or any Bank may incur (or that may be claimed against the Administrative Agent,
the Issuing Bank or any Bank by any person or entity whatsoever) by reason of
or in connection with the issuance or transfer of, or payment or failure to pay
under, any Letter of Credit; provided that the Applicant shall not be required
to indemnify the Issuing Bank for any claims, damages, losses, liabilities, and
reasonable costs, charges or expenses to the extent, but only to the extent,
caused by (i) the willful misconduct or gross negligence of the Issuing Bank in
determining whether a sight draft or
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certificate presented under a Letter of Credit complied with the terms of such
Letter of Credit or (ii) the Issuing Bank's wrongful dishonor of a drawing
under a Letter of Credit after the presentation by the applicable Beneficiary
of a certificate complying with the terms and conditions of such Letter of
Credit. Notwithstanding the foregoing, nothing in this Section is intended to
limit the Applicant's obligations contained under Section 2.3 hereof.
Section 2.6. Limited Liability of the Administrative Agent, the Issuing Bank
and the Banks. The Applicant assumes all risks of the acts or omissions of any
Beneficiary with respect to its use of a Letter of Credit. Neither the
Administrative Agent, the Banks, the Issuing Bank nor any of their respective
officers, directors, employees and agents shall be liable or responsible for,
and the obligations of each Bank to make payments, and of the Applicant to
reimburse the Banks for payments, shall not be excused by, any action or
inaction of the Administrative Agent, the Issuing Bank or any Bank related to:
(a) the use which may be made of any Letter of Credit or any acts or omissions
of the applicable Beneficiary in connection therewith; (b) the validity,
genuineness, form, accuracy, sufficiency or legal effect of documents presented
under any Letter of Credit, even if such documents should in fact prove to be
in any or all respects invalid, fraudulent or forged; (c) payment by the
Issuing Bank against presentation of documents which do not comply with the
terms of the relevant Letter of Credit, including the failure of any documents
to bear any reference or adequate reference to such Letter of Credit; (d) the
validity and sufficiency of any instrument transferring or assigning or
purporting to transfer or assign any Letter of Credit or the rights or the
benefits thereunder or proceeds thereof in whole or in part; (e) errors,
omissions, interruptions or delays in transmission or delivery of any messages,
by mail, cable, telex or otherwise; (f) errors in interpretation of technical
terms; (g) any loss or delay in the transmission of any document required in
order to make a drawing under any Letter of Credit; (h) the misapplication by
the applicable Beneficiary of any Letter of Credit of the proceeds of any
drawing under any Letter of Credit; (i) any consequences arising from causes
beyond the control of any of the Issuing Bank, the Administrative Agent or the
Banks, including without limitation any government acts; or (j) any other
circumstances whatsoever in making or failing to make payment under any Letter
of Credit, or notifying or failing to notify the Issuing Bank that it is
required to make any payment under any Letter of Credit, provided that the
foregoing shall not release the Issuing Bank from any liability to any Bank
arising out of the Issuing Bank's gross
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negligence or willful misconduct. Notwithstanding the foregoing, the Applicant
shall have a claim against the Issuing Bank and the Issuing Bank shall be
liable to the Applicant, to the extent, but only to the extent, of any direct,
as opposed to consequential, damages suffered by the Applicant which were
caused by (i) the Issuing Bank's willful misconduct or gross negligence in
determining whether documents presented under a Letter of Credit comply with
the terms thereof or (ii) the Issuing Bank's wrongful dishonor of a drawing
under a Letter of Credit after the presentation to it by the Beneficiary of
documents strictly complying with the terms and conditions of such Letter of
Credit.
Section 2.7. Fees. (a) Issuing Bank Fee. The Applicant shall pay to the
Administrative Agent on March 1, 1995 for the sole and exclusive benefit of the
Issuing Bank for its own account, an annual letter of credit fronting fee
(computed on the basis of a year of 360 days and the actual number of days
elapsed) at a rate per annum equal to 0.03% of the Aggregate Credit Amount (i)
for the period from the date of issuance of each Letter of Credit and ending on
February 28, 1995 and (ii) in quarterly installments in arrears on the first
day of June, September, December and March occurring thereafter and on the
Termination Date or any earlier date on which any Letter of Credit is
terminated.
(b) Letter of Credit Fee. The Applicant shall pay directly to the
Administrative Agent for the benefit of each Bank on March 1, 1995 a
non-refundable letter of credit fee (computed on the basis of a year of 360
days and the actual number of days elapsed) at a rate per annum equal for each
day to 1.22% of the Available Amount of each Letter of Credit as from time to
time in effect for the period from the date of issuance of such Letter of
Credit and ending on February 28, 1995 and in quarterly installments in arrears
on the first day of June, September, December and March occurring thereafter
and on the Termination Date or any earlier date on which such Letter of Credit
is terminated.
(c) Arrangement Fee. The Applicant shall pay to the Administrative Agent
for the benefit of each Bank on the Closing Date an arrangement fee equal to
1.0% of each such Bank's Credit Amount on the Closing Date.
(d) Agency Fee. The Applicant shall pay to the Administrative Agent for
its own account on the Closing Date an agency fee of $25,000.
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(e) Termination Fee. The Applicant shall pay to the Administrative Agent
for the benefit of each Bank a termination fee equal to 0.40% of the terminated
portion of each Bank's Credit Amount upon termination of any portion of the
Aggregate Credit Amount if terminated on or prior to April 1, 1995 (other than
any reductions as a result of the payment by the Issuing Bank of any A Drawing
under any Letter of Credit).
Section 2.8. Interest Rate Determinations. The Administrative Agent shall
determine any and all interest payable with respect to Reimbursement
Obligations, and its determination thereof shall be conclusive and binding on
all parties hereto and the Guarantor absent manifest error.
Section 2.9. Default Rate. If any Reimbursement Obligation is not paid
when due (whether by acceleration or otherwise), such Reimbursement Obligation
shall bear interest (computed on the basis of a year of 360 days and actual
days elapsed) from the date such payment was due until paid in full, payable on
demand, at a rate per annum, whether before or after any judgment thereon,
equal to the sum of two percent (2%) plus the Base Rate from time to time in
effect.
Section 2.10. Evidence of Debt. (a) The Issuing Bank and each Bank shall
maintain in accordance with its usual practice an account or accounts
evidencing the indebtedness to such Bank hereunder, including the amounts of
principal and interest payable and paid to such Bank and all Reimbursement
Obligations owing to such Bank from time to time under this Agreement.
(b) The Administrative Agent shall maintain accounts in which it shall
record (i) the amount of each Reimbursement Obligation owing hereunder, (ii)
the amount of any principal or interest due and payable or to become due and
payable from the Applicant to the Issuing Bank and each Bank hereunder and
(iii) the amount of any sum received by the Administrative Agent hereunder from
the Applicant and the Issuing Bank and each Bank's share thereof.
(c) The entries made in the accounts maintained pursuant to paragraphs
(a) and (b) of this Section 2.10 shall be prima facie evidence of the existence
and amounts of the obligations therein recorded; provided, however, that the
failure of the Issuing Bank and any Bank or the Administrative Agent to
maintain such accounts or any error therein shall not in any manner affect the
obligations of the Applicant hereunder.
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Section 2.11. Credit Amount Terminations. (a) The Aggregate Credit Amount
shall be reduced by the amount of each drawing under any Letter of Credit, as
provided in each Letter of Credit.
(b) Each Beneficiary shall have the right at any time and from time to
time, upon written notice to the Applicant, the Issuing Bank and the
Administrative Agent, to terminate the Letter of Credit issued in its favor
upon delivery of a notice of termination in the form Annex E to such Letter of
Credit and the delivery of such Letter of Credit to the Issuing Bank. Prior to
the transfer of all of any Beneficiary's interests in the Notes supported by
any Letter of Credit (other than a transfer pursuant to Section 2 of the Note
Transfer Agreement), the Applicant shall cause such Beneficiary to return the
related Letter of Credit to the Issuing Bank. Prior to the transfer of any
portion of any Beneficiary's interests in the Notes supported by any Letter of
Credit, the Applicant shall cause such Beneficiary to reduce the Available
Amount of such Letter of Credit by delivering to the Issuing Bank a reduction
certificate in the form of Annex D to the Letter of Credit in an amount
corresponding to the principal amount of Notes transferred plus interest
thereon. The failure of any Beneficiary to deliver a Letter of Credit,
reduction certificate or notice of termination to the Issuing Bank as aforesaid
shall not affect the Reimbursement Obligations of the Applicant or the
obligations of any Bank to pay the Issuing Bank its Percentage of any unpaid or
recaptured Reimbursement Obligation with respect to any Letter of Credit
remaining issued and undrawn upon.
Article III
Place and Application of Payments
Section 3.1. Place and Application of Payments. All payments of principal
of and interest on the Reimbursement Obligations, of fees, and of all other
amounts payable under this Agreement and the other Credit Documents (other than
the Note Transfer Agreement) by the Applicant shall be made to the
Administrative Agent or the Issuing Bank, as applicable, by no later than 2:00
p.m. (New York time) at the principal office of the Administrative Agent (or
such other location as the Administrative Agent may designate to the Applicant)
for the benefit of the Issuing Bank or the Banks, as applicable. Any payments
received after such time shall be deemed to have been received by the
Administrative Agent on the next Business Day. All such payments shall be made
in Dollars, in immediately available funds at the place of
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payment, without setoff or counterclaim. The Issuing Bank hereby agrees that
if it shall receive any payments of principal or interest on the Reimbursement
Obligations, of fees (other than fees payable directly to the Issuing Bank), or
of any other amounts payable under this Agreement or any of the other Credit
Documents, it shall promptly pay such amounts over to the Administrative Agent
for distribution in accordance with the terms hereof. The Administrative Agent
will promptly thereafter cause to be distributed like funds relating to the
payment of principal or interest on the Reimbursement Obligations or fees
ratably to the Banks and like funds relating to the payment of any other amount
payable to any Bank to such Bank, in each case to be applied in accordance with
the terms of this Agreement. Anything contained in any of the Credit Documents
to contrary notwithstanding, all payments, collections and setoffs received in
respect of the Indebtedness evidenced by the Credit Documents and all proceeds
of the Collateral received, in each instance, by the Administrative Agent, the
Issuing Bank or any of the Banks after the occurrence of an Event of Default
shall be remitted to the Administrative Agent and distributed as follows:
(a) first, to the payment of any outstanding costs and expenses incurred
by the Administrative Agent in monitoring, verifying, protecting, preserving or
enforcing the liens on the Collateral or in protecting, preserving or enforcing
rights, or otherwise performing its role, under the Credit Documents and in any
event including all amounts the Applicant has agreed to pay to the
Administrative Agent under Sections 7.4 and 10.14 hereof (such funds to be
retained by the Administrative Agent for its own account unless it has
previously been reimbursed for such costs and expenses by the Banks, in which
event such amounts shall be remitted to the Issuing Bank or the Banks, as the
case may be, to reimburse them for payments theretofore made to the
Administrative Agent);
(b) second, to the payment of any outstanding interest or other fees or
amounts due under or in respect of other Credit Documents other than for
principal, ratably among the Issuing Bank or the Banks, as the case may be, in
accordance with the amount of such interest and other fees or amounts owing
each;
(c) third, to the payment of the principal of the Reimbursement
Obligations to the Issuing Banks or ratably to the Banks in accordance with the
then respective unpaid principal balances thereof;
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(d) fourth, to the Issuing Bank or the Banks ratably in accordance with
the amounts of any other Obligations owed to each until all such Obligations
have been fully paid in cash and satisfied;
(e) fifth, to the Guarantor to the extent of any Guaranteed Obligations
paid by the Guarantor under the Guaranty Agreement; and
(f) sixth, to the Applicant, or at the direction of the Applicant, to any
other Person.
Article IV
Representations and Warranties
The Applicant represents and warrants to the Banks as follows:
Section 4.1. Organization and Qualification. The Applicant is duly
organized and validly existing in good standing under the laws of the State of
Delaware, has full and adequate corporate power and authority to own or lease
its Property and carry on its business as now being and hereafter proposed to
be conducted, is duly licensed or qualified and in good standing in each
jurisdiction in which the nature of the business transacted by it or the nature
of the Property owned or leased by it makes such licensing or qualification
necessary, except where the failure to be so licensed or qualified and in good
standing would not have a Materially Adverse Effect on the Applicant.
Section 4.2. Subsidiaries. The Applicant has no Subsidiaries.
Section 4.3. Corporate Authority and Validity of Obligations. The Applicant
has full right and authority to enter into the Credit Documents to which it is
a party, and to perform all of its obligations thereunder; the Credit
Documents to which the Applicant is a party have been duly authorized, executed
and delivered by the Applicant and constitute valid and binding obligations of
the Applicant enforceable in accordance with their terms, except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally and general principles of equity; and the Credit
Documents to which the Applicant is a party do not, nor do the performance or
observance by the Applicant of any of the matters or things herein provided
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for (i) contravene any provision of law, any judgment or any charter or by-law
provision of the Applicant or any material covenant, indenture or agreement of
or affecting the Applicant or a substantial portion of their respective
Properties, except for any covenant, indenture or agreement, the contravention
of which would not have a Materially Adverse Effect on the Applicant, or (ii)
require any Governmental Approval or any other consent or approval, other than
approvals which have already been obtained, are final and not subject to review
on appeal or to collateral attack, and are in full force and effect.
Section 4.4. Not an Investment Company. The Applicant is not an "investment
company" within the meaning of the Investment Company Act of 1940, as amended.
Section 4.5. Margin Stock. The Applicant is not engaged principally, or as
one of its primary activities, in the business of extending credit for the
purpose of purchasing or carrying Margin Stock. The Letter of Credit and the
proceeds of any payments thereunder are not intended to be used in violation of
Regulation U or Regulation X.
Section 4.6. Financial Reports. The consolidated and consolidating
statement of financial condition of the Guarantor and its Consolidated
Subsidiaries as at December 31, 1993 and the related statements of consolidated
and consolidating income and cash flows of the Guarantor and its Subsidiaries
for the year then ended and accompanying notes thereto, which financial
statements are accompanied by the report of KPMG Peat Marwick L.L.P.,
independent public accountants, were prepared in accordance with Generally
Accepted Accounting Principles and present fairly in all material respects the
consolidated and consolidating financial condition of the Guarantor and its
Consolidated Subsidiaries, as at such date and their consolidated and
consolidating results of operations and consolidated cash flows for the periods
then ended; and the unaudited balance sheet of the Applicant as at September
30, 1994, was prepared in accordance with Generally Accepted Accounting
Principles and fairly presents in all material respects the consolidated
financial condition of the Applicant, as at such date.
Section 4.7. No Material Adverse Change. Since December 31, 1993, there has
been no change that has or can reasonably be expected to have a Materially
Adverse Effect on either (i) the Applicant or (ii) this Agreement.
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Section 4.8. Litigation. There are not, in any court or before any
arbitrator of any kind or before or by any governmental or nongovernmental
body, any actions, suits, investigations or proceedings pending or threatened
(nor, to the knowledge of the Applicant, is there any basis therefor) against
or in any other way relating to or affecting (a) the Applicant or any of its
businesses or Property or (b) this Agreement, which are reasonably likely,
singly or in the aggregate, to have a Materially Adverse Effect on the
Applicant.
Section 4.9. Taxes. United States Federal income tax returns of the
Guarantor and its Consolidated Subsidiaries have been examined and closed
through the fiscal year ended December 31, 1983. The Guarantor and its
Consolidated Subsidiaries have filed all United States Federal income tax
returns and all other material tax returns which are required to be filed by
them and have paid all taxes shown to be due pursuant to such returns or
pursuant to any income tax assessment relating to such returns or the periods
covered thereby received by the Guarantor and the Consolidated Subsidiaries,
except to the extent that failure to so file or the failure to so pay, as the
case may be, together with all other such failures, would not have a Materially
Adverse Effect on the Guarantor or the Applicant.
Section 4.10. Approvals. No authorization, consent, license, exemption or
filing or registration with any court or governmental department, agency or
instrumentality, or any approval or consent of the stockholders of the
Applicant or the Guarantor or from any other Person, is necessary to the valid
execution, delivery or performance by the Applicant or the Guarantor of the
Credit Documents to which it is a party.
Section 4.11. Liens. There are no Liens on any of the Property of the
Applicant except for Permitted Liens.
Section 4.12. ERISA. The Applicant is in compliance in all material
respects with ERISA, to the extent applicable, and has received no notice to
the contrary from the PBGC or any other governmental entity or agency. As of
December 31, 1993 the Applicant would not have any liability to PBGC in respect
of Unfunded Benefit Liabilities if all employee pension benefit plans
maintained by the Applicant had been terminated as of such date. No condition
exists or event or transaction has occurred with respect to any Benefit Plan
which could reasonably be expected to result in the incurrence by the Applicant
of any material liability, fine or penalty. Except as
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disclosed to the Banks in writing, the Applicant has no contingent liability
with respect to any post-retirement benefits under a Welfare Plan, other than
liability for continuation coverage described in Part 6 of Title I of ERISA.
