UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
(Mark One)
[x] ANNUAL REPORT under Section 13 or 15(d) of the Securities
Exchange Act of 1934 [Fee Required]
For the fiscal year ended: December 31, 1997
[ ] TRANSITION REPORT under Section 13 or 15(d) of the
Securities Exchange Act of 1934
[No Fee Required]
For the transition period from ____________ to ____________
Commission file number 0-14451
Acap Corporation
(Name of small business issuer in its charter)
State of Incorporation: IRS Employer Id.:
Delaware 25-1489730
Address of Principal Executive Office:
10555 Richmond Avenue
Houston, Texas 77042
Issuer's telephone number, including area code: (713) 974-2242
Securities registered pursuant to Section 12(b) of the Act:None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.10 per share
(Title of Class)
Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
[x] Yes [ ] No.
Check if disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no
disclosure will be contained, to the best of registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or
any amendment to this Form 10-KSB. [x]
Revenues for the issuer for its most recent fiscal year were
$6,446,983.
As of March 23, 1998, 7,440 shares of the registrant's Common
Stock, excluding shares held in treasury, were issued and
outstanding, and the aggregate market value of such shares held
by non-affiliates of the registrant on such date, based on the
average of the closing bid and asked prices for such shares on
such date, was $1,793,505.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part II, Items 5 - 7 of Form 10-KSB
is incorporated by reference from the registrant's 1997 Annual
Report to Stockholders. The information required by Part III,
Items 9 - 12 of Form 10-KSB is incorporated by reference from
the registrant's definitive information statement to be
furnished in connection with the Annual Meeting of Stockholders
to be held on or about May 4, 1998.
The Exhibit Index, Part IV, Item 13, is located on page 7 of
this Form 10-KSB.
This Form 10-KSB contains a total of 265 pages including any
exhibits.
Transitional Small Business Disclosure Format (check one):
[ ] Yes [x] No
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Acap Corporation was incorporated under the laws of the State
of Delaware on March 18, 1985 by the management of American
Capitol Insurance Company ("American Capitol") to become the
parent or "holding company" of American Capitol. Acap
Corporation began operating in that capacity on
October 31, 1985. American Capitol is a Texas life insurance
company licensed in 33 states and the District of Columbia.
American Capitol began operations as a life insurance company
on June 1, 1954.
Unless the context otherwise requires, the term "Acap" refers
to the consolidated group of Acap Corporation and its wholly-
owned subsidiaries.
Acap primarily engages in the acquisition and servicing of
existing blocks of life insurance policies. Since September
1994, the Company has marketed a small volume of final expense
insurance and prearranged funeral service contracts. Through
its life insurance subsidiaries, Acap maintains a broad
portfolio of individual life insurance policies and annuity
contracts. Life insurance is the only industry segment
material to the operations of Acap.
Fortune National Corporation ("Fortune Corp"), a Pennsylvania
corporation, acquired a majority interest in American Capitol
in 1984. In the 1985 reorganization that resulted in American
Capitol becoming a wholly-owned subsidiary of Acap, Fortune
Corp's majority interest in American Capitol was exchanged for
an equivalent interest in Acap. Fortune Corp was liquidated
during 1996, leaving Fortune Corp's majority stockholder,
InsCap Corporation ("InsCap"), a Delaware corporation, with the
controlling interest in Acap, approximately 45% at December 31,
1997.
ACQUISITION STRATEGY
Acap's strategy for achieving growth and profits is based upon
the acquisition of blocks of existing life insurance policies
through the direct purchase of such blocks or indirectly
through the acquisition of life insurance companies. By
acquiring blocks of life insurance directly or through the
purchase of other life insurance companies, Acap hopes to add
"new" life policies to its books more economically than through
marketing.
Generally, insurance companies can acquire policies in two
ways; either by "purchasing" them policy by policy through
marketing, or by buying an existing block of policies.
Purchasing an existing block of business has the advantage that
the policies have an established "history." That is, an
existing block will have an established pattern of mortality
and lapse experience. Also, the company selling the block of
existing life policies has already absorbed the risks involved
in marketing the life insurance products. In purchasing an
existing block of policies, Acap's strategy is to set the
purchase price at the sum of the expected future profits of the
block of policies discounted at a rate of return in excess of
Acap's cost of funds. Acap then attempts to improve upon the
rate of return by maintaining the acquired policies at a lower
per policy cost than was used in the pricing assumptions and by
realizing a higher investment yield on the acquired assets than
was used in the pricing assumptions.
It also should be noted that the acquisition strategy has
certain risks and disadvantages. Since the marketing of life
insurance products generally involves greater risks than
acquiring existing blocks of life insurance, the profit margins
available through marketing may be greater than the margins
available with respect to an acquired block of life insurance.
Also, there are relatively few companies or blocks of business
meeting Acap's acquisition criteria that become available for
purchase each year. Acap's acquisition strategy requires Acap
to maintain the personnel, computer systems and physical
properties necessary to accommodate large growth phases without
the guarantee that such growth will occur.
ACQUISITIONS TO DATE
Acap (i.e., its predecessor, American Capitol) switched from a
traditional marketing strategy to the current acquisition
strategy in 1984 in connection with the change in control and
associated change in management resulting from Fortune Corp's
purchase of a majority of the outstanding common stock.
Acquisitions made through December 31, 1997 include:
Fortune National Life Insurance Company, acquired November
29, 1985, which added approximately 12,447 life policies
and annuity contracts to Acap's operations.
Associated Companies, Inc., acquired January 13, 1989,
which approximately doubled the existing insurance
operations of Acap.
Trans-Western Life Insurance Company, acquired February
25, 1994, which added approximately 4,235 life policies
and annuity contracts to Acap's operations.
Family Life Insurance Company of Texas, acquired August
31, 1994, which added approximately 46,500 life policies
and annuity contracts to Acap's operations.
Texas Imperial Life Insurance Company, acquired September
29, 1994, which added approximately 9,750 life policies
and annuity contracts to Acap's operations.
Oakley-Metcalf Insurance Company, acquired February 2,
1995, which added approximately 3,000 life policies to
Acap's operations.
The policies of World Service Life Insurance Company of
America, acquired through coinsurance effective June 1,
1996, which added approximately 18,000 life policies to
Acap's operations. Effective August 1, 1997, the
coinsurance was converted to assumption reinsurance.
The policies issued by South Texas Bankers Life Insurance
Company, acquired through coinsurance effective January 1,
1997, which added approximately 8,000 life policies to
Acap's operations.
PRODUCTS AND MARKETS
The policies serviced by Acap are primarily traditional whole
life policies, interest-sensitive whole life policies, term
life policies, stipulated premium whole life policies and
flexible premium annuity contracts.
Traditional whole life policies are generally characterized by
a uniform death benefit and a level periodic premium throughout
the insured's lifetime. These policies combine a savings
element with insurance protection. The savings element, called
the cash value, builds at a fixed rate of interest and may be
borrowed against by the policyholder and, if the policy
terminates other than through the death of the insured, may be
paid to the policyholder.
Acap's interest-sensitive whole life policies also generally
have a uniform death benefit and a level periodic premium.
However, with these policies, the interest rate credited to the
savings element of the policy may be varied at Acap's option
above a guaranteed minimum rate. The interest-sensitive
policies also provide for a surrender charge in the event that
the policyholder surrenders the policy during the first ten
years following the issue date of the policy. Further, Acap
may vary below a guaranteed maximum the amount charged against
the policy for expenses and mortality costs.
Term life policies generally offer pure insurance protection
(i.e., no savings element) for a specified period. Such
policies typically offer a conversion privilege, a renewal
privilege, or both. Premiums typically are adjusted upon the
exercise of either privilege.
Stipulated premium whole life policies are characterized by a
uniform death benefit and a level periodic premium throughout
the insured's lifetime, however, unlike traditional whole life
policies, stipulated premium whole life policies have no cash
value.
Flexible premium annuity contracts permit the annuitant to make
deposits as he sees fit, and allow the annuitant to make
withdrawals at his option, subject to deduction of applicable
surrender charges. The annuity balance earns interest on a tax
deferred basis at a rate that Acap may change annually.
From mid-1985 until September 1994, the Company relied
exclusively on its acquisition strategy and did not actively
market new business. Since September 1994, the Company has
marketed a small volume of final expense insurance and
prearranged funeral service contracts. These policies are
primarily written through independent funeral homes.
The following table sets forth information with respect to
gross insurance in force and net premium income of Acap during
the past three years:
(Dollars in Thousands) 1997 1996 1995
- ---------------------------------------------------------
Life insurance in force 287,401 291,396 286,803
Premium income:
Life 2,645 2,686 1,828
Annuity 977 472 547
--------------------------------
Total premiums 3,622 3,158 2,375
================================
The table below presents the direct collected premiums by major
geographic area for the last three years:
(Dollars in Thousands) 1997 1996 1995
- ---------------------------------------------------------
Texas 4,034 3,734 4,573
Ohio 454 491 550
Alabama 447 18 20
Indiana 414 432 457
Pennsylvania 347 370 399
Michigan 282 312 352
Other U.S. 1,825 1,864 2,102
--------------------------
Total 7,803 7,221 8,453
==========================
The preceding tables include certain premium amounts which
under Statement of Financial Accounting Standards No. 97 ("FAS
97") are credited to liability accounts and are not considered
revenues, and exclude surrender charges that under FAS 97 are
considered revenue. The premiums of Acap affected by FAS 97
are the premiums on interest-sensitive whole life policies and
annuity contracts.
COMPETITION
The life insurance industry is highly competitive. There are
approximately 1,770 legal reserve life insurance companies in
the United States. Although Acap's acquisition strategy is not
the standard strategy employed in the industry, Acap must
compete with a significant number of companies, both inside and
outside the life insurance industry, when looking for an
acquisition. Many of these companies have substantially
greater financial resources and larger staffs than Acap.
Acap also must compete with a significant number of other life
insurance companies to retain Acap's existing block of
policies. Many of these companies have broader and more
diverse product lines together with active agency forces, and
therefore, certain of Acap's policyholders may be induced to
replace their existing policies with those provided by Acap's
competitors.
REGULATION
The insurance subsidiaries of the Company are subject to
regulation by the supervisory insurance agency of each state or
other jurisdiction in which the insurance subsidiaries are
licensed to do business. These supervisory agencies have broad
administrative powers relating to the granting and revocation
of licenses to transact business, the approval of policy forms,
the form and content of mandatory financial statements,
capital, surplus, reserve requirements and the types of
investments that may be made. The insurance subsidiaries are
required to file detailed reports with each supervisory agency,
and its books and records are subject to examination by each.
In accordance with the insurance laws of the State of Texas
(the insurance subsidiaries' state of domicile) and the rules
and practices of the National Association of Insurance
Commissioners (the "NAIC"), the insurance subsidiaries are
examined periodically by examiners from Texas.
Most states have enacted legislation or adopted administrative
regulations covering such matters as the acquisition of control
of insurance companies and transactions between insurance
companies and the persons controlling them. The NAIC has
recommended model legislation on these subjects that has been
adopted, with variations, by many states. The nature and
extent of the legislation and administrative regulations now in
effect vary from state to state, and in most states prior
administrative approval of the acquisition of control of an
insurance company incorporated in the state, whether by tender
offer, exchange of securities, merger or otherwise, is
required, which process involves the filing of detailed
information regarding the acquiring parties and the plan of
acquisition.
The insurance subsidiaries are members of an "insurance holding
company system" and are required to register as such with the
State of Texas and file periodic reports concerning their
relationships with the insurance holding company and other
affiliates of the holding company. Material transactions
between members of the holding company system are required to
be "fair and reasonable" and in some cases are subject to
administrative approval, and the books, accounts and records of
each party are required to be so maintained as to clearly and
accurately disclose the precise nature and details of the
transactions. Notice to or approval by the State of Texas is
required for dividends paid by the insurance subsidiaries.
EMPLOYEES
At December 31, 1997, Acap had a total of 38 employees. None
of these employees is covered by a collective bargaining
agreement. Acap believes that it has excellent relations with
its employees.
ITEM 2. DESCRIPTION OF PROPERTIES.
The principal offices of the Company are located at 10555
Richmond Avenue, Houston, Texas 77042. The Company leases
13,087 square feet of office space pursuant to a five year
lease executed in 1997. The Company's offices are suitable for
the conduct of its business and the Company has an option to
lease additional space in the same building to provide room for
future growth.
The Company's investment policy prohibits making investments in
real estate without the prior approval of the Board of
Directors. There are no plans to make any real estate
investments in the foreseeable future. If the Company were
interested in making a real estate investment, regulatory
restrictions applicable to Texas life insurance companies would
prohibit the life insurance subsidiaries from investing in real
estate outside of the United States, in residential real
estate, or in any property, other than home office property,
that exceeds 5% of the insurer's statutory assets.
The Company owns and services first mortgage loans with
aggregate principal balances at December 31, 1997 of
$2,150,163. The Company's investment policy prohibits making
new investments in mortgage loans without the prior approval of
the Board of Directors. There are no plans to make any
mortgage loan investments in the foreseeable future. If the
Company were interested in making a mortgage loan investment,
regulatory restrictions applicable to Texas life insurance
companies would prohibit the life insurance subsidiaries from
investing in mortgage loans on real estate outside of the
United States, in other than first liens, or in any loan that
exceeds 25% of the insurer's statutory capital and surplus.
ITEM 3. LEGAL PROCEEDINGS.
Acap and its subsidiary are involved in various lawsuits and
legal actions arising in the ordinary course of operations.
Management is of the opinion that the ultimate disposition of
these matters will not have a material adverse effect on Acap's
financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during
the quarter ended December 31, 1997.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The required information regarding the market for the common
equity of the Company and related stockholder matters is
incorporated herein by reference from "Stockholder Information"
on page 32 of Acap's 1997 Annual Report to Stockholders.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION.
Management's Discussion and Analysis of Financial Condition and
Results of Operations is incorporated herein by reference from
"Management's Financial Analysis" on pages 3 - 9 of Acap's 1997
Annual Report to Stockholders.
ITEM 7. FINANCIAL STATEMENTS.
Financial statements and supplementary data are incorporated
herein by reference from pages 10 - 31 of Acap's 1997 Annual
Report to Stockholders.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
None.
PART III
The information required by Items 9-12 is incorporated by
reference from Acap's definitive information statement, which
is to be filed pursuant to Regulation 14C.
PART IV
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibits Description Location or
Incorporation by
Reference
3(a)(1) Certificate of Incorporation *Form 10 effective
of the Registrant dated June 22, 1986,
March 12, 1985 pages 58-61
3(a)(2) Certificate of Amendment to *Form 10 effective
the Certificate of June 22, 1986,
Incorporation of the pages 62-65
Registrant dated
October 25, 1985
3(a)(3) Certificate of Amendment to *Form 10K dated
the Certificate of December 31, 1988,
Incorporation of the pages 51-53
Registrant dated August 22, 1986
3(a)(4) Certificate of Amendment to *Form S4,
the Certificate of Registration No.
Incorporation of the 33-27874
Registrant dated March 20, 1989
3(a)(5) Certificate of Amendment to the *Form 10KSB dated
Certificate of Incorporation of December 31, 1994,
the Registrant dated May 9, 1994 pages 273- 276
3(b)(1) Bylaws of the Registrant, as *Form 10K dated
amended December 31, 1988,
pages 54-68
3(b)(2) Amendment to the Bylaws of the *Form 10Q dated
Registrant March 31, 1990,
page 11
4 Certificate of Designations of *Form 8K dated
the Preferred Stock of the December 31, 1986,
Registrant pages 23-31
10(a)(1) 1997 American Capitol Insurance Pages 11-19
Company Key Employee Incentive
Stock Option Plan
10(a)(2) Form of Grant of Stock Option Pages 20-25
used in 1997 American Capitol
Insurance Company Key Employee
Incentive Stock Option Plan
<PAGE>
10(b)(1) Employment Contract between *Form 10QSB dated
American Capitol Insurance March 31, 1997,
Company and John D. Cornett pages 13-26
10(b)(2) Stock Purchase Agreement between *Form 10QSB dated
American Capitol Insurance March 31, 1997,
Company and John D. Cornett pages 27-36
10(c) Disability Income Agreement Pages 26-29
between American Capitol
Insurance Company and William F.
Guest
10(d)(1) Reinsurance Agreement between *Form 10KSB dated
American Capitol Insurance December 31, 1993,
Company and Crown Life Insurance pages 10-66
Company effective
December 31, 1992, as amended
10(d)(2) Amendment dated June 30, 1996 *Form 10KSB dated
to the Reinsurance Agreement December 31, 1996,
between American Capitol pages 48-50
Insurance Company and Crown
Life Insurance Company
10(e)(1) Reinsurance Agreement effective *Form 10KSB dated
February 2, 1995 between December 31, 1994,
Oakley-Metcalf Insurance Company pages 213- 260
and Alabama Reassurance Company
10(e)(2) Amendment dated January 1, 1996 *Form 10KSB dated
to the Reinsurance Agreement December 31, 1996,
between Oakley-Metcalf Insurance pages 69-71
Company and Alabama Reassurance
Company
10(e)(3) Amendment dated December 31, *Form 10KSB dated
1996 to the Reinsurance December 31, 1996
Agreement between Texas Imperial page 72
Life Insurance Company and
Alabama Reassurance Company
10(f) Loan Agreement and related *Form 10KSB dated
documents between Acap December 31, 1994,
Corporation and Central National pages 261- 272
Bank
10(g) Coinsurance Agreement dated *Form 10KSB dated
June 1, 1996 between World December 31, 1996,
Service Life Insurance Company pages 73-138
of America and American Capitol
Insurance Company
10(h) Administration Agreement dated *Form 10KSB dated
June 1, 1996 between South Texas December 31, 1996,
Life Insurance Agency, Inc. and pages 139-147
American Capitol Insurance
Company
10(i) Administration Agreement dated *Form 10KSB dated
June 1, 1996 between South Texas December 31, 1996,
Life Insurance Company and pages 148-158
American Capitol Insurance
Company
10(j) Assumption Agreement dated Pages 30-74
August 1, 1997 between World
Service Life Insurance Company
of America and American Capitol
Insurance Company
10(k) Coinsurance Agreement dated Pages 75-128
January 1, 1998 between
Universal Life Insurance Company
and American Capitol Insurance
Company
10(l) Amendments Letter dated Pages 129-132
February 27, 1998 amending the
Coinsurance Agreement between
Universal Life Insurance Company
and American Capitol Insurance
Company
10(m) Closing Memorandum and Pages 133-135
Amendments to the Coinsurance
Agreement between Universal Life
Insurance Company and American
Capitol Insurance Company
10(n) Administration Agreement dated Pages 136-153
January 1, 1998 between
Universal Life Insurance Company
and American Capitol Insurance
Company
10(o) Coinsurance Agreement dated Pages 154-176
January 1, 1998 between
Republic-Vanguard Life Insurance
Company and American Capitol
Insurance Company
10(p) Lease Agreement dated Pages 177-227
November 21, 1997 between
Realtycorp International Group LC
and American Capitol Insurance
Company
11 Statement re computation of per *1997 Annual Report
share earnings to Stockholders,
page 17
13 1997 Annual Report to Pages 228-263
Stockholders
21 Subsidiaries of the Registrant Page 264
27 Financial Data Schedule Page 265
* Exhibit is incorporated by reference to the listed document.
(b) Reports on Form 8-K:
The following report of Form 8-K was filed in the last quarter
of the year ended December 31, 1997:
December 5, 1997
Item 5. Other Events. Reporting that American
Capitol Insurance Company had signed an agreement in
principle to coinsure the individual life insurance
policies of Universal Life Insurance Company.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Acap Corporation
Date: March 23, 1998
By:
/s/ William F. Guest
----------------------
William F. Guest
Chairman of the Board
In accordance with the Exchange Act, this report has been
signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Date: March 23, 1998
By:
/s/ William F. Guest /s/ John D. Cornett
---------------------- ----------------------
William F. Guest John D. Cornett
Chairman of the Board Executive Vice President
Principal Executive Officer) and Treasurer
President and Director (Principal Financial and
Accounting Officer)
/s/ R. Wellington Daniels /s/ C. Stratton Hill, Jr.
-------------------------- -------------------------
R. Wellington Daniels C. Stratton Hill, Jr.
Director Director
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF ACAP CORPORATION
WHOLLY-OWNED SUBSIDIARY OF ACAP CORPORATION:
American Capitol Insurance Company (Texas)
WHOLLY-OWNED SUBSIDIARIES OF AMERICAN CAPITOL INSURANCE
COMPANY:
Imperial Plan, Inc. (Texas)
Texas Imperial Life Insurance Company (Texas)
1997 AMERICAN CAPITOL INSURANCE COMPANY
KEY EMPLOYEE INCENTIVE STOCK OPTION PLAN
ARTICLE I
PURPOSE AND SCOPE OF THE PLAN
1.1 Purpose
The purpose of the Plan is to promote the long-term success of American
Capitol Insurance Company by providing financial incentives to key employees
who are in positions to make significant contributions toward such success.
The Plan is designed to attract individuals of outstanding ability to
employment with American Capitol and to encourage key employees to acquire a
proprietary interest in American Capitol, to continue employment with
American Capitol, and to render superior performance during such employment.
1.2 Definitions
Unless the context clearly indicates otherwise, the following terms
have the meanings set forth below.
"Acap" mean Acap Corporation, a Delaware corporation and the parent
company of the Company.
"American Capitol" means American Capitol Insurance Company, a Texas
corporation.
"Board of Directors" means the Board of Directors of the Company.
"Code" means The Internal Revenue Code of 1986, as amended.
"Committee" means the Compensation Committee of the Board of Directors,
which committee shall be composed of two or more directors who shall not be
eligible to receive an award under the Plan at any time within a period of
one year immediately preceding the date of their appointment to such
committee, while serving on the committee, and for one year immediately
following the date on which membership on the committee terminated.
"Common Stock" means the common stock of Acap, par value $.10 per
share.
"Company" means American Capitol Insurance Company, a Texas
corporation.
"Fair Market Value" of a share of Common Stock on any particular date
is the closing bid price of the share of Common Stock for such date, as
reported on the NASDAQ System.
"Grant Date," as used with respect to a particular Option, means the
date as of which such option is granted by the Committee pursuant to the
Plan.
"Grantee" means the individual to whom an Option is granted by the
Committee pursuant to the Plan.
"NASDAQ System" means the National Association of Security Dealers,
Inc. Electronic Bulletin Board.
"Option" means an option granted by the Committee pursuant to the Plan,
which option shall be an Incentive Stock Option (intended to qualify as such
under the provisions of section 422 of the Code).
"Option Term" means ten (10) years from the Grant Date.
"Plan" means the 1997 American Capitol Insurance Company Key Employee
Incentive Stock Option Plan as set forth herein and as may be amended from
time to time.
1.3 Aggregate Limitation
(a) The aggregate number of shares of Common Stock at any time with
respect to which Options may be granted shall not exceed five hundred (500)
shares of the shares of Common Stock owned by the Company. Further, in no
event shall the aggregate fair market value (determined on the Grant Date)
of the Common Stock granted to an Optionee in any calendar year exceed
$100,000.
(b) Any shares of Common Stock to be delivered by the Company upon the
exercise of Options shall be transferred from the shares of Common Stock
owned by the Company.
(c) In the event that any Option expires, lapses or otherwise
terminates prior to being fully exercised, any share of Common Stock
allocable to the unexercised portion of such option may be again subject to
an Option.
1.4 Administration of the Plan
(a) The Plan shall be administered by the Committee which shall have
authority:
(i) to determine key employees of American Capitol to whom, and
the time at which, Options shall be granted and the type and
number of shares of Common Stock to be subject to each such
option, taking into account the nature of the services
rendered by the particular employee, the employee's potential
contribution to the long-term success of American Capitol and
such other factors as the Committee in its discretion shall
deem relevant;
(ii) to interpret the Plan and to establish rules and regulations
relating to it;
(iii) to prescribe the terms and provisions of the agreements
for the grant of Options (which need not be identical);
and
(iv) to make all other determinations necessary or advisable in
order to administer the Plan.
(b) All decisions of the Committee upon questions concerning the Plan
or any Option shall be conclusive.
1.5 Eligibility for Awards
The Committee shall designate from time to time the key employees of
American Capitol who are to be granted Options.
1.6 Effective Date and Duration of Plan
The Plan shall become effective upon its adoption by the Board of
Directors. Unless previously terminated by the Board of Directors, the Plan
shall terminate on the tenth anniversary of its adoption by the Board of
Directors.
ARTICLE II
STOCK OPTIONS
2.1 Grant of Options
The Committee may from time to time, subject to the provisions of the
plan, grant Options to key employees to purchase shares of Common Stock
allotted in accordance with Section 1.3.
2.2 Option Requirements
(a) An Option shall be evidenced by a written instrument specifying
the type and number of shares of Common Stock that may be purchased by its
exercise and containing such terms and conditions consistent with the Plan
as the Committee shall determine.
(b) An Option shall not be granted on or after the tenth anniversary
of the date upon which the Plan was adopted by the Committee.
(c) The option price per share of Common Stock shall be equal to the
Fair Market Value of a share of Common Stock on the Grant Date, or, in the
case of an employee who owns more than 10% of the voting stock of the
Company, the option price per share of Common stock shall be equal to 110%
of the Fair Market Value of a share of Common Stock on the Grant Date.
(d) An Option shall not be transferable other than by will or the laws
of descent and distribution and, during the Grantee's lifetime, an Option
shall be exercisable only by the Grantee; except, that the Committee may
permit:
(i) exercise, during Grantee's lifetime, by Grantee's guardian or
legal representative; and
(ii) transfer, upon Grantee's death, to beneficiaries designated
by Grantee in a manner authorized by the Company; provided,
that the Committee determines that such exercise and such
transfer are consistent with requirements for exemption from
Section 16(b) of the Securities and Exchange Act of 1934, as
amended.
(e) Except as provided in Section 3.1, the shares of Common Stock
subject to an Option that are available for purchase at a particular time
shall be as follows:
Anniversary of Percentage of
Grant Date Shares Available for Purchases
Prior to the 5th Zero
After the 5th 100%
After the 10th Zero
provided that, in the case of an Grantee who owns more than 10% of the
voting stock of the Company, the shares of Common Stock subject to an Option
that are available for purchase at a particular time shall be zero per cent
prior to the 4th anniversary of the Grant Date, the percentage of shares
available to purchase shall be 100% after the 4th anniversary of the Grant
Date, and shall be zero per cent after the 5th anniversary of the Grant
Date.
(f) A person electing to exercise an Option shall give written notice,
in such form as the Committee may require, of such election to the Company
and shall tender to the Company the full purchase price of the shares of
Common Stock for which the election is made. Payment of the purchase price
shall be made in cash or in such other form as the Company may approve.
ARTICLE III
GENERAL PROVISIONS
3.1 Adjustment Provisions
(a) If:
(i) any recapitalization, reclassification, split-up or
consolidation of Common Stock is effected;
(ii) the outstanding shares of Common Stock are exchanged, in
connection with a merger or consolidation of Acap or a sale
by Acap of all or a part of its assets, for a different
number or class of shares of stock or other securities of
Acap or for shares of the stock or other securities of any
other corporation;
(iii) new, different or additional shares or other securities
of Acap or of another corporation are received by the
holders of Common Stock; or
(iv) any distribution is made to the holders of Common Stock other
than a cash dividend;
then the Committee shall make appropriate adjustments to:
(i) the number and class of shares or other securities that may
be transferred pursuant to Options, and
(ii) the purchase price to be paid per share under outstanding
Options.
(b) Upon the dissolution or liquidation of Acap, all Options to
purchase Acap Common Stock shall terminate; however, all Options previously
granted to purchase Acap Common Stock shall be exercisable, to the extent
otherwise exercisable with regard to subsection (3) of Section 2.23, prior
to such termination.
(c) Adjustments under subsection (a) shall be made according to the
sole discretion of the Committee and its decision shall be binding and
conclusive.
(d) Except as provided in subsections (a) and (b), the issuance by
Acap of shares of stock of any class, or securities convertible into shares
of stock of any class shall not affect the Options.
3.2 Termination of Option
(a) The Option and all rights hereunder with respect thereto, to the
extent such rights shall not have been exercised, shall terminate and become
null and void after the expiration of the Option Term.
(b) Upon the occurrence of the Grantee's ceasing for any reason to be
employed by the Employer (such occurrence being a "termination of the
Grantee's employment," the Option, to the extent not previously exercised,
shall terminate and become null and void immediately upon such termination
of the Grantee's employment, except in a case where the termination of the
Grantee's employment is by reason of retirement, disability or death. Upon
a termination of the Grantee's employment by reason of retirement,
disability or death, the Option may be exercised during the following
periods, but only to the extent that the Option was outstanding and
exercisable on any such date of retirement, disability or death: (i) the
one-year period following the date of such termination of the Grantee's
employment in the case of a disability (within the meaning of Section
22(e)(3) of the Code), (ii) the six-month period following the date of
issuance of letters testamentary or letters of administration to the
executor or administrator of a deceased Grantee, in the case of the
Grantee's death during his employment by the Employer, but not later than
one year after the Grantee's death, and (iii) the three-month period
following the date of such termination in the case of retirement on or after
attainment of age 65, or in the case of disability other than as described
in (i) above. In no event, however, shall any such period extend beyond the
Option Term.
(c) In the event of the death of Grantee, the Option may be exercised
by the Grantee's legal representative(s), but only to the extent that the
Option would otherwise have been exercisable by the Grantee.
(d) A transfer of the Grantee's employment between the Company and any
affiliate of the Company shall not be deemed to be a termination of the
Grantee's employment.
(e) Notwithstanding any other provisions set forth herein or in the
Plan, if the Grantee shall (i) commit any act of malfeasance or wrongdoing
affecting the Company or any affiliate of the company, (ii) breach any
covenant not to compete, or obligation of confidentiality, or employment
contract, with the Company or any affiliate of the Company, or (iii) engage
in conduct that would warrant the Grantee's discharge for cause, any
unexercised portion of the Option shall immediately terminate and be void,
and any exercise of such a voidable Option shall be rescindable by the
Committee.
3.3 Additional Conditions, Including Right of First Refusal
Any shares of Common Stock transferred under any provision of the Plan
may be transferred subject to such conditions, in addition to those
specifically provided in the Plan, as the Committee or Company may impose.
By accepting the Option, the Grantee does hereby grant to the Company a
right of first refusal as set forth in this section. Prior to a sale of
such shares (or portion thereof) by Grantee, Grantee or his/her successor
shall first offer such shares, or portion thereof, as the case may be, to
the Company at the same price per share at which Grantee intends to sell
same. Such offer shall be in writing dated and signed by the Grantee,
stating the number of shares to be sold and the price per share ("Offer
Notice") and delivered to the Company in compliance with the notice
provisions set forth herein. The Company shall reply to such offer no later
than the third business day following the receipt of the Offer Notice (the
day on which such Offer Notice is received being the first day, if it is a
business day, otherwise, the first day shall be the first business day
thereafter). Such reply shall be in writing dated and signed by an officer
of the Company offering to purchase all of the Common Stock that is the
subject of the Offer Notice and at the price stated in the Offer Notice,
committing to close and pay for such purchase of said Common Stock in cash
within three business days thereafter. If the Company notifies the Grantee
in writing that the Company elects not to exercise its right to purchase
such Common Stock, or fails to reply in writing to the Offer Notice as
hereinabove set forth and within the time hereinabove set forth, the Grantee
shall thereafter be free to sell said shares of Common Stock provided such
sale takes place within thirty (30) days following the date of the Offer
Notice and that such sale is at the same price and for the same number of
shares as stated in the Offer Notice. The failure by Grantee to sell such
shares as set forth in the immediately preceding sentence shall mean that
the Grantee must again offer the subject shares of Common Stock to the
Company, following the procedure above set forth, regarding and renewed
effort on the part of Grantee to sell the subject shares of Common Stock.
3.4 No Right to Employment
Nothing in the Plan or in any instrument executed pursuant thereto
shall confer upon any employee any right to continue in the employ the
Company or shall affect the right of the Company to terminate the employment
of any employee, with or without cause.
3.5 Legal Restrictions
The Company will not be obligated to transfer shares of Common Stock if
counsel to the Company determines that such transfer would violate any law
or regulation of any governmental securities exchange upon which the Common
Stock is listed. In connection with any stock transfer, the person
acquiring the shares shall, if requested by the Company, give assurances
satisfactory to counsel to the Company regarding such matters as the Company
may deem desirable to assure compliance with all legal requirements. Except
as provided below, the Company shall in no event be obliged to take any
affirmative action in order to cause the exercise of any Option or the
resulting delivery of shares of Common Stock by the Company to comply with
any law or regulation of any governmental authority. Notwithstanding the
foregoing, the Company shall cause a legend in the following form to be
placed on each certificate evidencing shares of Common Stock purchased upon
the exercise of Options:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED
FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE. SUCH SECURITIES
MAY NOT BE SOLD, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED AT ANY
TIME WHATSOEVER, EXCEPT UPON REGISTRATION, OR UPON DELIVERY TO THE
COMPANY OF AN OPINION OF COUNSEL TO THE COMPANY SATISFACTORY TO THE
COMPANY THAT REGISTRATION IS NOT REQUIRED FOR SUCH TRANSFER OR THE
SUBMISSION TO THE COMPANY OF SUCH OTHER EVIDENCE AS MAY BE SATISFACTORY
TO THE COMPANY TO THE EFFECT THAT ANY SUCH TRANSFER SHALL NOT BE IN
VIOLATION OF THE SECURITIES ACT OF 1933, AS AMENDED, APPLICABLE STATE
SECURITIES LAWS OR ANY RULE OR REGULATION PROMULGATED THEREUNDER. IN
ADDITION, THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
A RIGHT OF FIRST REFUSAL VESTED IN AMERICAN CAPITOL INSURANCE COMPANY
AS SET FORTH IN THAT CERTAIN 1997 AMERICAN CAPITOL INSURANCE COMPANY
KEY EMPLOYEE STOCK OPTION PLAN, A COPY OF WHICH MAY BE OBTAINED BY
CONTACTING AMERICAN CAPITOL INSURANCE COMPANY, HOUSTON, TEXAS.
3.6 No Rights as Shareholders
No grantee, and no beneficiary or other person claiming through a
Grantee, shall have an interest in any shares of Common Stock allocated for
the purposes of the Plan or subject to any Option until such shares of
Common Stock shall have been transferred to the Grantee or such person.
Furthermore, the existence of the Options shall not affect; the right or
power of Acap, or its stockholders to make adjustments, recapitalizations,
reorganizations or other changes in Acap's capital structure or business;
any issue of bonds, debentures, preferred or prior preference stocks
affecting the Common Stock or the rights thereof; the dissolution or
liquidation of Acap, or sale or transfer of any part of their respective
assets or business; or any other corporate act, whether of a similar
character or otherwise.
3.7 Withholding Taxes
The Company may require a Grantee, as a condition of exercise of an
Option, to pay or reimburse any taxes which the Company determines it is
required to withhold in connection with the grant or exercise of the Option.