Section 4.13. Environmental Compliance. (a) The Applicant has duly complied
with, and its Premises are in compliance with, the provisions of all federal,
state, and local environmental, health, and safety laws, codes and ordinances,
and all rules and regulations promulgated thereunder (collectively,
"Environmental Laws"), except to the extent that noncompliance with such
Environmental Laws would not have a Materially Adverse Effect on the Applicant.
(b) The Applicant has been issued and will maintain all required federal,
state, and local permits, licenses, certificates, and approvals relating to (i)
air emissions, (ii) discharges to surface water or groundwater, (iii) noise
emissions, (iv) solid or liquid waste disposal, (v) the use, generation,
storage, transportation, or disposal of toxic or hazardous substances or wastes
(intended hereby and hereafter to include any and all such materials listed in
any Environmental Laws as hazardous or potentially hazardous), or (vi) other
environmental, health, or safety matters, except to the extent that the failure
to have obtained or to maintain such permits, licenses, certificates and
approvals would not have a Materially Adverse Effect on the Applicant.
(c) The Applicant has not, with respect to the Premises, received notice
of, and does not know or reasonably suspect facts which might constitute, any
violation of any Environmental Laws, except to the extent that any such
violations would not have a Materially Adverse Effect on the Applicant.
(d) Except in accordance with a valid governmental permit, license,
certificate, or approval, there has been no emission, spill, release, or
discharge by the Applicant into or upon (i) the air, (ii) soils or any
improvements located thereon, (iii) surface water or groundwater, or (iv) the
sewer, septic system or waste treatment, storage or disposal system servicing
the Premises, of any toxic or hazardous substances or wastes at or from the
Premises during such time as the Applicant has held title to, or leased, the
Premises which would have a Materially Adverse Effect on the Applicant.
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(e) There has been no complaint, order, directive, claim, citation, or
notice by any governmental authority with respect to (i) air emissions, (ii)
spills, releases, or discharges to soils or improvements located thereon,
surface water, groundwater or the sewer, septic system or waste treatment,
storage or disposal systems servicing the Premises, (iii) noise emissions, (iv)
solid or liquid waste disposal, (v) the use, generation, storage,
transportation, or disposal of toxic or hazardous substances or waste, or (vi)
other environmental, health, or safety matters affecting the Applicant.
Article V
Conditions Present
Section 5.1. Effectiveness. This Agreement shall become effective and the
Letters of Credit shall be issued upon the receipt by the Administrative Agent
or the waiver by the Issuing Bank and the Banks of the following conditions
precedent:
(a) The favorable written opinions of (i) general counsel to the
Guarantor with respect to the Applicant and the Guarantor, and (ii) Jones,
Day, Reavis & Pogue, counsel to the Applicant and the Guarantor, in form
and substance satisfactory to the Banks;
(b) The favorable written opinion of Vedder, Price, Kaufman &
Kammholz, counsel to the Beneficiaries, in form and substance satisfactory
to the Banks;
(c) Certified copies of resolutions of the Board of Directors of the
Applicant authorizing the execution and delivery of the Credit Documents
to which it is a party and indicating the authorized signers of the Credit
Documents to which it is a party and all other documents relating thereto;
(d) A certificate of the Applicant's Secretary or Assistant Secretary
certifying the incumbency and the specimen signatures of such authorized
signers mentioned in (c) above;
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(e) The Pledge and Security Agreement duly executed and delivered by
the Applicant to the Administrative Agent, and acknowledged by the
Beneficiaries and any other party required by the Administrative Agent and
the Banks and in form and substance satisfactory to each thereof;
(f) The Note Transfer Agreement duly executed and delivered by the
Applicant and the Beneficiaries, in form and substance satisfactory to the
Banks;
(g) Duly executed financing statements, in form and substance
satisfactory to the Banks, from the Applicant covering the Collateral
described in the Pledge and Security Agreement, for filing in each
location identified in Schedule A of the Pledge and Security Agreement;
(h) The Guaranty Agreement duly executed and delivered by the
Guarantor and this Agreement duly executed and delivered by the Applicant;
(i) Certified copies of resolutions of the Board of Directors of the
Guarantor authorizing the execution and delivery of the Guaranty and
indicating the authorized signers of the Guaranty;
(j) A certificate of the Guarantor's Secretary or Assistant Secretary
certifying the incumbency and the specimen signatures of the authorized
signers mentioned in (i) above;
(k) Certified copies of the Certificate of Incorporation and by-laws
of the Applicant and the Guarantor;
(l) Good standing certificates of the Applicant and the Guarantor,
certified by the Secretary of State of the State of Delaware;
(m) A certificate of an officer of the Guarantor as to the receipt
from the staff of the Securities and Exchange Commission of an affirmative
verbal response to the no-action request letter with respect to the
transactions contemplated by the Note Transfer Agreement;
(n) Such other documents, certificates and opinions as any Bank or the
Issuing Bank may reasonably request; and
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(o) No law, regulation or other action of the United States or the
State of New York or any political subdivision or authority therein or
thereof shall be in effect or shall have occurred, the effect of which
would be to prevent the Issuing Bank or any Bank from fulfilling its
obligations under any of the Credit Documents to which it is a party.
Article VI
Covenants
The Applicant agrees that, so long as any Reimbursement Obligation or any
Letter of Credit is outstanding hereunder or any credit is available to or in
use by the Applicant or any Beneficiary hereunder except to the extent
compliance in any case or cases is waived in writing by the Required Banks:
Section 6.1. Corporate Existence. The Applicant shall, and shall cause each
Subsidiary to, preserve and maintain its corporate existence.
Section 6.2. Maintenance. The Applicant will maintain, preserve and keep
its Properties and equipment necessary to the proper conduct of its business in
reasonably good repair, working order and condition and will from time to time
make all reasonably necessary repairs, renewals, replacements, additions and
betterments thereto so that at all times such Properties and equipment shall be
reasonably preserved and maintained, and will cause each Subsidiary so to do in
respect of Property owned or used by it; provided, however, that nothing in
this Section 6.2 shall prevent the Applicant or a Subsidiary from discontinuing
the operation or maintenance of any such Properties if such discontinuance is,
in the judgment of the Applicant, desirable in the conduct of its business or
the business of such Subsidiary and not disadvantageous in any material respect
to the Banks.
Section 6.3. Taxes. The Applicant will duly pay and discharge, and will
cause each Subsidiary to pay and discharge, all taxes, rates, assessments, fees
and governmental charges upon or against the Applicant or such Subsidiary or
against their respective Properties, in each case before the same becomes
delinquent and before penalties accrue thereon, unless and to the extent that
the same is being contested in good faith and by appropriate proceedings and
adequate reserves under Generally Accepted Accounting Principles are provided
therefor.
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Section 6.4. Insurance. The Applicant will insure, and keep insured, and
will cause each Subsidiary to insure, and keep insured, in good and responsible
insurance companies, all insurable Property owned by it which is of a character
usually insured by companies similarly situated and operating like Property;
and to the extent usually insured (subject to self-insured retentions) by
companies similarly situated and conducting similar businesses, the Applicant
will also insure, and cause each Subsidiary to insure, employers' and public
and product liability risks in good and responsible insurance companies. The
Applicant will upon request of the Administrative Agent furnish a summary
setting forth the nature and extent of the insurance maintained pursuant to
this Section 6.4.
Section 6.5. Financial Statements and Information to Be Furnished. The
Applicant shall furnish or cause to be furnished to each Bank:
(a) Quarterly Financial Statements; Officer's Certificate. As soon as
available and in any event within 50 days after the close of each of the first
three quarterly accounting periods in each fiscal year of the Guarantor,
commencing with the quarterly period ending March 31, 1995:
(i) consolidated and consolidating (by business segment) balance sheets
of the Guarantor and its Consolidated Subsidiaries as at the end of
such quarterly period and the related consolidated and consolidating (by
business segment) statements of income and cash flows of the Guarantor and
the Consolidated Subsidiaries for such quarterly period and for the elapsed
portion of the fiscal year ended with the last day of such quarterly
period, setting forth in each case in comparative form the figures as of
the end of and for the corresponding periods of the previous fiscal year;
and
(ii) a certificate with respect thereto of the president or chief
financial officer of the Guarantor in the form of Schedule 6.5(a) hereto.
(b) Year-End Financial Statements; Accountants' and Officer's
Certificates. As soon as available and in any event within 95 days after the
end of each fiscal year of the Guarantor, commencing with the fiscal year ended
December 31, 1994:
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(i) consolidated and consolidating (by business segment) balance
sheets of the Guarantor and its Consolidated Subsidiaries as at the end of
such fiscal year and the related consolidated and consolidating (by
business segment) statements of income, retained earnings and cash flows
of the Guarantor and the Consolidated Subsidiaries for such fiscal year,
setting forth in comparative form the figures as at the end of and for the
previous fiscal year;
(ii) an audit report of KPMG Peat Marwick L.L.P., or other
independent certified public accountants of recognized standing
satisfactory to the Required Banks, on such of the financial statements
referred to in clause (i) as are consolidated financial statements, which
report shall be in scope and substance satisfactory to the Required Banks;
(iii) a certificate of such accountants addressed to the Banks and in
form and substance satisfactory to the Required Banks confirming that (A)
the Guarantor is authorized to deliver their report referred to in clause
(ii) to the Banks pursuant to this Agreement and (B) it is their
understanding that the Banks are relying on such report and such
certificate; and
(iv) a certificate of the president or chief financial officer of the
Guarantor in the form of Schedule 6.5(b) hereto.
(c) Quarterly Statements. As soon as available and in any event within 60
days after the end of each quarterly fiscal period of each fiscal year
commencing with the quarterly period ending December 31, 1994, copies of the
balance sheet of the Applicant as at the end of such period, in reasonable
detail showing in comparative form the figures for the corresponding date and
period in the previous fiscal year, prepared by the Applicant in accordance
with Generally Accepted Accounting Principles and certified as to fairness of
presentation in all material respects by the chief financial officer of the
Applicant.
(d) Annual Statements. As soon as available and in any event within 95
days after the close of each fiscal year of the Applicant commencing with the
fiscal year ending December 31, 1994, copies of the balance sheet of the
Applicant as at the end of each such fiscal year, prepared by the Applicant in
accordance with Generally Accepted
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Accounting Principles setting forth in comparative form the figures as at the
end of and for the previous fiscal year, accompanied by a certificate of the
Applicant to the effect that the balance sheet has been prepared in accordance
with Generally Accepted Accounting Principles and presents fairly in all
material respects the financial condition of the Applicant as of the close of
such fiscal year or for the period ending thereon.
(e) Reports and Filings. (i) Promptly upon receipt thereof, copies of
all reports (other than management letters or reports), if any, submitted to
the Guarantor, or any Subsidiary of the Guarantor, or the Board of Directors of
the Guarantor or any Subsidiary of the Guarantor, by its independent certified
public accountants; and (ii) as soon as practicable, copies of all such
financial statements and reports as the Guarantor or any Subsidiary of the
Guarantor shall send to its stockholders (other than reports of such
Subsidiaries sent to the Guarantor in the ordinary course of business) and of
all registration statements and all regular or periodic reports that the
Guarantor or any Subsidiary of the Guarantor shall file, or may be required to
file, as a reporting company subject to the reporting requirements of the
Securities Exchange Act of 1934 with the Securities and Exchange Commission or
any successor commission.
(f) Requested Information. From time to time and promptly upon request
of any Bank, such information regarding this Agreement and the business,
assets, liabilities, financial condition, results of operations or business
prospects of the Applicant, the Guarantor and its Subsidiaries as such Bank may
reasonably request, in each case in form and substance and certified in a
manner satisfactory to the requesting Bank.
(g) Notice of Defaults, Material Adverse Changes and Other Matters.
Prompt notice of: (i) any Default, (ii) the commencement of, or the occurrence
or nonoccurrence of any change or event relating to, any action, suit,
proceeding or investigation that would cause the representations and warranties
contained in any of the Credit Documents to be incorrect if made at such time,
(iii) any event or condition referred to in Section 7.1(f) hereof, whether or
not such event or condition shall constitute a Default, and (iv) any amendment
of the
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certificate of incorporation or by-laws of the Guarantor or the Applicant.
Section 6.6 Mergers or Consolidation. The Applicant shall not and shall not
agree to merge or consolidate with any Person.
Section 6.7. Benefit Plans. The Applicant shall not, nor shall it permit
any Subsidiary to (a) establish any Benefit Plan, or amend any Benefit Plan, in
either case in any manner that in the reasonable good faith estimate of the
applicable Applicant's actuary would increase the aggregate Unfunded Benefit
Liabilities under all Benefit Plans maintained by such Applicant or its ERISA
Affiliates to an amount in excess of $25,000,000, provided, however, that the
foregoing shall not prevent the Applicant from establishing or amending any
Benefit Plan to the extent necessary to comply with Applicable Law; or (b)
amend any Benefit Plan, except to the extent necessary to comply with
Applicable Law, if after giving effect to such amendment the Applicant would be
required to post security pursuant to Section 401(a)(29) of the Code.
Section 6.8. Conduct of Business. The Applicant and its Subsidiaries will
not engage in any business if, as a result, the general nature of the business
which would then be engaged in by the Applicant and its Subsidiaries taken as a
whole would be substantially changed from the general nature of the business
engaged in by the Applicant and its Subsidiaries taken as a whole on the date
of this Agreement.
Section 6.9. Liens. The Applicant will not nor will it permit any
Subsidiary to create, incur, permit to exist or to be incurred any Lien of any
kind on any Property owned by the Applicant or any Subsidiary; provided,
however, that this Section 6.9 shall not apply to nor operate to prevent
Permitted Liens.
Section 6.10. Disposition of Assets. The Applicant shall not, nor shall it
permit any Subsidiary to sell, lease, license, transfer or otherwise dispose of
any Property or interest therein, except that this Section 6.10 shall not apply
to (a) any disposition of any asset or interest therein in the ordinary course
of business, (b) any disposition in the ordinary course of business of any
distressed real estate asset to any wholly-owned Subsidiary of the Applicant
which Subsidiary's sole function is to acquire and hold such distressed real
estate, and (c) any disposition of any Property
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(including the Capital Securities of any Subsidiary) or interest therein for
fair market value, as determined by the Board of Directors of the Applicant.
Section 6.11. Compliance with Laws. Without limiting any of the other
covenants of the Applicant in this Article VI, the Applicant will, and will
cause each of its Subsidiaries to, conduct its business, and otherwise be, in
compliance with all applicable laws, regulations, ordinances and orders of any
governmental or judicial authorities, non-compliance with which would (a)
impair the validity or enforceability of, or the ability of the Applicant to
perform its obligations under any of the Credit Documents to which it is a
party, or (b) have a Materially Adverse Effect on the Applicant.
Section 6.12. Permitted Indebtedness. The Applicant will not, nor will it
permit any Subsidiary to, issue, incur, assume, create or have outstanding any
Indebtedness or Contingent Indebtedness; provided, however, that the foregoing
shall not operate to prevent the Indebtedness of the Applicant under the Credit
Documents or the Obligations.
Article VII
Events of Default and Remedies
Section 7.1. Events of Default. Any one or more of the following shall
constitute an Event of Default:
(a) default in the payment when due of any Obligation hereunder and the
continuance of such default for a period of two (2) days;
(b) default by the Applicant in the observance or performance of any
covenant set forth in Article VI hereof;
(c) default by the Applicant in the observance or performance of any
other provision of any of the Credit Documents to which it is a party not
mentioned in (a) or (b) above, which is not remedied within 30 days;
(d) any representation or warranty made (or deemed made) by the Applicant
in any of the Credit Documents to which it is a party, or made in the
Guaranty Agreement by the Guarantor, or in any statement or certificate
furnished pursuant hereto or thereto by the Applicant or the
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Guarantor, or in connection with the issuance of any Letter of Credit, proves
untrue in any material respect as of the date of the issuance or making (or
deemed making) thereof;
(e) A judgment or order shall be entered against the Applicant or any of
its Subsidiaries or the Guarantor by any court, and (i) in the case of a
judgment or order for the payment of money, either (A) such judgment or order
shall continue undischarged and unstayed for a period of 30 days in which the
aggregate amount of all such judgments and orders exceeds $10,000,000 or (B)
enforcement proceedings shall have been commenced upon such judgment or order
and (ii) in the case of any judgment or order for other than the payment of
money, such judgment or order could, together with all other such judgments or
orders, have a Materially Adverse Effect on the Applicant, any Subsidiary or
the Guarantor;
(f) (i) Any Termination Event shall occur with respect to any Benefit
Plan, (ii) any Accumulated Funding Deficiency, whether or not waived, shall
exist with respect to any Benefit Plan maintained by the Applicant or an ERISA
Affiliate, or with respect to any other employee benefit plan maintained by the
Applicant or an ERISA Affiliate that is subject to Section 412 of the Code,
(iii) the Applicant or any ERISA Affiliate shall engage in any Prohibited
Transaction involving any Benefit Plan maintained by the Applicant or an ERISA
Affiliate, (iv) the Applicant or any ERISA Affiliate shall be in "default" (as
defined in ERISA Section 4219(c)(5)) with respect to payments owing to a
Multiemployer Benefit Plan as a result of the Applicant's or any ERISA
Affiliate's complete or partial withdrawal (as described in ERISA Section 4203
or 4205) from such Multiemployer Benefit Plan, (v) the Applicant or any ERISA
Affiliate shall fail to pay when due an amount (other than premium payments to
the PBGC) that is payable by it to the PBGC or to a Benefit Plan in accordance
with Title IV of ERISA, or (vi) a proceeding shall be instituted by a fiduciary
of any Multiemployer Benefit Plan against the Applicant or any ERISA Affiliate
to enforce ERISA Section 515 and such proceeding shall not have been dismissed
within 60 days thereafter, except that no event or condition referred to in
clauses (i) through (vi) shall constitute an Event of Default if it, together
with all other such events or conditions at the time existing, has not had, and
will not have, a Materially Adverse Effect on the Applicant;
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(g) (i) The Applicant or any of its Subsidiaries or the Guarantor shall
fail to pay, in accordance with its terms and when due and payable (after
giving effect to any applicable grace period, which in the case of any Guaranty
of Indebtedness, shall be deemed not less than five Business Days after the
underlying Indebtedness became due), any of the principal of or interest on any
Indebtedness in an aggregate principal amount in excess of $10,000,000, (ii)
the maturity of any such Indebtedness shall, in whole or in part, have been
accelerated, or any such Indebtedness shall, in whole or in part, have been
required to be prepaid prior to the stated maturity thereof, in accordance with
the provisions of any Contract evidencing, providing for the creation of or
concerning such Indebtedness, or (iii) (A) any event shall have occurred and be
continuing that permits (or, with the passage of time or the giving of notice
or both, would permit) any holder or holders of such Indebtedness, any trustee
or agent acting on behalf of such holder or holders or any other Person so to
accelerate such maturity or require any such prepayment and such event has
continued unremedied and unwaived for a period of five Business Days and (B) if
the Contract evidencing, providing for the creation of or concerning such
Indebtedness provides for a cure period for such event, such event shall not be
cured prior to the end of such cure period;
(h) the Applicant or any of its Subsidiaries, or the Guarantor shall (i)
have entered involuntarily against it an order for relief under the United
States Bankruptcy Code, as amended, (ii) not pay, or admit in writing its
inability to pay, its debts generally as they become due, (iii) make an
assignment for the benefit of creditors, (iv) apply for, seek, consent to, or
acquiesce in, the appointment of a receiver, custodian, trustee, examiner,
liquidator or similar official for it or any substantial part of its Property,
(v) institute any proceeding seeking to have entered against it an order for
relief under the United States Bankruptcy Code, as amended, to adjudicate it
insolvent, or seeking dissolution, winding up, liquidation, reorganization,
arrangement, adjustment or composition of it or its debts under any law
relating to bankruptcy, insolvency or reorganization or relief of debtors or
fail to file an answer or other pleading denying the material allegations of
any such proceeding filed against it, (vi) fail to contest in good faith any
appointment or proceeding described in Section 7.1.(i) hereof, or (vii) consent
to or fail to contest in a timely and appropriate manner any petition filed
against it in an involuntary case under such bankruptcy laws or other similar
laws;
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(i) a custodian, receiver, trustee, examiner, liquidator or similar
official shall be appointed for the Applicant or any of its Subsidiaries, or
the Guarantor or any substantial part of any of their Property, or a proceeding
described in Section 7.1(h)(v) hereof shall be instituted against the Applicant
or any of its Subsidiaries or the Guarantor, and such appointment continues
undischarged or such proceeding continues undismissed or unstayed for a period
of sixty (60) days;
(j) The Guarantor at any time shall fail to directly or indirectly own
and control beneficially and of record (i) 96.1% of the outstanding Capital
Securities of KFS, or (ii) 100% of the outstanding Capital Securities of the
Applicant;
(k) an "Event of Default" or "Early Termination Event" under the Short
Term Facility, the Long Term Facility or the Master Agreement (as defined
respectively therein) shall have occurred and be continuing whether or not any
such agreements remain in effect, or the Guarantor shall breach any term,
covenant or condition of the Guaranty Agreement;
(l) A default shall be continuing under any Contract (other than a
Contract relating to Indebtedness to which clause (g) of this Section 7.1 is
applicable) binding upon the Applicant or the Guarantor, except a default that,
together with all other such defaults, has not had and will not have a
Materially Adverse Effect on (i) the Applicant or (ii) this Agreement;
(m) the occurrence of the date which is two Business Days prior to the
date on which any person or group of persons acting in concert acquires, in the
aggregate, 50% or more of any voting stock of the Guarantor;
(n) any material provision of this Agreement or any of the other Credit
Documents shall cease to be valid and binding, or the Applicant or the
Guarantor shall contest any such provision, or the Applicant, the Guarantor or
any agent or trustee on behalf of the Applicant or the Guarantor shall deny
that it has further liability under this Agreement or any of the other Credit
Documents;
(o) the Guarantor or any Subsidiary shall fail to maintain management
agreements with the Beneficiaries with substantially the same terms and
conditions as those in effect on the Closing Date or otherwise in form and
substance satisfactory to the Banks;
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(p) the Guarantor shall fail to maintain Liquidity Support in an
aggregate principal amount of at least the sum of the Aggregate Credit Amount
plus all outstanding Obligations; or
(q) an "event of default" or breach of any provisions of a Security
Document shall occur.
Section 7.2. Non-Bankruptcy Defaults. When any Event of Default other than
those described in Sections 7.1.(h) or (i) hereof has occurred and is
continuing, the Administrative Agent (or the Issuing Bank, as applicable)
shall, by notice to the Applicant, (a) if so directed by the Required Banks,
declare the Obligations to be forthwith due and payable and thereupon all of
the Obligations shall be and become immediately due and payable together with
all other amounts payable under the Credit Documents without further demand,
presentment, protest or notice of any kind; (b) if so directed by the Required
Banks, the Issuing Bank shall give notice of the occurrence of an Event of
Default to each Beneficiary of a Letter of Credit, thereby causing each Letter
of Credit to terminate 15 days after delivery of such notice; (c) if so
directed by the Required Banks, exercise any other right or remedy under the
Credit Documents; and (d) if so directed by the Required Banks, demand that the
Applicant immediately pay to the Administrative Agent the full amount then
available for drawing under all outstanding Letters of Credit, and the
Applicant agrees to immediately make such payment and acknowledges and agrees
that the Banks would not have an adequate remedy at law for the failure by the
Applicant to honor any such demand and that the Administrative Agent, for the
benefit of the Banks, shall have the right to require the Applicant to
specifically perform such undertaking whether or not any drawings or other
demands for payment have been made under any Letter of Credit. The
Administrative Agent, after the giving of any notice to the Applicant pursuant
to Section 7.1 hereof or this Section 7.2, shall also promptly send a copy of
such notice to the Banks, but the failure to do so shall not impair or annul
the effect of such notice.
Section 7.3. Bankruptcy Defaults. When any Event of Default described in
subsections (h) or (i) of Section 7.1 hereof has occurred and is continuing,
then all outstanding Obligations shall immediately become due and payable
together with all other amounts payable under this Agreement without
presentment, demand, protest or notice of any kind, and the obligation of the
Issuing Bank and the other Banks to issue any Letter of Credit or extend
further credit pursuant to any of the terms hereof shall immediately
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terminate and the Applicant shall immediately pay to the Administrative Agent
the full amount then available for drawing under all Letters of Credit, the
Applicant acknowledging that the Issuing Bank and the other Banks would not
have an adequate remedy at law for failure by the Applicant to honor any such
demand and that the Issuing Bank and the other Banks, and the Administrative
Agent on their behalf, shall have the right to require the Applicant to
specifically perform such undertaking whether or not any draws or other demands
for payment have been made under any of the Letters of Credit. Following any
such Event of Default the Administrative Agent shall, if so directed by the
Required Banks, give notice of the occurrence of an Event of Default to each
Beneficiary, thereby causing each Letter of Credit to terminate 15 days after
delivery of such notice.
Section 7.4. Expenses. The Applicant agrees to pay to the Administrative
Agent, the Issuing Bank and each Bank, all costs and expenses incurred or paid
by the Administrative Agent, the Issuing Bank and each such Bank, including
reasonable attorneys' fees and court costs, in connection with any Default or
in connection with the enforcement of any of the terms hereof.
Section 7.5. Collateral for Undrawn Letters of Credit. (a) If the payment
of the amount available for drawing under any or all outstanding Letters of
Credit is required under Section 7.2 or 7.3 hereof, the Applicant shall
forthwith pay the amount required to be so prepaid, to be held by the
Administrative Agent as provided in subsection (b) below.
(b) All amounts paid pursuant to subsection (a) above shall be held by
the Administrative Agent in a separate collateral account (such account, and
the credit balances, properties and any investments from time to time held
therein, and any substitutions for such account, any certificate of deposit or
other instrument evidencing any of the foregoing and all proceeds of and
earnings on any of the foregoing being collectively called the "Account") as
security for, and for application by the Administrative Agent (to the extent
available) to, the reimbursement of any payment under the Letter of Credit then
or thereafter made by the Issuing Bank, and to the payment of the unpaid
balance of any Reimbursement Obligations and all other Obligations. The
Account shall be held in the name of and subject to the exclusive dominion and
control of the Administrative Agent for the benefit of the Administrative Agent
and the ratable benefit of the Issuing Bank and the Banks. If and when
requested by the Applicant, the Administrative Agent shall invest funds held in
the Account from time to time in direct obligations of, or obligations the
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principal of and interest on which are unconditionally guaranteed by, the
United States of America with a remaining maturity of one year or less,
provided that the Administrative Agent is irrevocably authorized to sell
investments held in the Account when and as required to make payments out of
the Account for application to amounts due and owing from the Applicant to the
Administrative Agent, the Issuing Bank or the Banks; provided, however, that if
(i) the Applicant shall have made payment of all such obligations referred to
in subsection (a) above, (ii) all relevant preference or other disgorgement
periods relating to the receipt of such payments have, in the sole
determination of the Administrative Agent, passed, and (iii) no Letters of
Credit, Credit Amounts, Reimbursement Obligations or other Obligations remain
outstanding hereunder, then the Administrative Agent shall repay to the
Applicant any remaining amounts held in the Account.
Article VIII
Change in Circumstances
Section 8.1. Increased Cost and Reduced Return. (a) If the Code or, on or
after the date hereof, the adoption of any Applicable Law, or any change in the
Code or any Applicable Law, or any change in the interpretation or
administration thereof by any governmental authority, central bank or
comparable agency charged with the interpretation or administration thereof, or
compliance by the Issuing Bank or any Bank (or its Lending Office) with any
request or directive (whether or not having the force of law) of any such
authority, central bank or comparable agency:
(i) shall subject the Issuing Bank or any Bank (or its Lending Office) to
any tax, duty or other charge with respect to any Letter of Credit, or its
participation in any thereof, any Reimbursement Obligation owed to it or its
obligation to issue any Letter of Credit or its obligation to participate in
the Letters of Credit, or shall change the basis of taxation of payments to any
Bank (or its Lending Office) of the principal of or interest on its Letter(s)
of Credit, or participations therein or any other amounts due under this
Agreement in respect of its Letter(s) of Credit, or participations therein, any
Reimbursement Obligations owed to it, or its obligation to issue a Letter of
Credit, or acquire participations therein (except for changes in the rate of
tax on the overall net income of the Issuing Bank, such Bank or its Lending
Office imposed by the jurisdiction in which the
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Issuing Bank's or such Bank's principal executive office or Lending Office is
located);
(ii) shall impose, modify, require, make or deem applicable any reserve,
capital requirement, special deposit, insurance assessment or similar
requirement (including, without limitation, any such requirement imposed by the
Board of Governors of the Federal Reserve System) against assets of, deposits
with or for the account of, or credit extended by, or letters of credit or
commitments by, the Issuing Bank or any Bank (or its Lending Office) or shall
impose on any Bank (or its Lending Office) any other condition affecting its
Letter(s) of Credit, or its participation in any thereof, any Reimbursement
Obligation owed to it, or its obligation to participate in a Letter of Credit;
(iii) limit the deductibility of interest on funds obtained by the
Issuing Bank or any Bank to pay any of its liabilities or subject the Issuing
Bank or any Bank to any tax, duty, charge, deduction or withholding on or with
respect to payments relating to the Notes, the Letters of Credit or this
Agreement, or any amount paid or to be paid by the Issuing Bank or any Bank as
the issuer of any Letter of Credit or as a participant in the obligations
(other than any tax measured by or based upon the overall net income of the
Issuing Bank or such Bank imposed by any jurisdiction having control over the
Issuing Bank or any Bank);
(iv) change the basis of taxation of payments due the Issuing Bank or any
Bank under this Agreement (other than by a change in taxation of the overall
net income of the Issuing Bank or any Bank or its Lending Office imposed by the
jurisdiction in which the Issuing Bank's or such Bank's principal executive
office or Lending Office is located);
(v) cause or deem letters of credit to be assets held by the Issuing Bank
or any Bank and/or as deposits on its books; or
(vi) impose upon the Issuing Bank or any Bank any other condition with
respect to any amount paid or payable to or by the Issuing Bank or such Bank or
with respect to this Agreement or any of the other Credit Documents;
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and the result of any of the foregoing is to increase the cost to the Issuing
Bank or such Bank (or its Lending Office) of issuing or maintaining a Letter of
Credit, or participating therein, or to reduce the amount of any sum received
or receivable by the Issuing Bank or such Bank (or its Lending Office) under
this Agreement with respect thereto, by an amount deemed by the Issuing Bank or
such Bank to be material, then, within fifteen (15) days after demand by the
Issuing Bank or such Bank (with a copy to the Administrative Agent), the
Applicant shall be obligated to pay to the Issuing Bank or such Bank such
additional amount or amounts as will compensate the Issuing Bank or such Bank
for such increased cost or reduction.
(b) If, after the date hereof, any Bank, the Issuing Bank or the
Administrative Agent shall have reasonably determined that the adoption of any
applicable law, rule or regulation regarding capital adequacy, or any change
therein (including, without limitation, any revision in the Final Risk-Based
Capital Guidelines of the Board of Governors of the Federal Reserve System (12
CFR Part 208, Appendix A; 12 CFR Part 225, Appendix A) or of the Office of the
Comptroller of the Currency (12 CFR Part 3, Appendix A), or in any other
applicable capital rules heretofore adopted and issued by any governmental
authority), or any change in the interpretation or administration thereof by
any governmental authority, central bank or comparable agency charged with the
interpretation or administration thereof, or compliance by the Administrative
Agent, the Issuing Bank or any Bank (or its Lending Office) with any request or
directive regarding capital adequacy (whether or not having the force of law)
of any such authority, central bank or comparable agency, has or would have the
effect of reducing the rate of return on such Bank's, the Issuing Bank's or the
Administrative Agent's capital, or on the capital of any corporation
controlling such Bank, the Issuing Bank or the Administrative Agent, as a
consequence of its obligations hereunder to a level below that which such Bank,
the Issuing Bank or the Administrative Agent could have achieved but for such
adoption, change or compliance (taking into consideration policies of such
Bank, the Issuing Bank or the Administrative Agent with respect to capital
adequacy) by an amount reasonably deemed by such Bank, the Issuing Bank or the
Administrative Agent to be material, then from time to time, within fifteen
(15) days after demand by such Bank, the Issuing Bank or the Administrative
Agent (with a copy to the other Banks and the Administrative Agent), the
Applicant shall pay to such Bank, the Issuing Bank or the Administrative Agent
such additional amount or amounts as will compensate such Bank, the Issuing
Bank or the Administrative Agent for such reduction; provided that none of the
Banks, the
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Issuing Bank or the Administrative Agent shall be entitled to receive any
payment to compensate it for such costs incurred prior to the ninetieth day
preceding the date on which such Bank, the Issuing Bank or the Administrative
Agent gives such notice to the Applicant.
(c) Each Bank (but not the Issuing Bank) that determines to seek
compensation under this Section 8.1 shall notify the Applicant and the
Administrative Agent of the circumstances that entitle such Bank to such
compensation pursuant to this Section 8.1 and will designate a different
Lending Office if such designation will avoid the need for, or reduce the
amount of, such compensation and will not, in the judgment of such Bank, be
otherwise disadvantageous to such Bank. A certificate of the Issuing Bank or
any Bank claiming compensation under this Section 8.1 and setting forth the
additional amount or amounts to be paid to it hereunder shall be conclusive in
the absence of manifest error. In determining such amount, the Issuing Bank or
such Bank may use any reasonable averaging and attribution methods.
Section 8.2. Lending Offices. Each Bank may, at its option, elect to
maintain its obligations hereunder at the branch, office or affiliate specified
on the appropriate signature page hereof (each a "Lending Office") or at such
other of its branches, offices or affiliates as it may from time to time elect
and designate in a written notice to the Applicant and the Administrative
Agent.
Article IX
The Administrative Agent and the Issuing Bank
Section 9.1. Appointment and Authorization of Administrative Agent. Each
Bank hereby appoints The Bank of New York as the Administrative Agent and the
Issuing Bank under the Credit Documents and hereby authorizes the
Administrative Agent and the Issuing Bank to take such action as Administrative
Agent and the Issuing Bank on its behalf and to exercise such powers under the
Credit Documents as are delegated to the Administrative Agent and the Issuing
Bank by the terms thereof, together with such powers as are reasonably
incidental thereto.