3.8 Choice of Law
The place of administration of the Plan shall be within the State of
Texas and the validity, interpretation and administration of the Plan and of
any rules, regulations, determinations or decisions made thereunder, and the
rights of any and all persons having or claiming to have an interest therein
or thereunder, shall be determined exclusively in accordance with the laws
of the State of Texas. Without limiting the generality of the foregoing,
the period within which any action in connection with the Plan must be
commenced shall be governed by the laws of the State of Texas, without
regard to the place where the act or omission complained of took place, the
residence of any party to such action or the place where the action may be
brought.
IN WITNESS WHEREOF, and as conclusive evidence of its adoption of the
1997 American Capitol Insurance Company Key Employee Incentive Stock Option
Plan, the Board of Directors of American Capitol Insurance Company has
authorized the execution of this acknowledgment as of the 2nd day of
September, 1997.
/s/ H. Kathleen Musselwhite /s/William F. Guest
- ---------------------------------- ---------------------------------
H. Kathleen Musselwhite, Secretary William F. Guest, Chairman
1997 AMERICAN CAPITOL INSURANCE COMPANY
KEY EMPLOYEE INCENTIVE STOCK OPTION PLAN
GRANT OF INCENTIVE STOCK OPTION
(Grant No. -------)
THIS AGREEMENT is made as of the 2nd day of September, 1997 (the "Grant
Date"), by American Capitol Insurance Company, a Texas corporation (the
"Company") and John D. Cornett (the "Grantee"), an employee of the Company,
pursuant to the 1997 American Capitol Insurance Company Key Employee
Incentive Stock Option Plan (the "Plan"). A copy of the Plan is appended
and made a part of this Agreement.
WHEREAS, the Board of Directors of the Company (the "Board of Directors")
has adopted the Plan for the benefit of certain employees of the Company;
and
WHEREAS, the undersigned comprise all of the duly elected, qualified and
acting members of the Compensation Committee of the Board of Directors and,
as such, are authorized to select and designate employees of the Company as
key employees and to grant Incentive Stock Options pursuant to the Plan; and
WHEREAS, pursuant to the Plan, the Board of Directors regards the Grantee
as a key employee and has determined that it would be in the interest of the
Company and its shareholders to grant the option provided herein in order to
encourage the Grantee to acquire a greater proprietary interest in the
success of the Company, to continue employment with the Company and to
render superior performance during such employment; and
WHEREAS, the Grantee does not own 10% or more of the voting stock of the
Company;
NOW THEREFORE, the Company, acting by and through this unanimous action of
the Compensation Committee of its Board of Directors, and Grantee confirm
the foregoing recitations and agree as follows:
1. Grant of Option. Subject to the terms and conditions herein, the
Company grants to the Grantee, an option (the "Option"), effective on
the above Grant Date, to purchase one hundred (100) shares (the "Option
Shares") of the Common Stock of Acap Corporation ("Acap"), par value of
$.10 per share (the "Common Stock"), at a price of $240 per share (the
"Option Price"), which price is equal to the Fair Market Value (as
defined in Section 1.2 of the Plan) per share of the Option Shares on
the Grant Date. Such Option is intended to qualify as an Incentive
Stock Option pursuant to Section 422 of the Internal Revenue Code, as
amended.
2. Conditions of Exercise. The Option is exercisable only in accordance
with the conditions stated in this paragraph.
(a) Except as provided in subparagraph (b) of paragraph 8, the Option
may be exercised to the extent the Option Shares are available for
purchase in accordance with the following schedule:
Anniversary of Percentage of
Grant Date Shares Available for Purchase
Prior to the 5th Zero
After the 5th 100%
After the 10th Zero
(b) To the extent an Option is exercisable, such option may be
exercised in whole or in part (at any time) until such option
lapses.
3. Manner of Exercise. The Option shall be considered exercised on the
latest of (i) the date of exercise designated in the written notice
referred to in subparagraph (a), (ii) if the date so designated is not
a business day, the first business day following such date or (iii) the
earliest business day by which the Company has received all of the
following:
(a) Written notice, in such form as the Company may require,
designating, among other things, the date of exercise and the
number of Option Shares to be purchased;
(b) If the Option is to be exercised, payment of the Option Price in
such form as the Company may require; and
(c) Any other documentation that the Company may reasonably require.
4. Withholding for Taxes. Grantee agrees to pay or reimburse the Company
for any federal, state or local taxes required to be withheld by the
Company upon the exercise of the Option, at such time and upon such
terms and conditions as the Company may prescribe.
5. Delivery by the Company. After receipt of all items referred to in
paragraph 3 and any payment required by paragraph 4, the Company shall
deliver to the Grantee a certificate or certificates issued in
Grantee's name for the number of Option Shares purchased by exercise of
the Option. If delivery is by mail, delivery of shares of Common Stock
shall be deemed effected for all purposes when the certificate or
certificates, as the case may be, shall have been deposited in the
United States mail, addressed to the Grantee. In no event shall the
Company be liable for any delay in the issuance of the stock
certificate or certificates, as the case may be, if its delay, if any,
shall be reasonable under the circumstances or for cause.
6. Nontransferability of Option. During Grantee's lifetime, the Option is
not transferable (voluntarily or involuntarily) and is exercisable only
by Grantee, provided, however, if Grantee ceases to have legal capacity
to act, his or her duly appointed and qualified legal representative
shall be entitled to act on Grantee's behalf and such person shall be
deemed the Grantee. Following Grantee's death, the Option, if
otherwise exercisable, may be exercisable by the person to whom such
option passes according to Grantee's will or the laws of descent and
distribution, and such person shall be deemed the Grantee.
7. No Shareholder Rights. Grantee shall not be deemed for any purpose to
be a shareholder of the company with respect to any shares of Common
Stock as to which this Agreement relates until such shares shall have
been transferred to Grantee by the Company. Furthermore, the existence
of this Agreement shall not affect the right or power of the Company or
its shareholders, or Acap or its shareholders, to accomplish any
corporate act.
8. Adjustments.
(a) The Board of Directors, in accordance with Section 3.1 of the
Plan, shall make appropriate adjustments to the Option in the
event of a change in the Common Stock occurring after the Grant
Date.
(b) Upon the dissolution or liquidation of the Company or Acap, the
Option shall terminate; however, Grantee shall be given the
opportunity, prior to such termination, to exercise the Option
with regard to subparagraph (a) of paragraph 2.
(c) Except as provided in subparagraphs (a) and (b), the issuance by
Acap of shares of stock of any class, or securities convertible
into shares of stock of any class, shall not affect this Agreement
or the rights granted herein.
9. Restrictions Imposed by Law. Notwithstanding any other provision of
this Agreement, Grantee agrees that Grantee will not exercise the
Option and that the Company will not be obligated to deliver any shares
of Common Stock, if counsel to the Company determines that such
exercise, delivery or payment would violate any law or regulation of
any governmental authority or any agreement between the Company, or
Acap, and any national securities exchange upon which the Common Stock
is listed. The Company shall in no event be obligated to take any
affirmative action in order to cause the exercise of the Option or the
resulting delivery of shares of Common Stock to comply with any law or
regulation of any governmental authority.
10. Termination of Option.
(a) The Option and all rights hereunder with respect thereto, to the
extent such rights shall not have been exercised, shall terminate
and become null and void after the expiration of ten (10) years
from the Date of Grant (the "Option Term").
(b) Upon the occurrence of the Grantee's ceasing for any reason to be
employed by the Employer (such occurrence being a "termination of
the Grantee's employment"), the Option, to the extent not
previously exercised, shall terminate and become null and void
immediately upon such termination of the Grantee's employment,
except in a case where the termination of the Grantee's employment
is by reason of retirement, disability or death. Upon a
termination of the Grantee's employment by reason of retirement,
disability or death, the Option may be exercised during the
following periods, but only to the extent that the Option was
outstanding and exercisable on any such date of retirement,
disability or death: (i) the one-year period following the date of
such termination of the Grantee's employment in the case of a
disability (within the meaning of Section 22(e)(3) of the Code),
(ii) the six-month period following the date of issuance of
letters testamentary or letters of administration to the executor
or administrator of a deceased Grantee, in the case of the
Grantee's death during his employment by the Employer, but not
later than one year after the Grantee's death, and (iii) the
three-month period following the date of such termination in the
case of retirement on or after attainment of age 65, or in the
case of disability other than as described in (i) above. In no
event, however, shall any such period extend beyond the Option
Term.
(c) In the event of the death of Grantee or in the event Grantee
ceases to have legal capacity to act, the Option may be exercised
by the Grantee's legal representative(s), but only to the extent
that the Option would otherwise have been exercisable by the
Grantee.
(d) A transfer of the Grantee's employment between the Company and any
affiliate of the Company, or between any affiliates of the
Company, shall not be deemed to be a termination of the Grantee's
employment.
(e) Notwithstanding any other provisions set forth herein or in the
Plan, if the Grantee shall (i) commit any act of malfeasance or
wrongdoing affecting the Company or any affiliate of the Company,
(ii) breach any covenant not to compete, or obligation of
confidentiality, or employment contract, with the Company or any
affiliate of the Company, or (iii) engage in conduct that would
warrant the Grantee's discharge for cause, any unexercised portion
of the Option shall immediately terminate and be void, and any
exercise of such a voidable Option shall be rescindable by the
Committee.
11. Notice. Unless the Company notifies Grantee in writing of a different
procedure, any notice or other communication to the Company with
respect to this Agreement shall be in writing and shall be sent by
first class mail, postage prepaid and addressed as follows:
1997 American Capitol Insurance Company Key Employee Incentive Stock
Option Plan
Attention: Chairman
P. O. Box 42814
Houston, TX 77042-2814
Any notice or communication to the Grantee with respect to this
Agreement shall be in writing and shall be sent by first class mail,
postage prepaid, to Grantee's address as listed in the records of the
Company on the Grant Date, unless the Company has received written
notification from the Grantee of a change of address.
12. Amendment. Notwithstanding any other provision hereof, this Agreement
may be amended, without the consent of the Grantee, as follows:
(a) The Agreement may be cancelled or amended by the Board of
Directors at any time if the Board of Directors determines that
cancellation or amendment is necessary or advisable because of any
change or clarification after the Grant Date of any law or
governmental regulation, including any applicable federal or state
securities law;
(b) Subject to any required approval by Company shareholders, the
Board of Directors may amend or cancel this Agreement at any time
for reasons other than those stated in subparagraph (a); provided
that such action shall not adversely affect the Option to the
extent then exercisable.
13. Grantee Employment. Nothing this Agreement shall limit the right of
the Company to terminate the Grantee's employment or otherwise impose
upon the Company an obligation to employ the Grantee.
14. Determinations. All decisions of the Committee upon questions
regarding the Plan or this Agreement shall be conclusive. This
Agreement is made pursuant to the Plan, which is incorporated by
reference thereto for all purposes, and reference is made to the Plan
in respect to all matters not expressly set forth in this Agreement.
In the event of any inconsistency between the terms of the Plan and
this Agreement, or any matter not expressly set forth in this
Agreement, the terms of the Plan shall control. The validity and
interpretation of this Agreement shall be determined, exclusively, in
accordance with the laws of the State of Texas.
15. Grantee Acceptance. Grantee shall signify acceptance of the terms and
conditions of this Agreement by signing in the space provided below and
returning a signed copy to the Company. THIS AGREEMENT IS CONTINGENT
UNTIL SUCH ACCEPTANCE. THE COMPANY MAY REVOKE THE OPTION, AND VOID ALL
OBLIGATIONS UNDER THIS AGREEMENT, AT ANY TIME BEFORE THE COMPANY HAS
RECEIVED A FULLY EXECUTED COPY OF THIS AGREEMENT FROM THE GRANTEE.
AMERICAN CAPITOL INSURANCE COMPANY
By: Members of the Compensation Committee:
/s/C. Stratton Hill, Jr., M. D. /s/R. W. Daniels
------------------------------- ---------------------------
C. Stratton Hill, Jr., M. D. R. W. Daniels
ACCEPTED:
/s/John D. Cornett, Grantee
--------------------------------
John D. Cornett, Grantee
DISABILITY INCOME AGREEMENT
This agreement ("Agreement") is made by and between American Capitol
Insurance Company ("Company") and William F. Guest ("Guest") to be effective
August 25, 1997.
WHEREAS, Guest has served as Chairman of the Board and chief executive
officer of the Company, as well as chief executive officer of the Company's
affiliates, and
WHEREAS, Guest has been and continues to be primarily responsible for
developing and implementing the Company's business strategies, and
WHEREAS, Guest has accumulated and developed expertise, unique skills
and knowledge of the Company, its business affairs and the life insurance
industry in general, and accordingly is a key employee in respect to the
Company's business strategies and critical to the Company's continued
success, and
WHEREAS, the Company has previously provided to Guest a supplemental
disability income benefit tied to a waiver of premium benefit under the key
man life insurance policy that the Company has on Guest's life, and such
waiver of premium benefit expires August 28, 1997, by virtue of its terms,
and
WHEREAS, it is in the best interest of the Company to provide Guest
with a supplemental disability benefit to replace the expired benefit;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein and for other good and valuable consideration,
including the continued retention of Guest in his role as a key employee of
the Company, the receipt and sufficiency of which are hereby acknowledged,
the parties hereto, intending to be legally bound hereby, agree as follows:
1. Continuation of Employee Status and Income in the Event of Disability.
In the event Guest becomes disabled (as hereinafter defined) Guest
shall continue as an employee of the Company, and shall be entitled to all
of the employee benefits to which he was entitled at the commencement of his
disability, without a change in his employee status and standing (except as
otherwise expressly provided herein), including the salary in the amount
existing at the commencement of such disability ("regular salary"), except
that his regular salary shall be reduced, beginning one year from the date
on which such disability commenced if it still continues to exist without an
interim cessation, to eighty percent (80%) of his regular salary. Such
Company benefits and reduced income shall continue as aforesaid, from the
date on which such disability commenced, for a period of five (5) years, or
until Guest is seventy-five (75) years old, whichever occurs first;
provided, however, if such disability ceases to exist prior to the
expiration of the aforesaid period, Guest's regular salary shall resume on
the date of such cessation, and any disability that may commence thereafter
shall be treated as a new period of disability, without relating it to any
previous period or periods of disability.
2. Disability Defined.
"Disability" shall mean Guest's inability, either mental or physical,
to perform the necessary functions of his position of employment with the
Company by reason of his illness or incapacity, whether such disability is
deemed to be temporary or permanent, total or partial. Guest shall be
deemed to be disabled for the purpose of this Agreement if the Company's
Medical Director (or, at the election of the Company, any medical doctor
designated by the Company to perform the task hereby contemplated - herein
referred to as a "substitute medical doctor"), and a licensed physician or
physicians of Guest's choice, shall determine that Guest, whether by reason
of accident, illness or mental or physical infirmity, is unable, to a
substantial degree, to carry on with adequate vigor and competence his usual
and customary duties as a Company employee, in which case they shall
designate the date on which such disability is deemed to have commenced.
Such determination and designation shall be binding on the Company and
Guest. At any reasonable time thereafter upon request of either Guest or
the Company, but not more often than every six (6) months, Guest shall make
himself available for examination by the Company's Medical Director (or
substitute medical doctor, if applicable) and a physician or physicians of
Guest's choice, to determine whether such condition of disability continues
to exist. Upon the termination of such condition of disability, if and as
determined by such medical doctors as aforesaid, Guest shall return to his
normal duties and his regular salary shall resume as of such date, such date
to be designated by the medical doctors who perform the examination as
aforesaid.
In the event the above two medical doctors are unable to agree (within
two weeks following the completion of the examination, including related
tests, if any) on any aspect of the examination that is necessary for
reaching the required conclusion as to the disability and the commencement
date (or cessation date, as the case may be), such two doctors shall select
a third medical doctor ("third medical doctor") who shall review the
examination report and related tests, if any, and consult with the aforesaid
two medical doctors, and the third medical doctor shall make the
determinations required by this Agreement. The Company shall pay the costs
of the examinations performed pursuant to this Agreement.
3. Duties and Performance by Guest During a Period of Disability.
During any period of disability determined as herein provided, Guest
shall continue to assist the Company as an employee in any way and to
whatever extent that is compatible with his state or condition of
disability. For example, if his disability is not total, but nevertheless
he is determined to be disabled by the standard hereinabove set forth, Guest
shall provide assistance and consultation to the extent that he and the
Company determine to be appropriate under the circumstances. If his
disability is deemed to be total, and if Guest's condition permits it, Guest
shall provide assistance and consultation commensurate with his condition.
Unless clearly inappropriate due to his disability (determined in the sole
discretion of the Board of Directors), Guest shall continue to be a member
of the Company's Board of Directors but, in the sole discretion of the Board
of Directors, Guest may be removed, during the period of his disability, as
an officer of the Company and/or Chairman of the Board. If Guest is removed
as a member of the Board of Directors, he shall be elected to the position
of Director Emeritus as provided in the Company's By-Laws. In any case,
during such period of disability, whether partial or total, Guest shall not
compete with the Company in any of its business activities and objectives,
and shall not assist any other person or entity, through consultation,
sharing of information, or otherwise, in competition with the Company in any
of its business activities and objectives. Guest shall keep confidential
any and all information concerning the Company that is confidential and
proprietary and that is not otherwise available to the public. For purposes
of this paragraph, "Company" includes all of the Company's affiliates.
4. Not a Contract of Employment.
This Agreement imposes obligations and rights on the Company and Guest
only in respect to any period of disability as herein set forth, and apart
from such obligations and rights during any such period of disability,
Guest's employment with the Company is "at will."
5. Disability Insurance.
The Company may provide disability insurance to Guest as a benefit from
time to time, or for its own benefit, and the Company may elect, in its sole
discretion, to increase or decrease the amount of such disability insurance,
and Guest will cooperate with implementing such decision or decisions.
Proceeds payable to Guest under such disability insurance, if any, shall be
deducted from any amounts otherwise payable by the Company to Guest pursuant
to this Agreement. However, disability income payable to Guest pursuant to
any disability insurance for which Guest pays the premium, if any, shall
belong to Guest and shall not be deducted from amounts otherwise payable by
the Company to Guest pursuant to this Agreement.
This Agreement is binding upon, and shall inure to the benefit of, as
the case may be, the successors, representatives, and administrators of the
parties respectively. This Agreement is not assignable. This Agreement may
not be altered or amended except in writing signed and delivered by the
parties hereto. This Agreement contains the entire agreement of the parties
on the subject matter and supersedes any prior discussions or agreements,
written or oral, to the contrary.
6. Effective Date.
This Agreement is effective on August 25, 1997, and supersedes and
replaces the aforementioned disability benefit plan related to the life
insurance policy on Guest's life that expires on August 28, 1997.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered to be effective as of the day and year first above
written.
AMERICAN CAPITOL INSURANCE COMPANY
By:/s/John D. Cornett
---------------------------------------
ATTEST: John D. Cornett, President
By:/s/H. Kathleen Musselwhite
------------------------------------
H. Kathleen Musselwhite, Secretary
/s/William F. Guest
-------------------------------------
William F. Guest
ASSUMPTION REINSURANCE AGREEMENT
by and among
World Service Life Insurance Company of America,
American Capitol Insurance Company and
Jeffrey Mark Gamble
Dated August 1, 1997
<PAGE>
ASSUMPTION REINSURANCE AGREEMENT
This Assumption Reinsurance Assumption Agreement ("Agreement") is made
and entered into this First (1st) day of August, 1997, by World Service Life
Insurance Company of America ("World Service"), American Capitol Insurance
Company ("Reinsurer") and Jeffrey Mark Gamble ("Gamble").
Recitals
A. World Service is an Alabama domiciled stock life insurance company.
B. As of the date of this Agreement, World Service has in effect certain
life insurance and annuity policies as specified and defined in Section
2.1 below (sometimes referred to in this Agreement as the "Policies"),
the holders of which reside in six (6) states in which World Service is
licensed and otherwise qualified to do business.
C. Reinsurer is a Texas domiciled stock life insurance company licensed or
otherwise qualified to do business in all jurisdictions where holders
of the Transferred Policies reside except Tennessee and Kentucky.
D. Gamble owns 100% of the issued and outstanding stock of World Service
and desires to relieve World Service of the contractual obligations
expressed in this Agreement by substituting himself for World Service
in respect to all such obligations.
E. In accordance with the terms and conditions as set forth in this
Agreement, World Service and Gamble desire that Reinsurer reinsure and
assume the future liabilities arising under the Policies and Reinsurer
desires to reinsure and assume the future liabilities arising under the
Policies.
Contextual and General Purpose Statement
World Service and Reinsurer entered into an agreement in May, 1996,
whereby the policies of World Service were reinsured and assumed by
Reinsurer, and a similar agreement was entered into at the same time between
World Service's wholly owned subsidiary, South Texas Bankers Life Insurance
Company, a Texas domiciled insurer ("South Texas Bankers"), and Reinsurer.
Said agreements were subject to a post-closing price adjustment. In
connection with negotiating the post-closing price adjustment, the parties
amended said agreements whereby the subject policies were coinsured and were
not assumed, with Reinsurer reinsuring, or coinsuring, 91.42% of the policy
risks and World Service and South Texas Bankers retaining the balance (the
aforesaid percentage being an average, as the exact percentage for each
company was slightly different). The first agreements and the amendment
agreements were considered to be one agreement, simply changing what had
been an "assumption" transaction to a "coinsurance" transaction, with
related and other changes stated in the amendment agreements (the
"Coinsurance Agreement"). The Coinsurance Agreement contemplated that World
Service would reinsure and assume the policies of South Texas Bankers, which
was accomplished in early 1997, after approval by the Texas Department of
Insurance ("TDI"). The Coinsurance Agreement between Reinsurer and World
Service had been reviewed/approved by the TDI (as part of its approval of
the somewhat contemporaneous review/approval of the assumption by World
Service of the South Texas Bankers policies). The Coinsurance Agreement
between Reinsurer and World Service was approved by the Alabama Department
of Insurance ("ADI"). The ADI approval order contained a condition that
required the parties to use their best efforts to enter into an assumption
reinsurance agreement regarding all of the subject policies on or before
June 30, 1997. This Agreement is the result of the efforts by the parties
to achieve the result contemplated by the ADI.
During the period from the effective date of the first agreements (June
1, 1996) to the effective date of this Agreement (August 1, 1997) (herein
referred to as the "coinsurance period"), Reinsurer has administered
(pursuant to an administrative services agreement between Reinsurer and
World Service and South Texas Bankers, respectively) all of the subject
policies, and a monthly accounting and settlement has been made between the
parties. Noting here that all of the subject policies were issued to fund
preneed funeral contracts, a subsidiary of World Service, South Texas
Bankers Life Insurance Agency, Inc. ("South Texas Agency"), held a license
(or "permit") issued by the Texas Department of Banking ("TDB") permitting
it to sell preneed funeral contracts in Texas which were funded by insurance
policies issued by South Texas Bankers. (Prior to the issuance of the
license to South Texas Agency, such a license had been issued to South Texas
Bankers, but the role of South Texas Bankers in selling preneed contracts
pursuant to its permit was assumed by South Texas Agency when it became
licensed.) During the coinsurance period, Reinsurer performed
administrative services for South Texas Agency, pursuant to an
administrative services agreement, relating to the preneed contracts. As
part of the transaction covered by this Agreement, by separate agreement the
parties are transferring the preneed contracts from South Texas Bankers and
South Texas Agency to Imperial Plan, Inc., a wholly owned subsidiary of
Reinsurer which holds a license issued by the TDB, to be administered by an
administrative services agreement between Reinsurer and Imperial Plan, Inc.
During the coinsurance period, the need for certain financial
adjustments to the Coinsurance Agreement has developed and the parties have
settled these matters as set forth in this Agreement. Representations and
warranties that were set forth in the Coinsurance Agreement and its
predecessor agreements are incorporated in this Agreement and the
representations, warranties and other obligations of the Coinsurance
Agreement are confirmed to survive this Agreement if not inconsistent
herewith. (It may be that developments during the coinsurance period
indicated problems under one or more of the representations and warranties
contained in the Coinsurance Agreement and reiterated and extended in this
Agreement; this is intentional and the point is that the original
representations and warranties still apply as to "going forward" matters.)
Differences between policy obligations and non-policy (or "extra-
contractual" obligations) arose and were settled as they arose as part of
the monthly settlements (and as part of this Agreement), and the procedure
was that Reinsurer obtained instructions from World Service as authority for
paying or settling extra-contractual claims. Virtually all of the extra-
contractual issues arose in connection with the South Texas Bankers
policies. During the initial coinsurance period, World Service and South
Texas Bankers negotiated with the TDI and TDB a settlement agreement
regarding disputed issues, concluding the settlement agreement in mid-July,
1997. The parties anticipate that the settlement agreement, when
implemented, will resolve most of the extra-contractual matters that
surfaced during the initial coinsurance period. This Agreement is
predicated upon the implementation of the settlement agreement.
The parties intend that Reinsurer's obligations will be confined to the
obligations expressly stated in the reinsured policies, and that any and all
direct and indirect liabilities and costs caused by or arising from non-
policy or extra-contractual claims have been, are and will continue to be
the sole responsibility of World Service, except that Reinsurer has been
responsible for its obligations as administrator under the administrative
services agreement, and, going forward, Reinsurer will be responsible for
its administrative role. Regarding hold harmless and indemnification
obligations, in view of Gamble's desire to sell World Service as a "shell"
without World Service having the burden of defending and/or indemnifying
Reinsurer in respect to the subject policies, the parties agree that
Reinsurer will look to Gamble and not to World Service. However, in the
event World Service should incur liability or costs on account of extra-
contractual liability or otherwise, Reinsurer shall have no duty to
indemnify or hold harmless World Service, except that Reinsurer will have
the duty to indemnify and hold harmless World Service against policy, or
contractual, claims and costs related thereto. Gamble's indemnity and hold
harmless obligation covers (in separate documentation) also any extra-
contractual liabilities and costs in connection with the preneed contracts.
To support Gamble's obligation to hold harmless and indemnify Reinsurer, an
escrow fund in the amount of $100,000 is established, to be owned by Gamble
but administered by Reinsurer, from which fund Reinsurer may draw any amount
for which it believes Gamble has a duty to pay. If Gamble objects to a
withdrawal, the dispute can be submitted to an arbitration panel.
Accordingly, an arbitration agreement is established in connection with this
Agreement, and the three panel members are placed in position as arbitrators
at the outset. Gamble has certain ongoing obligations to provide Reinsurer
with current financial information.
The Agreement as stated hereinafter overrides and controls if there is
any conflict or inconsistency with the foregoing "Contextual and General
Purpose Statement" ("Statement"), which is provided solely to facilitate the
interpretation and application this Agreement. Accordingly, no significance
is to be attached to the fact that words chosen to state the foregoing
Statement may be different from, or less exact than, the words chosen in the
remainder of this Agreement, or that the foregoing Statement does not cover
a subject or item that is contained in the remainder of this Agreement.
Terms and Conditions
In consideration of the mutual benefits to be received by the parties
hereto and the mutual covenants and agreements contained herein, the parties
agree that the above "Recitals" and "Contextual and General Purpose
Statement" are hereby adopted and made a part of this Agreement and further
agree to the following terms and conditions:
Article I
Definitions
Except as defined elsewhere in this Agreement, terms used with initial
capitalization when the rules of grammar or form would not so require have
the meanings set forth below:
(a) The term "Accounting" has the meaning set forth in Section 5.1.
(b) The term "Transfer Value" means the consideration to be transferred to
Reinsurer from World Service, not including the effect of the Ceding
Fee, as set forth in Section 4.1.
(c) The term "Ceding Fee" has the meaning set forth in Section 4.2.
(d) The terms "Reserves," "IBNR Claims Reserves" and "Policy Assets" have
the meaning set forth in Section 11.5.
(e) The term "Closing" has the meaning set forth in Section 14.1.
(f) The term "Closing Date" has the meaning set forth in Section 14.1.
(g) The term "Commissions" has the meaning set forth in Article VIII.
(h) The term "Contract Date" means the date of execution of this Agreement
as set forth in the first paragraph of this Agreement.
(i) The term "Reinsured Policy Obligations" means benefits under and by
virtue of the terms of the Transferred Policies that arise and become
payable on account of a death or other event occurring on or after the
Effective Date.
(j) The term "Defenses" means any (i) known or unknown, actual or
contingent, rights, defenses, offsets, counterclaims, and cross-
actions, and (ii) any and all rights, limitations, terms, conditions,
and provisions provided for in this Agreement relative to the
assumption of the Policies.
(k) The term "Effective Date" means August 1, 1997.
(l) The terms "Transferred Policies," "Policies" or "Policy" have the
meaning set forth in Section 2.1.
(m) The term "Documents and Records" has the meaning set forth in Section
7.1.
(n) The term "Deadline Time" has the meaning set forth in Section 10.2(e).
(o) The term "April 30 Actuarial Appraisal" means the actuarial appraisal
prepared by Actuarial Resources Corporation based on the insurance and
annuity polices in force in World Service as of April 30, 1997.
(p) The term "Coinsurance Agreement" means the document or documents that
constitute the coinsurance agreement between Reinsurer and World
Service effective June 1, 1996.
(q) "World Service" means, when used as a modifier of, or in the context
of, the subject Policies or the marketing or issuing of them, all of
World Service's predecessors or subsidiaries or any other insurance
company that marketed or issued any of the subject Policies.
(r) The term "South Texas Bankers" means South Texas Bankers Life Insurance
Company, a Texas life insurance corporation which is a wholly owned
subsidiary of World Service.
(s) The term "South Texas Bankers Agreement" means a Reinsurance and
Assumption Agreement similar to this Agreement entered into between
Reinsurer and South Texas Bankers on or about the same date as the
Contract Date hereof and closed between the parties on the same date as
the Closing Date of this Agreement.
(t) The term "Gamble" means Jeffrey Mark Gamble, an individual residing in
Winchester, Tennessee.
Article II
Reinsurance and Assumption of Transferred Policies
Section 2.1. Transfer and Ceding. Subject to the terms and conditions
of this Agreement, World Service agrees to transfer and cede to Reinsurer
and Reinsurer agrees to reinsure and assume all policies that were subject
to, or covered by, the Coinsurance Agreement on the Effective Date
("Transferred Policies," the components of which [one or more, as the case
may be] are sometimes referred to herein as "Policies" or "Policy"). It is
the intent of the parties that the Transferred Policies shall include all of
World Service's insurance and annuity policies in force in accordance with
the terms of such policies as of the Effective Date.
Section 2.2. Standard of Performance; Liability. Reinsurer covenants
and agrees to administer all claims on the Transferred Policies and to
service and otherwise handle the Transferred Policies in accordance with
applicable state laws and regulations, beginning on the Effective Date.
Beginning on the Effective Date, Reinsurer shall be liable for the payment
of the Reinsured Policy Obligations. Reinsurer shall be liable for and
shall defend at its own expense actions on account of any act, error, or
omission of Reinsurer occurring on or after the Effective Date. Except for
its liabilities as stated in the Coinsurance Agreement, Reinsurer shall not
be liable for any claims or Policy benefits that arise or become payable by
virtue of a death or other event occurring before the Effective Date.
Except for its liabilities as stated in the Administrative Services
Agreement, Reinsurer shall not be liable for any actions, inactions, errors,
or omissions made by World Service, and any of its respective employees,
agents, and representatives in the solicitation, sale, servicing, renewal,
or processing of any claim under the Transferred Policies or in
communications with insureds, beneficiaries, or any other third party with
respect to the Transferred Policies or on account of any event or fact
occurring prior to the Effective Date. In addition, Reinsurer shall handle
and pay the claims in its ordinary course of business that were incurred
prior to the Effective Date but reported to Reinsurer on or after the
Effective Date, such payments to be made out of and to the extent of the
IBNR Claim Reserve Fund transferred to Reinsurer pursuant to Section 11.5
below.
Section 2.3. Defenses. This Agreement and the reinsurance and
assumption effected hereby shall have no effect upon, and Reinsurer shall
succeed to all Defenses that World Service had, still has, or may have in
connection with any current or potential claim and/or action on or under the
Transferred Policies, all of which are hereby expressly preserved and
assigned and transferred to Reinsurer. Reinsurer shall be entitled to
exercise the Defenses to the fullest extent possible under the prevailing
law and it is expressly provided that, by executing this Agreement, no
Defenses are or will be waived, but the same are expressly preserved, and
Reinsurer shall be duly subrogated thereto, whether the same are now known
to exist or may hereafter be discovered.
Section 2.4. Policy Reinstatement. Reinsurer agrees to assume World
Service's obligations, if any, to reinstate any lapsed policy or policies
that are entitled to reinstatement on the Effective Date under the terms of
such policy or policies and that otherwise would be Transferred Policies.
Reinsurer alone shall determine by exercise of its reasonable discretion
whether a policyholder has fulfilled all requirements necessary to effect
reinstatement of his or her policy or policies. Upon reinstatement, the
lapsed policies shall be included in the Transferred Policies reinsured and
assumed under the terms and conditions of this Agreement.
Section 2.5. Payment of Benefits. Except as otherwise provided in
this Agreement, Reinsurer shall pay benefits falling within the scope of the
Reinsured Policy Obligations directly to the policyholders or other
designated beneficiaries of the Transferred Policies in accordance with the
terms of such policies.
Article III
Assumption Certificate
Section 3.1. Form of Assumption Certificate. Subject to compliance
with regulatory requirements as set forth below in Article XIII below,
Reinsurer shall issue assumption certificates to each holder of the
Transferred Policies reinsured and assumed under this Agreement in
substantially the form of Exhibit 3.1. The assumption represented by the
assumption certificates is subject to the written terms and conditions of
the Transferred Policies and this Agreement, and any Defenses that are now
or may hereafter become available to World Service or Reinsurer.
Section 3.2. Delivery of Assumption Certificate. Subject to
compliance with regulatory requirements as set forth in Article XIII below,
the assumption certificates shall be mailed to each holder of the
Transferred Policies by first-class mail, postage prepaid, no later than six
months following the Effective Date.
Article IV
Transfer of Assets and Ceding Fee
Section 4.1. Transfer of Assets. The Transfer Value shall be an
amount equal to 8.58% ("World Service's Portion") of the Reserves and other
policy liabilities attributable to the Transferred Policies determined as of
July 31, 1997, and the assets equal to the Transfer Value to be transferred
as herein provided shall consist of World Service's Portion of the policy
loans (including due and accrued and unearned investment income thereon),
and deferred and uncollected and advance premiums attributable to the
Transferred Policies, and cash. However, the Transfer Value is to be based
upon July 31, 1997, policy data which is not available for purposes of the
Closing since it is expected that the Closing will occur before such data is
available. Therefore, at the Closing, the Transfer Value shall be the
estimated amount shown in Schedule 4.1 ("Pro Temp Transfer Value") to
determine the amount and types of assets to be transferred to Reinsurer on
the Closing Date. At the Closing, World Service shall transfer, assign,
convey and deliver to Reinsurer the Pro Temp Transfer Value as shown on
Schedule 4.1, adjusted by the amount of the Ceding Fee attributable to the
Transferred Policies, as described in Section 4.2. [Said Schedule 4.1 and
Schedule 4.2 exhibit a worksheet methodology to be used as the format for
using the appropriate July 31, 1997, data to calculate the Transfer Value
and Policy Assets, as well as the Ceding Fee based on the April 30 Actuarial
Appraisal as set forth in this Article IV.] The cash portion of the Pro
Temp Transfer Value (as adjusted by the amount of the Ceding Fee) shall be
delivered by World Service to Reinsurer by wire transfer on the Closing Date
to Reinsurer's designated bank account. On or before 30 days following the
Closing Date, Reinsurer shall determine the amount of the actual policy
reserves and other policy liabilities, and the amount of the Policy Assets,
and shall provide the results of such determination to World Service. If
the Pro Temp Transfer Value is larger than the Transfer Value determined by
using the actual July 31, 1997, policy data, Reinsurer shall pay the amount
of the difference to World Service within ten (10) business days following
receipt of the July 31 policy data. If the Pro Temp Transfer Value is
smaller than the Transfer Value determined by using the actual July 31
policy data, World Service shall pay the amount of the difference to
Reinsurer within ten (10) business days following receipt of the actual July
31 policy data.
Section 4.2. Ceding Fee. Subject to the terms and conditions of this
Agreement, and in consideration of the transfer by World Service of all its
respective rights, title, privileges, and prerogatives in the Transferred
Policies, Reinsurer agrees that the Ceding Fee shall be World Service's
Portion of the present value of the "Distributable Profit After FIT" of the
Transferred Policies as determined by the April 30 Actuarial Appraisal based
on the discount rate of 12% (the "12% Discount Value"), which is Eighty-Two
Thousand, Five Hundred and Forty Dollars ($82,540) in the aggregate, subject
to the following adjustments (the "Ceding Fee"):
However, the parties have agreed to settle certain matters in conjunction
with the aforesaid Ceding Fee amount, which matters are identified as set
forth in Exhibit 4.2, with the result that World Service will pay to
Reinsurer at Closing the "net" Ceding Fee amount equal to $116,000 as shown
on said Exhibit 4.2.
Article V
Accounting Standards and Principles
Section 5.1. Notice and Correction of Errors. If Policies falling
within the scope of this Agreement are omitted from Schedule 4.1, or if any
error is discovered in the data as reflected in the various calculations and
accountings to be accomplished in accordance with this Agreement and the
exhibits and schedules hereto ("Accounting"), or if any additional data is
discovered by a party hereto, and those errors or additional data require
revision of all or any portion of the Accounting, then the party discovering
the error or additional information shall immediately give written notice
thereof to the other party. Any payment required of a party because of such
a revision shall be made promptly and in no event shall the payment be made
more than one month after the parties agree to the amount of the payment to
be made. Any adjustments in payments resulting from errors, omissions, or
revisions as set out in this paragraph, if any, shall carry simple interest
at the rate of 10% per annum from the Closing Date.
Section 5.2. Reserves and Policy Assets Valuations. All reserves and
other policy liabilities, and all valuations of policy loans and due and
deferred premiums, with respect to the Transferred Policies shall be
determined and calculated as set forth in Section 11.5 below.
Article VI
Premiums and Other Receipts
Section 6.1. Transfer of Receipts. All premiums and other receipts of
any kind on the Transferred Policies received by any party or person on or
after the Effective Date, shall be the sole property of Reinsurer. World
Service shall account to Reinsurer for all monies, checks, drafts, money
orders, postal notes, and other instruments relating to premiums and any
other moneys that World Service receives on or after the Effective Date
("Instruments") and to which Reinsurer is entitled under this Agreement.
World Service shall pay any amounts due Reinsurer under this Section 6.1 at
the Closing. All Instruments delivered shall bear all necessary
endorsements required to effect transfer to the Reinsurer. World Service
shall deliver to Reinsurer all Instruments that it receives after the
Closing Date to which Reinsurer is entitled under this Agreement within 10
business days after receipt.
Section 6.2. Bank Drafts. After the Closing Date, Reinsurer shall
have all rights of World Service under outstanding bank draft authorizations
from policyholders that authorize withdrawal from policyholders' bank
accounts to pay premiums on the Transferred Policies, to the extent
permitted by the laws of the states in which the affected policyholders
reside. World Service will cooperate with Reinsurer after the Closing to
effect Reinsurer's ability to utilize or make substitutions for bank draft
authorizations existing at the time of Closing, providing executed
documentation if appropriate.
Section 6.3. Collections. Reinsurer shall have the right and
authority to collect for its own account all receivables and other items to
be transferred by World Service to Reinsurer and to make any necessary
endorsement without recourse and without warranties of any kind on any
checks or other evidences of indebtedness received by Reinsurer on account
of any such receivables or other items. World Service agrees to employ all
reasonable efforts to secure the endorsements necessary to effect the
transfers contemplated herein.
Article VII
Records
Section 7.1. Access. To the extent that Reinsurer does not possess
(in its role as administrator pursuant to the Administrative Services
Agreement) all of the records and information concerning the Policies prior
the Closing Date, World Service shall give Reinsurer reasonable access to
records and information concerning the Policies. World Service shall
cooperate with the reasonable efforts of Reinsurer to transfer the
administration of the Transferred Policies to Reinsurer, to the extent not
already accomplished by the date of Closing. World Service also agrees to
deliver to Reinsurer on the Closing Date all of World Service's files,
books, and records, to the extent not already delivered to Reinsurer,
relating to the Transferred Policies ("Documents and Records") without
charge. World Service has already transferred, delivered, assigned and
conveyed to Reinsurer all of its data processing equipment, hardware and
related implements, as well as all related operating and processing
software, within World Service's possession or control ("data processing
system"), used for the purpose of administration and servicing of the
Transferred Policies without charge. In connection with such data
processing system, World Service has or will assign and transfer to
Reinsurer without charge all of its rights, title and interests in any
service contracts, licenses, permits or agreements used or useful in
operating or supporting the data processing system.
Section 7.2. Delivery. Any and all correspondence, premiums, records
or other documents coming to World Service after the Closing Date and
pertaining to the Transferred Policies shall be delivered to Reinsurer
within 10 days following receipt thereof, without charge.
Article VIII
Commissions
Reinsurer does hereby assume and agree to pay the obligation of World
Service with respect to commissions, service fees, and/or producer
compensation under agent or broker commission contracts between World
Service and its agents and/or brokers in connection with premiums paid or to
be paid on the Transferred Policies which become due and payable on or after
the Effective Date, not to exceed, however, the amount or amounts, as the
case may be, shown in the April 30 Actuarial Appraisal in respect to the
Transferred Policies ("Commissions"). Gamble agrees to indemnify and hold
Reinsurer harmless from any liability, loss, or expense from claims of
agents or brokers for commissions, service fees, or producer compensation in
excess of said Commissions, and for any other claims of whatsoever nature.
Article IX
Litigation
If any court of competent jurisdiction enjoins or otherwise orders or
decrees (preliminarily or otherwise) that a party to this Agreement shall
not perform any or all of its obligations under this Agreement, the other
parties shall be absolutely relieved from performing any of their respective
obligations hereunder, for however long as the injunction, order, or decree
is in effect, but only to the extent that performance of any obligation
would violate the injunction, order, or decree. The parties, including the
party against which the injunction, order, or decree is entered, shall make
all reasonable efforts, each at its own expense or pro rata if joint action
is taken, to have the injunction, order, or decree dissolved and set aside.
Article X
Termination
Section 10.1. Duration. Except as otherwise provided in this Article
X, this Agreement may not be terminated and shall remain in full force and
effect until all of the liabilities reinsured and assumed hereunder have
been discharged or otherwise expire.
Section 10.2. This Agreement may be terminated at any time on or prior
to the Closing Date:
(a) by mutual written consent of World Service, Gamble and Reinsurer;
(b) by either World Service, Gamble or Reinsurer if the conditions set
forth in Section 13.1 have not been satisfied prior to the Closing
Date.
(c) by World Service or Gamble if the conditions set forth in Section 13.2
have not been satisfied or waived in writing by World Service, or any
of Reinsurer's covenants required to be performed on or prior to
Closing have not been performed or waived in writing by World Service,
on or prior to Closing;
(d) by Reinsurer if the conditions set forth in Section 13.3 have not been
satisfied or waived in writing by Reinsurer, or any of World Service's
covenants required to be performed on or prior to Closing have not been
performed or waived in writing by Reinsurer, on or prior to the Closing
Date;
(e) by World Service, Gamble or Reinsurer at any time after 5:00 p.m.,
Houston, Texas time on August 31, 1997 ("Deadline Time").
Section 10.3. Effect of Termination. In the event of any termination
of this Agreement on account of Section 10.2, the Coinsurance Agreement
shall continue in full force and effect.
Article XI
Representations and Warranties of World Service and Gamble
World Service and Gamble hereby represent and warrant to Reinsurer
that:
Section 11.1.
(a) Organization and Existence of World Service. World Service is a
Alabama-domiciled stock insurance company duly incorporated, validly
existing, and in good standing under the corporation and insurance laws
of the State of Alabama. World Service has all requisite corporate
power and authority to carry on its business as it is now being
conducted, and to own, lease, and operate its properties.
(b) Jeffrey Mark Gamble is an individual resident of Winchester, Tennessee.
Jeffrey Mark Gamble shall be liable in respect to all obligations of
Gamble expressed in this Agreement. Jeffrey Mark Gamble has heretofore
provided to Reinsurer a financial statement dated December 31, 1996,
which is incorporated herein by reference thereto for all purposes
("Gamble Financial Statement"). Jeffrey Mark Gamble hereby represents
and warrants that said Gamble Financial Statement was prepared in
conformity with generally accepted accounting principles applied on a
consistent basis and presents fairly the financial condition of Gamble
as of December 31, 1996, that all of the property reflected in said
Gamble Financial Statement is free and clear of any and all claims from
all parties unless reflected in said Gamble Financial Statement, and
that since the date thereof there have been no material adverse changes
in respect to Gamble's financial condition as reflected in said Gamble
Financial Statement.
Section 11.2. Qualification and Power. World Service is duly
qualified and in good standing to do business in every jurisdiction in which
such qualification is necessary because of the nature of its business or of
the properties owned, leased, or operated by it.
Section 11.3. Validity: No Violation. This Agreement is a valid and
binding obligation of World Service and Gamble, enforceable against them or
any of them in accordance with its terms and conditions. Neither the
execution and delivery of this Agreement, nor compliance with any of the
provisions of this Agreement by World Service or Gamble or either of them,
will:
(a) conflict with or result in a breach of any provision of the Articles of
Incorporation or Bylaws of World Service, or result in a default (or
give rise to any right of termination, cancellation, or acceleration)
under any of the terms, conditions, or provisions of any note, lien,
bond, mortgage, indenture, license, lease, agreement, consent order, or
other instrument or obligation to which World Service, Gamble, or
either of them, is a party or by which any of them may be bound;
(b) violate any judgment, order, writ, injunction, or decree of any court,
administrative agency, or governmental body applicable to World
Service, Gamble, or either of them, or to any of their respective
properties or assets; or
(c) cause, or give any person grounds to cause (with or without notice, the
passage of time or both), the maturity of any liability of World
Service, Gamble, or either of them, to be accelerated or increased.
Section 11.4. No authorization, consent or approval of, or filing
with, any public body or authority is necessary for World Service, Gamble,
or either of them, to obtain for the consummation of this Agreement, except
that such transaction requires the approvals, authorizations and clearances
contemplated by Section 13.1(a) hereof. No authorization, consent or
approval of any other person or entity is necessary for World Service or
Gamble to obtain for the consummation of the transactions contemplated by
this Agreement, and no person or entity has an option, right of first
refusal or preferential right to purchase all or any part of the Transferred
Policies or that is otherwise triggered as a result of the transactions
contemplated hereby.
Section 11.5. The reserves and other Policy liabilities with respect
to each of the Policies included in the Transferred Policies for the period
ended July 31, 1997, established on the books of World Service (i) were, or
will be, calculated and determined in accordance with generally accepted
actuarial and statutory accounting standards consistently applied, (ii) are,
or will be, based on actuarial assumptions that are in accordance with those
specified in the related Policies and (iii) meet, or will meet, the
requirements of the insurance laws of the State of Texas. In addition, the
reserves for the period ended July 31, 1997 and established on the books of
World Service with respect to the incurred but unreported policy claims
("IBNR Claims Reserves") and other policy liabilities (i) were, or will be,
calculated and determined in accordance with generally accepted actuarial
and statutory accounting standards consistently applied, (ii) are, or will
be, based on actuarial assumptions that are in accordance with those
specified in the related Policies and (iii) meet, or will meet, the
requirements of the insurance laws of the State of Texas. The reserves as
set forth in this Section 11.5 shall be referred to in this Agreement as
"Reserves." While the IBNR Claims Reserves shall be established as
aforesaid, if the claims paid by the Reinsurer attributable to the IBNR
Claims Reserves were in the aggregate more than the amount of the IBNR
Claims Reserves, World Service shall reimburse the Reinsurer for the amount
of the deficiency. The policy loan asset (including accrued interest and
unearned interest thereon) and the due and deferred premium asset with
respect to each of the Policies included in the Transferred Policies for the
period ended July 31, 1997, established on the books of World Service (i)
were, or will be, calculated and determined in accordance with generally
accepted actuarial and statutory accounting standards consistently applied,
(ii) are, or will be, based on actuarial assumptions that are in accordance
with those specified in the related Policies and (iii) meet, or will meet,
the requirements of the insurance laws of the State of Texas. The policy
loan asset (including accrued interest and unearned interest thereon) and
the due and deferred premium asset as set forth in this Section 11.5 shall
be referred to in this Agreement as "Policy Assets."
Section 11.6. Since May 31, 1996, there has not been any material
adverse change, or changes in the Transferred Policies or operations of
World Service taken as a whole which in the aggregate may be deemed
materially adverse or which could affect the validity or enforceability of
this Agreement, consummation of the transactions contemplated hereby or
compliance with the terms hereof by World Service.
Section 11.7. World Service has the right to use, free and clear of any
royalty or other payment obligations, claims of infringement or alleged
infringement or other lien or encumbrance, all systems software included in
or used to process the Transferred Policies and no third party will be
entitled to any payment or other benefit as a result of the transfer of the
data processing system by World Service to Reinsurer in accordance with this
Agreement.
Section 11.8. There are no claims, actions, suits, investigations and
administrative, arbitration or other proceedings (i) pending against World
Service or Gamble with respect to the Transferred Policies or (ii)
threatened against World Service with respect to the Transferred Policies.
Neither World Service nor Gamble is subject to or in default with respect to
any order, writ, judgment, decree, injunction or similar order of any court
or any foreign, federal, state or other governmental body. There are no
claims, actions, suits, investigations or administrative, arbitration or
other proceedings pending or threatened against or affecting World Service
or Gamble which individually or in the aggregate could have a material
adverse effect on the Transferred Polices which could affect the validity or
enforceability of this Agreement, consummation by World Service and Gamble
of the transactions contemplated hereby or compliance by World Service and
Gamble with the terms of this Agreement, and (ii) neither World Service nor
Gamble is subject to or in default with respect to any order, writ,
judgment, decree, injunction or similar order of any court or any foreign,
federal, state or other governmental body, the result of which being subject
to or of which default individually or in the aggregate could have a
material adverse effect on the Transferred Polices or which could affect the
validity or enforceability of this Agreement, consummation by World Service
and Gamble of the transactions contemplated hereby or compliance by World
Service and Gamble with the terms of this Agreement.
Section 11.9 The manner in which the Policies were marketed, and the
activities of sales organizations and personnel of the marketing company
(World Service, South Texas Bankers, or any other company that performed the
marketing of the subject Policies or portions thereof) will not result in
any liability or obligation that is other than the Reinsured Policy
Obligations. Without limiting the foregoing, there have been no promises or
guarantees regarding refunds of premiums or dividend scales, dividends or
surrender benefit to be paid that will result in a liability or obligation
other than the Reinsured Policy Obligations. Any guarantee or promise in
respect to dividends, other than as provided in the subject Policies
themselves, if any, shall be deemed to be an "extra-contractual" liability
or obligation. In respect to the Rainer Funeral Home, the promise or
promises made by the subject sales agent was unauthorized action on his part
and was isolated to that one funeral home. The reserves established in
respect to the Policies as of July 31, 1997, shall include reserves to allow
for the crediting of a guaranteed two percent (2%) dividend in respect to
the Rainer Funeral Home policies, in order to settle and satisfy the claim
made by said funeral home regarding representations made to it by the
subject sales agent. The letter to be sent to certain policyholders
regarding dividends as set forth in Section 13.4 below shall not result in
or bring to the attention of the parties that there are other instances in
which a minimum level of dividends was promised to funeral homes or
policyholders, or that dividends were to be credited sooner than the Policy
anniversary following the completion of the premium paying term of the
Policy. Further, if significant evidence is generated that representations
or promises regarding a minimum level or levels of dividends have been made
on a general or broad basis, Gamble will provide sufficient funds to cover
the policy reserves calculated to reserve for the obligation to pay
dividends at the promised level or levels, as the case may be. If an
insurance regulatory authority requires Reinsurer to increase Policy
reserves or other policy liabilities based on market conduct findings, or
for any other reason, then Gamble will provide sufficient funds to cover the
Policy reserves or other Policy liabilities required by such authority.
Section 11.10. World Service and Gamble are in compliance in all
respects with all laws, ordinances, regulations, orders, judgments,
injunctions, or decrees of any court, arbitrator or governmental authority
where the failure to comply, individually or in the aggregate, could
reasonably be expected to have a material adverse effect on the Transferred
Policies or any term, provision or obligation of this Agreement.
Section 11.11. The Actuarial Appraisal referred to in Section 4.1
includes all commissions which are payable to agents of World Service.
World Service is not in default under any of the terms, provisions or
conditions of any contract between World Service and any of its agents, past
or present. The failure of any agent who wrote business for World Service
to have been duly licensed (for the type of business which such agent wrote)
as an agent in the particular jurisdiction in which such agent wrote for
World Service will not individually or in the aggregate have a material
adverse effect on the Transferred Policies of World Service. To the
knowledge of World Service, there is no actual or threatened plan on the
part of any insurance agent or broker to rewrite any of the policies or
contracts of insurance included in the Transferred Policies.
Section 11.12.
(a) It has been the practice of World Service to send all communications
involving policyholders directly to the affected policyholders, and the
documents and records of World Service delivered to Reinsurer contain
adequate information to enable Reinsurer to send written notifications
or other communications directly to each policyholder whose policy or
contract is included in the Transferred Policies;
(b) no master list of all or any substantial number of the holders of the
Policies has been provided by World Service to any third party except
to World Service's consulting actuary, and such master list is not
available in the public domain; and
(c) no policyholder or group of policyholders, which individually or in the
aggregate account for five percent or more of the premium income
included in the Policies has threatened to terminate its or their
relationship with World Service.
Section 11.13. With respect to each of the Transferred Policies:
(a) World Service is a party to each of such and owns all of the rights and
interests of an insuring, reinsuring or ceding party, as the case may
be, in and to each of such Policies, free and clear of any Lien;
(b) each of such Policies is in full force and effect and constitutes a
valid and legally binding obligation of each of the parties thereto in
accordance with its terms; the transactions contemplated by this
Agreement will not affect the validity or binding character of any such
Policy; World Service is not in violation, breach or default of any
such Policy and no event has occurred which (with or without notice or
lapse of time or both) constitutes a breach or default by World Service
under any such Policy and no such Policy contains any provision
providing that the other party thereto may terminate the same by reason
of the transactions contemplated by this Agreement or any other
provision which would be altered or otherwise become applicable by
reason of such transactions;
(c) such Policies are, to the extent required under applicable law, on
forms approved by the insurance regulatory authority of the
jurisdiction where issued or have been filed with and not objected to
by such authority within the period provided for objection;
(d) all current benefits payable by World Service under any such Policy
have been paid or will be paid in the ordinary course of business under
the terms of the Policies under which they arose or to the satisfaction
of the parties thereto;
(e) no such Policy entitles the holder thereof or any other person or
entity to receive dividends or similar benefits in which the right to
receive such dividends or benefits is determined other than at the
discretion of the board of directors of World Service;
(f) The underwriting standards utilized and ratings applied by World
Service with respect to Policies issued by World Service conform in all
material respects to customary insurance industry practices as such
practices apply to the markets in which World Service has sold its
policies and, with respect to any such Policy reinsured in whole or in
part, conform in all material respects to the standards and ratings
required pursuant to the terms of the related reinsurance, coinsurance
or other similar Policy;
(g) each of such Policy was issued and has been serviced in the ordinary
course of business; and
(h) there has been no discrimination in violation of applicable insurance
laws among the policyholders whose policies and contracts of insurance
are included in such Policies with respect to the rates charged such
policyholders for the insurance in force afforded such policyholders by
such Policies.
(i) Regarding Policies owned or controlled by funeral homes known as the
Prime Succession funeral homes, there is no duty on the part of World
Service to honor or allow any Policy cancellation and to make payments
of policy benefits due to a request for cancellation, and no duty to
pay dividends to such funeral homes as policy owners other than as
provided in said subject Policies, whether the absence of such duty
arises from a binding and enforceable agreement between World Service
and Prime Succession or otherwise.
Section 11.14. The Documents and Records are accurate and complete in
all material respects and there are no deficiencies in the Documents and
Records which could reasonably be expected to have a material adverse effect
on either Reinsurer's satisfaction of its obligations in respect of the
Policies or the servicing by Reinsurer of the Policies in accordance with
customary insurance industry practices. There are no facts or other
circumstances that would prevent the Reinsurer (or which raises a material
probability that the Reinsurer might be prevented) from servicing the
Policies in accordance with customary insurance industry practice and in the
manner in which the Policies has serviced prior to the date hereof.
Section 11.15. As of the date hereof, neither this Agreement nor any
certificate or document furnished by World Service to Reinsurer in
connection with this Agreement or the transactions contemplated hereby
contains any untrue statement of material fact or omits to state a material
fact necessary to make the statements herein or therein not misleading in
light of the circumstances in which they were made.
Section 11.16. Survival of Representations and Warranties. The
representations and warranties of World Service and Gamble contained in this
Article XI and elsewhere in this Agreement shall survive the Closing until
all of the liabilities reinsured and assumed hereunder have been discharged
or otherwise expire.
Article XII
Representations and Warranties of Reinsurer
Reinsurer hereby represents and warrants to World Service that:
Section 12.1. Organization and Existence. Reinsurer is a Texas-
domiciled stock insurance company duly incorporated, validly existing, and
in good standing under the corporation and insurance laws of the State of
Texas. Reinsurer has all requisite corporate power and authority to carry
on its business as it is now being conducted, and to own, lease, and operate
its properties.
Section 12.2. Qualification and Power. Reinsurer is duly qualified
and in good standing to do business in every jurisdiction in which such
qualification is necessary because of the nature of its business or of the
properties owned, leased, or operated by it.
Section 12.3. Validity: No Violation. This Agreement is a valid and
binding obligation of Reinsurer, enforceable against it in accordance with
its terms and conditions. Neither the execution and delivery of this
Agreement, nor Reinsurer's compliance with any of the provisions of this
Agreement, will:
(a) conflict with or result in a breach of any provision of the Articles of
Incorporation or Bylaws of Reinsurer, or result in a default (or give
rise to any right of termination, cancellation, or acceleration) under
any of the terms, conditions, or provisions of any note, lien, bond,
mortgage, indenture, license, lease, agreement, consent order, or other
instrument or obligation to which Reinsurer is a party or by which it
may be bound;
(b) violate any judgment, order, writ, injunction, or decree of any court,
administrative agency, or governmental body applicable to Reinsurer or
to any of its properties or assets; or
(c) cause, or give any person grounds to cause (with or without notice, the
passage of time or both), the maturity of any liability of Reinsurer to
be accelerated or increased.
Section 12.4. Survival of Representations and Warranties. The
representations and warranties of Reinsurer contained in this Article XII
and elsewhere in this Agreement shall survive the Closing until all of the
liabilities reinsured and assumed hereunder have been discharged or
otherwise expired.
Article XIII
Covenants and Conditions Precedent to Closing
Section 13.1. The obligations of each of the parties hereto to proceed
with the Closing are subject to the fulfillment (unless waived by each party
in writing), prior to or at the Closing, of each of the following
conditions:
(a) No suit, action or other proceeding shall have been initiated and be
pending or be threatened by any governmental agency in which it is
sought to restrain, prohibit, invalidate, modify or condition, or set
aside, the transactions contemplated by this Agreement, and no statute,
rule or regulation having such effect shall have been promulgated or
enacted, nor shall any such suit, action or proceeding have been
initiated by any other third party not affiliated with the parties
hereto in which such third party shall have obtained preliminary or
permanent injunctive relief or which, in the opinion of counsel to
either party, has a reasonable likelihood of success; provided,
however, that each party shall use reasonable efforts in good faith to
cause such suit, action or proceeding, or the threat thereof, to be
dismissed or withdrawn, to cause such injunction to be dissolved or
vacated or to cause such statute, rule or regulation to be repealed or
rescinded.
(b) The receipt of the approval of this Agreement from the Alabama
Department of Insurance, provided however, if such approval is not
received on or before Closing and Closing occurs anyway by consent of
the parties hereto, such Closing shall be "subject to" receipt of such
approval, and in the event such approval is not received within sixty
(60) days following Closing, the Closing shall be rescinded and the
parties shall be restored to the their respective positions immediately
prior to Closing. Regarding regulatory approvals of the form of said
Assumption Certificate that may be required from the Alabama Department
of Insurance and the insurance departments of other states in which the
holders of the Transferred Policies reside, Reinsurer shall promptly
seek such regulatory approval, but such regulatory approvals shall not
be a condition precedent to Closing. If any such regulatory authority
fails to give the necessary approval within six months of the Closing
Date, then the affected policies will remain the obligation of World
Service pursuant to the Coinsurance Agreement and such policies shall
be subject to the provisions of Section 17.4 hereunder. In the event
this Agreement is rescinded or becomes subject to rescission for any
reason prior to the issuance by Reinsurer of Assumption Certificates to
any Policies, the Reinsurer shall thereupon be relieved of its
obligation to proceed with the issuance of such Certificates.
Section 13.2. The obligations of World Service and Gambles to proceed
with the Closing are subject to the fulfillment (unless waived by Reinsurer
in writing), prior to or at the Closing, of each of the following
conditions:
(a) The representations and warranties of Reinsurer contained in Article
XII of this Agreement shall be true and correct in all material
respects at and as of the Closing, as if each such representation and
warranty had been made as of the Closing.
(b) Reinsurer shall have performed and complied in all material respects
with all covenants, agreements, obligations, commitments and conditions
required by this Agreement to be performed or complied with prior to or
at the Closing.
(c) Reinsurer shall have delivered to World Service a certificate dated the
Closing Date and signed by the chairman, president or a vice president
of Reinsurer certifying to the fulfillment of the conditions specified
in this Section 13.2.
(d) Reinsurer shall have delivered to World Service at the Closing such
other documents as World Service may reasonably request.
Section 13.3. The obligations of Reinsurer to proceed with the Closing
are subject to the fulfillment (unless waived by Reinsurer in writing),
prior to or at the Closing, of each of the following conditions:
(a) The representations and warranties of World Service and Gamble
contained in Article XI and elsewhere in this Agreement shall be true
and correct in all material respects at and as of the Closing, as if
each such representation and warranty had been made as of the Closing.
(b) World Service and Gamble shall have performed and complied in all
material respects with all covenants, agreements, obligations,
commitments and conditions required by this Agreement to be performed
or complied with prior to or at the Closing.
(c) World Service and Gamble shall have delivered to Reinsurer a
certificate dated the Closing Date and signed by the president or a
vice president of World Service and by Jeffrey Mark Gamble certifying
to the fulfillment of the conditions specified in this Section 13.3.
(d) World Service and Gamble shall have delivered to Reinsurer at the
Closing such other documents as Reinsurer may reasonably request.
Section 13.4. Certain Post Closing Covenants.
(a) Gamble agrees that he shall cause World Service to send a letter to
certain of its policyholders (as hereinbelow identified) on the subject
of dividends, in form and substance like the letter attached hereto as
Exhibit 13.4. The letter shall be mailed by Reinsurer in its role as
administrator, the cost of which shall be reimbursed by Gamble in
accordance with the agreement now existing between World Service and
Reinsurer for the extra-administrative work performed by Reinsurer in
connection with the settlement agreement between World Service and the
TDI and TDB mentioned elsewhere in this Agreement. The purpose and
effect of the letter will be to advise such policyholders of the
current level of dividends, that the declaration and paymber of
dividends are in the discretion of the Company's Board of Directors
and that the declaration and payment of same are governed by the terms
of the subject policies. Such letter shall be mailed by Reinsurer
promptly following the Closing Date to funeral homes in Alabama that
are owners of Policies (excluding so-called "Prime Succcession" funeral
homes).
(b) Gamble will furnish to Reinsurer his Financial Statement consisting of
a balance sheet prepared in conformity with generally accepted
accounting principles applied on a consistent basis in sufficient
detail, including footnotes, explanations and qualifications sufficient
to cause such Financial Statement to present fairly, accurately and
completely the financial condition of Gamble as of the date of such
Financial Statement. Such Financial Statement shall be as of the end
of each calendar year, and shall be furnished to Reinsurer no later
than February 15 falling next thereafter, and shall be signed by Gamble
to certify as follows:
"I do hereby certify that the foregoing Financial Statement is
furnished to Reinsurer for the purpose of complying with our
obligation under that certain Assumption Reinsurance Agreement
dated August 1, 1997, that the information contained in the
Financial Statement is true, correct and complete in all material
respects, and does not fail to disclose any liabilities or claims
against Gamble that would have a material adverse effect on their
financial condition."
In addition to such Financial Statement, Gamble shall furnish to
Reinsurer a copy of his Individual Federal Income Tax Return as filed
with the Internal Revenue Service within ten (10) days from the date on
which same is filed. If such Return is not filed on or before April 15
of each year based on any such application for an extension of time
within which to file such Tax Return, a copy of such extension
application shall be furnished to Reinsurer within ten (10) days
following the filing of same with the Internal Revenue Service.
If the assets of Gamble include another business, corporation or
enterprise owned or controlled by Gamble which is required to file a
Federal Income Tax Return, a copy of same shall be furnished to
Reinsurer in the same manner and timetable as set forth above regarding
Gamble's Individual Tax Return.
Promptly upon Reinsurer's request therefor, Gamble shall provide
Reinsurer with such additional information regarding Gamble's financial
condition and status as Reinsurer may from time to time reasonably
request. All information furnished to Reinsurer concerning Gamble's
financial condition has been, and in respect to information furnished
hereafter, will be true, correct, complete, valid and genuine in all
respects.
(c) If Gamble furnishes a financial statement to any person or entity at
any time subsequent to the Effective Date hereof, he shall furnish a
copy of same to Reinsurer within five (5) days thereafter.
(d) In the event of a cancellation of the Policies deemed to be owned as a
"group," $45 per policy (grading down) will be paid by Gamble to
Reinsurer as an agreed-upon reimbursement of a corresponding portion of
the ceding fee. This amount shall be withdrawable from the Escrow
Fund. The $45 per policy amount will grade down by $1.00 per calendar
month, beginning with the first full calendar month following the
Effective Date hereof (but not below $20 per policy). A "group" for
purposes of this sub-section is defined as any situation in which a
single owner (such as a funeral home) owns or controls ten (10)
policies or more. A group cancellation is defined as any situation in
which the group owner cancels or surrenders, within a period of 12
months, 10% or more of the total policies owned by the owner, provided
such number is at least five (5) policies.
(e) In the event a claim is made that a refund or payment is due to a
policyowner that is larger than the cash surrender value of the subject
policy or policies because of a promise or commitment previously made
by World Service (or its predecessor or affiliate) or any of their
marketing personnel, Gamble will reimburse Reinsurer the difference
between the amount of the claim and the amount of the cash value as of
the effective date of determining such difference, the reimbursement to
be made at the time of the payment of the claim by Reinsurer. The
payment of same shall be made out of the Escrow Fund and shall be
subject to the Adjudication Rules set forth in Section 15.7.
(f) In the event a claim with supporting evidence is made that payments
have been made on a policy in excess of the amount reflected on the
records of Reinsurer (prior to May 31, 1996), Gamble shall reimburse
Reinsurer for the difference between the amount of the claim and the
amount of the payments received by Reinsurer based on the applicable
records. The payment of same shall be made out of the Escrow Fund and
shall be subject to the Adjudication Rules set forth in Section 15.7.
(g) In the event a life insurance policy is subject to being treated as
though it is an annuity based on the circumstantial evidence, Gamble
shall reimburse Reinsurer the difference between the amount claimed, or
the reserve required, as the case may be, and the cash surrender value
of the subject policy. Also, the value of the policy (the above $45
per policy, grading down as stated above in sub-section (d)) will be
payable to Reinsurer by Gamble. In other instances in which there is a
discrepancy between the amount due based on the Reinsured Policy
Obligation and the amount claimed, or based on instances in which the
records of the company or the policy data disagree with the basis of
the claim, Gamble shall reimburse Reinsurer the amount of the
difference. Such reimbursement shall be made out of the Escrow Fund
and shall be subject to the Adjudication Rules set forth in Section
15.7.
(h) In respect to the settlement agreement entered into between World
Service, Reinsurer, the TDI and the TDB, dated July 18, 1997, Gamble
will provide the funds to effect the implementation thereof and comply
in all respects with the obligations under said settlement agreement.
In addition, World Service will pay to Reinsurer for its services
pursuant to the agreement between Reinsurer and World Service to
perform the identified services (outside of the scope of its role under
the administrative services agreement or its duties as administrator of
the subject Policies following the assumption of the subject Policies).
While the parties expect that the implementation of such settlement
agreement will eliminate many of the issues that have arisen in respect
to differences between Reinsured Policy Obligations and claims by
policyholders and/or funeral homes, in the event differences not
covered by such settlement agreement arise in the future, such
differences shall be addressed as subject to reimbursement in
accordance with representations and warranties and other provisions of
this Agreement.
(i) Gamble shall pay an amount at Closing to Reinsurer that will reduce the
principle balance due on that certain mortgage loan to Kent Gamble
(Loan Number ML0218012, one of the mortgage loans transferred to
Reinsurer in connection with the Coinsurance Agreement) to $245,000.
(j) Gamble shall pay the "July" settlement amount, if any, of the
Coinsurance Agreement within 15 days following receipt of same, said
settlement being the amount required to settle accounts between
Reinsurer and World Service, which has been routinely presented on a
monthly schedule by Reinsurer to World Service, and it is expected that
the July settlement statement will not be ready by Closing Date, so
that the amount payable by World Service, if any, will not be known
until a subsequent date shortly thereafter.
Section 13.5 Rescission. If this Agreement is rescinded for any
reason, the parties shall be restored to the position they held under the
Coinsurance Agreement, except that Reinsurer shall have 100% of the
Reinsured Policy Obligations beginning on the Effective Date hereof, and the
claims that were settled and the reserves and ceding fee matters that were
transferred pursuant to Sections 4.1 and 4.2 shall not be reversed, i.e.,
such settlements and transfers shall be deemed to represent the
considerations for the increase of the reinsurance from 91.42% to 100%.