Section 9.2. Administrative Agent and its Affiliates. The Administrative
Agent and the Issuing Bank shall have the same rights and powers under this
Agreement and the other Credit Documents as any other Bank and may exercise
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or refrain from exercising the same as though it were not the Administrative
Agent or the Issuing Bank and the Administrative Agent and the Issuing Bank and
their respective affiliates may accept deposits from, lend money to, and
generally engage in any kind of business with the Applicant or the Guarantor or
any Affiliate of the Applicant or the Guarantor as if it were not the
Administrative Agent or the Issuing Bank under the Credit Documents. The term
"Bank" as used herein and in all other Credit Documents, unless the context
otherwise clearly requires, includes the Administrative Agent or the Issuing
Bank in its individual capacity as a Bank.
Section 9.3. Action by Administrative Agent and Issuing Bank. If the
Administrative Agent receives from the Applicant a written notice of a Default
pursuant to Section 6.5(g) hereof, the Administrative Agent shall promptly give
the Issuing Bank and each of the Banks written notice thereof. The obligations
of the Administrative Agent under the Credit Documents are only those expressly
set forth therein. Without limiting the generality of the foregoing, neither
the Administrative Agent nor the Issuing Bank shall be required to take any
action hereunder with respect to any Default, except as expressly provided in
Section 7.2 or 7.3 hereof. Upon the occurrence of a Default, the
Administrative Agent and the Issuing Bank, as applicable, shall take such
action with respect to enforcement of its liens on the Collateral under the
Security Documents and the preservation and protection thereof as it shall be
directed to take by the Required Banks and as permitted by the Security
Documents, but if the Required Banks have not given any such direction
following notice of an Event of Default from the Administrative Agent to the
Banks, the Administrative Agent and the Issuing Bank, as applicable, shall take
or refrain from taking such actions as it deems appropriate and in the best
interest of all the Banks. In no event, however, shall the Administrative
Agent or the Issuing Bank be required to take any action in violation of
Applicable Law or of any provision of any of the Credit Documents, and the
Administrative Agent and the Issuing Bank shall in all cases be fully justified
in failing or refusing to act hereunder or under any of the other Credit
Documents unless it shall be first indemnified to its reasonable satisfaction
by the Banks against any and all costs, expenses, and liabilities which may be
incurred by it by reason of taking or continuing to take any such action. The
Administrative Agent and the Issuing Bank shall be entitled to assume that no
Default exists unless notified to the contrary by a Bank or the Applicant. In
all cases in which this Agreement and the other Credit Documents do not require
the Administrative Agent or the Issuing Bank to take certain actions, the
Administrative Agent or the Issuing Bank, as
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applicable, shall be fully justified in using its discretion in failing to take
or in taking any action hereunder and thereunder.
Section 9.4. Consultation with Experts;. The Administrative Agent and the
Issuing Bank may consult with legal counsel, independent public accountants and
other experts selected by it and shall not be liable for any action taken or
omitted to be taken by it in good faith in accordance with the advice of such
counsel, accountants or experts.
Section 9.5. Liability of Administrative Agent and Issuing Bank; Credit
Decision. None of the Administrative Agent, the Issuing Bank nor any of their
respective directors, officers, agents, or employees shall be liable for any
action taken or not taken by it in connection with the Credit Documents (i)
with the consent or at the request of the Required Banks or (ii) in the absence
of its own gross negligence or willful misconduct. None of the Administrative
Agent, the Issuing Bank nor any of their respective directors, officers, agents
or employees shall be responsible for or have any duty to ascertain, inquire
into or verify (i) any statement, warranty or representation made in connection
with this Agreement, any other Credit Document or the issuance of any Letter of
Credit; (ii) the performance or observance of any of the covenants or
agreements of the Applicant or the Guarantor or any of its Subsidiaries
contained herein or in any of the other Credit Documents; (iii) the
satisfaction of any condition specified in Article V hereof, except receipt of
items required to be delivered to the Administrative Agent; or (iv) the
validity, effectiveness, genuineness, enforceability, perfection, value, worth
or collectibility hereof or of any of the other Credit Documents or of the
Liens provided for in the Security Documents or of any other document or
writing furnished in connection with any of the Credit Documents or of the
Collateral; and neither the Administrative Agent nor the Issuing Bank makes
representation of any kind or character with respect to any such matter
mentioned in this sentence. The Administrative Agent and the Issuing Bank may
each execute any of its duties under any of the Credit Documents by or through
employees, agents, and attorneys-in-fact and shall not be answerable to the
Banks, the Applicant or any other Person for the default or misconduct of any
such agents or attorneys-in-fact selected with reasonable care. Neither the
Administrative Agent nor the Issuing Bank shall incur any liability by acting
in reliance upon any notice, consent, certificate, other document, instrument
or statement (whether written or oral) believed by it to be genuine or to have
been sent by the proper party or parties. In particular and without limiting
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any of the foregoing, neither the Administrative Agent nor the Issuing Bank
shall have responsibility for confirming the accuracy of any notice, consent,
certificate, statement or document or instrument received by it under the
Credit Documents. Each Bank acknowledges that it has received and approved
copies of the Credit Documents, and such other information and documents
concerning the transactions contemplated and financed hereby as it has
requested to receive and/or review. Each Bank acknowledges that it has
independently and without reliance on the Administrative Agent, the Issuing
Bank, or any other Bank, and based upon such information, investigations and
inquiries as it deems appropriate, made its own credit analysis and decision to
extend credit to the Applicant in the manner set forth in the Credit Documents.
It shall be the responsibility of each Bank to keep itself informed as to the
creditworthiness of the Applicant, and neither the Administrative Agent nor the
Issuing Bank shall not have any liability to any Bank with respect thereto.
Section 9.6. Indemnity. The Banks shall ratably, in accordance with their
respective Percentages, indemnify and hold harmless each of the Administrative
Agent and the Issuing Bank and their respective directors, officers, employees,
agents and representatives from and against any liabilities, losses, costs or
expenses suffered or incurred by it under any of the Credit Documents or in
connection with the transactions contemplated thereby, regardless of when
asserted or arising, except to the extent they are promptly reimbursed for the
same by the Applicant or the Guarantor or out of the proceeds of the Collateral
and except to the extent that any event giving rise to a claim was caused by
the gross negligence or willful misconduct of the party seeking to be
indemnified. The obligations of the Banks under this Section 9.6 shall survive
termination of this Agreement.
Section 9.7. Resignation of Administrative Agent and Successor
Administrative Agent. The Administrative Agent, and prior to the issuance of
the Letters of Credit, the Issuing Bank, may resign at any time by giving
written notice thereof to the Banks and the Applicant. The Required Banks may
remove the Administrative Agent at any time. Upon any such resignation or
removal of the Administrative Agent or the Issuing Bank, the Required Banks
shall have the right to appoint a successor Administrative Agent or Issuing
Bank. If no successor Administrative Agent shall have been so appointed by the
Required Banks, and shall have accepted such appointment, within thirty (30)
days after the retiring Administrative Agent's giving of notice of resignation
or the Required Banks giving notice of removal, then
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the retiring or removed Administrative Agent may, on behalf of the Banks,
appoint a successor Administrative Agent, which shall be any Bank hereunder or
any commercial bank organized under the laws of the United States of America or
of any State thereof and having a combined capital and surplus of at least
$200,000,000. Upon the acceptance of its appointment as the Administrative
Agent hereunder, such successor Administrative Agent shall thereupon succeed to
and become vested with all the rights and duties of the retiring or removed
Administrative Agent under the Credit Documents, and the retiring or removed
Administrative Agent shall be discharged from its duties and obligations
thereunder. After any retiring or removed Administrative Agent's resignation
or removal hereunder as Administrative Agent, the provisions of this Article 10
and all protective provisions of the other Credit Documents shall inure to its
benefit as to any actions taken or omitted to be taken by it while it was
Administrative Agent.
Article X
Miscellaneous
Section 10.1. Withholding Taxes. (a) Payments Free of Withholding. Except
as otherwise required by law and subject to Section 10.1(b) hereof, each
payment by the Applicant under this Agreement and the other Credit Documents
shall be made without withholding for or on account of any present or future
taxes (other than overall net income taxes on the recipient imposed by the
jurisdiction in which such recipient's principal executive office or Lending
Office is located) imposed by or within the jurisdiction in which the Applicant
is domiciled, any jurisdiction from which the Applicant makes any payment, or
(in each case) any political subdivision or taxing authority thereof or
therein. If any such withholding is so required, the Applicant shall make the
withholding, pay the amount withheld to the appropriate governmental authority
before penalties attach thereto or interest accrues thereon and forthwith pay
such additional amount as may be necessary to ensure that the net amount
actually received by each Bank, the Issuing Bank, and the Administrative Agent
free and clear of such taxes (including such taxes on such additional amount)
is equal to the amount which that Bank, the Issuing Bank, or the Administrative
Agent (as the case may be) would have received had such withholding not been
made. If the Administrative Agent, the Issuing Bank, or any Bank pays any
amount in respect of any such taxes, penalties or interest, the Applicant
shall reimburse the Administrative Agent, the Issuing Bank, or that Bank for
that payment on demand in the
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currency in which such payment was made. If the Applicant pays any such taxes,
penalties or interest, it shall deliver official tax receipts evidencing that
payment or certified copies thereof to the Bank, the Issuing Bank, or the
Administrative Agent on whose account such withholding was made (with a copy to
the Administrative Agent if not the recipient of the original) on or before the
thirtieth day after payment. If any Bank, the Issuing Bank, or the
Administrative Agent determines it has received or been granted a credit
against or relief or remission for, or repayment of, any taxes paid or payable
by it because of any taxes, penalties or interest paid by the Applicant and
evidenced by such a tax receipt, such Bank, the Issuing Bank, or the
Administrative Agent shall, to the extent it can do so without prejudice to the
retention of the amount of such credit, relief, remission or repayment, pay to
the Applicant such amount as such Bank, the Issuing Bank, or the Administrative
Agent determines is attributable to such deduction or withholding and which
will leave such Bank, the Issuing Bank, or the Administrative Agent (after such
payment) in no better or worse position than it would have been in if the
Applicant had not been required to make such deduction or withholding. Nothing
in this Agreement shall interfere with the right of each Bank, the Issuing
Bank, and the Administrative Agent to arrange its tax affairs in whatever
manner it thinks fit nor oblige any Bank, the Issuing Bank, or the
Administrative Agent to disclose any information relating to its tax affairs or
any computations in connection with such taxes.
(b) U.S. Withholding Tax Exemptions. Each Bank that is not a United
States person (as such term is defined in Section 7701(a)(30) of the Code)
shall submit to the Applicant and the Administrative Agent on or before thirty
(30) days after the date hereof, two duly completed and signed copies of either
Form 1001 (relating to such Bank and entitling it to a complete exemption from
withholding under the Code on all amounts to be received by such Bank,
including fees, pursuant to the Credit Documents) or Form 4224 (relating to all
amounts to be received by such Bank, including fees, pursuant to the Credit
Documents) of the United States Internal Revenue Service. Thereafter and from
time to time, each such Bank shall submit to the Applicant and the
Administrative Agent such additional duly completed and signed copies of one or
the other of such Forms (or such successor forms as shall be adopted from time
to time by the relevant United States taxing authorities) as may be (i)
requested by the Applicant in a written notice, directly or through the
Administrative Agent, to such Bank and (ii) required under then-current United
States law or regulations to avoid or reduce United
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<PAGE> 57
States withholding taxes on payments in respect of all amounts to be
received by such Bank, including fees, pursuant to the Credit Documents.
(c) Inability of Bank to Submit Forms. If any Bank determines, as a
result of any change in applicable law, regulation or treaty, or in any
official application or interpretation thereof, that it is unable to submit to
the Applicant or Administrative Agent any form or certificate that such Bank is
obligated to submit pursuant to subsection (b) of this Section 10.1 or that
such Bank is required to withdraw or cancel any such form or certificate
previously submitted or any such form or certificate otherwise becomes
ineffective or inaccurate, such Bank shall promptly notify the Applicant and
Administrative Agent of such fact and such Bank shall to that extent not be
obligated to provide any such form or certificate and will be entitled to
withdraw or cancel any affected form or certificate, as applicable.
Section 10.2. No Waiver of Rights. No delay or failure on the part of the
Administrative Agent, the Issuing Bank or any Bank or on the part of the holder
or holders of any Reimbursement Obligation in the exercise of any power or
right under any of the Credit Documents shall operate as a waiver thereof, nor
as an acquiescence in any default, nor shall any single or partial exercise
thereof preclude any other or further exercise thereof or of any other power or
right, and the rights and remedies hereunder of the Administrative Agent, the
Issuing Bank, the Banks and the holder or holders of any Reimbursement
Obligation are cumulative to, and not exclusive of, any rights or remedies
which any of them would otherwise have.
Section 10.3. Non-Business Day. If any payment of principal or interest on
any Reimbursement Obligation or of any other Obligation shall fall due on a day
which is not a Business Day, interest or fees (as applicable) at the rate, if
any, such Reimbursement Obligation or other Obligation bears for the period
prior to maturity shall continue to accrue on such Obligation from the stated
due date thereof to and including the next succeeding Business Day, on which
the same shall be payable.
Section 10.4. Documentary Taxes. The Applicant agrees that it will pay any
documentary, stamp or similar taxes payable in respect of any of the Credit
Documents, including interest and penalties, in the event any such taxes are
assessed, irrespective of when such assessment is made and whether or not any
credit is then in use or available hereunder.
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<PAGE> 58
Section 10.5. Survival of Representations. All representations and
warranties made herein or in certificates given pursuant hereto shall survive
the execution and delivery of this Agreement and the other Credit Documents,
and shall continue in full force and effect with respect to the date as of
which they were made as long as any credit is in use or available hereunder.
Section 10.6. Survival of Indemnities. All indemnities and all provisions
relative to reimbursement to the Administrative Agent, the Issuing Bank or the
Banks of amounts sufficient to protect the yield of the Administrative Agent,
the Issuing Bank or the Banks with respect to the Reimbursement Obligations,
including, but not limited to, Sections 2.2, 2.5, 8.1 and 10.5 hereof, shall
survive the termination of this Agreement and the other Credit Documents and
the payment of Reimbursement Obligations and all other Obligations.
Section 10.7. Sharing of Set-Off. The Issuing Bank and each Bank agrees
with the Issuing Bank and each other Bank that if any such Bank shall receive
and retain any payment, whether by set-off or application of deposit balances
or otherwise ("Set-off"), on any Reimbursement Obligations or Guaranteed
Obligations in excess of its ratable share of payments on all such Obligations
then outstanding to the Issuing Bank or any of the Banks, then such Bank shall
purchase for cash at face value, but without recourse, ratably from the Issuing
Bank or each of such other Banks such amount of such Obligations, or
participations therein, held by the Issuing Bank or each such other Bank (or
interest therein) as shall be necessary to cause such Bank to share such excess
payment ratably with all other such Banks; provided, however, that if any such
purchase is made by any such Bank, and if such excess payment or part thereof
is thereafter recovered from such purchasing Bank, the related purchases from
the other such Banks shall be rescinded ratably and the purchase price restored
as to the portion of such excess payment so recovered, but without interest.
For purposes of this Section 10.7, amounts owed to or recovered by the Issuing
Bank in connection with Reimbursement Obligations or Guaranteed Obligations in
which Banks have been required to fund their participation shall be treated as
amounts owed to or recovered by the Issuing Bank as a Bank hereunder.
Section 10.8. Notices. Except as otherwise specified herein, all notices
under the Credit Documents (other than the Letters of Credit) shall be in
writing (including cable, telecopy, telex or other electronic communication)
and shall be given to a party hereunder at its address, telecopier number or
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<PAGE> 59
telex number set forth below or such other address, telecopier number or
telex number as such party may hereafter specify by notice to the
Administrative Agent and the Applicant, given by courier, by United States
certified or registered mail, or by other telecommunication device capable of
creating a written record of such notice and its receipt. Notices under the
Credit Documents (other than the Letters of Credit) to the Banks, the Issuing
Bank and the Administrative Agent shall be addressed to their respective
addresses, telecopier, telex, or telephone numbers set forth on the signature
pages hereof, and to the Applicant to:
To the Applicant: Kemper Asset Holdings, Inc.
One Kemper Drive, C-2
Long Grove, Illinois 60049
Attention: John H. Fitzpatrick, Vice President
With copies to: Kemper Corporation
Legal Department, C-3
One Kemper Drive
Long Grove, IL 60049
Attention: Kathleen A. Gallichio, Secretary
Each such notice, request or other communication shall be effective
(i) if given by telecopier, when such telecopy is transmitted to the telecopier
number specified in this Section 10.8 or on the signature pages hereof and a
confirmation of receipt of such telecopy has been received by the sender, (ii)
if given by telex, when such telex is transmitted to the telex number specified
in this Section 10.8 or on the signature pages hereof and the answerback is
received by sender, (iii) if given by courier, when delivered, (iv) if given by
mail, three business days after such communication is deposited in the mail,
registered with return receipt requested, addressed as aforesaid or (v) if
given by any other means, when delivered at the addresses specified in this
Section 10.8 or on the signature pages hereof; provided that notices described
in clauses (i), (ii), (iii), and (v) above that are received after normal
business hours will be deemed received at the opening of business on the next
Business Day.