Such rescission, therefore, will have the effect of returning the
relationship between Reinsurer and World Service to a coinsurance
relationship whereby Reinsurer's portion is 100% of the Policy Obligations.
This Agreement may be rescinded by any party hereto based on fraudulent or
materially misleading conduct by another party but for which the defrauded
or misled party would not have entered into this Agreement.
Article XIV
Closing
Section 14.1. Time and Location. The closing of the transactions
contemplated by this Agreement ("Closing") shall take place at such date,
time, and location as the parties hereto shall all agree or, in the absence
of such agreement, at 2 p. m. Local Time on August 8, 1997, at the offices
of Reinsurer ("Closing Date").
Section 14.2. Deliveries by World Service. At Closing World Service
shall deliver to Reinsurer the following:
(a) an accounting in contract level detail as to the Transferred Policies,
including a detail listing of the Policies,
(b) Any premiums or other receipts, if any, received by World Service in
connection with the Transferred Policies attributable to any premiums
or other amounts due or payable on or after the Effective Date,
(c) All amounts due and payable to Reinsurer by World Service and Gamble as
of the Closing Date as provided in this Agreement, or under the
Coinsurance Agreement, and
(d) The certificate contemplated under Section 13.3(c).
Section 14.3. Deliveries by Reinsurer. At Closing Reinsurer shall
deliver to World Service and the following:
(a) The certificate contemplated under Section 13.2(c)
Section 14.4. Interest. All amounts due at Closing shall bear
interest at the rate of seven percent (7%) per annum beginning on August 1,
1997, computed to, but not including, the Closing Date, provided the
amounts, plus interest, are paid by wire transfer prior to noon on Closing
Date, but if such amounts, plus interest, are paid after noon on the Closing
Date, such interest shall be computed from August 1, 1997, to, but not
including, the first business day falling after Closing Date.
ARTICLE XV
INDEMNIFICATION
Section 15.1 Losses. As used in this Agreement, "Loss" and/or
"Losses" shall mean all claims, lawsuits, proceedings by insurance
regulatory authorities or the TDB or any other regulatory authority,
investigations, expenses, settlements, assessments, obligations, damages,
losses, deficiencies, interest, late charges, adjustments, costs, judgments,
payments, liabilities, refunds, taxes, fines and penalties, including,
without limitation, costs and expenses of litigation and reasonable
attorneys' fees, reasonable actuarial and accounting fees and reasonable
costs of investigations.
Section 15.2 Indemnity by Gamble. Gamble shall indemnify, defend and
hold harmless Reinsurer and Reinsurer's subsidiaries and affiliates
including, without limitation, its officers, directors, employees and
shareholders and those of its subsidiaries and affiliates from and against
Losses that arise out of:
(a) the non-performance of any covenants, agreements, obligations
or commitments contained in this Agreement or in any exhibit, schedule,
certificate or other document delivered pursuant hereto required to be
performed by World Service or Gamble; or
(b) the fact that any representation or warranty made by World
Service or Gamble contained in this Agreement or in any exhibit,
schedule, certificate or other document delivered pursuant hereto was
untrue as of the Closing Date (determined as if such representation or
warranty had been made as of the Closing Date).
Section 15.3 Indemnity by Reinsurer. Reinsurer shall indemnify,
defend and hold harmless Gamble from and against Losses that arise out of:
(a) the non-performance of any covenants, agreements, obligations
or commitments contained in this Agreement or in any exhibit, schedule,
certificate or other document delivered pursuant hereto required to be
performed by Reinsurer; or
(b) the fact that any representation or warranty made by
Reinsurer contained in this Agreement or in any exhibit, schedule,
certificate or other document delivered pursuant hereto was untrue as
of the Closing Date (determined as if such representation or warranty
had been made as of the Closing Date).
Section 15.4 Payment. Payment required to be made to any party
entitled to indemnification hereunder shall be made within ten days after
receipt of an invoice or claim ("claim") therefor from a party seeking
indemnification. In the event of any dispute with respect to a party's
obligation to make any such payment, the parties shall use their best
efforts to resolve such dispute as promptly as practicable. In any event,
however, that the claim made by a party entitled to indemnification
hereunder is not paid in full within said 10 day period, such party (the
"Indemnity" as hereinafter defined) shall be entitled to initiate
arbitration proceedings in accordance with the "Arbitration Agreement"
attached hereto as Exhibit 15.4 and made a part hereof. Any such payment
amount shall include interest thereon at the rate of ten percent (10%) per
annum which shall accrue beginning on the first day of the obligation that
resulted in a finding that an amount became payable, and shall continue to
accrue until paid.
Section 15.5 Notice. Any person, corporation or other legal entity
entitled to indemnification under this Agreement, as the case may be, making
a claim under this Article XV is hereinafter referred to as the "Indemnitee"
and the party against whom such claim is asserted under Article XV is
hereinafter referred to as the "Indemnitor". All claims by any Indemnitee
under this Article X shall be asserted by Indemnitee delivering or causing
to be delivered, to Indemnitor, a written notice (the "Claim Notice")
describing in reasonable detail the facts or circumstances which may result
in a claim of Loss. (Such claim of Loss is hereinafter referred to as an
"Asserted Liability.") Indemnitee shall use reasonable efforts to give the
Claim Notice not later than the earlier of:
(i) Three months after the time at which Indemnitee is notified
in writing, actually becomes aware of or otherwise obtains actual
knowledge of any action, proceeding, investigation, demand or claim
(whether actual or threatened) or any other circumstance or state of
facts which could give rise to an Asserted Liability, or
(ii) With respect to any Asserted Liability which has become the
subject of proceedings before any court or tribunal or in which
Indemnitee has been served with legal process within such time as would
allow Indemnitor to timely file responsive pleadings in such proceeding
or action.
If a claim is not given by the Indemnitee as herein provided, the
Indemnitee shall be entitled to indemnification hereunder (i) if the
Indemnitee can establish that the time elapsed between the time the Claims
Notice should have been given pursuant to this Agreement and the actual
giving of the Claims Notice is reasonable under all the circumstances, (ii)
to the extent that the Indemnitee can establish that the Indemnitor has not
been prejudiced by such time elapsed or (iii) if the Indemnitee can
establish that the Indemnitor received actual notice of such Asserted
Liability from a party other than the Indemnitee within the time periods
specified in this Agreement or that the receipt of such notice satisfies the
requirements of either clause (i) or (ii) of this paragraph.
Section 15.6 Defense of Claims.
(a) Subject to the limitations hereinafter set forth, Indemnitor
shall have the right to control the contest of any Asserted Liability
and shall defend, at its own expense and by its own counsel, any
Asserted Liability. If Indemnitor does not notify Indemnitee in
writing within sixty days after receipt of the Claim Notice, or within
the time period prior to the date on which responsive pleadings must be
filed, whichever is less, that it elects to undertake the defense
thereof, Indemnitee shall have the right to defend the Asserted
Liability with counsel of its choosing reasonably satisfactory to
Indemnitor. Even in the event that Indemnitor does not notify
Indemnitee that it elects to undertake the defense of an Asserted
Liability within the applicable time periods set forth in this
Agreement, Indemnitor shall have the right to assume the defense of
such Asserted Liability, and to select counsel reasonably satisfactory
to Indemnitee, at any time prior to settlement or final determination
thereof; provided, however, that in such event Indemnitor shall be
responsible for and shall pay (or reimburse Indemnitee for) the fees
and expenses of counsel employed by Indemnitee prior to Indemnitor's
assumption of the defense of any such Asserted Liability.
(b) In the event that Indemnitor commences or thereafter assumes
the defense of any Asserted Liability as provided in this Agreement,
Indemnitee shall have the right to employ separate counsel with respect
to such claim and to participate in the defense thereof, provided that
the fees and expenses of counsel employed by Indemnitee shall be at the
expense of Indemnitee unless the employment of such counsel has been
specifically authorized in writing by Indemnitor.
Section 15.7 Escrowed Funds. An escrow fund in the initial amount of
ONE HUNDRED THOUSAND DOLLARS ($100,000) ("Escrow Fund") will be established
by the payment by Gamble to Reinsurer at Closing to cover on-going
differences between Reinsured Policy Obligations and other liabilities or
claims asserted or threatened against Reinsurer which Reinsurer elects to
pay out of the escrow fund. The "Adjudication Rules" applicable to claims
payable out of the Escrow Fund shall be as follows. Prior to paying same,
Reinsurer shall provide written notice to Gamble (or their designated agent)
in effect requesting approval to make the payment and setting a time limit
for receipt of approval or disapproval in writing from such agent, the time
limit to be not less than twenty-four hours but longer if the circumstances
permit (not to exceed three business days). If said agent approves the
making of the payment, or fails to respond as aforesaid within said time
limit, Reinsurer shall make the payment in accordance with said request. If
said agent disapproves the making of such payment, Gamble shall be liable
for all consequences resulting therefrom, and shall indemnify, defend and
hold harmless Reinsurer against all "Losses" as a result thereof as defined
and set forth in Article XV hereof. If Reinsurer elects to make such
payment notwithstanding disapproval as aforesaid, Reinsurer shall provide
prompt notice thereof to Gamble, in which case Gamble may protest the
payment of same out of the Escrow Fund by giving notice pursuant to the
Arbitration Agreement, thereby initiating an arbitration proceeding
regarding such matter. In respect to the arbitration of such matter, the
Arbitrating Panel shall presume that Reinsurer's payment was justified and
should have been made, and give weight to the practical need to make
payments when the amount in controversy is relatively low, compared to the
costs and risks of engaging in a contested claim process with the claimant,
and Gamble shall have the burden of proof before the Arbitrating Panel. The
amount in the Escrow Fund shall be replenished by Gamble within ten days
following notice from Reinsurer that it has fallen below the "minimum"
amount. The minimum amount shall be the initial $100,000, declining $1,000
per month, except that it shall not decline below $50,000. The fund shall
be entrusted to Reinsurer, in trust, to hold for Gamble as the owner
thereof, pursuant to this Agreement, and Gamble shall be credited with the
interest income earned thereon. Said Escrow Fund shall be maintained in a
money market account selected by Reinsurer. The balance remaining in the
Escrow Fund shall be returned to Gamble upon the expiration of a thirty-six-
month period when there has been no claim made that is the subject of
reimbursement from the Escrow Fund as provided herein. The fact that a
claim is paid or settled out of the Escrow Fund shall not relieve Gamble
from its duty to indemnify, defend and hold harmless Reinsurer as provided
in this Agreement to the extent of any "Loss" (as defined in this Article
XV) in excess of the amount paid from the Escrow Fund.
Section 15.8 Cooperation. After the Closing Date, Reinsurer, World
Service and Gamble shall each cooperate fully with the other (including,
without limitation, affording the other an opportunity to participate in the
defense) as to all Asserted Liabilities, shall make available to the other
as reasonably requested all information, records and documents relating
thereto and shall preserve all such information, records and documents until
the termination of any claim. Reinsurer, World Service and Gamble shall
each also make available to the other, as reasonably requested, its
personnel, agents and other representatives who are responsible for
preparing or maintaining information, records or other documents, or who may
have particular knowledge with respect to any such Asserted Liability.
Section 15.9 No Insurance. The indemnifications provided in this
Agreement shall not be construed as a form of insurance and shall be binding
upon and inure to the benefit of Reinsurer, and Gamble; and the
indemnification provisions shall apply with full force and effect
notwithstanding the fact the Indemnitee has insurance covering all or a
portion of the Losses.
Section 15.10 Reinsurer Not Indemnitor of World Service. It is
expressly agreed that Reinsurer has no duty to indemnify, defend or hold
harmless World Service or any of its subsidiaries, affiliates, shareholders,
officers, directors, agents or employees (except Gamble, and then only as
expressly provided in this Agreement).
Section 15.11 World Service Not Indemnitor of Reinsurer. It is
expressly agreed that World Service has no duty to indemnify, defend or hold
harmless Reinsurer or any of its subsidiaries, affiliates, shareholders,
officers, directors, agents or employees.
ARTICLE XVI
SURVIVAL OF OBLIGATIONS
Unless otherwise specifically set forth in this Agreement or in any of
the exhibits, schedules, certificates or other agreements delivered pursuant
hereto, all covenants, representations and warranties and other obligations
of the parties hereto as expressed in this Agreement shall survive
indefinitely). Any obligation resulting from or arising out of the non-
performance of any such covenant, agreement, obligation or commitment or of
any representation or warranty being untrue as of the Closing Date as to
which a written notice of possible Loss shall have been given to the
indemnifying party in accordance with the requirements of Article XV hereof
shall survive, as to matters identified with particularity in such notice,
until the resolution of the matters referred to therein. Unless otherwise
specifically set forth herein or in any of the exhibits, schedules,
certificates or other agreements delivered pursuant hereto, in case of any
representation or warranty being untrue as of the Closing Date or any non-
performance of any covenant, agreement, obligation or commitment contained
in this Agreement, or in any exhibit, schedule, certificate or other
agreement delivered pursuant hereto, the exclusive remedy therefor shall be
indemnification pursuant to Article X hereof, except to the extent the
remedy of specific performance may be available under applicable equitable
principles.
Article XVII
Miscellaneous Provisions
Section 17.1. Solicitation of Other Offers. Prior to the earlier of
(i) the termination of this Agreement as herein provided and (ii) the
Closing, World Service may not solicit or receive and may not consider other
offers to purchase all or any portion of the Transferred Policies.
Section 17.2. Publicity. Except as may otherwise be required by law,
no news release, statement, announcement or other public disclosure of or
concerning this Agreement or the transactions contemplated hereby shall be
made by either World Service or Reinsurer without obtaining the written
approval thereof by the other party hereto in advance. World Service and
Reinsurer will cooperate in the development and distribution of any and all
news releases, statements, announcements and other public disclosures of or
concerning this Agreement or the transactions contemplated hereby.
Section 17.3. Access and Confidentiality. During the period between
the termination of this Agreement as herein provided and the Closing,
Reinsurer's designated representatives, accountants, attorneys and agents
shall have and be afforded reasonable access during normal business hours
to any and all documents, instruments, agreements and other books, records
and properties of World Service constituting a part of, evidencing or
otherwise relating in any way to the Transferred Policies. All information
obtained by Reinsurer during the course of its investigation and review of
the Transferred Policies, except for information generally available to the
public other than as a result of a disclosure by World Service or its
representatives or otherwise available to Reinsurer or its representatives
on a non-confidential basis (the "Confidential Information"), will be
treated by Reinsurer as confidential and will not be disclosed by Reinsurer
to any third party without the prior written consent of the World Service;
provided, however, that all or any portion of the Confidential Information
may be disclosed by Reinsurer or its designated representatives,
accountants, attorneys and agents (i) to the extent required by applicable
law or legal process or (ii) to any third party associated with Reinsurer
including, but not limited to, any prospective source of financing, who
needs to know the Confidential Information in order to evaluate the
transactions contemplated hereby or assist Reinsurer in conducting any such
evaluation. Reinsurer will inform its designated representatives,
accountants, attorneys and agents of the confidential nature of the
Confidential Information and will direct all of such persons to treat the
Confidential Information as confidential.
Section 17.4. Certain Coinsurance Arrangements. With respect to each
state or other jurisdiction in which Reinsurer is not licensed and where
licensing would be required in order for Reinsurer to assume and service the
Transferred Policies in such state or other jurisdiction as contemplated
herein ("non-licensed state"), World Service will retain such policies and
Reinsurer and Reinsurer's share shall increase, effective on the Closing
Date, to one hundred percent (100%) of such risks as provided herein.
Reinsurer will be responsible for performing all administrative tasks
associated with servicing, conserving and maintaining the Policies subject
to the coinsurance agreement in accordance with the Administrative Service
Agreement presently existing between Reinsurer and World Service. Once
Reinsurer has obtained the appropriate license in such non-licensed state
Reinsurer shall assume the subject policies within such state.
Section 17.5. From and after the Effective Date, neither World Service
nor Gamble shall make, or authorize or participate in any way in the making
of, any communications with the holders or beneficiaries of the Transferred
Policies. Any communications that World Service or Gamble desires or needs
to make shall be done by Reinsurer and, subject to Reinsurer's approval,
inquiries or other communications received by World Service or Gamble shall
be promptly referred to Reinsurer for handling. Neither World Service nor
Gamble shall participate in or facilitate in any way any effort on the part
of any person or entity to replace or "re-write" any of the Transferred
Policies.
Section 17.6. Amendment. This Agreement may be amended only by a
written instrument executed by all of the parties hereto. No oral
agreement, efforts to negotiate an agreement, or oral agreement to make an
agreement, shall be binding on any party unless and until the same is
reduced to writing and signed by the parties hereto, and duly delivered as
an executed amendment hereto, and no party shall be entitled to rely on any
promises or discussions to the contrary.
Section 17.7. Assignment. No party may assign this Agreement or any
of its rights, interests, or obligations hereunder without the prior written
consent of the other party, if the assignment is to an entity other than an
affiliate of Reinsurer.
Section 17.8. Broker Fees. Each party hereby represents and warrants
that it has not taken any action that would impose on any other party hereto
liability for payment of any broker, finder, or similar fee in connection
with the origin, negotiation, execution, or performance of this Agreement.
Section 17.9. Counterparts. This Agreement may be executed in
separate counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
Section 17.10. Entire Agreement. This Agreement constitutes the
entire understanding of the parties pertaining to the subject matter
contained in this Agreement and supersedes all prior and contemporaneous
oral and written agreements, representations, and understandings of the
parties. The parties specifically agree that if there are any oral or
written agreements, commitments or understandings which are not incorporated
in this Agreement or documents expressly contemplated by this Agreement, the
same are expressly waived.
Section 17.11. Exhibits and Schedules. All exhibits and schedules
attached to and referenced in this Agreement are hereby incorporated by
reference into this Agreement as if they were set forth at length in the
text of this Agreement.
Section 17.12. Expenses. Each party shall pay all of its own costs,
fees, and expenses incurred or to be incurred in negotiating and preparing
this Agreement and in closing and carrying out the transactions contemplated
by this Agreement.
Section 17.13. Governing Law and Venue. This Agreement is
performable in Harris County, Texas, which shall be a proper place of venue
for suit on or in respect to this Agreement. World Service and Gamble
irrevocably agree that any legal proceeding in respect to this Agreement
shall be brought in the district courts of Harris County, Texas, or the
United States District Court for the Southern District of Texas, Houston
Division (collectively the "Specified Courts"). World Service and Gamble
irrevocably submit to the nonexclusive jurisdiction of the state and federal
courts of the State of Texas. World Service and Gamble hereby WAIVE, to the
fullest extent permitted by law, any objection which they, or any one of
them, may now or hereafter have to the laying of venue of any suit, action
or proceeding arising out of or relating to this Agreement or any related
document brought in any Specified Court, and hereby further irrevocably
WAIVE any claims that any such suit, action or proceeding brought in any
such court has been brought in an inconvenient forum. World Service and
Gamble further irrevocably consent to the service of process out of any of
the Specified Courts in any such suit, action or proceeding by the mailing
of copies thereof by certified mail, return receipt requested, postage
prepaid, to World Service and Gamble, or any one of them, as the case may
be, at their respective addresses as provided in this Agreement or as
otherwise provided by Texas law. Nothing herein shall affect the right of
Reinsurer to commence legal proceedings or otherwise proceed against World
Service, Gamble, or any one of them, in any jurisdiction or to serve process
in any manner permitted by applicable law. World Service and Gamble agree
that a final judgment in any such action or proceeding shall be conclusive
and may be enforced in other jurisdictions by suit on the judgment or in any
other manner provided by law. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE APPLICABLE LAWS OF THE STATE OF TEXAS AND
THE UNITED STATES OF AMERICA FROM TIME TO TIME IN EFFECT.
Section 17.14 Attorney's Fees. In the event any party hereto incurs
any legal, accounting, actuarial, or investigatory fees or costs, or costs
of judicial proceedings, for the purpose of, or in connection with,
enforcing or defending its rights under this Agreement that are not
reimbursed as part of the "Loss" as provided in Article XV, then the
prevailing party in such legal contest shall be entitled to reimbursement
for same to the extent that such fees or costs are reasonable and
attributable solely to such enforcement or defense activities.
Section 17.15. Headings. The captions and headings of this Agreement
are included for purposes of convenient reference only and shall not affect
the construction or interpretation of this Agreement.
Section 17.16. Rights Cumulative; Delay Not a Waiver. Reinsurer's
exercise of any right, benefit or privilege under this Agreement or any of
the documents or any other papers related to this Agreement or at law or in
equity shall not preclude the concurrent or subsequent exercise of any of
Reinsurer's other present or future rights, benefits or privileges. The
remedies provide in this Agreement are cumulative and not exclusive of any
remedies provided by law, this Agreement or any other documents of papers
related to the Agreement. No failure by Reinsurer to exercise, and no delay
in exercising, any right under this Agreement or any document or any other
papers related to this Agreement shall operate as a waiver thereof.
Section 17.17. Severability. If any provision of this Agreement is
held to be illegal, invalid or unenforceable under present or future laws,
the legality, validity and enforceability of the remaining provisions of
this Agreement shall not be affected thereby, and this Agreement shall be
liberally construed so as to carry out the intent of the parties to it.
Each waiver in this Agreement is subject to the overriding and controlling
rule that it shall be effective only if and to the extent that (a) it is not
prohibited by applicable law and (b) applicable law neither provides for nor
allows any material sanctions to be imposed against Reinsurer for having
bargained for and obtained it.
Section 17.18. Notices. Any notices made pursuant to this Agreement
shall be in writing and shall be deemed to have been duly given on the date
of delivery if delivered personally (including overnight delivery service)
or by facsimile transmission to the party to whom notice is given, or on the
third day after mailing if mailed to the party to whom notice is to be given
by certified mail, return receipt requested, and properly addressed as
follows:
(a) World Service Life Insurance Company of America
Attn: Mr. Jack G. Heffington
Vice Chairman/General Counsel
300 South Jefferson Street
Winchester, TN 37398
FAX: (615) 962-4926
(b) Reinsurer:
American Capitol Insurance Company
Attn: Mr. William F. Guest, Chairman
10555 Richmond Avenue
Houston, Texas 77042
FAX: (713) 953-7920
(c) Jeffrey Mark Gamble
300 South Jefferson Street
Winchester, TN 37398
FAX: (615) 962-4926
Any party to this Agreement may change the address to which notice is to be
delivered under this Section 17.18 by delivering written notice to that
effect to the other party in accordance with this section. Any document
delivered via facsimile transmission shall be treated as though it is an
original for all purposes.
Section 17.19. Severability. If any part of this Agreement is
contrary to, prohibited by, or deemed invalid under applicable law or
regulations, that provision shall not apply and shall be omitted to the
extent so contrary, prohibited, or invalid; but the remainder of this
Agreement shall not be invalidated and shall be given full force and effect
insofar as possible.
Section 17.20. Successors. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors
and permitted assigns.
Section 17.21. Third Party Beneficiaries. Except as to the holders of
the Policies, nothing in this Agreement, whether express or implied, is
intended to confer any rights or remedies under or by reason of this
Agreement on any persons other than the parties to it and their respective
successors and permitted assigns. In addition, nothing in this Agreement is
intended to relieve or discharge the obligation or liability of any third
person to any party to this Agreement or give any third person any right of
subrogation or action against any party to this Agreement.
Section 17.22. Waiver of Compliance. The party for whose benefit a
warranty, representation, covenant, or condition is intended may in writing
waive any inaccuracies in the warranties and representations contained in
the Agreement or waive compliance with any of the covenants or conditions
contained herein and so waive performance of any of the obligations of the
other party and any defaults under this Agreement. A waiver shall not
affect or impair, however, the waiving party's rights with respect to any
other warranty, representation, or covenant or any default hereunder not
specifically waived, nor shall any waiver constitute a continuing waiver.
IN WITNESS WHEREOF, the parties have caused their duly authorized
representatives to execute this Agreement on the date above note.
WORLD SERVICE LIFE INSURANCE COMPANY OF AMERICA
By:/s/Jack G. Heffington
-------------------------------
Jack G. Heffington
Vice-Chairman/General Counsel
AMERICAN CAPITOL INSURANCE COMPANY
By:/s/William F. Guest
------------------------------
William F. Guest, Chairman
JEFFREY MARK GAMBLE
By:/s/Jeffrey Mark Gamble
------------------------------
Jeffrey Mark Gamble
COINSURANCE AGREEMENT
This Coinsurance Agreement ("Agreement") is made and entered into by
Universal Life Insurance Company ("Universal" or the "Company") and American
Capitol Insurance Company ("Reinsurer").
Recitals
A. Universal is a Tennessee domiciled stock life insurance company.
B. As of the Effective Date of this Agreement, Universal has in effect
"Policies" as hereinafter defined.
C. Reinsurer is a Texas domiciled stock life insurance company.
D. In accordance with the terms and conditions as set forth in this
Agreement, Universal desires that Reinsurer reinsure the future
liabilities arising under the Policies and Reinsurer desires to
reinsure such future liabilities arising under the Policies as more
specifically set forth in this Agreement, and that Reinsurer perform
policy and data processing administrative services in respect to the
Policies as herein provided.
Terms and Conditions
In consideration of the mutual benefits to be received by the parties
hereto and the mutual covenants, agreements, representations and warranties
contained herein, the parties agree that the recitals set forth above and
elsewhere in this Agreement are correct in all material respects, and
further agree to the following terms and conditions:
Article I
Definitions
Section 1.1. The following terms used in this Agreement with initial
capitalization shall have the meanings set forth below unless the rules of
grammar or form would require otherwise:
(a) The term "Actuarial Appraisal" means the revised version of the
actuarial appraisal prepared by FMSI Actuarial Concepts & Systems
("FMSI") of the Polices in force in Universal as of December 31, 1996,
prepared as of September 30, 1997, and delivered to Reinsurer on
December 16, 1997, such revision having been performed by FMSI and such
revised version delivered to Reinsurer via facsimile on February 5,
1998.
(b) The term "Adjusting Transfer Amount" has the meaning set forth in
Section 4.3.
(c) The term "Administrative Services Agreement" has the meaning set forth
in Section 2.2.
(d) The term "Assumption Reinsurance Event" means the mailing of assumption
certificates following the election by Universal or Reinsurer to
convert the Policies to Assumption Reinsurance, or following the
dissolution of Universal, which would cause an automatic conversion of
the Policies to Assumption Reinsurance.
(e) The term "Closing" has the meaning set forth in Section 13.1.
(f) The term "Ceding Fee" has the meaning set forth in Section 4.2.
(g) The term "Closing Date" has the meaning set forth in Section 13.2.
(h) The term "Closing Net Transfer Amount" has the meaning set forth in
Section 4.1.
(i) The term "Commission Allowance" has the meaning set forth in Section
3.4.
(j) The terms "Defense" or "Defenses" means any (i) known or unknown,
actual or contingent, rights, defenses, offsets, counterclaims, and
cross-actions, and (ii) any and all rights, limitations, terms,
conditions, and provisions provided for in this Agreement relative to
the Policies.
(k) The term "Documents and Records" means all of the files, books and
records, in paper and/or electronic data format, required for, and
customarily used by, Universal in maintaining, recording and reporting
the information and transactions pertaining to the Policies such that
the Policies can be reasonably and accurately administered and
serviced; and also includes all of Universal's data processing
equipment, hardware and related implements, as well as all related
operating and processing software, within Universal's possession or
control, used for the purpose of administering and servicing the
Policies, as more fully set forth (as to the data processing hardware
and software) in Section 12.4.
(l) The term "Effective Date" means January 1, 1998.
(m) The terms "Net Transfer Amount" means the amount of assets to be
transferred to Reinsurer from Universal as set forth in Section 4.1.
(n) The terms "Policies," "Policy" and "Home Service Policies" shall have
the following meanings. "Policies" shall mean all of Universal's
individual life insurance policies in force with issue dates on or
before December 31, 1997, which shall be included in the list of such
policies provided to Reinsurer pursuant to Section 13.2 (a) below, and
which individually shall be referred to as "Policy." Such policies
include life insurance policies of the type often referred to as
"ordinary" policies as well as the type often referred to as
"industrial" policies. In addition to the above, the terms "Policies"
or "Policy" include policies that are not currently paying premiums but
which have not lapsed because they have non-forfeiture values (known as
"paid-up" polices). The Company also has other types of insurance in
force not included in this definition of "Policies" or "Policy" (for
instance, life insurance policies issued on a "group" basis and
accident and health type policies) and are therefore not a part of the
subject coinsurance. Premium notices are mailed to all policyholders
(to provide to them the opportunity to pay their premiums by mail),
such that the ones who do not respond by mail are called on by Company
agents for the purpose of premium collection. Such policies are
referred to herein as "Home Service Policies.") The Company has been
engaged in converting the Home Service Polices to the mode of paying
premiums by mail instead of having the premiums collected by Company
agents, and intends to finalize this conversion in 1998.
(o) The term "Policy Assets" has the meaning set forth in Section 10.5.
(p) The term "Policy Obligations" means benefits under and by virtue of the
terms of the Policies that arise and become payable on account of a
death or other event covered by the terms of the Policies occurring on
or after the Effective Date, and as further defined in Section 2.2.
(q) The terms "Reserves" and "IBNR Claims Reserves" have the meaning set
forth in Section 10.5.
Article II
Reinsurance of Policy Obligations
Section 2.1. Ceding. Subject to the terms and conditions of this
Agreement, the Company hereby cedes to Reinsurer and Reinsurer hereby
reinsures one hundred percent (100%) of the Policy Obligations. Except for
the Policy Obligations, the Company shall continue to have all liabilities
not specifically reinsured by the Reinsurer hereunder, including any
liabilities relating to any agreements or commitments issued in connection
with the Policies which are not recognized or reserved for on the books of
the Company, or arising out of the marketing, servicing or other
relationships between the Company and any person, agent or entity, and the
Company shall indemnify the Reinsurer and hold the Reinsurer harmless from
all liabilities and costs incurred by the Reinsurer in respect to claims or
litigation involving any such liabilities not specifically reinsured by the
Reinsurer hereunder, as more fully set forth in Article XIV below.
Section 2.2. Standard of Performance; Liability. Concurrently with
the Effective Date of this Agreement, Reinsurer and Universal have entered
into an "Administrative Services Agreement," a copy of which is incorporated
herein by reference thereto ("Administrative Services Agreement"). As,
when, and to the extent set forth in the Administrative Services Agreement,
Reinsurer shall be liable for and shall defend at its own expense, actions
on account of any actions, inactions, errors, or omissions of Reinsurer.
Reinsurer shall not be liable for any claims or Policy benefits that arise
or become payable by virtue of a death or other event occurring before the
Effective Date. Reinsurer shall not be liable for any actions, inactions,
errors, or omissions made by Universal and/or any of its respective
employees, agents, and representatives in the solicitation, sale, servicing,
renewal, or processing of any claim under the Policies or in communications
with insureds, beneficiaries, or any other third party with respect to the
Policies or on account of any event or fact occurring prior to the Effective
Date. In addition, as, when, and to the extent set forth in the
Administrative Services Agreement, Reinsurer shall handle and pay the claims
in its ordinary course of business that were incurred prior to the Effective
Date but reported to Reinsurer or Company on or after the Effective Date,
such payments to be made out of and to the extent of the IBNR Claim Reserve
Fund transferred to Reinsurer pursuant to Section 10.5 below.
Section 2.3. Duration of Risk. Except as otherwise provided herein,
this Agreement shall be unlimited in duration.
Section 2.4. Reinsurer's Liability. The Reinsurer's liability in
respect to the Policy Obligations will begin simultaneously with the
Company's liability, but not prior to the Effective Date of this Agreement.
The Reinsurer's liability in respect to the Policy Obligations will
terminate simultaneously with the Company's liability, except as otherwise
provided herein.
Article III
ADMINISTRATION
Section 3.1. Administration. The Reinsurer shall perform the policy
administration and data processing services for the Policies in accordance
with the Administrative Services Agreement completed, executed and delivered
by the Parties prior to Closing, which agreement is incorporated herein by
reference thereto for all purposes.
Section 3.2. Policy Loans. The Reinsurer shall be entitled to all
interest earned, on an incurred basis, on any of the outstanding policy
loans on the Policies.
Section 3.3. Premiums. The Reinsurer shall be entitled to all
premiums collected on the Policies with a due date on and following the
Effective Date of this Agreement, including any premiums paid in advance to
the Company, which shall be delivered by the Company to Reinsurer at
Closing. The Company, in its capacity as administrator of the Policies
during the "Transition Period" as provided in the Administrative Services
Agreement, shall receive and administer premiums and other payments with
respect to the Polices received by the Company, shall pay all Policy
Obligations, and shall account for any and all such collected premiums and
other payments as of the end of each calendar month. Universal shall
promptly deliver to Reinsurer all premiums and other payments related to the
Policies received by Universal which become due on or after the Effective
Date, whether received before or after Closing.
Section 3.4. Commission Allowance. Reinsurer shall pay Universal a
commission allowance equal to the following: a commission allowance on
first year premiums at the rate of 35% on Plan OG2 (5 Pay Life), 40% on Plan
OG3 (10 Pay Life), 45% on Plan OG4 (15 Pay Life), 50% on Plans 801 (Whole
Life), 810 (Whole Life), 821 (10 Year Term) and OG5 (20 Pay Life), 55% on
Plan OG1 (Whole Life), and 60% on Plan 820 (Whole Life); a commission
allowance on renewal premiums for new ordinary business (1997 issues) at the
rate of 7% of premiums for policy years 2 through 10 and 3% of premiums
thereafter; and a commission allowance on renewal premiums for ordinary and
industrial (pre-1997 issues) at the rate of 10% of premiums for policy years
2 and 3, 4% of premiums for policy year 4, 3% of premiums for policy years 5
through 15 inclusive, 2% of premiums for policy years 16 through 20
inclusive and 0% thereafter ("Commission Allowance"). Except for the
Commission Allowance payable to the Company as aforesaid, Reinsurer shall
not be liable for any liabilities, losses, or expenses arising from claims
of agents, brokers or other parties for commissions, service fees, or
producer compensation, and Universal shall indemnify and hold Reinsurer
harmless from any liabilities, losses, or expenses from claims of agents,
brokers or other parties for such commissions, service fees, or producer
compensation, and for any other claims of a similar or related nature, as
more fully set forth in Article XIV below.
Section 3.5. Premium Taxes and Premium Assessments. Reinsurer shall
be liable for any and all assessments and premium taxes based upon and
measured by the amount of premium income attributable to the Policies in
respect to such premiums due on and following the Effective Date and
received by Reinsurer that become payable on account of such Policies by any
state, county, parish, or municipal authority.
Section 3.6. Income Tax. The Company and the Reinsurer shall each be
separately and solely liable for its respective Federal Income Tax
liabilities, including any "DAC" taxable income that may be incurred by the
reinsurance of the Policies by the Reinsurer.
Section 3.7. Payment of Benefits. Reinsurer shall be liable for any
and all claims and other Policy benefits falling within the scope of the
Policy Obligations that become due and payable on and following the
Effective Date, and for any and all claims based on Reinsurer's role as
administrator pursuant to the Administrative Service Agreement. Except as
otherwise provided in this Agreement, the Reinsurer, as administrator
governed by the provisions of the Administrative Services Agreement, shall
service and pay, on behalf of the Company, all such claims and other Policy
benefits falling within the scope of the Policy Obligations directly to the
policyholders or other designated beneficiaries of the Policies in the
ordinary course of business in accordance with the terms and conditions of
such Policies, other applicable documentation (if any) and applicable law.
In the event of any claim that falls outside of the scope of the Policy
Obligations, or exceeds the benefits provided by such Policies, and/or if
such claim is attributable to the Company in any way, the Reinsurer shall
seek instructions from the Company and shall respond to and pay or refuse to
pay, as the case may be, such claim in compliance with such instructions, in
which case the Reinsurer's liability in respect to such claim shall be
limited to the amount payable that falls within (a) the scope of the Policy
Obligations, if any, and/or (b) is attributable to Reinsurer as
administrator as aforesaid (apart from its obligations in respect to the
Policy Obligations), if any. The failure on the part of the Company to
issue instructions, or a delay by the Company in issuing instructions which
are requested, shall be deemed to be instructions to refuse to pay such
claim unless and until the receipt by the Reinsurer of instructions to the
contrary. Instructions shall be deemed not to be issued unless and until
the same are received by the Reinsurer in writing. The Reinsurer shall
maintain records of the servicing of claims such that the Company will be
able to conduct an audit of such servicing as herein provided.
Section 3.8. Payment of Policy Claims. Except as provided in Section
3.7 of this Agreement, Reinsurer shall pay claims or other benefits on the
Policies reinsured hereunder without seeking instructions from the Company.
Section 3.9. Dividends to Policyholders. All of the Policies are
non-participating Policies, meaning that dividends are not payable thereon.
If there is any exception, the Company shall have sole discretion and
control regarding the declaration and payment of dividends to the holders of
the Policies during any and all calendar months for which this Agreement is
in effect. The Company shall be solely responsible for funding the payment
of any such dividends. The Reinsurer shall not be liable in respect to any
claim against the Reinsurer relating to the declaration or payment of any
dividend (whether declared and/or paid before, on or after the Effective
Date), or the failure to declare or pay any dividend, and the Company shall
indemnify and hold the Reinsurer harmless in respect to any such claim, as
more fully set forth in Article XIV.
Section 3.10. Contested Claims. In the event of a claim involving
any matter other than (a) a Policy Obligation and/or (b) Reinsurer's role as
administrator pursuant to the Administrative Services Agreement resulting in
a dispute, compromise, or litigation ("contest"), the Reinsurer and the
Company will share, in proportion to the ultimately determined respective
liabilities, the costs of the contest in addition to the amount of the claim
itself, or the Reinsurer may elect (as herein provided) not to participate.
The management of such contest shall be the sole responsibility of
Reinsurer; provided, however, that the Company, at its election and expense,
shall have the right to be present and/or represented in any all proceedings
related thereto. Notwithstanding the foregoing, if Reinsurer elects not to
participate in such contest, and if the subject claim is not based on
Reinsurer's role as administrator pursuant to the Administrative Services
Agreement, Reinsurer may discharge its liability by agreeing to pay to the
Company the full amount of the Policy Obligation liability on the subject
Policy, in which case all aspects (including costs, assessments, judgments,
etc.) of the contest incurred after such payment is made by the Reinsurer
shall be the sole responsibility of the Company.
Article IV
Transfer of Assets and Ceding Fee
Section 4.1. Transfer of Assets. The Company shall transfer to
Reinsurer an amount of assets equal to the Reserves as of December 31, 1997,
as defined in Section 10.5, less the "Ceding Fee" (defined below), as
determined in Section 4.3 (the "Net Transfer Amount"). The composition of
the assets so transferred shall include the Policy Assets as of December 31,
1997. However, since the Reserves and Policy Assets as of December 31,
1997, will not be determined prior to the Closing Date, the parties agree
that, to effect the Closing, the Company shall transfer to Reinsurer at
Closing an amount equal to the "Closing Net Transfer Amount" (defined in the
next sentence). The "Closing Net Transfer Amount" shall be the amount shown
on Schedule 4.1 attached hereto, using estimated Reserves and Policy Assets.
There shall be a "Post-Closing Adjustment" as set forth in Section 4.3, such
that the Closing Net Transfer Amount shall be adjusted to equal the Net
Transfer Amount.
Section 4.2. Ceding Fee. The "Ceding Fee" shall be the amount set
forth as the Ceding Fee in Schedule 4.1, which Ceding Fee is subject to the
return of the amount of $250,000 to Reinsurer if the Company does not
transfer the data processing equipment and hardware by the Company to
Reinsurer as set forth in Section 12.4. The assets comprising the Closing
Net Transfer Amount to be delivered by the Company to Reinsurer are set
forth in Schedule 4.1.
Section 4.3. Post-Closing Adjustment. Immediately following the
completion and filing by the Company of its regular Annual Statement with
the Tennessee Insurance Division as set forth below, there shall be a "Post-
Closing Adjustment" whereby the amounts of the Reserves and Policy Assets
that were estimated and used to effect the Closing will be replaced by the
actual amounts of the Reserves and Policy Assets as of December 31, 1997,
such that the Net Transfer Amount shall be recalculated, using the format of
Schedule 4.3 attached hereto. The December 31, 1997, Reserves and Policy
Assets shall be determined as set forth in Section 10.5. Using the format
of Schedule 4.3, the parties shall calculate the amount that should have
been transferred at Closing if the amount of the Reserves and Policy Assets
as of December 31, 1997, had been known at Closing. If the Net Transfer
Amount is more than the Closing Net Transfer Amount, the Company shall
transfer additional assets to Reinsurer equal in amount to such differential
("Adjusting Transfer Amount"), together with interest on the Adjusting
Transfer Amount (at the rate of the 6.2% per annum) from the Effective Date
to the "Post-Closing Adjustment Date" (as hereinafter defined). If the Net
Transfer Amount is less than the Closing Net Transfer Amount, Reinsurer
shall transfer assets to the Company equal in amount to such differential
("Adjusting Transfer Amount"), together with interest on the Adjusting
Transfer Amount (at the rate of the 6.2% per annum) from the Effective Date
to the "Post-Closing Adjustment Date" (as hereinafter defined). The assets
comprising such Adjusting Transfer Amount shall consist of (i) bonds having
an NAIC designation of 1, (ii) accrued investment income attributable to
said bonds, (iii) Policy Assets attributable to the Policies (that is, an
adjustment, up or down, of such Policy Assets to bring the Policy Assets
component of the Closing Transfer Amount in line with the actual Policy
Assets attributable to the Policies at December 31, 1997,) and/or cash. The
purpose of this Section 4.3 is that the Post-Closing Adjustment shall put
the parties in the respective positions they would have been in if the
Closing had used the Reserves and Policy Assets determined as of December
31, 1997, instead of the amounts that were used to accommodate an earlier
Closing. The Post-Closing Adjustment shall take place on the first business
day falling next after the expiration of ten (10) days following the date on
which the Company files its 1997 Annual Statement with the Tennessee
Insurance Division, referred to herein as the "Post-Closing Adjustment
Closing Date." The Adjusting Transfer Amount shall bear interest at the
rate of 10% per annum, compounded annually, beginning on the Post-Closing
Adjustment Closing Date until paid.
Section 4.4. Conversion of Coinsurance of the Policies to
Assumption Reinsurance. By this Agreement the type of reinsurance in place
means that the Policies remain in the name of the Company and the Policy
Obligations are transferred to Reinsurer (typically referred to as
"coinsurance"). Upon the occurrence of an Assumption Reinsurance Event,
Reinsurer shall assume the Policies in effect on the effective date thereof
(the "Assumption Effective Date") by mailing to holders of such Policies an
assumption certificate as set forth in this Section 4.4 whereby the affected
Policies will be transferred to, and assumed directly by, the Reinsurer
(referred to herein as the "assumption" of the Policies in force on the
Assumption Effective Date, or "assumption reinsurance"). Whether the
reinsurance is of the coinsurance type or the assumption reinsurance type, the
administration of the Policies in the case of the subject transaction is to be
performed by Reinsurer as set forth in the Administrative Services Agreement.
The election by the Company, at its sole discretion, or the election by
Reinsurer, at its sole discretion, to convert the coinsurance to assumption
reinsurance shall be subject to the fulfillment of the following conditions:
(a) such assumption of the Policies shall comprise all of the Policies in
force as of the Assumption Effective Date; (b) the party electing to have
the conversion effected shall give written notice to to the other party not
less thirty (30) days in advance of the Assumption Effective Date; (c) such
notice shall designate the Assumption Effective Date (which date shall be
the end of a month following the date of such notice, which month shall be
not more than 12 months from the date of such notice); (d) Reinsurer shall
be obligated to effect the assumption of the Policies only to the extent set
forth in this Section 4.4; (e) there shall be no litigation or threat of
litigation by a third party or regulatory opposition seeking or threatening
to prevent such assumption reinsurance or making claims or threats against
the Company or Reinsurer based on market misconduct on the part of the
Company; and (f) the Company shall be obligated to establish the escrow fund
in the event the Company is dissolved as provided hereinbelow. The Company
shall reimburse Reinsurer for reasonable costs of printing and postage
incurred by Reinsurer in sending the assumption certificates to the affected
policyholders. To the extent that such assumption certificate is subject to
regulatory approval prior to the mailing of same, Reinsurer shall use
commercially reasonable efforts to obtain such approvals at its own expense.
Reinsurer shall make commercially reasonable efforts to obtain such
approvals and to mail such assumption certificates to the affected
policyholders within six months following the Assumption Effective Date
(except that Reinsurer shall not be obligated to obtain a license to do
business in any state in which it is not licensed at such time as a
condition of sending assumption certificates to affected policyholders in
such state). In the event that regulatory approval is not obtained in
respect to any state in which regulatory approval is required as a condition
to sending assumption certificates to affected policyholders in such state,
Reinsurer shall not be obligated to send assumption certificates to affected
policyholders in such state, and the affected Policies shall continue to be
governed by this Agreement as coinsurance (except, see below regarding
dissolution of the Company). To the extent that affected policyholders in
any state have the right to elect to reject the subject assumption and in
fact exercise such election, the affected Policies shall continue to be
governed by this Agreement as coinsurance. In the event of the assumption
of the Policies as aforesaid, Reinsurer shall continue to perform all
administration and data processing responsibilities relating thereto.
Following the assumption of the Policies, the Reinsurer's liabilities in
respect to such assumed Policies shall continue to be limited to the Policy
Obligations and shall not be enlarged by virtue of the conversion of the
form of reinsurance from coinsurance (as set forth in this Agreement) to
assumption reinsurance, and the Company shall continue to have all
liabilities in respect to the assumed Policies except (a) the Policy
Obligations and any of Reinsurer's liabilities resulting from Reinsurer's
role as administrator pursuant to the Administrative Services Agreement, and
(b) the Company's obligation to indemnify the Reinsurer and hold the
Reinsurer harmless from all liabilities not specifically transferred to and
assumed by Reinsurer hereunder shall continue as set forth in this
Agreement. In the event the Company is dissolved, voluntarily or
involuntarily, or placed in receivership, the Company shall establish an
escrow fund pursuant to Section 8.2 prior to dissolution. In the event the
Company is dissolved, voluntarily or involuntarily, or placed in
receivership, and if the conversion from coinsurance to assumption
reinsurance has not theretofore occurred, the conversion from coinsurance to
assumption reinsurance shall take place automatically, provided the
following conditions are fulfilled: (a) the Assumption Effective Date shall
be not later than the effective date of the dissolution of the Company or
the date on which receivership commences, as the case may be; (b) the
Company shall establish an escrow fund pursuant to Section 8.2 prior to
dissolution; and (c) Reinsurer shall obtain required approvals in the
affected states (and the aforementioned escrow fund shall include a
provision for the printing and postage of the assumption certificates). It
is the understanding of the parties that assumption reinsurance occurring in
connection with the dissolution of the ceding company does not involve the
acceptance of the affected policyholders and, therefore, to that extent, the
condition that affected policyholders have the option to elect not to be
assumed by the Reinsurer will not apply. In the event of the assumption of
the Policies in connection with the Company's dissolution or receivership as
aforesaid, Reinsurer shall continue to perform all administration and data
processing responsibilities relating thereto. Following such assumption of
the Policies, the Reinsurer's liabilities in respect to the Policies shall
continue to be limited to the Policy Obligations and liabilities resulting
from its role as administrator of the Policies, and shall not be enlarged by
virtue of the conversion of the form of reinsurance from coinsurance (as set
forth in this Agreement) to assumption reinsurance; the Company shall
continue to have all liabilities not specifically included within the Policy
Obligations or resulting from Reinsurer's role as administrator of the
Policies; the Company's obligation to indemnify the Reinsurer and hold the
Reinsurer harmless from all liabilities not specifically reinsured by the
Reinsurer hereunder shall continue as set forth in this Agreement; and the
escrow fund shall be sufficient to cover foreseeable liabilities of the
Company, as provided in Section 8.2.
Section 4.5 Adjustment of Ceding Fee Retrospectively Due to
Lapses, Withdrawals and Mortality. The parties agree that the lapse,
withdrawal and mortality assumptions used in the Actuarial Appraisal are
predicated on the stability of the environment, which may not be the case in
the event of the sending of assumption certificates in the event coinsurance is
converted to assumption reinsurance as set forth in Section 4.4 ("Assumption
Reinsurance" as defined above). As used in this Section 4.5, "lapses" means
the cessation of premium payment in respect to the Policies, even though some
of the "lapsed" Policies remain in force as a result of a non-forfeiture
benefit provision in such Policy or Policies. Upon the occurrence of an
Assumption Reinsurance Event, a calculation shall be made to determine if a
retrospective adjustment of the Ceding Fee shall be required. The Ceding
Fee is based partially on the present value of projected statutory profits
from the Policies over a thirty (30) year period discounted at a rate of
14%. The parties agree to use a discount rate of 15.08% for purposes of
such recalculation instead of the 14% rate used in the Actuarial Appraisal
because the Ceding Fee shown in the Actuarial Appraisal in the amount of
$13.243 million was compromised to the amount of $12.750 million, and the
higher discount rate for purposes of the recalculation is to adjust for this
difference. In determining the annual premium income the parties agree that
certain assumptions are made for each year in the number of policies that
may lapse, the amount of cash surrenders, the number of lapsed policies not
surrendered but converted to Extended Term Insurance ("ETI"), and the amount
of administration expense allowed to administer each policy. The Company
shall refund to Reinsurer the decrease in the Ceding Fee, if any, determined
by recalculating the Ceding Fee under the Actuarial Appraisal by
substituting in lieu of projected statistics in the Actuarial Appraisal the
following actual statistics occurring within the twelve (12) month period
next following an Assumption Reinsurance Event ("Substitution Period"),
namely:
(a) the actual number of Policies that lapse during the Substitution
Period;
(b) the increase in the actual amount of the cash withdrawals for the
Policies that lapse during the Substitution Period;
(c) the increase in the amount of Policies that lapse but are not
surrendered during the Substitution Period;
(d) the decrease in administration expense attributable to Policies that
lapse, whether surrendered, converted to extended term insurance, or
otherwise; and
(e) the increase in death claims attributable to ETI Policies during the
Substitution Period that are received more than six (6) months after
the date of death of the insured.
The Company shall cause FMSI to perform the recalculations as set forth in
this Section 4.5 at the Company's sole expense, and shall use its best
efforts to have the recalculation performed within thirty (30) days from the
date on which Reinsurer provides the data reflecting the actual lapse and
withdrawal experience for the 12 month period following the Assumption
Reinsurance Event, as aforesaid. All other assumptions used in the
Actuarial Appraisal shall remain the same. In the event the Ceding Fee, as
recalculated, is reduced below Twelve Million Seven Hundred Fifty Thousand
Dollars ($12,750,000) then Universal will pay Reinsurer the difference. The
Retrospective Ceding Fee Adjustment shall be made at the election of
Reinsurer upon Reinsurer's giving written notice to the Company that the
Assumption Reinsurance Event has occurred, and that the lapse and/or the
mortality experience of the Policies following such event has exceeded the
lapses and/or mortality projected to occur pursuant to the lapse and/or
mortality assumption used in the Actuarial Appraisal. It is assumed that
the amount payable under this Section 4.5 occurred evenly throughout the
period in question, and, therefore, the amount payable hereunder shall bear
interest at the rate of six and two-tenths percent (6.2%) per annum,
compounded annually, commencing one hundred eighty three days after the
mailing of Assumption Certificates; provided, however, that if the amount
owed to Reinsurer is not paid within thirty (30) days following the
determination of the amount due and written notice thereof is provided to
the Company (the "Due Date"), the amount in default shall bear interest at
the rate of ten percent (10%) per annum, compounded annually, beginning on
such Due Date.
ARTICLE V
ACCOUNTING AND SETTLEMENT
Section 5.1. Agreement Accounting Period. The accounting period for
this Agreement shall be on a calendar month basis unless otherwise specified
herein. The first report shall be for the month beginning January 1, 1998.
Section 5.2. Monthly Report. During the Transition Period as defined
in the Administrative Services Agreement, within twenty (20) calendar days
after the end of the each calendar month beginning January 1, 1998, Company
will submit to Reinsurer a Monthly Cash Settlement (as defined in Section
5.3 below) report in accordance with the Administrative Services Agreement
which shall contain the amount of premiums, commission allowance,
administration expense allowances, benefits, dividends to policyholders,
reserves, outstanding policy loans and interest incurred thereon, due and
unpaid premiums, due and deferred premiums, any and all claim reserves as
calculated in accordance with NAIC Convention Blank Exhibit 11, and number
of Policies in force for such calendar month (except that the first such
report [for January] will not be due until February 28, 1998).
Section 5.3. Monthly Cash Settlements. Within five (5) working days
after the receipt by the Company (or, during the Transition Period, by
Reinsurer) of each Monthly Cash Settlement report as specified in Sections
5.1 and 5.2 (the "Monthly Cash Settlement Date"), the Company shall pay to
the Reinsurer (for such accounting period):
(a) the premiums as defined in Section 3.3; and
(b) the interest on outstanding policy loans as defined in Section 3.2;
and
(c) the decrease, if any, in outstanding policy loans as defined in
Section 3.2.
Simultaneously, the Reinsurer shall pay to the Company:
(d) the Commission Allowance as defined in Section 3.4; and
(e) the Policy benefit payments as defined in Section 3.7; and
(f) the increase, if any, in outstanding policy loans as defined in
Section 3.2; and
(g) the premium assessment as defined in Section 3.5.
The settlement as above described is sometimes referred to in this Agreement
as the "Monthly Cash Settlement."
Section 5.4. Amounts Due Monthly. Except as otherwise specifically
provided in this Agreement, all amounts due to be paid to either the Company
or the Reinsurer under this Agreement on a monthly basis shall be determined
on a net basis as of the last day of each calendar month and shall be due
and payable on or before the Monthly Cash Settlement Date. If the amounts,
as defined in Section 5.3 above, cannot be determined at such date on an
exact basis as set forth herein, such payments will be paid in accordance
with an approximate amount determined by the Reinsurer, which amount shall
be adjusted to the actual amount determined as soon as practicable
thereafter.
Section 5.5. Delayed Payments. For purposes of Section 5.4 above,
if there is a delayed settlement of a payment due, interest will be added,
in an amount calculated as: the amount of the payment which is delinquent,
multiplied by ten percent (10%), multiplied by the number of days such
amount has been delinquent, regardless of holidays or weekends, and divided
by the whole number 365. For purposes of this paragraph, a payment shall be
deemed to be delinquent after the Monthly Cash Settlement Date.
Section 5.6. Offset of Payments. All monies due either to the
Company or to the Reinsurer under this Agreement shall be offset against
each other, dollar for dollar, regardless of any insolvency of either party.
Article VI
MUTUAL COVENANTS
Section 6.1. Covenants. The Reinsurer and the Company mutually agree
as follows:
(a) to indemnify, defend and hold harmless the other, its directors,
officers, employees and agents from any and all claims, actions,
suits, judgments, damages (including punitive or exemplary damages),
fines and other proceedings, whether civil, criminal (only to the
extent permitted by law or public policy), administrative,
investigative or otherwise, together with all costs, expenses and
other amounts, including attorney's fees, arising out of any failure
of the indemnifying party to perform its duties, obligations or
responsibilities to the other party, its directors, officers,
employees and agents, under this Agreement, as more fully set forth in
Article XIV; and
(b) the Company shall be solely liable for claims arising out of any
breach of any duty on the part of the Company to any holder, insured,
assignee, beneficiary or other claimant under any Policy, and
Reinsurer's liabilities shall arise solely from its obligation to pay
amounts coming due under the terms of the Policies within the scope of
the Policy Obligations, and any liability on the part of the Reinsurer
to the Company resulting solely from Reinsurer's role as administrator
pursuant to the Administrative Services Agreement. Except for
Reinsurer's role as administrator as aforesaid, the Company shall
remain solely liable for all fines, penalties or other assessments
imposed against the Company by any Insurance Department or other
governmental entity for any conduct of the Company, its employees or
authorized representatives, which was not expressly authorized, in
writing, by the Reinsurer; and
(c) any and all materials, information, proposals, studies or other
documents relative to this Agreement are confidential and proprietary.
Neither party shall disclose, directly or indirectly, any information
obtained from the other party, relative to this Agreement, to any
third party without the express written consent of the other unless
applicable statute, law or regulation requires such disclosure, except
as may be required pursuant to the Arbitration Agreement.
Section 6.2. Policy Conservation. The Company covenants and warrants
that it will take no action that would encourage the holders of the Policies
to surrender, reduce or otherwise terminate their existing coverages either
through direct or indirect acts, including but not limited to, a plan of
internal replacement. Also, the Company will not permit its employees,
agents or other representatives to re-write any of the Policies or to
encourage the holders of the Policies to surrender, reduce or otherwise
terminate their existing coverages either through direct or indirect acts,
and shall have an express Company policy of prohibiting its employees,
agents or other representatives from re-writing any of the Policies and an
express Company policy of directing its employees, agents and other
representatives to encourage the retention and conservation of the Policies.
"Re-writing" as used in the immediately preceding sentence means the
soliciting and accepting of applications for life insurance policies which
relate to or cause the termination of an existing Policy (such as, for
example, a transaction involving, contemplating or resulting in the
replacement of a Policy by another life insurance policy).
ARTICLE VII
ARBITRATION
Section 7.1. Agreement. All disputes and differences between the
Company and the Reinsurer pertaining to this Agreement and the related
agreements (that is, the agreements with the effective date of January 1,
1998, between Reinsurer and the Company, entitled "Administrative Services
Agreement," "Master Assignment of Notes and Liens," and "Mortgage Portfolio
Administrative Services Agreement") on which an agreement cannot be reached
will be decided by arbitration, regardless of the insolvency of either
party, unless the conservator, receiver, liquidator, or statutory successor
is specifically exempted from an arbitration proceeding by applicable state
law. Such arbitration shall be conducted in accordance with the Arbitration
Agreement completed, executed and delivered by the Parties prior to Closing,
which agreement is incorporated herein by reference thereto for all
purposes.
ARTICLE VIII
INSOLVENCY OR DISSOLUTION
Section 8.1. Insolvency. In the event of the Company's insolvency,
the Reinsurer's contractual liability on the Policies shall continue to be
determined by all the terms, conditions and limitations under this
Agreement, but the Reinsurer will make settlement (1) directly to the
Company's liquidator, receiver or statutory successor, and (2) without
increase or diminution because of the Company's insolvency. The liquidator,
receiver or statutory successor of the Company shall give the Reinsurer
written notice of the pendency of a claim against the Company on any Policy
within a reasonable time after such claim is filed in the insolvency
proceeding. During the pendency of any such claim, the Reinsurer may
investigate such claim and interpose in the Company's name (or in the name
of the Company's liquidator, receiver or statutory successor), in the
proceeding where such claim is to be adjudicated, any Defense or Defenses
which the Reinsurer may deem available to the Company or its liquidator,
receiver or statutory successor. The expense thus incurred by the Reinsurer
shall be chargeable, subject to court approval, against the Company as a
part of the expense of liquidation to the extent of a proportionate share of
the benefit which may accrue to the Company solely as a result of the
defense undertaken by the Reinsurer.
Section 8.2 Dissolution. In the event the Company is dissolved,
whether voluntarily or involuntarily, the Company shall be required to
establish an escrow fund in an amount, and pursuant to a governing escrow
agreement and trust document, that will be sufficient to fund any and all
foreseeable liabilities and obligations under this Agreement which have not
fully and finally terminated prior to the date of such dissolution.
"Foreseeable liabilities" includes, but are not limited to, understatement
of Policy reserve liabilities, liabilities arising from market conduct
issues, and liabilities arising from re-writing of policies. Such escrow
fund amount and escrow agreement and trust document shall be subject to
approval by Reinsurer, which approval shall not be unreasonably withheld.
Such escrow fund shall be funded with cash and thereafter such cash shall be
in invested in investment grade corporate or government bonds pursuant to
Reinsurer's instructions. The balance remaining in such escrow fund upon
the satisfaction of all liabilities and obligations under this Agreement
shall belong to the Company. If the parties are unable to agree in a timely
manner on the amount of the escrow fund, or whether the escrow fund should
be released to the Company, such issues shall be determined by arbitration
pursuant to Article VII.
Article IX
Termination
Section 9.1. Termination. This Agreement may be terminated as
follows:
(a) at any time prior to Closing by mutual written consent of the Company
and Reinsurer;
(b) by the Company on or before Closing if the conditions set forth in
Section 12.2 have not been satisfied or waived in writing by the
Company on or before the Closing Date;
(c) by the Company if this Agreement has not been approved by its Board of
Directors on or before February ___, 1998;
(d) by Reinsurer if the conditions set forth in Section 12.3 have not been
satisfied or waived in writing by Reinsurer on or before the Closing
Date; or
(d) by the Company or Reinsurer if the conditions set forth in Section
12.1 have not been satisfied or waived in writing by the Company or
Reinsurer, as the case may be, on or before the Closing Date.
Section 9.2. Effect of Termination. In the event of any termination
of this Agreement, if one party is entitled to terminate this Agreement as
herein provided in Sections 9.1 (b), (c), (d) or (e), such party shall have
the option (in lieu of electing to terminate this Agreement) to enforce this
Agreement by filing suit for specific performance against the other party
for any breach of any of the provisions of this Agreement, and/or to recover
damages incurred by such party, including all reasonable costs of any nature
whatsoever incurred in the enforcement of its rights under this Agreement.
Article X
Representations and Warranties of Universal
Universal hereby represents and warrants to Reinsurer that:
Section 10.1. Organization and Existence. Universal is a Tennessee-
domiciled stock insurance company duly incorporated, validly existing, and
in good standing under the corporation and insurance laws of the State of
Tennessee. Universal has all requisite corporate power and authority to
carry on its business as it is now being conducted, and to own, lease, and
operate its properties.
Section 10.2. Qualification and Power. Universal is duly qualified
and in good standing to do business in every jurisdiction in which such
qualification is necessary because of the nature of its business or of the
properties owned, leased, or operated by it.
Section 10.3. Validity: No Violation. Subject to the Company's right
of termination as set forth in Article IX, this Agreement is a valid and
binding obligation of Universal, enforceable against it in accordance with
its terms and conditions. Neither the execution and delivery of this
Agreement, nor Universal's compliance with any of the provisions of this
Agreement, will:
(a) conflict with or result in a breach of any provision of the Articles
of Incorporation or Bylaws of Universal, or result in a default (or
give rise to any right of termination, cancellation, or acceleration)
under any of the terms, conditions, or provisions of any note, lien,
bond, mortgage, indenture, license, lease, agreement, consent order,
or other instrument or obligation to which Universal is a party or by
which it may be bound;
(b) violate any judgment, order, writ, injunction, or decree of any court,
administrative agency, or governmental body applicable to Universal or
to any of its properties or assets; or
(c) cause, or give any person grounds to cause (with or without notice,
the passage of time or both), the maturity of any liability of
Universal to be accelerated or increased.
Section 10.4. Except for approvals required as set forth in Article
IX, no authorization, consent or approval of, or filing with, any public
body or authority is necessary for Universal to obtain for the consummation
of this Agreement, and except as set forth in Section 12.1(b) hereof. No
authorization, consent or approval of any other person or entity is
necessary for Universal to obtain for the consummation of the transactions
contemplated by this Agreement, and no person or entity has an option, right
of first refusal or preferential right to purchase all or any part of the
Policies or that is otherwise triggered as a result of the transactions
contemplated hereby.
Section 10.5. The reserves and other Policy-related liabilities with
respect to each of the Policies included in the Policies for the period
ended December 31, 1997, were, or will be, established on the books of
Universal as of December 31, 1997, (i) were, or will be, calculated and
determined in accordance with generally accepted actuarial and statutory
accounting standards consistently applied, (ii) were, or will be, based on
actuarial assumptions that are in accordance with those specified in the
related Policies, (iii) meet the requirements of the insurance laws of the
State of Texas, and (iv) in the aggregate are not less the amounts required
for lines 1, 3, 4, 9, and 19 of page 3 of Universal's December 31, 1997,
Annual Statement. In addition, the reserves for the period ended December
31, 1997 were, or will be, established on the books of Universal with
respect to the incurred but unreported policy claims ("IBNR Claims
Reserves") and (i) were, or will be, calculated and determined in accordance
with generally accepted actuarial and statutory accounting standards
consistently applied, (ii) are, or will be, sufficient to pay all of the
liabilities in respect to such claims incurred before January 1, 1998, but
not reported to Universal as of December 31, 1997 and (iii) meet, or will
meet, the requirements of the insurance laws of the State of Texas. The
reserves as set forth in this Section 10.5 shall be referred to in this
Agreement as "Reserves." While the IBNR Claims Reserves shall be
established as aforesaid, if the claims paid by the Reinsurer attributable
to the Policies which were incurred prior to the Effective Date but not
reported to Universal as clams payable as of the Effective Date are in the
aggregate more than the amount of the IBNR Claims Reserves, Universal shall
reimburse the Reinsurer for the amount of the excess within 30 days
following written notice from Reinsurer identifying the payment or payments
in excess, as aforesaid. If, after twelve (12) months from the Effective
Date, the aggregate claims attributable to the IBNR Claims Reserves are less
than the IBNR Claims Reserves, then Reinsurer shall refund the amount by which
the IBNR Claims Reserves exceeds the aggregate amount of such claims. The
policy loan asset (including accrued interest and unearned interest thereon)
and the due and deferred premium asset with respect to each of the Policies
included in the Policies for the period ended December 31, 1997, were, or will
be, established on the books of Universal (i) were, or will be, calculated and
determined in accordance with generally accepted actuarial and statutory
accounting standards consistently applied, (ii) were, or will be, based on
actuarial assumptions that are in accordance with those specified in the
related Policies and (iii) meet, or will meet, the requirements of the
insurance laws of the State of Texas. Such policy loan asset and the due
and deferred premium asset shall be referred to in this Agreement as "Policy
Assets."
Section 10.6. In respect to the Net Transfer Amount, Universal is the
equitable and legal owner of all such assets and the transfer of such assets
to Reinsurer pursuant to this Agreement will vest good and marketable title
to such assets in Reinsurer.
Section 10.7. Since December 31, 1996, there has not been any
material adverse change, or changes in the Policies or operations of
Universal taken as a whole which in the aggregate may be deemed materially
adverse to the Policies, or which could affect the validity or
enforceability of this Agreement, consummation of the transactions
contemplated hereby or compliance with the terms hereof by Universal. For
purposes of this Section, "Historical Policy Data" means the Policy Assets,
Reserves, and Policy statistical information and results as reflected in the
Company's Annual Statements (as filed by the Company with insurance
regulators on the NAIC Convention Blank) for the years 1993-1996 and, in
respect to the year 1997, the inforce Policy data and other Policy year-end
information furnished to Reinsurer on electronic format or otherwise. (In
respect to 1997, for convenience, the Policy Assets, Reserves, and Policy
statistical information and results as reflected in the Company's 1997
Annual Statement when filed by the Company with insurance regulators on the
NAIC Convention Blank shall replace the inforce Policy data and other Policy
year-end information furnished to Reinsurer on electronic format or
otherwise, except to the extent that Reinsurer objects to such replacement.)
The Historical Policy Data were prepared and presented in conformity with
statutory accounting practices prescribed or permitted by applicable
insurance regulatory laws and regulations applied on a consistent basis and
presented completely and accurately such data at the respective dates and
for the respective periods indicated therein. Notwithstanding the foregoing
sentence, the reserve amount ($1,859,705) reflected in Exhibit 8, Line
070004, of the 1996 Annual Statement was incorrectly recorded on said line
and the mistake should be corrected by recording said amount on the line
immediately above, namely, Line 070003, and the and Reinsurer hereby accepts
such correction in the 1996 Annual Statement.
Section 10.8. Universal has the right to use, free and clear of any
royalty or other payment obligations, claims of infringement or alleged
infringement or other lien or encumbrance, all systems software included in
or used to process the Policies and no third party will be entitled to any
payment or other benefit as a result of the transfer the data processing
system by Universal to Reinsurer in accordance with this Agreement.
Section 10.9. There are no claims, actions, suits, investigations and
administrative, arbitration or other proceedings (i) pending against
Universal with respect to the Policies or (ii) threatened against Universal
with respect to the Policies. Universal is not subject to or in default
with respect to any order, writ, judgment, decree, injunction or similar
order of any court or any foreign, federal, state or other governmental
body. There are no claims, actions, suits, investigations or
administrative, arbitration or other proceedings pending or threatened
against or affecting Universal which individually or in the aggregate could
have a material adverse effect on the Polices which could affect the
validity or enforceability of this Agreement, consummation by Universal of
the transactions contemplated hereby or compliance by Universal with the
terms of this Agreement, and (ii) Universal is not subject to or in default
with respect to any order, writ, judgment, decree, injunction or similar
order of any court or any foreign, federal, state or other governmental
body, the result of which being subject to or of which default individually
or in the aggregate could have a material adverse effect on the Polices or
which could affect the validity or enforceability of this Agreement,
consummation by Universal of the transactions contemplated hereby or
compliance by Universal with the terms of this Agreement.
Section 10.10. Universal is in compliance in all respects with all
laws, ordinances, regulations, orders, judgments, injunctions, or decrees of
any court, arbitrator or governmental authority where the failure to comply,
individually or in the aggregate, could reasonably be expected to have a
material adverse effect on the Policies.
Section 10.11. Universal is not in default under any of the terms,
provisions or conditions of any contract between Universal and any of its
agents, past or present. The failure of any agent who wrote business for
Universal to have been duly licensed (for the type of business which such
agent wrote) as an agent in the particular jurisdiction in which such agent
wrote for Universal will not individually or in the aggregate have a
material adverse effect on the Policies of Universal. To the knowledge of
Universal, there is no actual or threatened plan on the part of any
insurance agent or broker to rewrite any of the Policies.
Section 10.12.