Section 10.9. Counterparts. This Agreement may be executed in any number of
counterpart signature pages, and by the different parties on different
counterparts, each of which when executed shall be deemed an original but all
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such counterparts taken together shall constitute one and the same instrument.
Section 10.10. Successors and Assigns. This Agreement shall be binding upon
the Applicant and its successors and assigns, and shall inure to the benefit of
each of the Banks and the benefit of their respective successors and assigns,
including any subsequent holder of any Reimbursement Obligation. The Applicant
may not assign any of its rights or obligations under any of the Credit
Documents without the written consent of all of the Banks.
Section 10.11. Assignments. No Bank may assign any or all of its rights and
obligations under this Agreement to any person (other than another Bank)
provided that (i) with the consent of the Applicant which consent shall not be
unreasonably withheld, and (ii) with the prior written consent of the Issuing
Bank any Bank may assign any or all of such rights and obligations to one or
more commercial banks provided that each assignment shall be for an amount of
at least $5,000,000 and shall be in form and substance satisfactory to the
Issuing Bank. Upon any such assignment, its notification to the Administrative
Agent, and the payment of a $2,500 recordation and administration fee to the
Administrative Agent, the assignee shall become a Bank hereunder. The Credit
Amount of the assignee shall be governed by all of the terms and conditions
hereof, and the Bank granting such assignment shall have its Credit Amount and
its obligations and rights in connection therewith, reduced by the amount of
such assignment.
Section 10.12. Amendments;. Any provision of the Credit Documents (other
than the Letters of Credit) may be amended or waived if, but only if, such
amendment or waiver is in writing and is signed by (a) the Applicant, (b) the
Required Banks, (c) if the rights or duties of the Administrative Agent or the
Issuing Bank are affected thereby, the Administrative Agent and the Issuing
Bank, and (d) if the rights or duties of the Issuing Bank are affected thereby,
the Issuing Bank; provided that:
(i) no amendment or waiver pursuant to this Section 10.12 shall (A)
increase any Credit Amount of any Bank without the consent of such Bank or
(B) reduce the amount of or postpone any date for payment of any principal
of or interest on any Reimbursement Obligation or of any fee payable
hereunder without the consent of each Bank and the Issuing Bank or (C)
release the Guaranty or any Collateral for any Reimbursement Obligation or
as expressly provided in any such Security Document or
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<PAGE> 61
amend any of the terms of any Security Document without the consent of
each Bank and the Issuing Bank; and
(ii) no amendment or waiver pursuant to this Section 10.12 shall,
unless signed by each Bank and the Issuing Bank, change any provision of
Article III hereof, Article VIII hereof, Section 7.4 hereof, Section 10.14
hereof, this Section 10.12, or the definition of Required Banks, or affect
the number of Banks required to take any action under the Credit Documents.
Section 10.13. Headings. Section headings used in this Agreement and the
Table of Contents are for reference only and shall not affect the construction
of this Agreement.
Section 10.14. Legal Fees, Other Costs and Indemnification. The Applicant
agrees to pay all reasonable costs and expenses of the Administrative Agent in
connection with the preparation, negotiation, associated due diligence review,
administration, and syndication of the Credit Documents, including without
limitation, the reasonable fees and disbursements of Chapman and Cutler and
other counsel to the Banks and Emmet, Marvin & Martin, special counsel to the
Administrative Agent and the Issuing Bank, in connection with the preparation
and execution of the Credit Documents, and any amendment, waiver or consent
related hereto and thereto, whether or not the transactions contemplated herein
are consummated. The Applicant further agrees to indemnify each Bank, the
Administrative Agent, the Issuing Bank and their respective directors, officers
and employees, against all losses, claims, damages, penalties, judgments,
liabilities and expenses (including, without limitation, all expenses of
litigation or preparation therefor, whether or not the indemnified Person is a
party thereto) which any of them may incur or reasonably pay arising out of or
relating to any of the Credit Documents or any of the transactions contemplated
thereby or the direct or indirect application or proposed application of the
proceeds of any Letter of Credit, other than those which arise from the gross
negligence or willful misconduct of the party claiming indemnification. The
Applicant, upon demand by the Administrative Agent, the Issuing Bank, or a Bank
at any time, shall reimburse the Administrative Agent, the Issuing Bank or such
Bank for any legal or other expenses incurred in connection with investigating
or defending against any of the foregoing except if the same is directly due to
the gross negligence or willful misconduct of the party to be indemnified.
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<PAGE> 62
Section 10.15. Set Off. In addition to any rights now or hereafter granted
under applicable law and not by way of limitation of any such rights, upon the
occurrence of any Event of Default, each Bank, the Issuing Bank, the
Administrative Agent and each subsequent holder of any Reimbursement Obligation
is hereby authorized by the Applicant at any time or from time to time, without
notice to the Applicant or to any other Person, any such notice being hereby
expressly waived, to set off and to appropriate and to apply any and all
deposits (general or special, including, but not limited to, indebtedness
evidenced by certificates of deposit, whether matured or unmatured, but not
including trust accounts, and in whatever currency denominated) and any other
indebtedness at any time held or owing by that Bank, the Issuing Bank, the
Administrative Agent or that subsequent holder to or for the credit or the
account of the Applicant, whether or not matured, against and on account of the
obligations and liabilities of the Applicant to that Bank, the Administrative
Agent, the Issuing Bank or that subsequent holder under the Credit Documents,
including, but not limited to, all claims of any nature or description arising
out of or connected with the Credit Documents, irrespective of whether or not
(a) that Bank, the Administrative Agent, the Issuing Bank or that subsequent
holder shall have made any demand hereunder or (b) the principal of or the
interest on amounts due hereunder shall have become due and payable pursuant to
Article VII and although said obligations and liabilities, or any of them, may
be contingent or unmatured.
Section 10.16. Entire Agreement. The Credit Documents constitute the entire
understanding of the parties thereto with respect to the subject matter thereof
and any prior or contemporaneous agreements, whether written or oral, with
respect thereto are superseded thereby.
Section 10.17. Governing Law. This Agreement and the other Credit Documents
(other than the Letters of Credit), and the rights and duties of the parties
hereto, shall be construed and determined in accordance with the internal laws
of the State of New York.
Section 10.18. Submission to Jurisdiction; Waiver of Jury Trial. The
Applicant hereby submits to the nonexclusive jurisdiction of any United States
District Court located in New York, New York and of any New York State court
sitting in New York, New York for purposes of all legal proceedings arising out
of or relating to this Agreement, the other Credit Documents or the
transactions contemplated hereby or thereby. The Applicant irrevocably waives,
to the fullest extent permitted by law, any objection which it may
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<PAGE> 63
now or hereafter have to the laying of the venue of any such proceeding brought
in such a court and any claim that any such proceeding brought in such a court
has been brought in an inconvenient forum. Each of the Applicant, the
Administrative Agent, the Issuing Bank and each Bank hereby irrevocably waives
any and all right to trial by jury in any legal proceeding arising out of or
relating to any of the Credit Documents or the transactions contemplated
thereby.
Section 10.19. Severability. Any invalidity or unenforceability of any
provision or application to the Credit Documents shall not affect other lawful
provisions and applications thereof, and to this end the provisions of the
Credit Documents are declared to be severable. Section headings used in the
Credit Documents are for convenience of reference only and are not a part
thereof for any other purpose.
Upon your acceptance hereof in the manner hereinafter set forth, this
Agreement shall be a contract between us for the purposes hereinabove set
forth.
Kemper Asset Holdings, Inc.
By /s/ JOHN W. BURNS
-------------------------
Name JOHN W. BURNS
-------------------------
Title Treasurer
-------------------------
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<PAGE> 64
Address: Bank of Montreal
115 South LaSalle Street
Chicago, Illinois 60603
Telecopy: (312) 750-6057
Telephone: (312) 750-3888 By
Attention: Jonathan Hook -----------------------------
Name
------------------------
Title
------------------------
Credit Amount: $41,000,000
Lending Office:
115 South LaSalle Street
Chicago, Illinois 60603
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<PAGE> 65
Address: THE BANK OF NEW YORK, as
Administrative Agent and
Issuing Bank
One Wall Street
New York, NY 10286 By
Telecopy: (212) 809-9520 ----------------------------
Telephone: (212) 635-6407 Name
Attention: Benjamin L. Balkind ------------------------
Title
------------------------
Credit Amount: $41,000,000
Lending Office:
One Wall Street
New York, NY 10286
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<PAGE> 66
Address: CREDIT SUISSE
227 West Monroe Street, Suite 4000
Chicago, Illinois 60606 By
Telecopy: (312) 630-0359 ---------------------------
Telephone: (312) 630-0086 Name
Attention: John Bordes -----------------------
Title
-----------------------
Credit Amount: $41,000,000 By
Name
Lending Office: -----------------------
Title
-----------------------
12 East 49th Street, 41st Floor
New York, New York 10017
Telecopy: (212) 238-5246
Telephone: (212) 238-5218
Attention: Hazel Leslie
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<PAGE> 67
Address: MELLON BANK, N.A.
One Mellon Bank Center, Room 0370
Pittsburgh, PA 15258 By
Telecopy: (412) 234-8087 ------------------------
Telephone: (412) 234-7541 Name Scott Sanford
Attention: Sally J. Schurko Title Senior Vice President
Credit Amount: $41,000,000
Lending Office:
Three Mellon Bank Center, Room 2329
Pittsburgh, PA 15259
Telecopy: (412) 234-2733
Telephone: (412) 234-2194
Attention: Sue Stahl, Trade Operations
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<PAGE> 68
Address: THE FIRST NATIONAL BANK OF CHICAGO
One First National Plaza, Suite 0085
Chicago, IL 00670-0085 By
Telecopy: (312) 732-4033 -------------------------------
Telephone: (312) 732-9565 Name
Attention: Cynthia Priest ---------------------------
Title
---------------------------
Credit Amount: $41,000,000
Lending Office:
One First National Plaza, Suite 0085
Chicago, IL 00670-0085
Telecopy: (312) 732-4033
Telephone: (312) 732-9565
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<PAGE> 69
Schedule 2.1
The $205,000,000 Aggregate Letter of Credit Amount should be issued as
follows:
<TABLE>
<CAPTION>
LETTER OF CREDIT LOC AMOUNT PRINCIPAL INTEREST
<S> <C> <C> <C>
Letter of Credit No. S00031924 $103,535,700 $100,000,000 $3,535,700
Letter of Credit No. S00031925 82,828,000 80,000,000 2,828,000
Letter of Credit No. S00031926 10,353,500 10,000,000 353,500
Letter of Credit No. S00031927 5,177,100 5,000,000 177,100
Letter of Credit No. S00031928 3,105,700 3,000,000 105,700
------------ ------------ ----------
Total $205,000,000 $198,000,000 $7,000,000
</TABLE>
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<PAGE> 70
KEMPER CORPORATION
CERTIFICATE AS TO QUARTERLY FINANCIAL STATEMENTS
I, , [President, Chief Financial
Officer] of Kemper Corporation, a Delaware corporation (the "Guarantor"),
hereby certify, pursuant to Section 6.5(a) of the Letter of Credit Agreement
dated as of January , 1995, among the Kemper Asset Holdings, Inc. (the
"Applicant"), the banks party thereto and The Bank of New York, as
Administrative Agent (the "Credit Agreement"), that:
1. (a) The accompanying unaudited consolidated and
consolidating financial statements of the Guarantor and the
Consolidated Subsidiaries as at and for the quarterly accounting
period ending , 19 , present fairly, in
accordance with Generally Accepted Accounting Principles (except for
changes therein or therefrom described below that have been approved
in writing by
, the Guarantor's current independent certified public
accountants), the consolidated and consolidating (by business segment)
financial position of the Guarantor and the Consolidated Subsidiaries
as at the end of such quarterly period, and the consolidated and
consolidating (by business segment) results of operations and cash
flows of the Guarantor and the Consolidated Subsidiaries for such
quarterly period, and for the elapsed portion of the fiscal year ended
with the last day of such quarterly period, in each case on the basis
presented and subject only to normal year-end auditing adjustments.
(b) Except as disclosed or reflected in such financial
statements, as at , neither the Guarantor nor any Subsidiary had any
Liability, contingent or otherwise, or any unrealized or anticipated
loss, that, singly or in the aggregate, has had or could reasonably be
expected to have a Materially Adverse Effect on the Guarantor and the
Consolidated Subsidiaries taken as a whole.
2. (a) The changes from Generally Accepted Accounting
Principles are as follows:
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<PAGE> 71
All such changes have been approved in writing by
[(b) Attached as Annex A are unaudited consolidated and
consolidating financial statements of the Guarantor and the
Consolidated Subsidiaries as at and for the quarterly accounting
period ending
, 19 , which have been prepared in accordance with
Generally Accepted Accounting Principles without giving effect to the
changes referred to in Paragraph 2(a) of this Certificate or any
previous Certificate. Such financial statements are complete and
correct and present fairly, in accordance with Generally Accepted
Accounting Principles, the consolidated and consolidating (by business
segment) financial position of the Guarantor and the Consolidated
Subsidiaries as at the end of such quarterly period, and the
consolidated and consolidating (by business segment) results of
operations and cash flows for such quarterly period, and for the
elapsed portion of the fiscal year ending with the last day of such
quarterly period, in each case on the basis presented and subject only
to normal year-end auditing adjustments.]1*
3. Here follow the calculations required to establish whether
or not the Guarantor was in compliance with Section 4.13, 4.14 and
4.15 of the Long Term Facility as of , 19 [the end of
the quarterly accounting period referred to in 1(a) above].
4. Based on an examination sufficient to enable me to make an
informed statement, no Default exists, including, in particular, any
such arising under the provisions of Article VI of the Credit
Agreement or Article 3 of the Guaranty, except the following:
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<PAGE> 72
[If none such exists, insert "None"; if any do exist, specify the same by
Section, give the date the same occurred, whether it is continuing, and the
steps being taken by the Guarantor or a Subsidiary with respect thereto.]
Capitalized terms not otherwise defined herein shall have the meaning set forth
in the Credit Agreement. 1*
Dated:
-----------------------------------
[President, Chief
Financial Officer]
-----------------
1* Paragraph (b) should be included in, and Annex A attached to, the
Certificate only if changes from Generally Accepted Accounting Principles
are specified in Paragraph 2(a) of this or any previous Certificate.
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<PAGE> 73
Kemper Corporation
CERTIFICATE AS TO ANNUAL FINANCIAL STATEMENTS
I, , [President, Chief Financial Officer] of Kemper
Corporation, a Delaware corporation (the "Guarantor"), hereby certify, pursuant
to Section 6.5(b) of the Letter of Credit Agreement dated as of January ,
1995, among the Kemper Asset Holdings, Inc. (the "Applicant"), the banks party
thereto and , as Administrative Agent (the
"Credit Agreement"), that:
1. (a) The accompanying consolidated and consolidating financial
statements of the Guarantor and the Consolidated Subsidiaries as at
............................... and for the [fiscal year] [12 months] ending
, 19 , present fairly, in accordance with Generally
Accepted Accounting Principles (except for changes therein or therefrom
described below that have been approved in writing by
, the Guarantor's current independent certified
public accountants), the consolidated and consolidating (by business segment)
financial position of the Guarantor and the Consolidated Subsidiaries as at the
end of such fiscal year, and the consolidated and consolidating (by business
segment) results of operations and cash flows of the Guarantor and the
Consolidated Subsidiaries for such fiscal year, in each case on the basis
presented.
(b) Except as disclosed or reflected in such financial statements, as at
, neither the Guarantor nor any Subsidiary had any
Liability, contingent or otherwise, or any unrealized or anticipated loss,
that, singly or in the aggregate, has had or could reasonably be expected to
have a Materially Adverse Effect on the Guarantor and the Consolidated
Subsidiaries taken as a whole.
2. (a) The changes from Generally Accepted Accounting Principles are as
follows:
All such changes have been approved in writing by .
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<PAGE> 74
[(b) Attached as Annex A are unaudited consolidated and consolidating
financial statements of the Guarantor and the Consolidated Subsidiaries as at
and for the 12 months ending , 19 , which
have been prepared in accordance with Generally Accepted Accounting Principles
without giving effect to the changes referred to in Paragraph 2(a) of this
Certificate or any previous Certificate. Such financial statements are
complete and correct and present fairly, in accordance with Generally Accepted
Accounting Principles, the consolidated and consolidating (by business segment)
financial position of the Guarantor and the Consolidated Subsidiaries as at the
end of such fiscal year, and the consolidated and consolidating (by business
segment) results of operations and cash flows for such quarterly period, and
for the elapsed portion of the fiscal [year] [period], in each case on the
basis presented.]1
3. Here follow the calculations required to establish whether or not the
Guarantor was in compliance with Section 4.13, 4.14 and 4.15 of the Long Term
Facility as of December 31, 19 .
4. Based on an examination sufficient to enable me to make an informed
statement, no Default exists, including, in particular, any such arising under
the provisions of Article VI of the Credit Agreement or Article 3 of the
Guaranty, except the following:
[If none such exists, insert "None"; if any do exist, specify the same by
Section, give the date the same occurred, whether it is continuing, and the
steps being taken by the Guarantor or a Subsidiary with respect thereto.]
Capitalized terms not otherwise defined herein shall have the meaning set forth
in the Credit Agreement.2*
Dated:
-------------------------------
[President, Chief Financial Officer]
------------------
2* Paragraph (b) should be included in, and Annex A attached to, the
Certificate only if changes from Generally Accepted Accounting Principles
are specified in Paragraph 2(a) of this or any previous Certificate.
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<PAGE> 1
EXHIBIT 10.25(b)
FIRST AMENDMENT TO LETTER OF CREDIT AGREEMENT
This First Amendment to Letter of Credit Agreement dated February 27, 1995
(this "Amendment") among Kemper Asset Holdings, Inc. (the "Applicant"), The
Bank of New York, in its capacity as Issuing Bank (the "Issuing Bank") and as
administrative agent (the "Administrative Agent") and the Banks (as hereafter
defined):
W I T N E S S E T H
WHEREAS, the Applicant has heretofore entered into a Letter of Credit
Agreement dated as of January 26, 1995 (the "Agreement"), with The Bank of New
York as Issuing Bank and Administrative Agent and the banks signatory thereto
(the "Banks"), pursuant to which the Issuing Bank issued its letters of credit;
WHEREAS, the parties hereto desire to amend the Agreement as set forth
herein;
NOW THEREFORE, in consideration of the premises, the parties hereto hereby
agree as follows:
1. The definition of "Note Transfer Agreement" shall be amended and
restated in its entirety as follows:
"Note Transfer Agreement" means the Restated Note Proceeds
Transfer Agreement dated as of February 27, 1995, between the
Applicant and the Beneficiaries, as such agreement may be modified or
amended from time to time hereafter with the consent of the
Administrative Agent and the Banks.
2. The definition of "Pledge and Security Agreement" shall be amended and
restated in its entirety as follows:
"Pledge and Security Agreement" means the Pledge and Security
Agreement dated January 26, 1995 between the Applicant and The Bank of
New York, as Administrative Agent, as amended by the First Amendment
to Pledge and Security Agreement dated February 27, 1995, and as
further amended or modified from time to time hereafter.
<PAGE> 2
3. The parties hereto hereby consent to the execution and delivery of the
Restated Note Proceeds Transfer Agreement dated as of February 27, 1995 between
the Applicant and the Beneficiaries (the "Revised Note Transfer Agreement").
4. The effectiveness of this Amendment is subject to the satisfaction of
or waiver by the Administrative Agent, the Issuing Bank and the Required Banks
in their sole discretion of all of the following conditions precedent:
(a) delivery by the Applicant of an executed counterpart of
this Amendment and the Amendment to Pledge and Security Agreement
dated the date hereof (the "Security Agreement Amendment");
(b) delivery by the Applicant of an executed copy of the Revised Note
Transfer Agreement;
(c) an incumbency certificate from the Applicant certifying the names
and the signatures of the officers of the Applicant authorized
to sign this Amendment, the Security Agreement Amendment and the
Revised Note Transfer Agreement;
(d) an incumbency certificate from the Beneficiaries certifying the
names and signatures of the officer of the Beneficiaries
authorized to sign the Revised Note Transfer Agreement;
(e) a duly executed amendment to financing statement, in form
and substance satisfactory to the Administrative Agent and the
Banks, covering the collateral described in the Security
Agreement Amendment; and
(f) such other documents, certificates and opinions as the
Administrative Agent, the Issuing Bank and the Required Banks or
their counsel shall reasonably request.
- 2 -
<PAGE> 3
5. The Applicant hereby represents and warrants as follows:
(a) The execution, delivery and performance by the Applicant
of this amendment and the Agreement, as amended hereby, the
Security Agreement Amendment, and the Pledge and Security
Agreement as amended thereby and the Revised Note Transfer
Agreement are within its corporate powers, have been duly
authorized by all necessary corporate action and do not
contravene (i) its articles of incorporation or by-laws, or (ii)
any law or any contractual restriction binding on or affecting
the Applicant, or result in, or require, the creation or
imposition of any mortgage, deed of trust, pledge, lien, security
interest or other charge, encumbrance or preferential arrangement
of any nature upon or with respect to any of the properties now
owned or hereafter acquired by the Applicant.
(b) No authorization, approval or other action not heretofore
received by, and no notice to or filing with, any governmental
authority or regulatory body is required for the due execution,
delivery and performance by the Applicant of this Amendment or
the Agreement, as amended hereby, Security Agreement Amendment,
or the Pledge and Security Agreement as amended thereby, or the
Revised Note Transfer Agreement.
(c) The Agreement, as amended hereby, and the Pledge and
Security Agreement as amended by the Security Agreement
Amendment, and the Revised Note Transfer Agreement constitute
legal, valid and binding obligations of the Applicant enforceable
against the Applicant in accordance with their respective terms.
(d) The Applicant represents to the Administrative Agent and
the Banks that as of the date hereof, each of the representations
and warranties set forth in Article IV of the Agreement are true
and correct as of the date
- 3 -
<PAGE> 4
hereof. The Applicant is in full compliance with all of the
terms of the Agreement, the Pledge and Security Agreement and the
other Credit Documents and no event of default or event which
with the giving of notice or passage of time, or both, would
constitute an event of default has occurred or shall occur under
any Credit Document after giving effect to this Amendment, the
Security Agreement Amendment or the Revised Note Transfer
Agreement.
Except as specifically amended herein, the Agreement shall continue in full
force and effect in accordance with its terms. Reference to this specific
amendment need not be made or have been made in any note, document, agreement,
letter, certificate, the Agreement itself, or any communication issued or made
subsequent to or with respect to the Agreement, it being hereby agreed that any
reference to the Agreement shall be sufficient to refer to the Agreement as
hereby amended. As provided by Section 10.14 of the Agreement, the Applicant
shall pay the reasonable fees and disbursements of the counsel to the Banks and
the Administrative Agent in connection with the preparation of this Amendment
and the Security Agreement Amendment, whether or not such Amendments become
effective. In case any one or more of the provisions contained herein should
be invalid, illegal or unenforceable in any respect, the validity, legality and
enforceability of the remaining provisions contained herein shall not in any
way be affected or impaired hereby. All capitalized terms used herein without
definition shall have the same meanings herein as they have in the Agreement.
This instrument shall be construed and governed by and in accordance with the
internal laws of the State of New York.
This Amendment may be simultaneously executed in several counterparts, each of
which shall be an original and all of which shall constitute but one and the
same instrument.
- 4 -
<PAGE> 5
Dated as of the date first above written
Kemper Asset Holdings, Inc.
By /s/ JOHN W. BURNS
----------------------------
Its Treasurer
----------------------------
The Bank of New York, as
Administrative Agent and
Issuing Bank
By
Its
----------------------------
Bank of Montreal
By
Its
----------------------------
Credit Suisse
By
Its
----------------------------
By
Its
----------------------------
- 5 -
<PAGE> 6
Mellon Bank, N.A.
By
Its
----------------------------
The First National Bank of
Chicago
By
Its
----------------------------
The undersigned Acknowledges and Agrees that the Guaranty Agreement remains in
full force and effect.
Kemper Corporation
By /s/ JOHN W. BURNS
----------------------------
Its Treasurer
----------------------------
- 6 -
<PAGE> 1
EXHIBIT 10.25(c)
KEMPER CORPORATION
GUARANTY AGREEMENT
WHEREAS, Kemper Asset Holdings, Inc., a Delaware corporation ("Debtor"),
has applied to the Banks (as hereinafter defined) for the issuance of letters
of credit from time to time on behalf of the Debtor under the terms set forth
in that certain Letter of Credit Agreement dated as of January 26, 1995, among
the Banks party thereto, the Debtor and The Bank of New York, as Administrative
Agent and as Issuing Bank (the "Credit Agreement");
WHEREAS, as a condition to issuing the letters of credit, the
Administrative Agent, the Issuing Bank and the Banks have required that the
Debtor provide the Administrative Agent, the Issuing Bank and the Banks with
this Guaranty Agreement executed by Guarantor (as hereinafter defined) (this
"Guaranty") pursuant to which Guarantor guaranties to pay to the Banks amounts
owed by Debtor pursuant to the terms of the Credit Documents to which it is a
party; and
WHEREAS, the execution and delivery of the Credit Agreement and the
issuance of the Letters of Credit will directly benefit the Guarantor;
NOW, THEREFORE, FOR VALUE RECEIVED and in consideration of the issuance of
the Letter of Credit by the Issuing Bank and the participations therein by the
Banks (as defined in the Credit Agreement), from time to time, KEMPER
CORPORATION, a Delaware corporation (hereinafter designated the "Guarantor"),
hereby guarantees the full and prompt payment to the Administrative Agent, the
Issuing Bank and the Banks when due and at all times thereafter of any and all
indebtedness, fees, expenses, obligations and liabilities of every kind and
nature of the Debtor to any Bank, the Issuing Bank or the Administrative Agent
arising out of or in connection with the Credit Documents (such term and other
terms used herein which are defined in the Credit Documents having the meanings
set forth therein), howsoever evidenced, whether now existing or hereafter
created or arising, whether direct or indirect, absolute or contingent, joint
or several, or joint and several and howsoever owned, held or acquired, whether
through direct loan or as collateral, or otherwise (hereinafter all such
indebtedness, obligations and liabilities being collectively referred to as the
"Guaranteed Indebtedness"); and the Guarantor further agrees to pay all
expenses, legal and/or otherwise (including court costs and reasonable
-1-
<PAGE> 2
attorneys' fees), paid or incurred by the Administrative Agent, the Issuing
Bank and any Bank in endeavoring to collect the Guaranteed Indebtedness, or any
part thereof, and in enforcing this Guaranty.
1. LIABILITY ABSOLUTE AND UNCONDITIONAL.
1.1. This Guaranty shall be a continuing, absolute, irrevocable and
unconditional Guaranty, and shall remain in full force and effect until any and
all of the Guaranteed Indebtedness shall be fully paid in cash. The liability
of the Guarantor hereunder shall in no way be affected or impaired by (and the
Banks, the Administrative Agent and the Issuing Bank are hereby expressly
authorized to make from time to time, without notice to or consent of anyone)
any sale, pledge, surrender, compromise, settlement, release, renewal, change
in, modification or other disposition of any of the Guaranteed Indebtedness,
either express or implied, or of any contract or contracts evidencing any
thereof, or of any security or collateral therefor. The liability of the
Guarantor hereunder shall also in no way be affected or impaired by any
acceptance by any Bank, the Administrative Agent or the Issuing Bank of any
security for or other guarantors upon any of the Guaranteed Indebtedness, or by
any failure or omission on the part of any Bank, the Administrative Agent or
the Issuing Bank to realize upon or protect any of the Guaranteed Indebtedness,
or any collateral or security or other guaranty therefor, or to exercise any
lien upon or right of appropriation of any moneys, credits or Property of the
Debtor, possessed by any Bank, the Administrative Agent or the Issuing Bank
toward the liquidation of the Guaranteed Indebtedness, or by any application of
payments or credits thereon. The Issuing Bank or the Banks, as the case may
be, shall have the exclusive right to determine how, when and what application
of payments and credits, if any, shall be made on the Guaranteed Indebtedness,
or any part thereof. In order to hold the Guarantor liable hereunder, there
shall be no obligation on the part of any Bank, the Administrative Agent or the
Issuing Bank, at any time, to resort for payment to the Debtor or to any other
guaranty, or to any other person or corporation, other properties or estate, or
resort to any collateral, security, property, liens or other rights or remedies
whatsoever and the Banks, the Administrative Agent and the Issuing Bank shall
have the right to enforce this Guaranty irrespective of whether or not other
proceedings or steps are pending seeking resort to or realization upon or from
any of the foregoing.
-2-
<PAGE> 3
1.2. All diligence in collection or protection, and all presentment,
demand, protest and/or notice, as to any and everyone, whether or not the
Debtor or the Guarantor or others, of dishonor and of default and of
non-payment and of the creation and existence of any and all of the Guaranteed
Indebtedness, and of any security and collateral therefor, and of the
acceptance of this Guaranty, and of any and all extensions of credit and
indulgence, are expressly waived.
2. REPRESENTATIONS AND WARRANTIES.
2.1. Incorporation of Representations and Warranties by Reference. The
Guarantor hereby makes, as of the date hereof, to the Banks, the Administrative
Agent and the Issuing Bank the same representations and warranties as are set
forth by it in the Long Term Facility and the Short Term Facility, which
representations and warranties, as well as the related defined terms contained
therein, are hereby incorporated herein by reference for the benefit of the
Banks, the Administrative Agent and the Issuing Bank with the same effect as if
each and every such representation and warranty and defined term were set forth
herein in its entirety and were made as of the date hereof. No amendment to
such representations and warranties or defined terms made pursuant to the Long
Term Facility or the Short Term Facility shall be effective to amend such
representations and warranties and defined terms as incorporated by reference
herein without the prior written consent of the Administrative Agent, the
Issuing Bank and the Banks.
2.2. Authorization; Enforceability; Required Consents; Absence of
Conflicts. The Guarantor has the power, and has taken all necessary action
(including any necessary stockholder action) to authorize, execute, deliver and
perform in accordance with its terms this Guaranty. This Guaranty has been
duly executed and delivered by the Guarantor and is a legal, valid and binding
obligation of the Guarantor, enforceable against the Guarantor in accordance
with its terms except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
the enforcement of creditors' rights generally and general principles of
equity. The execution, delivery and performance in accordance with its terms
by the Guarantor of this Guaranty, do not and (absent any change in any
Applicable Law or applicable Contract) will not (a) require any Governmental
Approval or any other consent or approval, including any other consent or
approval of any Subsidiary of the Guarantor
-3-
<PAGE> 4
or any consent or approval of the Stockholders of the Guarantor or any
Subsidiary of the Guarantor, other than Governmental Approvals and other
consents and approvals that have been obtained, are final and not subject to
review on appeal or to collateral attack, are in full force and effect, or, in
the case of any Subsidiary of the Guarantor other than a Restricted Subsidiary
(as defined in the Long Term Facility), Governmental Approvals or other
consents or approvals the lack of which, alone or in the aggregate, would not
have a Materially Adverse Effect on the Guarantor and the Restricted
Subsidiaries, taken as a whole, or on the Guarantor's ability to perform its
obligations hereunder or (b) violate or conflict with, result in a breach of,
constitute a default under, or result in or require the creation of any Lien
upon any assets of the Guarantor or any Restricted Subsidiary under (i) any
Contract to which the Guarantor or any Restricted Subsidiary is a party or by
which the Guarantor or any Restricted Subsidiary or any of their respective
properties may be bound except for any Contract the violation of which, or the
existence of a default under, would not, alone or in the aggregate, have a
Materially Adverse Effect on the Guarantor and the Restricted Subsidiaries
taken as a whole or on the ability of the Guarantor to perform its obligations
hereunder or (ii) any Applicable Law.
2.3. Since December 31, 1993, there has been no change with respect to
the Guarantor and its Subsidiaries taken as a whole that has had or can
reasonably be expected to have a Materially Adverse Effect on (a) the Guarantor
or (b) this Guaranty.
2.4. The Guarantor, directly or indirectly, owns 100% of the outstanding
Capital Securities of the Debtor.
3. COVENANTS.
3.1. Incorporation by Reference-Long Term Facility Covenants. From and
after the date hereof and so long as any amount may be drawn under any Letter
of Credit, and thereafter so long as any amounts remain outstanding, or
Reimbursement Obligations remain unfulfilled under the Credit Agreement, except
to the extent compliance in any case or cases is waived in writing by the
Issuing Bank, the Administrative Agent and the Banks, the Guarantor agrees that
it will, for the benefit of the Issuing Bank, the Administrative Agent and the
Banks, comply with, abide by, and be restricted by all the agreements,
covenants, obligations and undertakings
-4-
<PAGE> 5
contained in the provisions of Articles 4 and 5 of the Long Term Facility,
regardless of whether any Indebtedness is now or hereafter remains outstanding
under the Long Term Facility or the Long Term Facility shall have terminated,
all of which provisions, together with the related definitions, exhibits and
ancillary provisions, are incorporated herein by reference, mutatis mutandis,
and made a part hereof to the same extent and with the same force and effect as
if the same had been herein set forth in their entirety, and will be deemed to
continue in effect for the benefit of the Issuing Bank, the Administrative
Agent and the Banks irrespective of whether the Long Term Facility remains in
effect, and without regard or giving effect to any amendment or modification to
such provisions or any waiver of compliance therewith, no such amendment,
modification or waiver to in any manner constitute an amendment, modification
or waiver of the provisions thereof as incorporated herein unless consented to
in writing by the Administrative Agent, the Issuing Bank and the Banks;
provided that all information required to be provided to the Banks in said
provisions shall be provided to the Administrative Agent, the Issuing Bank and
the Banks, provided further that said provisions as incorporated herein and
made a part hereof shall be amended in the following respects:
(i) the terms "Bank" or "Banks" appearing in said provisions shall mean
and refer to the Issuing Bank and the Banks;
(ii) the term "Borrower" appearing in said provisions shall mean and
refer to the Guarantor;
(iii) the terms "Event of Default" and "Default" appearing in said
provisions shall mean and refer to an Event of Default and Default,
respectively, as defined in the Credit Agreement; and
(iv) the term "this Agreement" appearing in said provisions shall mean
and refer to this Guaranty.