(a) except for communications which are customary to communicate to
policyholders through servicing agents in connection with collecting
premiums in respect to the Home Service Policies, it has been the
practice of Universal to send all communications involving holders of
the Policies directly to the affected policyholders, and the Documents
and Records of Universal to be delivered to Reinsurer contain adequate
information to enable Reinsurer as administrator to send written
notifications or other communications directly to each policyholder
whose policy or contract is included in the Policies;
(b) except for lists customarily provided to agents in connection with
collecting premiums in respect to the Home Service Policies, and
except for lists provided to the Company's reinsurers for the purpose
of reinsurance transactions and accounting in the ordinary course of
business, no lists or master list of all or any substantial number of
the holders of the Policies has been provided by Universal to any of
its agents, representatives or third party except to Universal's
consulting actuary, and such lists or master list are not available in
the public domain; and
(c) no policyholder or group of policyholders, which individually or in
the aggregate account for five percent or more of the premium income
included in the Policies has threatened to terminate its or their
relationship with Universal.
Section 10.13. With respect to each of the Policies:
(a) Universal is a party to each of such Policies and owns all of the
rights and interests of an insuring, reinsuring or ceding party, as
the case may be, in and to each of such Policies, free and clear of
any Lien;
(b) each of such Policies is in full force and effect and constitutes a
valid and legally binding obligation of each of the parties thereto in
accordance with its terms; the transactions contemplated by this
Agreement will not affect the validity or binding character of any
such Policy; Universal is not in violation, breach or default of any
such Policy and no event has occurred which (with or without notice or
lapse of time or both) constitutes a breach or default by Universal
under any such Policy and no such Policy contains any provision
providing that the other party thereto may terminate the same by
reason of the transactions contemplated by this Agreement or any other
provision which would be altered or otherwise become applicable by
reason of such transactions;
(c) such Policies are, to the extent required under applicable law, on
forms approved by the insurance regulatory authority of the
jurisdiction where issued or have been filed with and not objected to
by such authority within the period provided for objection;
(d) all current benefits payable by Universal under any such Policy have
been paid or will be paid in the ordinary course of business under the
terms of the Policies under which they arose or to the satisfaction of
the parties thereto;
(e) no such Policy entitles the holder thereof or any other person or
entity to receive dividends or similar benefits in which the right to
receive such dividends or benefits is determined other than at the
discretion of the board of directors of Universal;
(f) the underwriting standards utilized and ratings applied by Universal
with respect to Policies issued by Universal conform in all material
respects to customary insurance industry practices as such practices
apply to the markets in which Universal has sold its policies and,
with respect to any such Policy reinsured in whole or in part, conform
in all material respects to the standards and ratings required
pursuant to the terms of the related reinsurance, coinsurance or other
similar Policy;
(g) each of such Policy was issued and has been serviced in the ordinary
course of business;
(h) there has been no discrimination in violation of applicable insurance
laws among the policyholders whose policies and contracts of insurance
are included in such Policies with respect to the rates charged such
policyholders for the insurance in force afforded such policyholders
by such Policies; and
(i) the decisions and actions of the Company, either individually or
collectively, in converting the method of premium collection from
collection by Company agents to collection exclusively by premium
billing and collection via mail do not and will not contravene or
violate any obligation of the Company under or in respect to any of
the subject Policies or applicable laws and regulations, whether such
decisions or actions have been taken before the Effective Date or are
taken after the Effective Date (in exercising its role as
administrator under the Administrative Services Agreement during the
Transition Period [as defined therein] or to instruct Reinsurer as
administrator in carrying out the Company's premium collection policy
or policies resulting from such decisions and actions), and the
Company has had and retains the exclusive right to, and responsibility
for, determining changes in the mode of collecting premiums as
aforesaid. Further, in the event the Policies are assumed by
Reinsurer and Reinsurer converts the method of premium collection from
collection by agents to collection exclusively by premium billing and
collection via mail, such conversion by Reinsurer would not and will
not contravene or violate any obligation under or in respect to any of
the subject Policies or applicable laws and regulations.
Section 10.14. With respect to reinsurance between the Company and
any reinsurer or reinsurers in respect to the Policies, and/or any such
reinsurance reflected in the Company's 1997 Annual Statement:
(a) all such reinsurance applicable to the Policies as indicated on the
Company's books and records is fully supported and in accord with the
reinsurance treaties covering the respective Policies;
(b) the reinsurance reserve credit, or credits, as the case may be, taken
by the Company in respect to any such reinsurance is correct;
(c) the reinsurance treaties are in full force and effect for the period
or periods which they purport to cover and are enforceable by the
parties thereto in accordance with the terms and provisions of such
treaties;
(d) all of the Policies issued while such treaty or treaties were in force
are fully reinsured for the amount in excess of the Company's portion
(or "retention" amount) as set forth in such treaty or treaties;
(e) in respect to any Policy claim which is not reinsured in accordance
with the records of the applicable reinsurer and would be reinsured
but for an error or omission, such claim is nevertheless reinsured by
virtue of an errors and commission provision contained in such
reinsurance treaty or treaties;
(f) such reinsurance treaties, together with their benefits and
obligations, are assignable, and shall be assigned to Reinsurer as of
the Effective Date, and
(g) with respect to any Policy that is not covered by any such reinsurance
treaty that is in excess of the applicable retention limit that would
have been covered but for a failure of the treaty to apply to such
Policy (for whatever reason), Reinsurer shall be liable for the
portion of the Policy for which it would have been liable but for the
failure of such coverage (that is, the retained portion), and the
Company shall be liable for the portion that would have been covered
by such reinsurance treaty but for the failure of such coverage, and
Reinsurer shall pay to the Company that portion of the premiums and
reserves to which the reinsurer would have been entitled under the
reinsurance treaty but for the failure of such coverage. In respect
to this subsection (g), to be more specific, if the subject Policy is
not recorded by the Company (as of the Effective Date) as reinsured in
respect to the amount in excess of the Company's applicable retention
limit (the "excess over retention"), then the Company presumably
recorded a reserve liability in respect to the excess over retention,
which amount would have been transferred to Reinsurer as of the
Effective Date, and, beginning on the Effective Date, Reinsurer would
have collected the premium relating to the entire Policy (for the
retention amount and the excess over retention). In such a case, upon
discovery that the Policy is not reinsured in respect to the excess
over retention, Reinsurer shall transfer to the Company in cash an
amount equal to the reserve liability attributable to the excess over
retention portion of the Policy, as well as an amount equal to the
premium that would have been due to the reinsurer in respect to the
excess over retention portion from the Effective Date to the date
thereof, such that Reinsurer will be placed in the position it would
have been in if the subject Policy had been covered by the subject
reinsurance treaty, and, in effect, the Company will be the reinsurer
in respect to the excess over retention amount. On the other hand, if
the subject Policy is recorded by the Company (as of the Effective
Date) as reinsured in respect to the amount in excess of the Company's
applicable retention limit, but the reinsurer thereof denies that it
is the reinsurer in respect to the excess over retention portion of
such Policy, then presumably the funds transferred to Reinsurer in
respect to the Policies would not have included an amount attributable
to the excess over retention portion of such Policy but, instead, the
Company presumably would have held a reinsurance reserve credit, and
would have transferred same to Reinsurer, as of the Effective Date.
Upon discovery of such a case, Reinsurer shall be required to
eliminate the reinsurance reserve credit in respect to the excess over
retention portion of such Policy (because the reinsurer is not showing
a reserve liability in respect thereto), but no funds matching the
reserve liability attributable to the excess over retention portion of
such Policy would have been transferred to Reinsurer at Closing, so,
in that case, Reinsurer will not transfer to the Company funds equal
to the reserve liability attributable to the excess over retention
portion of the Policy, but will pay to the Company the premium that
would have been due to the reinsurer in respect to the excess over
retention portion from the Effective Date to the date thereof, such
that Reinsurer will be placed in the position it would have been in if
the subject Policy had been covered by the subject reinsurance treaty,
and, in effect, the Company will be the reinsurer in respect to the
excess over retention amount.
Section 10.15. The Documents and Records are accurate and complete in
all material respects and, in all material respects, completely record and
reflect all of the Company's liabilities and obligations. The Policy
records are sufficiently well labeled and organized to permit reasonable
access (by industry standards) and there are no deficiencies in the
Documents and Records which could reasonably be expected to have a material
adverse effect on either Reinsurer's satisfaction of its obligations in
respect of the Policies or the servicing by Reinsurer of the Policies in
accordance with customary insurance industry practices. There are no facts
or other circumstances that would prevent the Reinsurer (or which raises a
material probability that the Reinsurer might be prevented) from servicing
the Policies in accordance with customary insurance industry practice and in
the manner in which the Policies have been serviced prior to the Effective
Date. During the "Transition Period" under the Administrative Services
Agreement (during which the Company shall have the administrative
responsibilities as set forth therein), the Company shall continue to work
toward the completion of the migration of all of the processing from its IBM
mainframe to its Unisys system, and shall reasonably cooperate with
Reinsurer's efforts to assist in the progress of such migration, the
objective being to bring the electronic data processing environment on which
the Company is processing the Policies onto a single system (the Unisys
system) which is year 2000 compliance. If the migration onto the Unisys
system is completed on or before the end of the Transition Period, the
Company shall be entitled to retain the IBM mainframe hardware and shall not
be obligated to transfer it to Reinsurer, notwithstanding anything to the
contrary herein contained.
Section 10.16. Neither this Agreement nor any certificate or
document furnished by Universal to Reinsurer in connection with this
Agreement or the transactions contemplated hereby contains any untrue
statement of material fact or omits to state a material fact necessary to
make the statements herein or therein not misleading in light of the
circumstances in which they were made.
Section 10.17. Survival of Representations and Warranties. The
representations and warranties of Universal contained in this Article X and
elsewhere in this Agreement shall survive the Closing until all of the
liabilities reinsured hereunder have been discharged or otherwise expire.
Article XI
Representations and Warranties of Reinsurer
Reinsurer hereby represents and warrants to Universal that:
Section 11.1. Organization and Existence. Reinsurer is a Texas-
domiciled stock insurance company duly incorporated, validly existing, and
in good standing under the corporation and insurance laws of the State of
Texas. Reinsurer has all requisite corporate power and authority to carry
on its business as it is now being conducted, and to own, lease, and operate
its properties.
Section 11.2. Qualification and Power. Reinsurer is duly qualified
and in good standing to do business in every jurisdiction in which such
qualification is necessary because of the nature of its business or of the
properties owned, leased, or operated by it.
Section 11.3. Validity; No Violation. Subject to Reinsurer's right
of termination as set forth in Article IX, this Agreement is a valid and
binding obligation of Reinsurer, enforceable against it in accordance with
its terms and conditions. Neither the execution and delivery of this
Agreement, nor Reinsurer's compliance with any of the provisions of this
Agreement, will:
(a) conflict with or result in a breach of any provision of the Articles
of Incorporation or Bylaws of Reinsurer, or result in a default (or
give rise to any right of termination, cancellation, or acceleration)
under any of the terms, conditions, or provisions of any note, lien,
bond, mortgage, indenture, license, lease, agreement, consent order,
or other instrument or obligation to which Reinsurer is a party or by
which it may be bound;
(b) violate any judgment, order, writ, injunction, or decree of any court,
administrative agency, or governmental body applicable to Reinsurer or
to any of its properties or assets; or
(c) cause, or give any person grounds to cause (with or without notice,
the passage of time or both), the maturity of any liability of
Reinsurer to be accelerated or increased.
Section 11.4. Survival of Representations and Warranties. The
representations and warranties of Reinsurer contained in this Article XI and
elsewhere in this Agreement shall survive the Closing until all of the
liabilities reinsured and assumed hereunder have been discharged or
otherwise expired.
Article XII
Covenants and Conditions Precedent to Closing
Section 12.1. The obligations of each of the parties hereto to
proceed with the Closing were subject to the fulfillment (unless waived by
each party in writing), prior to or at the Closing, of each of the following
conditions:
(a) No suit, action or other proceeding shall have been initiated and be
pending or be threatened by any governmental agency in which it is
sought to restrain, prohibit, invalidate, modify or condition, or set
aside, the transactions contemplated by this Agreement, and no
statute, rule or regulation having such effect shall have been
promulgated or enacted, nor shall any such suit, action or proceeding
have been initiated by any other third party not affiliated with the
parties hereto in which such third party shall have obtained
preliminary or permanent injunctive relief or which, in the opinion of
counsel to either party, has a reasonable likelihood of success;
provided, however, that each party shall use reasonable efforts in
good faith to cause such suit, action or proceeding, or the threat
thereof, to be dismissed or withdrawn, to cause such injunction to be
dissolved or vacated or to cause such statute, rule or regulation to
be repealed or rescinded.
(b) The receipt of the required approval of this Agreement from regulatory
authorities, if any.
(c) The parties shall execute and deliver at Closing the Administrative
Services Agreement and the Arbitration Agreement.
Section 12.2. The obligations of the Company to proceed with the
Closing are subject to the fulfillment (unless waived by the Company in
writing), prior to or at the Closing, of each of the following conditions:
(a) The representations and warranties of Reinsurer contained in Article X
of this Agreement shall be true and correct in all material respects
at and as of the Closing, as if each such representation and warranty
had been made as of the Closing.
(b) Reinsurer shall have performed and complied in all material respects
with all covenants, agreements, obligations, commitments and
conditions required by this Agreement to be performed or complied with
prior to or at the Closing.
(c) Reinsurer shall have delivered to Universal a certificate dated the
Closing Date and signed by the president or a vice president of
Reinsurer certifying to the fulfillment of the conditions specified in
this Section 12.2.
(d) Compliance by Reinsurer with any and all requirements lawfully imposed
by Tennessee's Insurance statutes or by the Commissioner of the
Tennessee Department of Commerce and Insurance which will permit the
Company to be allowed a credit for the Policy reserve liabilities
attributable to the insurance ceded to Reinsurer hereunder.
(e) Reinsurer shall have delivered to Universal at the Closing such other
documents as Universal may reasonably request.
Section 12.3. The obligations of Reinsurer to proceed with the
Closing are subject to the fulfillment (unless waived by Reinsurer in
writing), prior to or at the Closing, of each of the following conditions:
(a) The representations and warranties of Universal contained in Article X
of this Agreement shall be true and correct in all material respects
at and as of the Closing, as if each such representation and warranty
had been made as of the Closing.
(b) Universal shall have performed and complied in all material respects
with all covenants, agreements, obligations, commitments and
conditions required by this Agreement to be performed or complied with
prior to or at the Closing.
(c) Universal shall have delivered to Reinsurer a certificate dated the
Closing Date and signed by the president or a vice president of
Universal certifying to the fulfillment of the conditions specified in
this Section 12.3.
(d) Universal shall have delivered to Reinsurer at the Closing such other
documents as Reinsurer may reasonably request, including evidence
reasonably satisfactory to Reinsurer that this Agreement and the
related agreements have been approved by the Company's Board of
Directors.
(e) Reinsurer, by and through its designated representatives, shall have
completed to its satisfaction a legal, financial and business due
diligence review and investigation of the Policies and related
information, and in the course of such due diligence review and
investigation Reinsurer shall not have discovered any facts,
information, potential risks, or other problems which Reinsurer
reasonably believes to have an actual or potential adverse impact or
effect on the Policies, or upon the respective values of the Policies,
as a result of the consummation of the subject transactions relative
to the information heretofore furnished to Reinsurer by the Company;
and that the Policy-related assumptions used in the Actuarial
Appraisal are reasonably supported by the historical performance of
the Policies, and the modeling and sampling decisions and related
methodology are reasonable.
Section 12.4. Documents and Records. Universal agrees to deliver to
Reinsurer at Closing (or later in accordance with the Administrative
Services Agreement if called for by the Administrative Services Agreement)
all of the Documents and Records without charge. In exchange for a
consideration in the amount of Two Hundred Fifty Thousand Dollars ($250,000)
added to the Ceding Fee, Universal agrees to assign, convey, transfer and
deliver at the end of the Transition Period (as defined in the
Administrative Services Agreement) to Reinsurer, as-is, where-is, and
without warranty, all of its right, title, and interests in any and all of
the hardware and equipment within its possession or control used or useful
in operating or supporting the data processing systems and administering and
servicing the Policies, and its right, title and interests in any service
contracts, licenses, permits or agreements relating thereto, all of which
shall be described with particularity on Exhibit 12.4, which is represented
and warranted by Universal to be complete. Universal agrees to license to
Reinsurer without charge or royalty any and all software within its
possession or control used or useful in operating or supporting the data
processing systems and administering and servicing the Policies. Such
hardware and software systems include data processing programs, discs,
tapes, remittance processing and billing equipment, documentations, manuals,
specifications, applications, routines, formulas, and techniques relating
thereto. However, the Company may elect to exclude from the aforesaid the
hardware and equipment portion thereof and not to assign, convey, transfer
and deliver same to Reinsurer on the condition that the Company pay $250,000
to Reinsurer, such amount to be due and payable at the end of the Transition
Period and to bear interest at the rate of 10% per annum, compounded
annually, from such date until paid.
Section 12.5. Cooperation. The parties shall assist and cooperate
with each other by making all reasonable efforts to seek and obtain the
aforementioned approvals and any other approvals the parties agree are
necessary or advisable, and each party shall bear its own expenses related
thereto.
Article XIII
Closing
Section 13.1. Time and Location. The closing of the transactions
contemplated by this Agreement ("Closing") shall take place on at 10 A. M.,
local time, on February 23, 1998, except that Closing may occur on a
different time and date by mutual written agreement of the parties (the
"Closing Date").
Section 13.2. Deliveries by Universal. At Closing Universal shall
deliver to Reinsurer (a) an accounting as of December 31, 1997, in contract
level detail as to the Policies, including a detail listing of the Policies,
which are the subject of this Agreement, and (b) the assets comprising the
Closing Net Transfer Assets shown on Schedule 4.1.
ARTICLE XIV
INDEMNIFICATION
Section 14.1 Losses. As used in this Agreement, "Loss" and/or
"Losses" shall mean all claims, lawsuits, proceedings by insurance
regulatory authorities or any other regulatory authority, investigations,
expenses, settlements, assessments, obligations, damages, losses,
deficiencies, interest, late charges, adjustments, costs, judgments,
payments, liabilities, refunds, taxes, fines and penalties, including,
without limitation, costs and expenses of litigation and reasonable
attorneys' fees, reasonable actuarial and accounting fees and reasonable
costs of investigations.
Section 14.2 Indemnity by Universal. Universal shall indemnify,
defend and hold harmless Reinsurer and Reinsurer's subsidiaries and
affiliates including, without limitation, its officers, directors, employees
and shareholders and those of its subsidiaries and affiliates from and
against Losses that arise out of:
(a) the non-performance of any covenants, warranties, agreements,
obligations or commitments contained in this Agreement or in any
exhibit, schedule, certificate or other document delivered pursuant
hereto required to be performed by Universal; or
(b) the fact that any representation or warranty made by
Universal contained in this Agreement or in any exhibit, schedule,
certificate or other document delivered pursuant hereto was untrue as
of the Closing Date (determined as if such representation or warranty
had been made as of the Closing Date).
Section 14.3 Indemnity by Reinsurer. Reinsurer shall indemnify,
defend and hold harmless Universal from and against Losses that arise out
of:
(a) the non-performance of any covenants, warranties, agreements,
obligations or commitments contained in this Agreement or in any
exhibit, schedule, certificate or other document delivered pursuant
hereto required to be performed by Reinsurer; or
(b) the fact that any representation or warranty made by
Reinsurer contained in this Agreement or in any exhibit, schedule,
certificate or other document delivered pursuant hereto was untrue as
of the Closing Date (determined as if such representation or warranty
had been made as of the Closing Date).
Section 14.4 Payment. Payment required to be made to any party
entitled to indemnification hereunder shall be made within ten days after
receipt of an invoice or claim ("claim") therefor from a party seeking
indemnification. In the event of any dispute with respect to a party's
obligation to make any such payment, the parties shall use their best
efforts to resolve such dispute as promptly as practicable. In any event,
however, that the claim made by a party entitled to indemnification
hereunder is not paid in full within said 10 day period, such party (the
"Indemnity" as hereinafter defined) shall be entitled to initiate
arbitration proceedings in accordance with the Arbitration Agreement. Any
such payment amount shall include interest thereon at the rate of ten
percent (10%) per annum (compounded annually) which shall accrue beginning
on the first day of the obligation that resulted in a finding that an amount
became payable, and shall continue to accrue until paid.
Section 14.5 Notice. Any person, corporation or other legal entity
entitled to indemnification under this Agreement, as the case may be, making
a claim under this Article XIV is hereinafter referred to as the
"Indemnitee" and the party against whom such claim is asserted is
hereinafter referred to as the "Indemnitor." All claims by any Indemnitee
under this Article XIV shall be asserted by Indemnitee delivering or causing
to be delivered, to Indemnitor, a written notice (the "Claim Notice")
describing in reasonable detail the facts or circumstances which may result
in a claim of Loss. (Such claim of Loss is hereinafter referred to as an
"Asserted Liability.") Indemnitee shall use reasonable efforts to give the
Claim Notice not later than the earlier of:
(i) Three months after the time at which Indemnitee is notified
in writing, actually becomes aware of or otherwise obtains actual
knowledge of any action, proceeding, investigation, demand or claim
(whether actual or threatened) or any other circumstance or state of
facts which could give rise to an Asserted Liability, or
(ii) With respect to any Asserted Liability which has become the
subject of proceedings before any court or tribunal or in which
Indemnitee has been served with legal process within such time as
would allow Indemnitor to timely file responsive pleadings in such
proceeding or action.
If a claim is not given by the Indemnitee as herein provided, the
Indemnitee shall be entitled to indemnification hereunder only (i) if the
Indemnitee can establish that the time elapsed between the time the Claims
Notice should have been given pursuant to this Agreement and the actual
giving of the Claims Notice is reasonable under all the circumstances, (ii)
to the extent that the Indemnitee can establish that the Indemnitor has not
been prejudiced by such time elapsed, or (iii) if the Indemnitee can
establish that the Indemnitor received actual notice of such Asserted
Liability from a party other than the Indemnitee, or otherwise had actual
notice of the basic facts constituting the Asserted Liability, within the
time periods specified in this Agreement or that the receipt of such notice
satisfies the requirements of either clause (i) or (ii) of this paragraph.
Section 14.6 Defense of Claims.
(a) Subject to the limitations hereinafter set forth, Indemnitor
shall have the right to control the contest of any Asserted Liability
and shall defend, at its own expense and by its own counsel, any
Asserted Liability. If Indemnitor does not notify Indemnitee in
writing within sixty days after receipt of the Claim Notice, or within
the time period prior to the date on which responsive pleadings must
be filed, whichever is less, that it elects to undertake the defense
thereof, Indemnitee shall have the right to defend the Asserted
Liability with counsel of its choosing reasonably satisfactory to
Indemnitor. Even in the event that Indemnitor does not notify
Indemnitee that it elects to undertake the defense of an Asserted
Liability within the applicable time periods set forth in this
Agreement, Indemnitor shall have the right to assume the defense of
such Asserted Liability, and to select counsel reasonably satisfactory
to Indemnitee, at any time prior to settlement or final determination
thereof; provided, however, that in such event Indemnitor shall be
responsible for and shall pay (or reimburse Indemnitee for) the fees
and expenses of counsel employed by Indemnitee prior to Indemnitor's
assumption of the defense of any such Asserted Liability.
(b) In the event that Indemnitor commences or thereafter assumes
the defense of any Asserted Liability as provided in this Agreement,
Indemnitee shall have the right to employ separate counsel with
respect to such claim and to participate in the defense thereof,
provided that the fees and expenses of counsel employed by Indemnitee
shall be at the expense of Indemnitee unless the employment of such
counsel has been specifically authorized in writing by Indemnitor.
Section 14.7 Cooperation. After the Closing Date, Reinsurer and
Universal shall each cooperate fully with the other (including, without
limitation, affording the other an opportunity to participate in the
defense) as to all Asserted Liabilities, shall make available to the other
as reasonably requested all information, records and documents relating
thereto and shall preserve all such information, records and documents until
the termination of any claim. Reinsurer and Universal shall each also make
available to the other, as reasonably requested, its personnel, agents and
other representatives who are responsible for preparing or maintaining
information, records or other documents, or who may have particular
knowledge with respect to any such Asserted Liability.
Section 14.8 No Insurance. The indemnifications provided in this
Agreement shall not be construed as a form of insurance and shall be binding
upon and inure to the benefit of Reinsurer, and Universal; and the
indemnification provisions shall apply with full force and effect
notwithstanding the fact the Indemnitee has insurance covering all or a
portion of the Losses.
ARTICLE XV
SURVIVAL OF OBLIGATIONS
Unless otherwise specifically set forth in this Agreement or in any of
the exhibits, schedules, certificates or other agreements delivered pursuant
hereto, all covenants, representations and warranties and other obligations
of the parties hereto as expressed in this Agreement shall survive
indefinitely. Any obligation resulting from or arising out of the non-
performance of any such covenant, agreement, obligation or commitment or of
any representation or warranty being untrue as of the Closing Date as to
which a written notice of possible Loss shall have been given to the
indemnifying party in accordance with the requirements of Article XIV hereof
shall survive, as to matters identified with particularity in such notice,
until the resolution of the matters referred to therein. Unless otherwise
specifically set forth herein or in any of the exhibits, schedules,
certificates or other agreements delivered pursuant hereto, in case of any
representation or warranty being untrue as of the Closing Date or any non-
performance of any covenant, agreement, obligation or commitment contained
in this Agreement, or in any exhibit, schedule, certificate or other
agreement delivered pursuant hereto, the exclusive remedy therefor shall be
indemnification pursuant to Article XIV hereof, except to the extent the
remedy of specific performance may be available under applicable equitable
principles.
Article XVI
Miscellaneous Provisions
Section 16.1. Extracontractual Damages. The Reinsurer does not agree
to indemnify the Company for, and shall not be liable for, any
extracontractual damages or liability of any kind whatsoever of the
Company's, except for any of Reinsurer's obligation stated in the
Administrative Services Agreement.
Section 16.2. Misunderstandings and Oversights. If any failure to
pay amounts due or to perform any other act required by this Agreement is
unintentional and caused by oversight, the Company and the Reinsurer will
adjust the situation to what it would have been had the oversight not
occurred.
Section 16.3. Facility of Reinsurance. The Company shall not enter
into any other reinsurance agreements, including assumption reinsurance that
would cover the Policies, or by any other act impair the value of the
Policies ceded to Reinsurer under this Agreement, without the express
written approval of the Reinsurer.
Section 16.4. Policy Changes. The Company shall not make any changes
after the Effective Date of this Agreement in the provisions and conditions
of the Policies.
Section 16.5. Audit. The Company or the Reinsurer, their respective
employees or authorized representatives may audit, inspect and examine,
during regular business hours, at the home office of the Company or the
Reinsurer, as the case may be, provided that three working days advance
notice has been given to the other party, any and all books, records,
statements, correspondence, reports, trust accounts and their related
documents or other documents that relate to the Policies. The audited party
agrees to provide a reasonable work space for such audit, inspection or
examination and to cooperate fully and to faithfully disclose the existence
of and produce any and all materials reasonably requested by such auditors,
investigators, or examiners. The expense of the respective party's
employee(s) or authorized representative(s) engaged in such activities shall
be borne solely by such auditing party, and the party being audited shall be
entitled to reimbursement for expenses reasonably incurred by such audited
party. The auditing party agrees to conduct such audit in a courteous,
prompt, professional and reasonable manner, and to provide immediate written
disclosure to the audited party of any discrepancy or variance (when
compared to any previously reported information) discovered by the auditing
party.
Section 16.6. Law and Venue. It is agreed that this Agreement is
subject to and is to be interpreted in accordance with the laws of the State
of Texas. Venue for any action, suit or other proceeding shall be
exclusively in Harris County, Texas, or Shelby County, Tennessee. The
parties agree to waive any other venue.
Section 16.7. Counterparts. This Agreement may be executed
simultaneously in any number of counterparts, each of which shall be deemed
an original, but all of which shall constitute one and the same instrument.
Section 16.8. Severability. In the event that any provision or term
of this Agreement shall be held by any court to be illegal or unenforceable,
all of the other terms and provisions shall remain in full force and effect,
except if the provision or term held to be illegal or unenforceable is also
held to be a material part of this Agreement such that the party in whose
favor the material term or provision was stipulated herein would not have
entered into this Agreement without such term or provision, then the party
in whose favor the material term or provision was stipulated shall have the
right, upon such holding, to terminate this Agreement.
Section 16.9. Amendments. This Agreement shall be amended only by
mutual consent and written agreement executed and delivered by the parties.
Section 16.10. Schedules and Paragraph Headings. Schedules attached
hereto are made a part of this Agreement. Paragraph headings are provided
for reference purposes only and are not made a part of this Agreement.
Section 16.11. Financial Reports. The Company and the Reinsurer each
agree to furnish the other with their respective NAIC Annual and Quarterly
Statements, as required by their respective state laws within five (5) days
after such reports are filed with such respective states.
Section 16.12. Survival. The representations, warranties, covenants
and agreements respectively made by the Company and the Reinsurer in this
Agreement shall survive the termination or expiration of this Agreement.
Section 16.13. Notices. Any notices made pursuant to this Agreement
shall be in writing and shall be deemed to have been duly given on the date
of delivery if delivered personally (including overnight delivery service)
or by facsimile transmission to the party to whom notice is given, or on the
third day after mailing if mailed to the party to whom notice is to be given
by certified mail, return receipt requested, and properly addressed as
follows:
If to the Company:
Universal Life Insurance Company
Attn: Dr. Benjamin L. Hooks
Chairman of the Board
480 Linden Avenue
Memphis, TN 38126
FAX: (901) 528-8231
With a copy to:
Allan J. Wade, Esq.
Twentieth Floor
First Tennessee Building
165 Madison Avenue
Memphis, Tennessee 38103
FAX: (901) 577-2303
If to the Reinsurer:
American Capitol Insurance Company
Attn: William F. Guest, Chairman
10555 Richmond Avenue
Houston, Texas 77042
FAX: (713) 953-7920
Any party to this Agreement may change the address to which notice is to be
delivered to such party under this Section 16.13 by delivering written
notice to that effect to the other party in accordance with this Section
16.13. Any document delivered via facsimile transmission shall be treated
as the original for all purposes unless the original is substituted
therefor.
Section 16.14. Understanding of Agreement. The Parties agree that
the drafting of this Agreement has been a joint effort and no special weight
or presumption should arise in favor of or against either Party based on
whether one Party or the other was more responsible for the drafting of this
Agreement. Each Party has consulted with its accounting, actuarial and
legal advisers in respect to the negotiations and the drafting of this
Agreement. Each Party has read and understands this Agreement, and each
party agrees that it shall not be entitled to claim a failure to understand
the meaning and effect of this Agreement, or any part thereof, as a defense
under any circumstances.
Section 16.15. Assignment. No party may assign this Agreement or any
of its rights, interests, or obligations hereunder without the prior written
consent of the other party, if the assignment is to an entity other than an
affiliate of Reinsurer.
Section 16.16. Broker Fees. Each party hereby represents and
warrants that it has not taken any action that would impose on any other
party hereto liability for payment of any broker, finder, or similar fee in
connection with the origin, negotiation, execution, or performance of this
Agreement, except that Reinsurer shall be solely responsible for the payment
of a finder's fee to Merger Acquisition Profiles of Chatsworth, California.
Section 16.17. Cooperation. The parties agree that they will from
time to time, upon the request of any other party and without further
consideration, execute, acknowledge, and deliver in proper form any further
instruments and take such other action as the other party may reasonably
require in order to carry out effectively the intent of this Agreement.
Section 16.18. Entire Agreement. This Agreement constitutes the
entire agreement and understanding of the parties pertaining to the subject
matter contained in this Agreement and supersedes all prior and
contemporaneous oral and written agreements, representations, and
understandings of the parties.
Section 16.19. Exhibits and Schedules. All exhibits and schedules
attached to and referenced in this Agreement are hereby incorporated by
reference into this Agreement as if they were set forth at length in the
text of this Agreement.
Section 16.20. Expenses. Unless otherwise expressly provided in this
Agreement, each party shall pay all of its own costs, fees, and expenses
incurred or to be incurred in negotiating and preparing this Agreement and
in closing and carrying out the transactions contemplated by this Agreement.
Section 16.21. Severability. If any part of this Agreement is
contrary to, prohibited by, or deemed invalid under applicable law or
regulations, that provision shall not apply and shall be omitted to the
extent so contrary, prohibited, or invalid; but the remainder of this
Agreement shall not be invalidated and shall be given full force and effect
insofar as possible.
Section 16.22. Successors. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors
and permitted assigns.
Section 16.23. Third Party Beneficiaries. Except as to the holders
of the Policies, nothing in this Agreement, whether express or implied, is
intended to confer any rights or remedies under or by reason of this
Agreement on any persons or entities other than the parties to it and their
respective successors and permitted assigns. In addition, nothing in this
Agreement is intended to relieve or discharge the obligation or liability of
any third person or entity to any party to this Agreement or give any third
person or entity any right of subrogation or action against any party to
this Agreement.
Section 16.24. Waiver of Compliance. The party for whose benefit a
warranty, representation, covenant, or condition is intended may waive any
inaccuracies in the warranties and representations contained in the
Agreement or waive compliance with any of the covenants, warranties, or
conditions contained herein and so waive performance of any of the
obligations of the other party and any defaults under this Agreement, but to
be effective any such waiver must be in writing signed by the party granting
such waiver. A waiver shall not affect or impair, however, the waiving
party's rights with respect to any other warranty, representation, or
covenant or any default hereunder not specifically waived, nor shall any
waiver constitute a continuing waiver.
Section 16.25. Waiver of Right to Trail by Jury. The Company and
Reinsurer both expressly waive any right to trial by jury of any claim,
demand, action or cause of action (a) arising under this Agreement or any
other instrument or document executed or delivered in connection herewith,
or (b) in any way connected or incident to the dealing of the parties hereto
in connection with the transactions related hereto, in each case whether now
existing or hereafter arising; and the Company and Reinsurer both hereby
agree and consent that any such claim, demand, actin or cause of action
shall be decided by arbitration and to the extent applicable by a court
trial without a jury, and that any party to this Agreement may file an
original counterpart or a copy of this Agreement with any court as written
evidence of the consent of the Company and Reinsurer to the waiver of the
right to trial by jury.
IN WITNESS WHEREOF, the parties have caused their duly authorized
representatives to execute this Agreement as of the Effective Date.
UNIVERSAL LIFE INSURANCE COMPANY
By: /s/Benjamin L. Hooks
--------------------------------------------
Benjamin L. Hooks,Chairman of the Board of Directors
Witness:/s/Eldredge M. Williams
--------------------------------------------
Eldredge M. Williams,
Executive Vice President
AMERICAN CAPITOL INSURANCE COMPANY
By: /s/William F. Guest
--------------------------------------------
William F. Guest, Chairman of the Board of Directors
Witness:/s/Dan R. Stites
--------------------------------------------
Dan R. Stites, Vice President
<PAGE>
Schedule 4.1
1 UNIVERSAL LIFE COINSURANCE-CLOSING Closing Date 03/03/98
2
3 CEDING FEE 13,000,000
4 (including $250,00 for purchase of equipment
5
6 CALCULATION OF CLOSING NET TRANSFER AMOUNT
7
8 Aggregate reserve for life policies 51,650,598
(AS pg 3 line 1)
9 Supplementary contracts without life
contingencies (AS pg 3 line 3) 220,000
10 Policy and contract claims (AS pg 3 line 4) 818,642
11 Premiums received in advance (AS pg 3 line 9) 753,915
12 Remittances and items not allocated 0
(AS pg 3 line 19) -----------
13 Estimated Reserves 53,443,155 sum of lines
8 thru 12
14
15 less Ceding Fee to be retained by Universal 13,000,000 from line 3
Life
16
17 Closing Net Transfer Amount (before interest) 40,443,155 line 13-
line 15
18
19 Interest for following number of days from 425,927 line 17 x
12/31/97 @ 6.2% 62 ---------- 6.2%/365 x
days elapsed
20 Total assets to be transferred to American 40,869,082 line 17 +
Capitol ========== line 19 21
21
22 LISTING OF ASSETS TO BE TRANSFERRED
23 Amount
24 Cash 25,473,967
25 Policy loans (net of accrued interest 1,059,602
and unearned interest)
26 Mortgage loans 3,514,605 detail
attached
27 Life insurance premiums deferred and 1,231,771
and uncollected
28 Accrued invetment income as of Closing Date 144,567 detail
attached
29 Bonds 9,444,570 detail
attached
----------
30 Total 40,869,082
==========
sum of lines
24 thru 29
<PAGE>
Universal Life Bonds To Be Transferred
Closing date 03/03/98
Book Coupon Accrued
Issuer Value (%) Interest Maturity
Aetna 608,919 6.75 18,675 09/15/13
Alabama Power 408,723 8.30 5,703 07/01/22
Alabama Power 516,484 8.75 11,181 12/01/21
Alabama Power 496,190 7.25 3,222 08/01/07
Atlantic City Electric 298,338 6.63 1,767 08/01/13
Boeing 303,396 6.35 4,022 06/15/03
Carolina Tel & Tel 507,560 5.75 1,278 08/15/00
Coca-Cola 498,208 7.50 13,125 10/25/11
Florida P&L 303,580 7.63 5,846 06/01/24
Florida P&L 408,040 7.30 12,329 04/01/16
Georgia Municipal
Electric 351,329 7.40 4,461 01/01/23
Illinois Bell Tel 50,036 4.38 377 07/01/03
New England Power 534,910 8.00 3,733 08/01/22
New England Telephone 50,141 4.63 398 07/01/05
Northern Telecom 300,000 6.00 100 09/01/03
Old Dominion Electric 206,178 7.48 3,823 12/01/13
Otter Tail Power 494,863 8.25 3,535 08/01/22
Pacific Bell 424,850 7.13 13,142 03/15/26
Pacific Northwestern
Bell 50,460 4.50 950 04/01/03
Piedmont Natural Gas 500,000 6.87 5,916 10/06/23
Province of Ontario 209,299 7.38 1,393 01/27/03
Public Service Electric
& Gas 178630 6.50 3,855 05/01/04
Seagram & Sons 308,233 7.00 7,933 04/15/08
Shell Oil 206,003 6.70 596 08/15/02
Southern Bell Tel & Tel 50,136 6.00 1,267 10/01/04
US West Comm Global 624,055 7.50 9,500 06/15/23
US West Communications 250,684 6.13 4,509 11/15/05
Wisconsin Bell 305,325 7.25 1,933 02/01/07
9,444,570 144,567
<TABLE>
<CAPTION>
UNIVERSAL LIFE MORTGAGE LOANS ACAP February 4, 1998
LOAN CUSTOMER NAME Orig. Loan Maturity Current Loan
# Date Date Balance
<S> <C> <C> <C> <C>
217 Bethel Temple COGIC 10/7/85 5/7/11 571,889.46
238 Burning Bush Baptist Church 8/16/89 12/1/04 51,953.53
283 Freeman, Robert 9/28/88 10/1/13 113,332.36
297 Great Beulahland COGIC 11/2/90 11/1/10 321,407.84
299 Greater Gethsemane Baptist 10/1/86 11/1/06 67,196.32
300 Greater Hope Missionary Baptist 10/16/86 2/1/07 213,365.39
301 Agape Christian Faith Ministry 1/12/90 1/12/10 127,894.69
400 Pilgram Rest Baptist Church 7/1/74 7/1/12 121,394.23
452 The New Friendship Missionary 12/12/89 11/12/10 128,633.82
471 Unity Center of Memphis 1/12/84 5/1/04 133,238.37
649 Greater Deliverance COGIC 2/14/91 3/1/11 51,575.27
672 Robinson, Paul A & Chrysti C 8/2/91 9/1/16 55,733.03
683 Patterson, Mary P 12/13/91 9/13/11 70,090.28
688 Gospel Temple COGIC 12/31/91 3/1/12 292,282.43
701 Pentecostal Temple COGIC 4/10/92 5/1/97 191,048.78
702 Highland Heights COGIC 4/9/92 5/1/12 215,086.51
713 United Missionary Baptist 7/21/92 8/1/12 198,953.95
716 South Main Renaissance 8/12/92 9/1/12 194,285.15
741 Little, Constance L 3/3/94 4/1/16 43,163.86
748 Greater Rose of Sharon A 11/16/94 12/1/24 83,519.48
750 African American Holiness Church 12/21/94 1/1/17 128,490.53
757 Mercer, Frank Jr & Dolores S 1/17/96 2/20/16 89,428.98
766 Green Pastures 5/13/97 12/1/12 50,721.64
<CAPTION>
LOAN CUSTOMER NAME Int. Reg Paymt Int. Pd Prin Pd
# Rate (P&I) Since Since
12/31/97 12/31/97
<S> <C> <C> <C> <C> <C>
217 Bethel Temple COGIC 10.0 6,462.82 * *
238 Burning Bush Baptist Church 13.5 903.83 576.47 327.36
283 Freeman, Robert 8.5 1,106.51 818.17 288.34
297 Great Beulahland COGIC 9.5 3,495.56 2,593.28 902.28
299 Greater Gethsemane Baptist 12.5 1,022.53 713.39 309.14
300 Greater Hope Missionary Baptist 12.0 3,303.26 2,154.57 1,129.43
301 Agape Christian Faith Ministry 13.0 1,757.36 1,412.10 345.26
400 Pilgram Rest Baptist Church 9.0 1,247.71 927.92 319.79
452 The New Friendship Missionary 13.0 1,757.36 1,420.26 337.10
471 Unity Center of Memphis 14.5 2,696.91 * *
649 Greater Deliverance COGIC 10.0 583.84 * 159.93
672 Robinson, Paul A & Chrysti C 10.5 566.51 * *
683 Patterson, Mary P 10.5 2,402.25 Qtrly
688 Gospel Temple COGIC 8.0 2,873.88 1,985.92 1,043.75
701 Pentecostal Temple COGIC 10.0 2,588.20 1,605.76 2,965.96@
702 Highland Heights COGIC 10.5 2,406.10 * *
713 United Missionary Baptist 11.0 2,281.15 1,858.72 422.46
716 South Main Renaissance 10.0 2,101.00 * *
741 Little, Constance L 8.0 410.76 293.28 117.48
748 Greater Rose of Sharon A 9.0 686.70 * *
750 African American Holiness Church 8.8 1,153.24 * *
757 Mercer, Frank Jr & Dolores S 8.5 806.67 645.60 161.07
766 Green Pastures 10.5 562.57 452.33 110.24
43,176.72 17,457.77 5,973.63
<FN>
*This loan will likely have a double payment during February or at some
point during the next few months.
@This loan had multiple payments made in January.
</FN>
</TABLE>
February 27, 1998
VIA FACSIMILE
(901) 528-8231
Universal Life Insurance Company
480 Linden Avenue
Memphis, Tennessee 38126
ATTN: Dr. Benjamin L. Hooks, Chairman of the Board of Directors
Re: Amendments to Coinsurance Agreement to make it ready for parties to
sign.
Dear Dr. Hooks:
This letter sets forth certain amendments to the 2-20-98 Discussion Draft of
the Coinsurance Agreement and Administrative Services Agreement which I
faxed to you and Allan Wade on 2-20-98, and related agreements. You and I
have communicated to the effect that these two drafts are acceptable;
however, this letter is to make certain changes, as follows:
1. Closing Date
The Closing Date in Section 13.1 is changed from February 23, 1998, to March
3, 1998.
2. List of Policies
Section 13.2 requires Universal to deliver a detail list of the Policies at
Closing. You and I have discussed the problem that the "inforce list" of
policies (at December 31) does not match (in terms of policy count and face
amount) the aggregate reserve run, but that there should be a match . (A
match makes it more likely that the inforce list is accurate; certainly a
failure to match means that one or the other, or both, have errors.) By
this amendment, Reinsurer agrees to accept the inforce list as it exists at
Closing, even though it does not match the reserve run, and Universal agrees
to continue to work on the task of providing an inforce list and a reserve
run as of December 31, 1998, that match as to policy count and face amount,
and the resulting inforce list of Policies shall be substituted for the
inforce list delivered at Closing as evidence of the exact list of Polices
as defined in the Coinsurance Agreement - which task Universal agrees to
pursue with diligence until completed as aforesaid.
3. Arbitration Agreement
The Coinsurance Agreement requires that the Administrative Services
Agreement must be signed and delivered concurrently with the Coinsurance
Agreement. By this amendment, it is agreed that the Arbitration Agreement
must be executed and delivered by the parties concurrently with the
execution and delivery of the Coinsurance Agreement.
4. Schedule 4.1
Schedule 4.1 attached to the Coinsurance Agreement has certain changes that
we have discussed (relating to the list of bonds). Also, the numbers change
depending on the date of Closing. Enclosed is a revised Schedule 4.1 and
related list of bonds, showing bonds with an aggregate book value of
$9,444,570 and a total amount of assets to be transferred to American
Capitol (line 20) of $40,869,082, based on a Closing Date of March 3. This
Schedule 4.1 replaces the one that I faxed to you and Allan as part of the
Coinsurance Agreement on 2-20-98. I understand from my telephone discussion
with you a few minutes ago when you had reviewed the first draft of this
letter that you reserve the right to verify the accuracy of the computations
in Schedule 4.1.
5. Post-Closing Adjustment
Section 4.3 of the Coinsurance Agreement contemplated closing of the
transaction prior to the completion by Universal of its 1997 Annual
Statement but which in fact has now been completed. The Coinsurance
Agreement contemplated the use of "estimated" numbers for certain amounts in
Schedule 4.1. The enclosed Schedule 4.1 includes December 31, 1998,
reserves, due and deferred premiums and policy loans which Universal
furnished to us. Accordingly, there will be no need to have the post-
closing adjustment contemplated by Section 4.3.
6. Mortgages
The mortgages listed on Schedule 4.1 are to be transferred at Closing
pursuant to the "Master Assignment of Notes and Liens" and "Mortgage
Portfolio Administrative Services Agreement" which have been approved by you
and Allan. Since there is no reference to these documents in the
Coinsurance Agreement, I am noting this arrangement here.
7. Communications with Policyholders
While we have discussed the need to keep Reinsurer informed "in advance" of
Universal's plans and progress in communicating with its policyholders,
neither the Coinsurance Agreement nor the Administrative Services Agreement
specifically address this issue. The point is that communications - say,
communications relating to the discontinuance of collection of premiums at
home sites, the so-called home service business - may have an important
bearing on lapses, etc., and we need to feel that Universal will be entirely
sensitive to the impact of any communications to the subject Policyholders
which would affect the value of the Policies during the "Transition Period"
in which Universal is administering the Policies. My understanding is that
in our discussions you have agreed to keep us informed in advance of any
communications, as above stated, but this needs to be a written commitment.
Therefore, the amendment is:
By this amendment of the Administrative Services Agreement, Universal
agrees to furnish to Reinsurer not less than 5 business days in advance
a copy of each and every communication to be sent to Policyholders, and
to discuss same contemporaneously with Reinsurer, except for routine
administrative communications, such as premium notices, beneficiary
changes, answers to Policyholder questions regarding Policies, etc.
8. Monthly Cash Settlement
By this amendment of the Administrative Services Agreement, the deadline for
Universal to furnish the Monthly Cash Settlement for the month of January,
1998, to Reinsurer, is changed from February 28, 1998, to March 9, 1998.
9. Equipment List
We have not received a reply to our latest comment on the equipment list.
We are willing to leave this issue open to resolution post-closing, relying
on the parties making a good faith effort to complete the list in compliance
with the requirements set forth in the Coinsurance Agreement promptly
following Closing.
Upon acceptance of both parties of this letter setting forth the above
amendments and agreements, this letter is to be executed and faxed by each
party to the other along with the execution of the signature page of the
Coinsurance Agreement, the Administrative Services Agreement and the
Arbitration Agreement, to signify by each party their agreement expressed in
said documents and this letter. When I arrive in Memphis on Monday in
preparation for the Closing I will bring the documents to be executed and
delivered in multiple copies for the files of the parties (except for the
Arbitration Agreement, which has been signed by the two party arbitrators
and has been sent to you). Note, however, that my acceptance and agreement
to the above has one qualification which you and I just agreed to on the
telephone when I reported the status of Republic-Vanguard's expected
commitment, that is, I expect to receive the commitment before noon today:
my acceptance and agreement is contingent upon receiving the commitment from
Republic-Vanguard.
[Signatures appear on the next page.]
Sincerely yours,
AGREED:
/s/William F. Guest /s/Benjamin L. Hooks
- ---------------------- ---------------------------
William F. Guest Benjamin L. Hooks
Chairman of the Board
Universal Life Insurance Company
CLOSING MEMORANDUM AND AMENDMENTS
Pursuant to the Coinsurance Agreement effective January 1, 1998,
between Universal Life Insurance Company ("Universal") and American Capitol
Insurance Company ("American Capitol"), the Closing of the subject
reinsurance by American Capitol of the block of Universal's individual life
insurance policies as defined therein was consummated, contemporaneously
with the execution and delivery by the parties to each other of this Closing
Memorandum and Amendments, in multiple originals, in conjunction with which
the following changes, additions, amendments, and verifications are hereby
agreed to and acknowledged by the parties:
1. Closing Date
The Closing Date was changed to March 5, 1998.
2. Schedule 4.1
Schedule 4.1 was updated to March 5, 1998, and certain changes in the
composition of the assets, as well as a change in the reserve amount, were
made, a copy of which is attached hereto, being the final Schedule 4.1 used
for purposes of Closing, which supersedes all prior versions of Schedule
4.1. The reserve amount change was based on a new certification by
Universal's actuary which amount the parties agree to substitute for the
reserve amount shown in Universal's 1997 Annual Statement previously filed,
but to have the same effect as though such substituted amount had been
entered by Universal in its 1997 Annual Statement. The agreement by the
parties to use the attached Schedule 4.1 does not modify or alter any of the
agreements, covenants and warranties in the Coinsurance Agreement and
documents related thereto (including the Administrative Services Agreement,
the Master Assignment of Notes and Liens, Mortgage Portfolio Administrative
Services Agreement, and the Arbitration Agreement), which were executed and
delivered by the parties at or before Closing. Attached to Schedule 4.1 is
a revised listing of the mortgage notes transferred as part of the assets.
The mortgage documents contain certain errors and deficiencies which are to
be cured in keeping with covenants and warranties contained in applicable
documents. Any errors in the computations of amounts contained in Schedule
4.1 that are plainly computation errors are subject to correction, if
needed. The amount of the reserves is subject to Universal's warranties as
stated in the Coinsurance Agreement, to be audited in due course by American
Capitol.
3. Transfer of Assets
The parties recognize that American Capitol has reinsured the subject
policies with Republic-Vanguard Life Insurance Company and certain of the
assets listed in Schedule 4.1 and transferred at Closing to American Capitol
are in fact transferred directly to Republic-Vanguard by Universal pursuant
to authorization and instruction from American Capitol, to-wit, the cash and
book-entry bonds, and such transfer by Universal to Republic-Vanguard has
the same effect as if such assets so transferred had been transferred by
Universal to American Capitol.
4. Acknowledged Receipt
American Capitol acknowledges having received the assets listed on Schedule
4.1 from Universal, subject to such audits, verifications, agreements,
covenants and warranties stated in the applicable agreement documents, and
subject to the prompt consummation of the transfer of the book-entry bonds
(to be transferred to Republic-Vanguard pursuant to Universal's
instructions) and wire transfer of cash to Republic-Vanguard pursuant to
Universal's instructions.
5. Equipment and List of Policies
The parties acknowledge that the equipment list (hardware used for
processing and servicing of the policies as set forth in the Coinsurance
Agreement) has been discussed, is still under review, and is subject to such
additions as the parties agree upon. Similarly, the list of policies being
coinsured and delivered by Universal at Closing has been determined to be
subject to such changes as may result from a final reconciliation of the in
force policy list as of December 31, 1998, which the parties agree to pursue
diligently to completion.
6. Amendment of Master Assignment of Notes and Liens
The second sentence of the Master Assignment of Notes and Liens, beginning
with "The Notes are secured ..." and ending with "... a part hereof" is
hereby amended to read instead as follows: "The Notes are secured by deeds
of trust (herein called the "Security Documents") described on Exhibit A
under the Register Numbers indicated thereon and recorded in the Register's
office of Shelby County, Tennessee (or other applicable jurisdiction, as the
case may be).
The principal payments received on the Notes since December 31, 1997,
referred to in Section 1 (d), have been accounted for and settled as part of
the cash item in Schedule 4.1.
Section 1, 15 is amended by inserting at the beginning of the sentence: To
the best of Assignor's knowledge,...."
In each case in which reference is made to Assignor's obligation to endorse
a Note or other assignment document, Assignor may, in lieu thereof, make
such endorsement by executing and delivering an allonge or other acceptable
short form assignment of the Notes and Deeds of Trust, in recordable form,
sufficient to effect transfer of record of the ownership of such Notes and
Deeds of Trust described on Exhibit A. Similarly, in respect to Assignee's
obligation to make such endorsements upon the occasion of transferring the
Notes and Deeds of Trust back to Assignor, Assignee my use an allonge or
other acceptable short from assignment instrument as above allowed to
Assignor.
References to Exhibit B are hereby deleted or changed to Exhibit A as
appropriate, in that all required descriptions of the Notes and Deeds of
Trust are contained on Exhibit A.
7. No Oral or Other Amendments
Except as stated in this Closing Memorandum and Amendments and the February
27, 1998, letter agreement between the parties, there are, as of the
Closing, no amendments or modifications, written or oral, to the Coinsurance
Agreement and related documents which are identified herein.
IN WITNESS WHEREOF, the parties execute and deliver to each other this
Closing Memorandum in multiple originals by their duly authorized officers
on this 5th day of March, 1998.
Universal Life Insurance Company American Capitol Insurance Company
By:/s/Benjamin L. Hooks By:/s/William F. Guest
---------------------------- ----------------------------
Benjamin L. Hooks, Chairman William F. Guest, Chairman
<PAGE>
ADMINISTRATIVE SERVICES AGREEMENT
American Capitol Insurance Company, hereinafter referred to as "Administrator,"
and Universal Life Insurance Company, hereinafter referred to as "Client,"
agree as follows:
1. Except as provided below for an initial period of time referred to herein
as the "Transition Period," during the term of this agreement ("Agreement"),
Administrator will perform for Client in respect to Client's "Policies"
(defined below) the policy administration and data processing services
hereinafter designated in this Agreement and exhibits attached hereto and made
a part hereof for all purposes. The parties acknowledge that the parties have
entered into a coinsurance agreement effective January 1, 1998 ("Coinsurance
Agreement") which agreement is incorporated herein by reference thereto for all
purposes, whereby Administrator (a life insurance company) has coinsured 100%
of the Policy Obligations (as defined in the Coinsurance Agreement) of all of
Client's individual life insurance policies in force as of December 31, 1997
("Policies" as defined in the Coinsurance Agreement) as set forth in the
Coinsurance Agreement, and that the purpose of this Agreement is to provide for
the administration of the Polices by Administrator for Client. This Agreement
does not involve marketing of new policies or adding other polices that would
be subject to this Agreement. The Commissioner of Commerce and Insurance for
the State of Tennessee shall be referred to herein as the "Commissioner."
2. Client shall designate the person or persons to whom Administrator will
report. Client will keep Administrator informed of its corporate policy and
changes in policy to enable Administrator to carry out the subject services for
Client in an efficient manner. Client shall appoint one or more of
Administrator's officers as its attorney-in-fact to act for Client in
performing routine functions in the course of administering the Policies and
performing data processing services as called for by this Agreement.
3. Following the "Transition Period" as hereinafter defined, Administrator
shall maintain at its principal administrative office for the duration of this
Agreement and five (5) years thereafter adequate books and records of all
transactions between Administrator, Client and the insureds ("Transaction
Information"), and shall safeguard all such Transaction Information in
confidence to the same extent that Administrator safeguards comparable
information relating to its own business, provided, however, if such
Transaction Information is available to the general public, is known or in the
possession of Administrator prior to the date of this Agreement, or is known
or in the possession of Administrator prior to actual receipt by Administrator
of such Transaction Information from Client or is obtained from third parties,
Administrator shall bear no responsibility for its disclosure, inadvertently
or otherwise. Notwithstanding anything to the contrary herein contained, the
Commissioner may use any such Transaction Information in any proceedings
instituted against Administrator, and Client shall retain the right to
continuing access to such books and records of Administrator sufficient to
permit Client to fulfill all of its contractual obligations to insured persons.
4. Client agrees that it will assign, convey, transfer and deliver at the end
of the Transition Period to Reinsurer its data processing hardware and license
its software as more fully set forth in the Coinsurance Agreement. All
hardware and software relating to the subject services furnished, owned,
licensed or developed by Administrator during the term of this Agreement and
at any time thereafter shall be and remain the sole property of Administrator.
5. In the event of termination of this Agreement, Administrator may, at its
option, retain any property or data in its possession that belongs to Client
until all sums due Administrator pursuant to this Agreement are paid, including
such additional charges as may be determined by Administrator and Client to be
reasonable and necessary to effect an orderly termination of the work and
services then being performed by Administrator and to assure and protect the
orderly and timely perpetuation of Client's business as affected by such work
and services. Upon termination of this Agreement, Client shall instruct
Administrator in writing prior to such termination as to the disposition of all
such property or data.
6. Administrator (or Client during the Transition Period) shall use due care
and diligence in performing the work and services to be performed hereunder and
agrees that it will correct any errors which are caused solely by
Administrator, its authorized agents, employees, programs, or data processing
equipment, and its liability for such errors shall be limited to the correction
of same within a reasonable time as full compensation for any and all damages
which may result from such error or errors and, in any event, the liability of
Administrator to Client or any other party for any and all losses or damages
directly or indirectly arising out of this Agreement, or the performance
hereof, shall not exceed the task of performing the correction of such error
or errors giving rise to such loss or damages and it is hereby stipulated that
such amount shall constitute an agreed amount of liquidated damages for such
losses and damages. The parties acknowledge that Administrator has certain
liabilities in respect to the subject Policies in its capacity as Reinsurer
under the Coinsurance Agreement and, except as hereinabove stated,
Administrator shall not incur any additional liability by virtue of its role
and responsibilities as Administrator pursuant to this Agreement.
7. Administrator shall perform the subject administrative services at no
charge, it being understood that Administrator's charges have been incorporated
in the consideration involved in the Coinsurance Agreement. The charges
hereinafter set forth in Exhibit C attached hereto shall be paid to Client for
performing the administrative services during the Transition Period, as set
forth below and in the Coinsurance Agreement.
8. Each party agrees that in the event of default in any of the covenants or
agreements contained herein and in any exhibit or exhibits attached hereto or
made a part hereof, the defaulting party will pay all costs and expenses of
enforcement or collection, including reasonable attorney's fees, which may
arise or accrue as a result thereof.
9. This Agreement may not be terminated by either party during the existence
of the Coinsurance Agreement and shall automatically terminate if and when such
Coinsurance Agreement terminates, unless the parties agree otherwise in
writing.
10. Beginning on the Effective Date hereof, there shall be a transition period
during which the Policies, which are currently being serviced exclusively by
Client, shall continue to be serviced exclusively by Client ("Transition
Period"). During such Transition Period Client shall provide all of the
services in respect to the Policies that are required by this Agreement to be
provided by Administrator, and Client shall provide to Administrator all of the
financial interface and financial reports in respect to the Policies that
Administrator is required to furnish to Client during the term of this
Agreement following the Transition Period. More specifically, Client is to
provide to Administrator on a timely basis the financial information relating
to the subject Policies sufficient to enable Administrator to complete
reporting requirements of the various state insurance departments in its role
as Reinsurer under the Coinsurance Agreement and to complete applicable
miscellaneous reporting forms as required by the states. During the Transition
Period, Client shall perform the billing and collection called for in the
"BILLING/COLLECTION" section below and remit to Administrator all premiums and
other payments collected or received by Client in respect to the Policies. On
or about the "Transition Period Termination Date" (defined below),
Administrator shall give written notice to the holders of the Policies to the
effect that future premiums and other payments shall be addressed to
Administrator's home office address. During the Transition Period,
Administrator shall pay to Client 100% of the fees set forth in Schedule C for
each month that Client provides the subject administrative services, which
payment shall be made by crediting such amount to Client in the Monthly Cash
Settlement called for in the Coinsurance Agreement. The Transition Period
shall begin on the Effective Date of this Agreement and shall end at the close
of business on June 30, 1998 (the "Transition Period Termination Date"). The
transfers to be made by Client to Administrator as set forth as Client's
Responsibilities in items 3 and 4 under "Management" below shall be made on the
Transition Period Termination Date. During the Transition Period, Client shall
provide assistance and opportunity for Administrator to observe, investigate,
and analyze Client's procedures, methods, policies, documents, equipment,
systems and other ways and means by which servicing is provided in respect to
the Policies and the operations of the data processing activities, and Client
shall fully share with and inform Administrator of its procedures, methods,
policies, documents, equipment, systems and other ways and means used by Client
to perform such services, including Client's progress and plans for completing
the conversion of its data processing from its main frame data processing
system to its Unisys system. During the Transition Period Client shall
complete the documentation called for by item 3 under "Management" below.
Administrator shall be allowed the opportunity to interview Client's personnel
involved in the subject services and to make offers of employment and/or
consultation to such personnel, and to make employment and consulting
arrangements with such personnel to the extent approved by Client, provided,
however, Administrator shall not unduly interfere with the work
responsibilities of such personnel nor attempt to terminate the employment
relationship between Client and such personnel prior to the Transition Period
Termination Date. During the Transition Period, Client shall be responsible
for processing the work involved in the subject services on a current basis and
to maintain personnel responsible for such work at current levels, if
necessary, to assure that the work is maintained on a current basis, even if
this involves hiring employees on a short term and/or temporary basis to
maintain such personnel at current levels (notwithstanding the fact that a
period of transition such as the subject one may involve personnel turnover and
instability). Client and Administrator commit to cooperate with each other in
a good faith effort to effect a smooth and effective transition so as to
accomplish the needs of each party and to continue quality and orderly services
to the holders of the Policies, and the maintaining of good systems and
procedures customarily dedicated to that purpose.
11. Client warrants that it is duly authorized to enter into this Agreement
and that Administrator has in no way caused or induced Client to breach any
contracted obligation and Client agrees to indemnify and hold harmless
Administrator from any claim or claims.
12. The parties hereto agree that each will comply with all applicable
federal, state and local laws, the violation of which may adversely affect the
performance of this Agreement.
13. This Agreement, the Coinsurance Agreement incorporated herein by
reference, and the exhibits attached hereto and made a part hereof constitute
the entire agreement of the parties on the subject of policy administration and
data processing services, and supersedes all prior and contemporaneous
agreements or understandings between the parties, whether written or oral. Any
modifications or amendments hereof must be in writing signed by both parties.
14. This Agreement shall inure to the benefit of and be binding upon the
parties hereto, their successors and legal representatives, and shall not be
assigned by either party without the prior written consent of the other party.
15. If any failure to pay amounts due or to perform any other act required by
this Agreement is unintentional and caused by oversight, Client and
Administrator will adjust the situation to what it would have been had the
oversight not occurred. Any amounts which are not paid when due shall bear
interest at the rate of 10% per annum, compounded annually, until paid.
16. Client or Administrator, their respective employees or authorized
representatives may audit, inspect and examine, during regular business hours,
at the home office of Client or Administrator, as the case may be, provided
that three working days advance written notice has been given to the other
party, any and all books, records, statements, correspondence, reports, trust
accounts and their related documents or other documents that relate to the
Policies. The audited party agrees to provide a reasonable work space for such
audit, inspection or examination and to cooperate fully and to faithfully
disclose the existence of and produce any and all materials reasonably
requested by such auditors, investigators, or examiners. The expense of the
auditing party's employee(s) or authorized representative(s) engaged in such
activities shall be borne solely by such auditing party, and the party being
audited shall be entitled to reimbursement for expenses reasonably incurred by
such audited party. The auditing party agrees to conduct such audit in a
courteous, prompt, professional and reasonable manner, and to provide immediate
written disclosure to the audited party of any discrepancy or variance (when
compared to any previously reported information) discovered by the auditing
party.
17. This Agreement is subject to and is to be interpreted in accordance with
the laws of the State of Texas. Venue for any action, suit or other proceeding
shall be exclusively in Harris County, Texas, or Shelby County, Tennessee. The
parties agree to waive any other venue.
18. In the event that any provision or term of this Agreement shall be held
by any court to be illegal or unenforceable, all of the other terms and
provisions shall remain in full force and effect.
19. This Agreement shall be amended only by mutual consent and written
agreement executed and delivered by the parties.
20. The representations, warranties, covenants and agreements respectively
made by Client and Administrator in this Agreement shall survive the
termination or expiration of this Agreement.
21. Any notices made pursuant to this Agreement shall be in writing and shall
be deemed to have been duly given on the date of delivery if delivered
personally (including overnight delivery service) or by facsimile transmission
to the party to whom notice is given, or on the third day after mailing if
mailed to the party to whom notice is to be given by certified mail, return
receipt requested, and properly addressed as follows:
If to Client:
Universal Life Insurance Company
Attn: Dr. Benjamin L. Hooks
Chairman of the Board
480 Linden Avenue
Memphis, TN 38126
FAX: (901) 528-8231
With a copy to:
Allan J. Wade, Esq.
Twentieth Floor
First Tennessee Building
165 Madison Avenue
Memphis, Tennessee 38103
FAX: (901) 577-2303
If to Administrator:
American Capitol Insurance Company
Attn: William F. Guest, Chairman
10555 Richmond Avenue
Houston, Texas 77042
FAX: (713) 953-7920
Any party to this Agreement may change the address to which notice is to be
delivered to such party by delivering written notice to that effect to the
other party in accordance herewith. Any document delivered via facsimile
transmission shall be treated as the original for all purposes unless the
original is substituted therefor.
22. The Parties agree that the drafting of this Agreement has been a joint
effort and no special weight or presumption should arise in favor of or against
either party based on whether one party or the other was more responsible for
the drafting of this Agreement. Each party has consulted with its accounting,
actuarial and legal advisers in respect to the negotiations and the drafting
of this Agreement. Each party has read and understands this Agreement, and
each party agrees that it shall not be entitled to claim a failure to
understand the meaning or effect of this Agreement, or any part thereof, as a
defense under any circumstances.
23. No party may assign this Agreement or any of its rights, interests, or
obligations hereunder without the prior written consent of the other party.
24. The parties agree that they will from time to time, upon the request of
any other party and without further consideration, execute, acknowledge, and
deliver in proper form any further instruments and take such other action as
the other party may reasonably require in order to carry out effectively the
intent of this Agreement.
25. Unless otherwise expressly provided in this Agreement, each party shall
pay all of its own costs, fees, and expenses incurred or to be incurred in
negotiating and preparing this Agreement and in closing and carrying out the
transactions contemplated by this Agreement.
26. Nothing in this Agreement, whether express or implied, is intended to
confer any rights or remedies under or by reason of this Agreement on any
persons or entities other than the parties to it and their respective
successors and permitted assigns. In addition, nothing in this Agreement is
intended to relieve or discharge the obligation or liability of any third
person or entity to any party to this Agreement or give any third person or
entity any right of subrogation or action against any party to this Agreement.
27. The party for whose benefit a warranty, representation, covenant, or
condition is intended may waive any inaccuracies in the warranties and
representations contained in the Agreement or waive compliance with any of the
covenants, warranties, or conditions contained herein and so waive performance
of any of the obligations of the other party and any defaults under this
Agreement, but to be effective any such waiver must be in writing signed by the
party granting such waiver. A waiver shall not affect or impair, however, the
waiving party's rights with respect to any other warranty, representation, or
covenant or any default hereunder not specifically waived, nor shall any waiver
constitute a continuing waiver.
28. This Agreement may be executed simultaneously in any number of
counterparts, each of which shall be deemed an original, but all of which shall
constitute one and the same instrument.
29. Client and Administrator both expressly waive any right to trial by jury
of any claim, demand, action or cause of action (a) arising under this
Agreement or any other instrument or document executed or delivered in
connection herewith, or (b) in any way connected or incident to the dealing of
the parties hereto in connection with the transactions related hereto, in each
case whether now existing or hereafter arising; and Client and Administrator
both hereby agree and consent that any such claim, demand, actin or cause of
action shall be decided by arbitration (pursuant to the Arbitration Agreement
as set forth in the Coinsurance Agreement) and to the extent applicable by a
court trial without a jury, and that any party to this Agreement may file an
original counterpart or a copy of this Agreement with any court as written
evidence of the consent of Client and Administrator to the waiver of the right
to trial by jury.
30. The Effective Date of this Agreement is January 1, 1998.
IN TESTIMONY WHEREOF, Client and Administrator have caused this Agreement
to be duly executed by their respective undersigned authorized officers,
effective as of the Effective Date.
UNIVERSAL LIFE INSURANCE COMPANY
By:/s/Benjamin L. Hooks
--------------------------------------------
Benjamin L. Hooks
Chairman of the Board of Directors
Witness:/s/Eldredge M. Williams
---------------------------------------
Eldredge M. Williams, Executive Vice President
AMERICAN CAPITOL INSURANCE COMPANY
By: /s/William F. Guest
-------------------------------------------
William F. Guest
Chairman of the Board of Directors
Witness:/s/Dan R. Stites
----------------------------------------
Dan R. Stites, Vice President
<PAGE>
EXHIBIT A
MANAGEMENT
Client's responsibility shall be:
1. To provide from its Board of Directors or an Officer instructions
regarding its corporate policy, products, growth and general operations of
Client and such other instructions as are called for herein. To select and
authorize one or more officers of Client to whom Administrator is to report and
from whom Administrator is to receive instructions. To designate and appoint
not less than two officers of Administrator to act as Client's attorney-in-fact
to perform in Client's place and stead the routine policy transactions, such
as claims payments and such other functions as the parties may deem
appropriate.
2. Following the Transition Period, to provide financial interface and
receive the financial reports from Administrator.