Other than as hereinabove amended, any terms contained in the provisions
of the Long Term Facility incorporated herein which are defined in the Long
Term Facility shall have the same meaning herein as in the Long Term Facility.
-5-
<PAGE> 6
3.2. Incorporation by Reference-Short Term Facility Covenants. From and
after the date hereof and so long as any amount may be drawn under any Letter
of Credit, and thereafter so long as any amounts remain outstanding or
Reimbursement Obligations remain unfulfilled under the Credit Agreement, except
to the extent compliance in any case or cases is waived in writing by the
Issuing Bank, the Administrative Agent and the Banks, the Guarantor agrees that
it will, for the benefit of the Issuing Bank, the Administrative Agent and the
Banks, comply with, abide by, and be restricted by all the agreements,
covenants, obligations and undertakings contained in the provisions of
Articles 4 and 5 of the Short Term Facility, regardless of whether any
Indebtedness is now or hereafter remains outstanding under the Short Term
Facility or the Short Term Facility shall have terminated, all of which
provisions, together with the related definitions, exhibits and ancillary
provisions, are incorporated herein by reference, mutatis mutandis, and made a
part hereof to the same extent and with the same force and effect as if the
same had been herein set forth in their entirety, and will be deemed to
continue in effect for the benefit of the Issuing Bank, the Administrative
Agent and the Banks irrespective of whether the Short Term Facility remains in
effect, and without regard or giving effect to any amendment or modification to
such provisions or any waiver of compliance therewith, no such amendment,
modification or waiver to in any manner constitute an amendment, modification
or waiver of the provisions thereof as incorporated herein unless consented to
in writing by the Administrative Agent, the Issuing Bank and the Banks;
provided that all information required to be provided to the Banks in said
provisions shall be provided to the Administrative Agent, the Issuing Bank and
the Banks, provided further that said provisions as incorporated herein and
made a part hereof shall be amended in the following respects:
(i) the terms "Bank" or "Banks" appearing in said provisions shall mean
and refer to the Issuing Bank and the Banks;
(ii) the term "Borrower" appearing in said provisions shall mean and
refer to the Guarantor;
(iii) the terms "Event of Default" and "Default" appearing in said
provisions shall mean and refer to an Event of Default and Default,
respectively, as defined in the Credit Agreement; and
-6-
<PAGE> 7
(iv) the term "this Agreement" appearing in said provisions shall mean
and refer to this Guaranty.
Other than as hereinabove amended, any terms contained in the provisions
of the Short Term Facility incorporated herein which are defined in the Short
Term Facility shall have the same meaning herein as in the Short Term Facility.
4. MISCELLANEOUS.
4.1. Any provision of this Guaranty may be amended or modified and
compliance with any of its terms may be waived either retroactively or
prospectively if, and only if, an instrument is executed in writing by the
Guarantor and the Administrative Agent, the Issuing Bank and the Banks.
4.2. The payment by the Guarantor of any amount pursuant to this Guaranty
shall not in any way entitle the Guarantor to any right, title or interest
(whether by way of subrogation or otherwise) in and to any of the Guaranteed
Indebtedness of the Debtor or any proceeds thereof or any security therefor
unless and until the full amount owing to the Banks, the Issuing Bank and the
Administrative Agent on the Guaranteed Indebtedness has been fully paid in
immediately available funds. No act of commission or omission of any kind, or
at any time, upon the part of the Administrative Agent, the Issuing Bank and
the Banks in respect of any matter whatsoever, shall in any way affect or
impair this Guaranty.
4.3. In the case of the occurrence of an Event of Default under Section
7.1(h) or 7.1(i) of the Credit Agreement, all of the Guaranteed Indebtedness
then existing shall immediately become due and accrued and payable from the
Guarantor.
4.4. The Issuing Bank and the Banks may, without any notice whatsoever to
anyone, sell, assign, or transfer all of the Guaranteed Indebtedness, or any
part thereof, or grant participations therein, and in that event each and every
immediate and successive assignee, transferee, or holder of or participant in
all or any part of the Guaranteed Indebtedness, shall have the right to enforce
this Guaranty, by suit or otherwise, for the benefit of such assignee,
transferee, holder or participant, as fully as if such assignee, transferee,
holder or participant were herein by name specifically given such rights,
powers and benefits; but each of the
-7-
<PAGE> 8
Issuing Bank and the Banks shall have an unimpaired right to enforce this
Guaranty for the benefit of the Issuing Bank or such Bank or any such
participant, as to such of the Guaranteed Indebtedness that it has not sold,
assigned or transferred.
4.5. If any payment applied by the Administrative Agent, the Issuing Bank
or the Banks to the Guaranteed Indebtedness is thereafter set aside, recovered,
rescinded or required to be returned for any reason (including, without
limitation, the bankruptcy, insolvency or reorganization of the Debtor or any
other obligor), the Guaranteed Indebtedness to which such payment was applied
shall for the purposes of this Guaranty be deemed to have continued in
existence, notwithstanding such application, and this Guaranty shall be
enforceable as to such of the Guaranteed Indebtedness as fully as if such
application had never been made.
4.6. The obligations of the Guarantor hereunder shall be absolute and
unconditional under all circumstances, irrespective of the validity or the
enforceability of the Guaranteed Indebtedness, irrespective of any present or
future law of any government or of any agency thereof purporting to reduce,
amend or otherwise affect any of the Guaranteed Indebtedness, and irrespective
of any other circumstance that might otherwise constitute a defense available
to, or a discharge of, the Debtor or the Guarantor.
4.7. Any invalidity or unenforceability of any provision or application
of this Guaranty shall not affect other lawful provisions and applications
hereof, and to this end the provisions of this Guaranty are declared to be
severable. This Guaranty may not be released or otherwise changed except by a
writing signed by the Administrative Agent, the Issuing Bank and the Banks.
Section headings used in this Guaranty are for convenience of reference only
and are not part of this Guaranty for any other purpose.
4.8. All notices or other communications given hereunder by the
Administrative Agent, the Issuing Bank or any Bank to the Guarantor shall be
addressed to the Guarantor at Attention: Kathleen A. Gallichio, General
Counsel, Kemper Corporation, One Kemper Drive C-3, Long Grove, Illinois 60049
or to such other address as the Guarantor shall designate by notice in writing
to the Administrative Agent, the Issuing Bank or the Banks. Any such notice or
other communication shall be effective only upon receipt thereof by the
Guarantor.
-8-
<PAGE> 9
4.9. This Guaranty and every part hereof, shall be binding upon the
Guarantor, and upon the legal representatives, successors and assigns of the
Guarantor, and shall inure to the benefit of the Administrative Agent, the
Issuing Bank and the Banks, their successors, legal representatives and
assigns. The Guarantor shall not assign any of its rights hereunder or
delegate any of its duties hereunder without the prior written consent of the
Administrative Agent, the Issuing Bank and the Banks.
4.10. This Guaranty shall be governed by and construed according to the
laws of the State of New York, in which State it shall be performed by the
Guarantor. All payments to be made by the Guarantor hereunder shall be made in
U.S. dollars at the principal office of the Administrative Agent (or at such
other place for the account of the Administrative Agent, the Issuing Bank or
the Banks as they may from time to time specify to the Guarantor) in
immediately available and freely transferable funds at the place of payment,
all such payments to be paid without setoff, counterclaim or reduction and
without deduction for, and free from, any and all present or future taxes,
levies, imposts, duties, fees, charges, deductions, withholding or liabilities
with respect thereto or any restrictions or conditions of any nature. If the
Guarantor is required by law to make any deduction or withholding on account of
any tax or other withholding or deduction from any sum payable by the Guarantor
hereunder, the Guarantor shall pay any such tax or other withholding or
deduction and shall pay such additional amount necessary to ensure that, after
making any payment, deduction or withholding, the Banks shall receive and
retain (free of any liability in respect of any such payment, deduction or
withholding) a net sum equal to what it would have received and so retained
hereunder had no such deduction, withholding or payment been required to have
been made.
4.11. The Guarantor hereby submits to the nonexclusive jurisdiction of
any United States District Court located in New York, New York and of any New
York State court sitting in New York, New York for purposes of all legal
proceedings arising out of or relating to this Guaranty, the other Credit
Documents or the transactions contemplated hereby or thereby. The Guarantor
irrevocably waives, to the fullest extent permitted by law, any objection which
it may now or hereafter have to the laying of the venue of any such proceeding
brought in such a court and any claim that any such proceeding brought in such
a court has been brought in an inconvenient forum. The Guarantor hereby
irrevocably waives any and all right to trial
-9-
<PAGE> 10
by jury in any legal proceeding arising out of or relating to any Credit
Document or the transactions contemplated thereby.
4.12. This Guaranty and the other Credit Documents constitute the entire
understanding of the parties thereto with respect to the subject matter thereof
and any prior or contemporaneous agreements, whether written or oral, with
respect thereto are superseded thereby.
4.13. This Guaranty and every part hereof shall be effective upon
delivery to the Administrative Agent, on behalf of the Issuing Bank and the
Banks, without further act, condition or acceptance by the Administrative
Agent, the Banks, or the Issuing Bank, shall be binding on the Guarantor, and
upon successors and assigns of the Guarantor, and shall inure to the benefit of
the Administrative Agent, the Banks and the Issuing Bank, and their successors
and assigns. The Guarantor waives notice of the acceptance hereof by the
Administrative Agent, the Banks and the Issuing Bank.
4.14. In addition to any rights now or hereafter granted under applicable
law and not by way of limitation of any such rights, upon the occurrence of any
Event of Default, each Bank, the Issuing Bank, the Administrative Agent and
each subsequent holder of any Guaranteed Obligation is hereby authorized by the
Guarantor at any time or from time to time, without notice to the Guarantor or
to any other Person, any such notice being hereby expressly waived, to set off
and to appropriate and to apply any and all deposits (general or special,
including, but not limited to, indebtedness evidenced by certificates of
deposit, whether matured or unmatured, but not including trust accounts, and in
whatever currency denominated) and any other indebtedness at any time held or
owing by the Bank, the Issuing Bank, the Administrative Agent or that
subsequent holder to or for the credit or the account of the Guarantor, whether
or not matured, against and on account of the obligations and liabilities of
the Guarantor to the Bank, the Administrative Agent, the Issuing Bank or that
subsequent holder hereunder, including, but not limited to, all claims of any
nature or description arising out of or connection with this Guaranty,
irrespective of whether or not that Bank, the Administrative Agent, the Issuing
Bank or that subsequent holder shall have made any demand hereunder.
-10-
<PAGE> 11
SIGNED AND DELIVERED by the Guarantor, as of the 26th day of January, 1995.
THE GUARANTOR ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THIS GUARANTY AS OF
THE TIME OF EXECUTION.
Kemper Corporation
By /s/ John W. Burns
--------------------------------
Its Treasurer
--------------------------------
ADDRESS: One Kemper Drive, C-3
Long Grove, Illinois 60049
-11-
<PAGE> 1
EXHIBIT 10.25(d)
RESTATED NOTE PROCEEDS TRANSFER AGREEMENT
This RESTATED NOTE PROCEEDS TRANSFER AGREEMENT (this "Agreement") made as
of the 27th day of February, 1995 among KEMPER ASSET HOLDINGS, INC., a Delaware
corporation ("KAHI") and wholly-owned subsidiary of KEMPER CORPORATION, a
Delaware corporation ("Kemper"), KEMPER MONEY MARKET FUND ("KMMF"), CASH
EQUIVALENT FUND ("CEF"), KEMPER PORTFOLIOS ("KP"), CASH ACCOUNT TRUST ("CAT")
and KEMPER INVESTORS FUND ("KINF"), each a Massachusetts business trust (each
of KMMF, CEF, KP, CAT and KINF a "Fund" and collectively the "Funds");
WITNESSETH:
WHEREAS, since July 1994 the Funds have and continue to own in the
portfolios indicated (each a "Portfolio") certain County of Orange, State of
California, 1994-95 Taxable Notes dated July 8, 1994 and due July 10, 1995 (the
"Notes") in the respective principal amounts indicated:
<TABLE>
<CAPTION>
Principal Amount
Fund of Notes
---- ----------------
<S> <C>
KMMF -- Money Market Portfolio $100,000,000
CEF -- Money Market Portfolio 80,000,000
KP -- Cash Reserves Fund 10,000,000
CAT -- Money Market Portfolio 5,000,000
KINF -- Money Market Portfolio 3,000,000
--------------
Total $198,000,000
==============
</TABLE>
WHEREAS, the County of Orange, California (the "Debtor"), has filed a
petition under Chapter 9 of the United States Bankruptcy Code (the "Code");
WHEREAS, Kemper, KAHI and each of the Funds have concluded that it is in
their respective interests that the Funds and through them their shareholders
not suffer any loss or delay in receiving the amounts of either interest or
principal due under the Notes;
WHEREAS, KAHI and each of the Funds have previously entered into a Put and
Call Agreement dated December 15, 1994 (the "Put and Call Agreement")
<PAGE> 2
providing for, among other things, the termination of such Agreement in the
event a "Qualified Party" (as defined in such Agreement) has issued an
irrevocable letter of credit meeting certain conditions specified in such
Agreement;
2
<PAGE> 3
WHEREAS, subsequent to entering into the Put and Call Agreement, KAHI
entered into a $205,000,000 Letter of Credit Agreement (the "Letter of Credit
Agreement") with the banks (the "Banks") identified as parties thereto and the
Administrative Agent and Issuing Bank (as such terms are defined in the Letter
of Credit Agreement) pursuant to which the Issuing Bank, which is a Qualified
Party, has issued irrevocable letters of credit (the "Letters of Credit") to
the Funds to support payments of principal and interest due or to become due to
the Funds on account of the Notes;
WHEREAS, (i) the Letter of Credit Agreement provides that KAHI is
obligated to reimburse the Issuing Bank for, among other things, any draws on
the Letters of Credit and (ii) in connection with the issuance of the Letters
of Credit, Kemper executed a guaranty (the "Guaranty") in favor of the Banks
guaranteeing the reimbursement obligations of KAHI to the Banks, the Issuing
Bank and the Administrative Agent under the Letter of Credit Agreement;
WHEREAS, KAHI entered into the Letter of Credit Agreement and Kemper
executed the Guaranty to induce the Issuing Bank to issue the Letters of
Credit, all in consideration of, among other things, the execution of the Note
Transfer Agreement dated as of January 26, 1995 (the "Note Transfer Agreement")
by the Funds;
WHEREAS, no assignments, transfers or actual exercises of any rights of
any party ever occurred under the Put and Call Agreement or the Note Transfer
Agreement;
WHEREAS, the Funds at all times since their purchase thereof have owned
the Notes, and all rights and claims associated with the Notes, without any
adjustment or modification thereto whatsoever;
WHEREAS, each Fund desires that Kemper and KAHI continue to take the
actions requested of them by the Banks in connection with the Letter of Credit
issued to each Fund; and
WHEREAS, the parties to the Note Transfer Agreement desire to clarify
certain aspects of the Note Transfer Agreement, including without limitation
that (i) the Notes and the Rights (as defined below) shall continue to be owned
by the Funds in every respect, except as contemplated in Paragraphs 3 and 4,
and (ii) KAHI shall be entitled to receive from each Fund, with respect to its
Notes on account of which any payment is made pursuant to such Letters of
Credit, only the corresponding Proceeds (as defined below) from (a) the Notes
and (b) the Rights, all as more fully set forth in Paragraphs 2 and 5 below;
3
<PAGE> 4
NOW, THEREFORE, intending to be legally bound hereby, the parties agree:
1. Each of the recitals set forth above is hereby incorporated in its
entirety into this Agreement. Without in any way limiting the generality of
the foregoing, the Funds represent and warrant that the recitals contained in
the first "WHEREAS" clause are true and acknowledge that KAHI and its assigns
are relying thereon.
2. Each Fund, with respect to any Notes on account of which any payment
is made pursuant to a Letter of Credit (and/or Paragraph 8 of this Agreement),
shall, simultaneously with any drawing for such payment under a Letter of
Credit (and/or the making of such payment pursuant to said Paragraph 8), assign
and transfer or cause to be assigned and transferred to KAHI, free and clear of
any lien, encumbrance or rights of any other person except the rights of the
Administrative Agent and Kemper described in Paragraph 10 below, (a) in the
case of each A Drawing (as defined in the Letters of Credit) made under a
Letter of Credit (and/or payment pursuant to said Paragraph 8), all Proceeds
(as hereinafter defined) of or from such Fund's rights and claims with respect
to the interest payment on account of which such A Drawing (or payment) was
made and (b) in the case of each B Drawing or C Drawing (as each is defined in
the Letters of Credit) made under a Letter of Credit (and/or payment pursuant
to said Paragraph 8), all Proceeds of or from (i) such Fund's right, title and
interest in and to the Notes and (ii) all other rights and claims of such Fund
with respect to the principal and any accrued interest on account of which such
B Drawing or C Drawing (or payment) was made. Each assignment and transfer
provided for in this Paragraph shall become effective immediately (and without
further action by the Fund or KAHI) upon the Fund's receipt, pursuant to a
Letter of Credit (and/or Paragraph 8 of this Agreement), of the payment on
account of which such assignment and transfer of Proceeds is being made. Each
Fund agrees to execute, and deliver to KAHI or as KAHI, or KAHI's agent (as
contemplated in Paragraph 3 of this Agreement), may direct, from time to time,
any and all documents, and to perform all acts requested by KAHI, necessary to
further effectuate such assignment and transfer of Proceeds, or a purchase
under Paragraph 3 hereof, including without limitation any filings with the
Bankruptcy Court having jurisdiction over the Debtor's Chapter 9 bankruptcy
case (the "Bankruptcy Court") and any notice to Investors Fiduciary Trust
Company of Kansas City, Missouri, the custodian of the assets of each of the
Funds, and/or United Missouri Bank, N.A., Kansas City, Missouri, the
sub-custodian of certain of the assets of the Funds, including the Notes, of
such assignment and transfer of Proceeds or purchase, as the case may be. As
used in this Agreement, the term "Proceeds," as it pertains to any Note or
Right (as defined below), shall include without limitation all cash amounts,
collections, assets, payments
4
<PAGE> 5
or other proceeds, whenever received, of, from or in any way on account of or
related to such interest payment, Note or Right, as appropriate, and all rights
to receive any or all of the foregoing, but shall not include any funds
obtained pursuant to any A Drawing, B Drawing or C Drawing under a Letter of
Credit (and/or payment pursuant to Paragraph 8 hereof).
3. (a) KAHI shall have the unconditional right to require each Fund, or
any of them, to sell to KAHI, at the greatest of (a) par plus accrued interest
(without considering any limitations which may be imposed on such accrual under
the Code) less the aggregate amount of all A Drawings and B Drawings or C
Drawings, if any, made under such Fund's Letter of Credit on account of its
Notes, (b) market less the aggregate amount of all A Drawings and B Drawings or
C Drawings, if any, made under such Fund's Letter of Credit on account of its
Notes or (c) $1.00, all or such part of the Notes then held by such Fund(s) as
KAHI shall designate at any time and from time to time for so long as such
Fund(s) shall own any of the Notes. KAHI may exercise its rights under this
Paragraph by giving written notice to such Fund(s) not later than 5:00 p.m.
(Central time) on the business day immediately preceding the date of purchase
designated by KAHI. Such Fund(s) shall assign and transfer or cause to be
assigned and transferred to KAHI, and KAHI shall purchase and pay for, the
Notes plus accrued interest (without considering any limitations which may be
imposed on such accrual under the Code), or such portion thereof as KAHI shall
have elected to purchase, by wire transfer of immediately available funds by
12:00 noon (Central time) on such date of purchase. Promptly thereafter, each
Fund shall submit to the Issuing Bank an appropriate certificate of reduction
or notice of termination, as the case may be, pursuant to the Letter of Credit
reflecting such purchase. As used in this Agreement, the term "transfer," as
it pertains to any Note, has the meaning assigned thereto in Section 8-313(1)
of the Uniform Commercial Code.
(b) In the event of any A Drawing, B Drawing or C Drawing under a
Letter of Credit and (i) KAHI's failure to reimburse the Issuing Bank for any
such drawing under a Letter of Credit within the time period specified in the
Letter of Credit Agreement and (ii) Kemper's failure to so reimburse the
Issuing Bank for any such drawing within the time period specified in the
Guaranty, then the Administrative Agent, as agent for KAHI, shall be entitled
to exercise all of KAHI's rights under this Paragraph 3 to purchase all of the
Notes, or any of them, then held by the Funds, all on the terms and conditions
specified in this Paragraph 3.
4. For so long as such Fund(s) shall own any of the Notes, each Fund may,
at any time and from time to time, if such Fund has provided to the Issuing
Bank an appropriate certificate of reduction or notice of termination, as the
case may be, pursuant to the Letter of Credit,
5
<PAGE> 6
consummate rescission of its purchase of its Notes or sell its Notes or any
part thereof to any other person or persons. Upon any such rescission or sale
made in accordance with the preceding sentence, any rights and/or obligations
of KAHI under Paragraph 3 above to acquire the Notes so rescinded or sold shall
be extinguished automatically without further action by any party. Each Fund
promptly shall notify KAHI of any such rescission or sale pursuant to this
Paragraph 4.
5. Each Fund hereby assigns and transfers to KAHI all Proceeds of or from
any and all actions, claims, causes of action, rights of rescission or other
rights under the laws of the United States or any state or municipal
subdivision thereof (including but not limited to federal and state securities
laws, the Racketeer Influenced Corrupt Organizations Act, the Code and the
common law) to equitable relief or damages, including punitive, treble, or
other extraordinary damages, and attorneys fees and costs, which such Fund may
have against any person, partnership, corporation, association, governmental
entity (including all their respective agents, representatives, divisions,
subsidiaries or affiliated entities) arising out of, concerning or relating to
the purchase or holding by such Fund of any Notes (such actions, claims, causes
of action and rights collectively hereinafter the "Rights") (a) that relate to
any Note(s) the Proceeds of which are in fact assigned to KAHI and/or (b) that
relate to any Note(s) which are in fact purchased by or on behalf of KAHI
pursuant to Paragraph 3 hereof. Each assignment and transfer of Proceeds of
Rights provided for in this Paragraph shall become effective immediately (and
without further action by the Fund or KAHI) upon any such assignment and
transfer of Proceeds of Notes or purchase of Notes, as the case may be. Each
Fund agrees to execute and deliver to KAHI or pursuant to its direction, from
time to time, any and all documents necessary to further effectuate such
assignment and transfer, including without limitation any filings with the
Bankruptcy Court. Notwithstanding anything in this Agreement to the contrary,
and notwithstanding a Fund's obligation under certain circumstances to transfer
the Proceeds of a Right relating to a Note, so long as a Fund shall continue to
own and hold any Note, all Rights relating to such Note shall remain in and be
the property of such Fund and shall not be assigned or transferred to any
person except to the extent permitted by Paragraph 4.
6. As to any Proceeds of or from any Notes and/or Rights required to be
assigned and transferred to KAHI pursuant to this Agreement, each Fund shall
promptly and from time to time forward, endorse over and otherwise take all
such actions necessary to assign and transfer to KAHI, after the date thereof,
all such Proceeds received by such Fund.
6
<PAGE> 7
7. (a) Each Fund hereby appoints, authorizes and directs KAHI (at KAHI's
own cost and expense) to act as its duly authorized agent and to take such
actions as are necessary to protect each Fund's interests in the Notes and
assert, in such Fund's name and for such Fund's benefit, each Fund's Rights in
the Debtor's Chapter 9 bankruptcy case and otherwise, including, without
limitation, the timely and proper filing of proof(s) of claim, if necessary,
with respect to the Notes and the Rights. KAHI hereby accepts such
appointment, authorization and direction. The Funds and KAHI further agree to
reasonably cooperate with each other with respect to (i) any filings required
or desired to be made with the Bankruptcy Court in the Debtor's Chapter 9
bankruptcy case, including without limitation filings under Federal Rule of
Bankruptcy Procedure 3001(e), (ii) the prosecution of any Rights and (iii) any
other actions reasonably intended to increase the value of, or reduce any loss
ultimately to be borne by KAHI or Kemper on, the Notes. Each Fund hereby
waives its right to object to any transfer under Federal Rule of Bankruptcy
Procedure 3001(e) of any claims relating to the Notes and/or the Rights, if and
when any such Notes and Rights are purchased by KAHI pursuant to this
Agreement.
7
<PAGE> 8
(b) The parties acknowledge and agree that the foregoing appointment,
authorization and direction and the assignment(s) and transfer(s) of Proceeds
contemplated by this Agreement are for the purpose of having KAHI control the
actions and proceedings described in the foregoing paragraph to be pursued by
the parties, if any.
8. In the event an interest payment on the Notes on account of which an A
Drawing, B Drawing or C Drawing is or could be made exceeds the amount
available for the payment of interest under a Letter of Credit, upon notice to
KAHI thereof by a Fund, KAHI shall pay to such Fund, by wire transfer of
immediately available funds by 12:00 noon (Central time) on the business day
following receipt of such notice, the amount of such shortfall.
9. All of the parties' respective rights and obligations under (a) the
Put and Call Agreement are hereby merged into and for all purposes superceded
and replaced by the rights granted and obligations assumed hereunder and (b)
the Note Transfer Agreement are hereby reaffirmed as clarified and restated
herein.
10. This Agreement shall inure to the benefit of, and shall be binding
upon, the parties hereto and shall not be assignable by any party; provided,
however, that KAHI may grant (a) to the Administrative Agent a security
interest in and lien upon all of KAHI's rights under this Agreement to secure
KAHI's reimbursement obligations and the other indebtedness, obligations and
liabilities of KAHI to the Banks, the Issuing Bank and the Administrative Agent
under or related to the Credit Documents (as defined in the Letter of Credit
Agreement) and (b) to Kemper a security interest in and lien junior to that of
the Administrative Agent upon all of KAHI's rights under this Agreement to
secure KAHI's obligations to Kemper to repay Kemper for amounts paid by Kemper
under the Guaranty and for the preparation and prosecution of claims in
Bankruptcy Court or any other court or dispute resolution forum with respect to
the Notes and/or the Rights. KAHI hereby authorizes each Fund, upon and after
receipt of notice from the Administrative Agent, to transfer the Proceeds of or
from all actions, claims and other rights, and otherwise pay all sums, in each
case due and to become due to KAHI under this Agreement, directly to the
Administrative Agent, and KAHI hereby releases each Fund from any liability for
any costs, expenses, damages, liabilities or claims, including attorney's fees,
resulting from such Fund's action or omission to act or otherwise under this
authorization and direction. This Agreement may be amended only by a writing
signed on behalf of all parties.
11. Except as otherwise provided herein, all notices or consents required
or permitted by this Agreement shall be in writing and shall be deemed
delivered if delivered in person or if sent by registered or
8
<PAGE> 9
certified mail, return receipt requested, by facsimile or similar transmission,
or by overnight delivery, as follows, unless such address is changed by written
notice hereunder:
(a) If to KAHI and/or Kemper:
Kemper Asset Holdings, Inc. and
Kemper Corporation
One Kemper Drive
Long Grove, Illinois 60049
Attn: Chief Financial Officer
with a copy to:
Kathleen A. Gallichio
Senior Vice President, General Counsel
and Corporate Secretary
Kemper Corporation
One Kemper Drive
Long Grove, Illinois 60049
(b) If to a Fund:
[Name of Fund]
c/o Kemper Financial Services, Inc.
120 South LaSalle Street
Chicago, Illinois 60603
Attn: Chief Investment Officer
with a copy to:
Charles F. Custer
Vedder, Price, Kaufman & Kammholz
222 North LaSalle Street
Chicago, Illinois 60601
12. This Agreement is executed by or on behalf of the Fund(s) and the
obligations hereunder are not binding upon any of the Trustees, officers or
holders of shares of any Fund individually but are binding only upon each Fund
and its respective assets and property. All liabilities and obligations of any
Fund under this Agreement shall apply only to the Portfolio indicated above,
and no assets of any other portfolio shall be liable for the liabilities and
obligations of such Portfolio.
9
<PAGE> 10
13. Each Fund's Declaration of Trust as amended is on file with the
Secretary of the Commonwealth of Massachusetts. This Agreement shall be
construed in accordance with the laws of the State of Illinois (except as to
Paragraph 12 and the first sentence of this Paragraph 13 hereof which shall be
construed in accordance with the laws of the Commonwealth of Massachusetts).
14. KAHI hereby acknowledges that it has received a legal opinion from
counsel to the Funds addressed to KAHI, Kemper and the Banks, which opinion is
in form and substance satisfactory to KAHI.
15. This Agreement restates the Note Transfer Agreement as of the date
hereof. Specific reference to this restated Agreement need not be made nor
have been made in any note, document, agreement, letter, certificate or other
communication issued or made subsequent hereto or with respect to this
Agreement or the Note Transfer Agreement, including without limitation (i) the
Acknowledgment of Assignment dated January 26, 1995 from the Funds to the
Administrative Agent and (ii) the Collateral Subordination Agreement dated as
of January 26, 1995 between Kemper and the Administrative Agent, it being
hereby agreed that any reference to the Note Transfer Agreement shall be deemed
a sufficient reference to this Agreement.
10
<PAGE> 11
IN WITNESS WHEREOF, the parties have caused this instrument to be executed
as of the day and year first above written.
ATTEST: KEMPER ASSET HOLDINGS, INC.
/s/ JOHN W. BURNS By: /s/ JOHN H. FITZPATRICK
----------------------- --------------------------------
Its President
KEMPER MONEY MARKET FUND
CASH EQUIVALENT FUND
KEMPER PORTFOLIOS
CASH ACCOUNT TRUST
KEMPER INVESTORS FUND
ATTEST:
/s/ PHILLIP J. COLLORA By: /s/ STEPHEN B. TIMBERS
----------------------- --------------------------------
Its Vice President
GUARANTY
FOR VALUE RECEIVED, KEMPER CORPORATION, a Delaware corporation ("Kemper"),
hereby unconditionally guarantees all obligations of payment of KEMPER ASSET
HOLDINGS, INC., a Delaware corporation (KAHI"), under Paragraph 8 of the
foregoing Restated Note Proceeds Transfer Agreement of even date. Kemper
hereby waives any defenses that KAHI may have, now or in the future, to any
such obligations.
Dated as of February 27, 1995.
ATTEST: KEMPER CORPORATION
/s/ JOHN W. BURNS By: /s/ JOHN H. FITZPATRICK
----------------------- --------------------------------
Its Executive Vice President and
Chief Financial Officer
11
<PAGE> 1
EXHIBIT NO. 21
SUBSIDIARIES OF KEMPER CORPORATION
AS OF MARCH 24, 1995
<TABLE>
<CAPTION>
JURISDICTION OF
NAME OF SUBSIDIARY INCORPORATION
------------------- ---------------
<S> <C>
Federal Kemper Life Assurance Company........................................................... Illinois
Kemper Asset Holdings, Inc. .................................................................... Delaware
Kemper International Management, Inc. .......................................................... Delaware
Kemper Portfolio Corp. ......................................................................... Delaware
FKLA Realty Corporation....................................................................... Illinois
Kemper Financial Companies, Inc. ("KFC")1....................................................... Delaware
Kemper Financial Services, Inc. .............................................................. Delaware
Kemper Advisors, Inc. ..................................................................... Delaware
Kemper Distributors, Inc. ................................................................. Delaware
Kemper Asset Management Company............................................................ Delaware
Kemper Investment Management Company Limited............................................... England
Kemper Sales Company....................................................................... Delaware
Kemper Service Company..................................................................... Delaware
Supervised Service Company, Inc. ........................................................ Delaware
INVEST Financial Corporation Holding Company (96.0% owned)................................. Delaware
INVEST Financial Corporation............................................................. Delaware
Selected Financial Services, Inc. ......................................................... Illinois
Kemper Investors Life Insurance Company....................................................... Illinois
Investors Brokerage Services, Inc. ........................................................ Delaware
Kemper Securities Holdings, Inc. ............................................................. Delaware
Kemper Securities, Inc. ................................................................... Delaware
Kemper Clearing Corp. ................................................................... Delaware
Beta Systems Inc. ......................................................................... Wisconsin
Carnegie Administration Corp. ............................................................. New York
Kemper Asset Leasing Corp. ................................................................ Delaware
Kemper Mortgage Group, Inc. ............................................................... Delaware
Gateway Mortgage Acceptance Corporation.................................................. Delaware
KFC Portfolio Corp. .......................................................................... Delaware
Kemper/Cymrot, Inc. ....................................................................... Delaware
Kemper/Cymrot Management, Inc. .......................................................... Georgia
Kemper Real Estate, Inc. .................................................................. Delaware
KILICO Realty Corporation.................................................................. Illinois
</TABLE>
1 Certain designated employees of subsidiaries of KFC own securities
constituting, convertible into or exercisable for approximately 3.15% of the
common stock of KFC as of December 31, 1994.
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<DEBT-HELD-FOR-SALE> 5,200,915
<DEBT-CARRYING-VALUE> 5,200,915
<DEBT-MARKET-VALUE> 5,200,915
<EQUITIES> 25,118
<MORTGAGE> 1,034,505
<REAL-ESTATE> 336,272
<TOTAL-INVEST> 7,390,261
<CASH> 231,487
<RECOVER-REINSURE> 741,867
<DEFERRED-ACQUISITION> 696,804
<TOTAL-ASSETS> 13,153,967
<POLICY-LOSSES> 7,871,160
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 728,117
<COMMON> 331,150
0
360,363
<OTHER-SE> 565,844
<TOTAL-LIABILITY-AND-EQUITY> 13,153,967
151,830
<INVESTMENT-INCOME> 484,796
<INVESTMENT-GAINS> (81,479)
<OTHER-INCOME> 99,009
<BENEFITS> 474,614
<UNDERWRITING-AMORTIZATION> 59,169
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 120,606
<INCOME-TAX> 34,893
<INCOME-CONTINUING> 85,713
<DISCONTINUED> 5,727
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 91,440
<EPS-PRIMARY> 1.97
<EPS-DILUTED> 1.97
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