3. Prior to the Transition Period Termination Date, to provide Administrator
with documentation regarding user (customer service personnel) procedures and
data processing systems operations, such documentation to be reasonably
sufficient to enable the performance of the respective services. (The parties
acknowledge that the subject documentation is not adequate as of the effective
date of this Agreement, that a Transition Period is called for in this
Agreement before Administrator fully assumes the duties hereunder, and,
accordingly, prior to the end of such Transition Period, Client will develop
the documentation to a level of sufficiency specified in the preceding
sentence.)
4. To transfer to Administrator on the Transition Period Termination Date all
of the files, books and records, in paper, microfiche, electronic, and/or other
format, required for, and customarily used by, Client in maintaining, recording
and reporting the information and transactions pertaining to the Policies such
that the Policies can be reasonably and accurately administered and serviced;
and also to transfer to Administrator on the Transition Period Termination Date
all of Client's data processing hardware and to license Client's software as
provided in above and in the Coinsurance Agreement.
5. During the Transition Period, to provide financial information relating to
the subject Policies sufficient to enable Administrator to complete
requirements of the various state insurance departments, file premium tax,
advertising and miscellaneous reporting obligations as required by the states.
Administrator's responsibilities shall be:
1. Following the Transition Period, to perform the subject services in
keeping with corporate policy of Client as communicated by Client to
Administrator, which shall be in keeping with the standards customarily
observed by Client prior to the transfer of responsibilities to Administrator
as herein provided.
2. Following the Transition Period, to provide financial information relating
to the subject Policies sufficient to enable Client to complete requirements
of the various state insurance departments, file premium tax, advertising and
miscellaneous reporting obligations as required by the states.
3. During the Transition Period, to provide financial interface and receive
the financial reports from Client.
MARKETING
No new policies shall be added to this Agreement.
UNDERWRITING/ISSUE
Client's responsibility shall be:
Following the Transition Period, to set underwriting standards and guidelines
as conditions for reinstatement of policies that are eligible for
reinstatement.
Administrator's responsibility shall be:
Following the Transition Period, to reinstate policies consistent with
underwriting standards and guidelines provided by Client.
CLAIMS SERVICE
Client's responsibilities shall be:
During the Transition Period, to perform the responsibilities of Administrator
as set forth below. Following the Transition Period, to inform Administrator
of its claims-paying policies and guidelines respecting routine claims
processing. To issue instructions to Administrator in respect to claims that
are other than routine or in respect to which Administrator requests
instructions. To inform Administrator on a timely basis of all notices of
claims when notice thereof is not sent directly to Administrator. To pay to
Administrator any claims or portions of claims that Administrator is required
to pay in respect to the Policies that are not within the scope of the Policy
Obligations.
Administrator's responsibility shall be:
Following the Transition Period, to verify and pay all claims in accordance
with the terms and conditions of the Policies and Client's policies, guidelines
and, when applicable, instructions.
POLICYHOLDER SERVICE
Client's Responsibilities shall be:
During the Transition Period, to perform the responsibilities of Administrator
as set forth below. Following the Transition Period, to inform Administrator
of its policies and guidelines respecting routine policyholder service. To
issue instructions to Administrator in respect to policyholder service matters
that are other than routine or in respect to which Administrator requests
instructions. To inform Administrator on a timely basis of all communications
received from policyholders when such communication is not received directly
by Administrator.
Administrator's Responsibility shall be:
Following the Transition Period, to answer and process all inquiries received,
including cash surrenders, policy loans, reinstatement requests and policy
changes, in keeping with Client's guidelines.
BILLING/COLLECTION
Client's responsibility shall be:
During the Transition Period, to perform the responsibilities of Administrator
as set forth below, and to keep copies of all records of such premiums and
other receipts and claims payments and policy loans in respect to such Policies
and make available to Administrator upon Administrator's request such copies
pertaining to all such premiums and other receipts and claims payments and
policy loans. In respect to the holders of Policies that customarily receive
the service of premium collection at their homes or other designated places of
premium collection, during the Transition Period Client may continue or
discontinue (in its sole discretion, and without compensation for same) causing
its agents to collect premiums from such policyholders, but premiums shall not
be accepted by Client or its agents in respect to Policies that have lapsed
without prior written approval by Administrator. Client shall remit all
collected premiums and other payments to Administrator as the Reinsurer under
the Coinsurance Agreement.
Administrator's responsibilities:
Following the Transition Period, to provide billing notices either through pre-
authorized check, coupons, or direct bills for modal premiums when due. To
collect and deposit in Client's account all premiums received and to reconcile
on a daily basis premium collections and deposits as received by Administrator.
In this regard, Client hereby authorizes Administrator to establish one or more
bank accounts in the name of Client in respect to which Administrator's
officers are hereby authorized to sign and transact business in the same manner
that it operates banking accounts in its own name. Client will provide in a
timely manner appropriate resolutions by its Board of Directors and
certifications by its officers to facilitate the above. Client and
Administrator acknowledge that the subject Policies are co-insured 100% by
Administrator and that all premiums and other payments received in respect to
the subject Policies belong to Administrator as more fully set forth in the
Coinsurance Agreement. Accordingly, all such premiums and other receipts to
which Administrator is entitled may be allocated directly to Administrator.
Administrator shall keep copies of all records of such premiums and other
receipts, claims payments and other payments in respect to such Policies and
shall make available to Client upon Client's request such copies pertaining to
all such premiums and other receipts and claims payments. Claims payments
shall be paid on drafts of and as authorized by Client. On or about the time
of the Transition Period Termination Date, Administrator shall provide written
notice to Client and to insured individuals advising them of the identity of
and relationship among Administrator, the policyholder and Client. In respect
to collected funds, Administrator shall identify and state separately in
writing to the person paying to Administrator any charge or premium for
insurance coverage the amount of any charge or premium specified by Client for
such insurance coverage.
Monthly Cash Settlement
Client's responsibility shall be:
During the Transition Period, to prepare and send to Administrator the Monthly
Cash Settlement which Administrator (following the Transition Period) is
required to prepare and send to Client as set forth in the Coinsurance
Agreement, and to make remittances to Administrator as called for therein, or
to receive remittances from Administrator as called for therein, as the case
may be. Following the Transition Period, to receive and review promptly the
Monthly Cash Settlement provided by Administrator as set forth in the
Coinsurance Agreement, and to report in writing to Administrator any errors or
matters in respect to which Client disagrees or disapproves within 30 days
following receipt thereof; and to receive remittances called for therein, or
to make payments to Administrator as called for therein, as the case may be.
Administrator's responsibility shall be:
During the Transition Period, to receive and review promptly the Monthly Cash
Settlement provided by Administrator as set forth in the Coinsurance Agreement,
and to report in writing to Client any errors or matters in respect to which
Administrator disagrees or disapproves within 30 days following receipt
thereof; and to receive remittances called for therein, or to make payments to
Administrator as called for therein, as the case may be. Following the
Transition Period, to prepare and send to Client the Monthly Cash Settlement
as set forth in the Coinsurance Agreement, and to make remittances to Client
as called for therein, or to receive remittances from Client as called for
therein, as the case may be.
INVESTMENTS
Client's responsibility shall be:
Client, pursuant to the Coinsurance Agreement, has not retained any of the
Policy Obligations as set forth in the Coinsurance Agreement.
Administrator's responsibility shall be:
Administrator, pursuant to the Coinsurance Agreement, is solely responsible for
the assets covering the Policy Obligations as set forth in the Coinsurance
Agreement, and Administrator shall be solely responsible for the investments
relating to such assets.
ACCOUNTING, TAXES, REPORTING AND REGULATORY COMPLIANCE
Client's responsibility shall be:
During the Transition Period, to provide sufficient policy data and information
to Administrator to enable Administrator to record all accounting entries on
Administrator's books to properly account for all transactions implemented by
Client in respect to the subject Policies. Following the Transition Period,
to inform Administrator of the Officer to whom Administrator is to report and
to inform Administrator of any specific format required to interface with
Client in respect to accounting procedures, taxes and tax reporting, financial
reporting and regulatory compliance. Client shall be solely responsible for
its accounting functions, taxes and tax reporting, financial reporting and
regulatory compliance.
Administrator's responsibility shall be:
During the Transition Period, to inform Client of the Officer to whom Client
is to report and to inform Client of any specific format required to interface
with Administrator in respect to accounting procedures, taxes and tax
reporting, financial reporting and regulatory compliance. Following the
Transition Period, to provide sufficient policy data and information to Client
to enable Client to record all accounting entries on Client's books to properly
account for all transactions implemented by Administrator in respect to the
subject Policies.
COMMISSIONS
Client's responsibility shall be:
Subject to the provisions and limitations in the Coinsurance Agreement, to make
all commission and other compensation arrangements with its agents. During the
Transition Period, to prepare agent commission statements and disburse funds
to agents based on the results of the commission statements, not to exceed the
"Commission Allowance" as defined in the Coinsurance Agreement.
Administrator's responsibility shall be:
Following the Transition Period, to prepare agent commission statements and
disburse funds to agents based on the results of the commission statements,
pursuant to Client's guidelines and instructions, not to exceed the "Commission
Allowance" as defined in the Coinsurance Agreement.
POLICY DIVIDENDS
Client's responsibility shall be:
It is Administrator's understanding that all of the subject Policies are non-
participating and therefore no dividends have been or will be payable. If any
dividend obligation exists, it shall be Client's responsibility to determine,
declare, and fund all dividends to be paid in respect to the subject Policies
and to instruct Administrator accordingly. During the Transition Period, to
pay or otherwise credit dividends to the subject Policies, if any.
Administrator's responsibility shall be:
Following the Transition Period, to pay or otherwise credit dividends to the
subject Policies, if any, in accordance with Client's instructions.
Administrator shall be entitled to rely upon and implement the dividend scales
and practices of Client.
<PAGE>
EXHIBIT B
DATA PROCESSING SERVICES
Client's responsibility shall be:
During and Transition Period, to furnish data, documentation, instructions, and
assistance to Administrator in a timely manner as needed by Administrator from
Client to enable Administrator to prepare for and to perform the subject
administrative services when the Transition Period ends, and following the
Transition Period, to provide such follow-up information and assistance that
is needed to supplement the foregoing as needed by Administrator.
Administrator's responsibilities shall be:
To provide all data processing services necessary to the normal administration
of the subject Policies as called for by this Agreement.
<PAGE>
Exhibit C
FEES
During the Transition Period, Client will be entitled to charge monthly for the
administrative services it performs under this Agreement according to the
following schedule.
Maintenance
Monthly Fee Per Policy. Per policy charges are based on the number of
applicable policies in force at the beginning of each month. Per transaction
charges are based on the number of such transactions processed during the
month.
Policy Status In Force (Beginning of Month)
Industrial Premium Paying .................. $.8333 per policy
Industrial Non-Premium Paying............... .4166 per policy
Ordinary Premium Paying..................... 2.083 per policy
Ordinary Non-Premium Paying................. 1.042 per policy
Death Claim................................. 25.00 per claim
Surrender................................... 10.00 per surrender
[Signatures appear on Page 9.]
REINSURANCE AGREEMENT
between
AMERICAN CAPITOL INSURANCE COMPANY
of
HOUSTON, TEXAS
(hereinafter referred to as the "Company")
and
REPUBLIC-VANGUARD LIFE INSURANCE COMPANY
of
DALLAS, TEXAS
(hereinafter referred to as the "Reinsurer")
TREATY # UL98-OCO
ORDINARY
COINSURANCE
<PAGE>
TABLE OF CONTENTS
ARTICLES
I. PURPOSE
II. DURATION OF RISK
III. CONSIDERATIONS
IV. BENEFIT PAYMENTS
V. ACCOUNTING AND SETTLEMENT
VI. REPRESENTATIONS AND WARRANTS
VII. ARBITRATION
VIII. INSOLVENCY
IX. TERMINATION
X. GENERAL PROVISIONS
XI. EXECUTION AND EFFECTIVE DATE
SCHEDULES
A. POLICIES AND RISKS REINSURED
B. NOTICES
C. EXPERIENCE REFUND FORMULA
D. SEGREGATED ASSET ACCOUNT
E. ADDITIONAL RECAPTURE AMOUNT
F. INVESTMENT GUIDELINES
<PAGE>
PREAMBLE
This Agreement is made and entered into by and between American Capitol
Insurance Company (hereinafter referred to as the "Company") and
Republic-Vanguard Life Insurance Company (hereinafter referred to as the
"Reinsurer").
The Company and the Reinsurer mutually agree to reinsure on the terms and
conditions stated herein. This Agreement is an indemnity reinsurance
agreement between the Company and the Reinsurer and performance of the
obligations of each party under this Agreement shall be rendered solely to
the other party. In no instance shall anyone other than the Company or the
Reinsurer have any rights under this Agreement.
ARTICLE I
PURPOSE
1.01 Policies Reinsured. The Company has assumed through coinsurance or
assumption reinsurance certain individual life insurance policies which it
desires to reinsure hereunder. The Policies and Quota Share thereof
described in Schedule A, which is attached hereto and by this reference made
a part hereof, constitute this block (the portion of such policies reinsured
hereunder are hereinafter referred to as the "Policy" or "Policies").
1.02 Purpose of Agreement. The purpose of this Agreement is to provide for
the indemnity reinsurance by the Reinsurer of 100% of the interest of the
Company in the policies reinsured hereunder. It is the intent of the
parties that the Reinsurer's profits on the Policies shall be limited to
only the experience, as defined herein, if any, of the Policies and the
Reinsurer shall have no other recourse against the Company for payments
other than those amounts specifically allowed for herein. This Agreement
shall commence on the Effective Date of this Agreement, is subject to the
terms and conditions set forth herein, and shall cease upon the termination
date of this Agreement as defined in Article IX.
ARTICLE II
DURATION OF RISK
2.01 Duration. Except as otherwise provided herein, this Agreement shall be
unlimited in duration.
2.02 Reinsurer's Liability. The liability of the Reinsurer with respect to
any Policy will begin simultaneously with that of the Company, but not prior
to the Effective Date of this Agreement. The Reinsurer's liability with
respect to any Policy will terminate on the date the Company's liability on
such Policy is terminated.
2.03 Recapture. The Policies are eligible for recapture without the
Additional Recapture Amount specified in Schedule E commencing ten (10)
years after the date on which the Negative Experience Refund Carryforward,
as defined in C.02, first reaches zero. In the event the Company elects to
recapture the Policies prior to the date falling ten (10) years after the
date on which the Negative Experience Refund Carryforward first reaches
zero, other than for a reason specified in Article IX, the amount due from
the Reinsurer to the Company as part of the terminal monthly cash settlement
shall be reduced by the Additional Recapture Amount. In the event the
Company elects to recapture a percentage, but less than 100%, of the risks
of the Policies, as provided above, then such percentage recapture shall
apply to all the Policies and the Additional Recapture Amount shall be
determined proportionately. Furthermore, the Company may recapture any such
policies as specifically provided for in Article IX with any and all
appropriate notices as may be contained therein.
ARTICLE III
CONSIDERATIONS
3.01 Initial Portfolio Transfer. On the Effective Date of this Agreement,
the Company shall pay to the Reinsurer an amount equal to the reserves as
defined in 10.01 less the reinsurance reserve credits on reinsurance ceded,
if any, on the Policies. The Company may make such payment directly to a
segregated asset account established by the Reinsurer as defined in Schedule
D and attached hereto (hereinafter referred to as the "segregated asset
account"). Such segregated asset account shall be maintained for the
duration of this agreement and the assets housed therein, as defined herein,
shall be separate and distinct from any other assets of the Reinsurer. Both
parties agree that, as of the Effective Date of this Agreement, the value of
the bonds transferred to the Reinsurer, shall be equal to the fair market
value as required under the Internal Revenue Code Section 1060. Such
payment shall be the net payment as of the Effective Date of this Agreement
and it is specifically understood that the Initial Consideration as defined
in paragraph 3.02 below shall be offset against this payment and only the
net amount of assets needs to be actually transferred to the Reinsurer as of
such date.
3.02 Initial Consideration. Simultaneously with the payment defined in 3.01
above, the Reinsurer shall pay the Company a consideration for such Policies
in an amount equal to thirteen million five hundred thousand dollars
($13,500,000).
3.03 Premiums. The Reinsurer's portion of all premiums collected on the
Policies (net of any other reinsurance premiums related to reinsurance in
force prior to the Effective Date of this Agreement) shall become the sole
property of the Reinsurer as of the Effective Date of this Agreement and the
Company shall remit any and all such collected premiums as of the end of
each calendar month to the Reinsurer as part of the monthly settlement
contained herein.
3.04 Commission Allowance. The Reinsurer shall pay to the Company a
commission allowance equal to the following: a commission allowance on
first year premiums at the rate of 35% on Plan OG2 (5 Pay Life), 40% on Plan
OG3(10 Pay Life), 45% on Plan OG4 (15 Pay Life), 50% on Plans 801 (Whole
Life), 810 (Whole Life), 821 (10 Year Term) and OG5 (20 Pay Life), 55% on
Plan OG1 (Whole Life), and 60% on Plan 820 (Whole Life); a commission
allowance on renewal premiums for new ordinary business (1997 issues) at the
rate of 7% of premiums for policy years 2 through 10 and 3% of premiums
thereafter; and a commission allowance on renewal premiums for ordinary and
industrial (pre-1997 issues) at the rate of 10% of premiums for policy years
2 and 3, 4% of premiums for policy year 4, 3% of premiums for policy years 5
through 15 inclusive, 2% of premiums for policy years 16 through 20
inclusive.
3.05 Premium Tax Allowance. The Reinsurer shall pay to the Company a
premium tax allowance equal to 2.5% of all premiums collected on the
Policies.
3.06 Income Tax Reimbursement. The Company and the Reinsurer agree to
remain liable for their respective Federal Income Tax liabilities, including
any "DAC" taxable income that may be incurred by the reinsurance of the
Policies by the Reinsurer.
3.07 Administration. The Company shall provide all administration for the
Policies. The Reinsurer shall pay the Company an administration fee in an
amount equal to the following:
$25 for each death claim processed during a month, $10 for each surrender
processed during a month, $.8333 for each industrial premium paying policy
in force at the beginning of the month, $.4167 for each industrial paid up
policy in force at the beginning of the month, $2.0833 for each ordinary
premium paying policy in force at the beginning of the month, $1.0417 for
each ordinary paid up policy in force at the beginning of the month and
$.4167 for each policy, whether industrial or ordinary, on extended term
insurance at the beginning of the month. The above per transaction and per
policy expenses shall increase 2% (compounded) on each anniversary of the
Effective Date of this Agreement.
In addition to the foregoing, the Reinsurer shall pay the Company an
additional administration fee equal to 17% of the premiums collected on
ordinary policies.
3.08 Policy Loan Interest. The Company agrees to pay the Reinsurer monthly,
any and all interest earned, on an incurred basis, on any of the outstanding
policy loans on the Policies.
3.09 Adjustment to Initial Consideration. Section 4.5 of that certain
Coinsurance Agreement between Universal Life Insurance Company ("Universal")
and the Company provides for the possibility of an adjustment to the ceding
fee the Company is to pay Universal pursuant to that Coinsurance Agreement.
In the event that Universal pays the Company an amount pursuant to that
Section 4.5, the Company agrees to pay the Reinsurer a like amount as an
adjustment to the Initial Consideration defined in paragraph 3.02 of this
Agreement.
ARTICLE IV
BENEFIT PAYMENTS
4.01 Notice. Upon request of the Reinsurer, the Company will notify the
Reinsurer monthly after receipt of any information on a claim or surrender
on a policy to the extent it is reinsured hereunder. Upon such request, the
reinsurance claim form and copies of notifications, claim papers, and proofs
will be furnished the Reinsurer as soon as possible.
4.02 Liability and Payment. The Reinsurer will accept the decision of the
Company on payment of a benefit on a policy reinsured hereunder. The
Reinsurer will pay to the Company monthly the reinsurance benefit on the
Policies. Such reinsurance benefit shall be defined as the Reinsurer's
portion of the total death, surrender or other policy benefits paid by the
Company, net of other reinsurance, during such month.
4.03 Contested Claims. The Company will advise the Reinsurer of its
intention to contest, compromise, or litigate a claim involving a policy
reinsured hereunder. The Reinsurer will pay its share of the additional
expenses of the contest in addition to its share of the claim itself, or it
may choose not to participate. If the Reinsurer chooses not to participate,
it will discharge its liability by payment to the Company of the full amount
of its liability on the policy reinsured.
4.04 Dividends to Policyholders. The Reinsurer shall reimburse to the
Company the actual dividends paid to the policyholders reinsured hereunder
during any and all calendar months for which this Agreement is in effect.
Such dividends shall be computed on the dividend scale in effect as of the
Effective Date of this Agreement. No changes shall be made to such dividend
scale without the express written consent of the Reinsurer.
ARTICLE V
ACCOUNTING AND SETTLEMENT
5.01 Agreement Accounting Period. The accounting period for this Agreement
shall be on a calendar month basis unless otherwise specified herein.
5.02 Monthly Reports. Within 10 working days after the end of each calendar
month the Company will submit to the Reinsurer a monthly accounting report
which shall contain the amount of premiums, commission allowance,
administration fees, benefits, dividends to policyholders, reserves,
outstanding policy loans and interest incurred thereon, due and unpaid
premiums, due and deferred premiums, any and all claim reserves as
calculated in accordance with NAIC Convention Blank Exhibit 11, number of
Policies and in force for such calendar month.
5.03 Monthly Cash Settlements. Within 10 working days after the end of each
calendar month the Company shall pay to the Reinsurer:
a) For the first month only, the net portfolio transfer as defined in
3.01; and
b) the net amount of premiums as defined in 3.03; and
c) any experience refunds paid to the Company, if any, as part of any
other reinsurance agreements, as described in 10.05; and
d) the interest on outstanding policy loans as defined in 3.08; and
e) the decrease, if any, in outstanding policy loans as defined in
3.08.
Simultaneously, the Reinsurer shall pay to the Company:
a) For the first month only the initial consideration as defined in
3.02; and
b) the net paid reinsurance benefits, as defined in 4.02; and
c) the commission allowance as defined in 3.04; and
d) the premium tax allowance defined in 3.05; and
e) the administration fees as defined in 3.07; and
f) the dividends to policyholders as defined in 4.04; and
g) the experience refund as defined in ScheduleC.01 attached hereto,
if any; and
h) the increase, if any, in outstanding policy loans as defined in
3.08.
5.04 Amounts Due Monthly. Except as otherwise specifically provided in this
Agreement, all amounts due to be paid to either the Company or the Reinsurer
under this Agreement on a monthly basis shall be determined on a net basis
as of the last day of each calendar month and shall be due and payable as of
such date. If the amounts, as defined in 5.03 above, cannot be determined
at such dates as defined herein, on an exact basis, such payments will be
paid in accordance with a mutually agreeable formula which will approximate
the actual payments.
5.05 Delayed Payments. For purposes of 5.04 above, if there is a delayed
settlement of a payment due, there will be an interest penalty assessed, in
an amount calculated as: the amount of the payment which is delinquent,
multiplied by ten percent (10%), multiplied by the number of days such
amount has been delinquent, regardless of holidays or weekends, and divided
by the whole number 365. For purposes of this paragraph, a payment shall be
considered delayed after 20 working days from the date such payment is due.
For purposes of this Agreement the number of days a payment is delinquent
shall commence on the day following the date such payment is deemed overdue,
as defined above, and shall end on the date such payment is mailed.
5.06 Offset of Payments. Any debts or credits, liquidated or unliquidated,
in favor of or against either the Company or the Reinsurer with respect to
this Agreement only shall be set-off and only the balance shall be allowed
or paid.
ARTICLE VI
REPRESENTATIONS AND WARRANTS
6.01 Representations of the Company. The Company represents and warrants as
follows:
a) it is a corporation duly organized, existing and in good standing
under the laws of the State of Texas; and
b) it is empowered under applicable laws and by its charter and
bylaws to enter into and perform the duties contemplated in this Agreement;
and
c) it has taken all requisite corporate proceedings to authorize it
to enter into and perform the duties contemplated in this Agreement; and
d) no person under its control shall commit any action that would
violate any state law or regulation, in those jurisdictions covered
hereunder, governing administration or servicing of insurance as defined
thereunder; and
e) it has obtained any and all regulatory approvals as may be
required for the Company to cede the Policies covered hereunder and to
assure whatever reserve credits it may wish to take for such cession.
f) it has provided certain data, both oral and written, as part of
the Reinsurer's due diligence process and that such data is complete and
accurately describes the current financial condition of the Company and the
Policies eligible for reinsurance hereunder.
g) it is a U.S. taxpayer.
6.02 Representations and Warrants of the Reinsurer. The Reinsurer
represents and warrants as follows:
a) it is a corporation duly organized, existing and in good standing
under the laws of the State of Texas; and
b) it is empowered under applicable laws and by its charter and
bylaws to enter into and perform the duties contemplated in this Agreement;
and
c) it has taken all requisite corporate proceedings to authorize it
to enter into and perform the duties contemplated in this Agreement; and
d) it has obtained any and all regulatory approvals as may be
required for the Reinsurer to provide the reinsurance covered hereunder.
e) it has provided certain data, both oral and written, as part of
the Company's due diligence process and that such data is complete and
accurately describes the current financial condition of the Reinsurer.
f) it is a U.S. taxpayer.
6.03 Covenants. The Reinsurer and the Company agree as follows:
a) to indemnify, defend and hold harmless the other, its directors,
officers, employees and agents from any and all claims, actions, suits,
judgments, damages (including punitive or exemplary damages), fines and
other proceedings, whether civil, criminal (only to the extent permitted by
law or public policy),administrative, investigative or otherwise, together
with all costs, expenses and other amounts, including attorney's fees,
arising or alleged to have arisen out of any act, error or omission related
to or resulting from the performance of the duties, obligations or
responsibilities of the other party, its directors, officers, employees and
agents, under this Agreement; and
b) the Reinsurer shall have no obligation arising out of any breach
of any duty on the part of the Company to any insured covered hereunder.
The Company shall remain solely liable for all fines, penalties or other
assessments imposed against the Reinsurer by any Insurance Department or
other governmental entity for any conduct of the Company, its employees or
authorized representatives, which was not expressly authorized, in writing,
by the Reinsurer; and
c) any and all materials, information, proposals, studies or other
documents relative to this Agreement are confidential and proprietary.
Neither party shall disclose, directly or indirectly, any information
obtained from the other party, relative to this Agreement, to any third
party without the express written consent of the other unless applicable
statute, law or regulation requires such disclosure.
6.04 Expenses. Each of the parties agrees to pay all costs incurred by it
for actuarial, legal and other services received or utilized in connection
herewith.
ARTICLE VII
ARBITRATION
7.01 Agreement. All disputes and differences between the Company and the
Reinsurer on which an agreement cannot be reached will be decided by
arbitration, regardless of the insolvency of either party, unless the
conservator, receiver, liquidator, or statutory successor is specifically
exempted from an arbitration proceeding by applicable state law. Either
party may initiate arbitration by providing written notification to the
other party. Such written notice shall contain a brief statement of the
issue(s), the failure on behalf of the parties to reach amicable agreement
and the date of demand for arbitration. The arbitrators will regard this
Agreement from the standpoint of practical business and equitable principles
rather than that of strict law. The arbitrators shall be solely responsible
for determining what shall be considered and what procedure they deem
appropriate and necessary in the gathering of such facts or data to decide
such dispute. The arbitrators shall render their decision not later than 45
days following the close of the arbitration hearings, if any. Both parties
agree that the decision of the arbitrators is final and binding and that no
appeal shall be made from that decision. Should either party fail to comply
with the decision of the arbitrators, the other party shall have the right
to seek and receive the assistance of an appropriate court to enforce the
decision of the arbitrators. The costs of the arbitration are to be borne
equally by both parties unless the arbitrators decide otherwise.
7.02 Method. Three arbitrators will decide any differences. They must be,
or have been, officers of life insurance companies other than the two
parties to this Agreement or any company owned by, or affiliated with,
either party. One of the arbitrators is to be appointed by the Company,
another by the Reinsurer, and they shall select a third before arbitration
begins. Should one party fail to comply with the notice to arbitrate and
fail to select an arbitrator, the other party shall have the right to
appoint such arbitrator on their behalf. The appointments shall be made in
the following manner: the Company and the Reinsurer shall each present an
initial list of five prospective arbitrators to the other party within 25
days of the mailing of the notification initiating the arbitration. The
Company and the Reinsurer shall select one arbitrator each from the list
supplied by the other party. Should the selected arbitrator decline to
serve, another name shall be selected from the respective list. The party
who initiated the list will submit as many additional names as necessary so
that at all times there will be a pool of five names from which the other
party may make its selection. The two arbitrators, once selected, shall
then select the third arbitrator from the remaining eight names on the two
lists. Should the two arbitrators be unable to agree on a choice for the
third arbitrator the remaining eight names shall be placed in a pool and the
final arbitrator shall be drawn at random from such account. If the
prospective arbitrator so chosen shall decline to serve as the third
arbitrator, another prospective arbitrator shall be randomly selected until
the original account is exhausted. The parties shall continue to replace
the pool with an additional eight names until an arbitrator is found.
ARTICLE VIII
INSOLVENCY
8.01 Agreement. In the event of the Company's insolvency, the Reinsurer's
contractual liability on the Policies shall continue to be determined by all
the terms, conditions and limitations under this Agreement, but the
Reinsurer will make settlement (1) directly to the Company's liquidator,
conservator, receiver or statutory successor, and (2) without increase or
diminution because of the Company's insolvency. The liquidator,
conservator, receiver or statutory successor of the Company shall give the
Reinsurer written notice of the pendency of a claim against the Company on
any Policy within a reasonable time after such claim is filed in the
insolvency proceeding. During the pendency of any such claim, the Reinsurer
may investigate such claim and interpose in the Company's name (or in the
name of the Company's liquidator, receiver or statutory successor), in the
proceeding where such claim is to be adjudicated, any defense or defenses
which the Reinsurer may deem available to the Company or its liquidator,
receiver or statutory successor. The expense thus incurred by the Reinsurer
shall be chargeable, subject to court approval, against the Company as a
part of the expense of liquidation to the extent of a proportionate share of
the benefit which may accrue to the Company solely as a result of the
defense undertaken by the Reinsurer.
ARTICLE IX
TERMINATION
9.01 Termination by Mutual Consent. This Agreement may be terminated at any
time by mutual written consent of the parties.
9.02 Termination by Term. This Agreement shall automatically and
immediately terminate at the date the liability of the Company on the last
Policy covered hereunder terminates. Any and all amounts that may be owed
one party by the other and remain unpaid as of such date shall immediately
become due and payable as of the date such last policy expires. No
additional accounting or settlements, other than the customary and usual
monthly settlement as defined in 5.03, will be made, with the last day of
such month defined as the date of termination as contemplated by this
paragraph 9.02.
9.03 Recapture by Company. In addition to the recapture rights provided for
in 2.03, the Company shall have the additional right to recapture the
Policies in full only, at such time and in such manner as set forth below
for any of the following numerated defaults by the Reinsurer, should the
Reinsurer:
a) have ceased doing business; or
b) been voluntarily or involuntarily placed in conservatorship,
receivership, liquidation, bankruptcy, or been dissolved; or
c) been proven culpable for fraud or embezzlement; or
d) failed to comply with any applicable federal, state or municipal
statute, law, rule, or regulation governing the insurance or reinsurance of
the Policies; or
e) be found in default of this Agreement or the Trust Agreement, as
defined therein; or
f) allow its statutory Capital and Surplus as defined within the
meaning of the NAIC Convention Blank to become less than $5,000,000, at any
time, for the duration of this Agreement; or
g) have the reserve credit taken by the Company with respect to this
Agreement disallowed by any state in which the Company is licensed, unless
such disallowance results from some action taken by the Company, other than
the act of entering into this Agreement. The Reinsurer and the Company
agree to cooperate in resolving any issue that has resulted in the
disallowance of the reserve credit.
The Company shall give written notice to the Reinsurer that the Reinsurer is
in default of one or more of the conditions described above. The Reinsurer
shall have fifteen (15) days in which to remedy such default(s). If at the
end of such fifteen (15) days, the Reinsurer shall have failed to secure
such remedy as may be required in the sole opinion of the Company, the
Policies shall be immediately eligible for recapture as of the sixteenth
(16th) day from the date such notification of default(s) was first sent.
9.04 Method of Termination or Recapture. Should this Agreement be
terminated or recaptured for any of the reasons contained in this Article or
paragraph 2.03, the Reinsurer agrees to take the following actions:
a) the Reinsurer will use every and all best efforts to promptly
transfer to the Company copies of all insureds' files, documents, reports,
records, correspondence or other documents relating to the Policies so
recaptured or terminated that the Reinsurer may have in its possession; and
b) to pay any and all amounts that may be due the Company within ten
(10) days of receipt by the Reinsurer of the terminal settlement specified
below as provided by the Company.
The Company agrees to take the following actions:
a) to prepare the terminal monthly accounting report in accordance
with 5.02; and
b) to prepare the terminal monthly cash settlement in accordance with 5.03
for the period from the end of the last month for which settlement has been
made to the effective date of termination as described above. In addition,
such settlement shall include a terminal reserve transfer in the amount of
the reserve released by the Reinsurer because of such terminated Policies,
less, the outstanding policy loans on such terminated Policies, less, the
amount of due and deferred premium asset on such terminated Policies, less,
if applicable, the Additional Recapture Amount, as of such terminal
accounting date. In no event should this calculation of the terminal
reserve transfer be an amount less than zero (0); and
c) should the Company voluntarily recapture any or all of the
Policies, as described within this Agreement, the Company shall pay to the
Reinsurer the absolute value of the terminal experience refund formula, as
defined in Schedule C.01, should such calculation result in a negative
value, in proportion to the percentage of the Policies recaptured, for the
terminal accounting period, if any.
ARTICLE X
GENERAL PROVISIONS
10.01 Reserves. The term "reserves," whenever used for the purpose of this
Agreement, shall mean the gross statutory reserves that would have been
required under Texas regulation and in accordance with accepted actuarial
industry practice on the Policies had this Agreement not have been placed in
effect.
10.02 Extracontractual Damages. The Reinsurer does not indemnify and shall
not be liable for any extracontractual damages or liability of any kind
whatsoever of the Company's resulting from, but not limited to: negligent,
reckless or intentional wrongs; fraud; oppression; bad faith; or strict
liability.
10.03 Misunderstandings and Oversights. If any failure to pay amounts due
or to perform any other act required by this Agreement is unintentional and
caused by misunderstanding or oversight, the Company and the Reinsurer will
adjust the situation to what it would have been had the misunderstanding or
oversight not occurred.
10.04 Reinstatements. If a policy reinsured hereunder that was reduced,
terminated, or lapsed, is reinstated, the reinsurance for such policy under
this Agreement will be reinstated automatically to the amount that would
have been in force if the policy had not been reduced, terminated, or
lapsed.
10.05 Facility of Reinsurance. The Company and the Reinsurer hereby
acknowledge and agree that the coinsurance cession of the Policies will not
alter certain third party reinsurance agreements that may already be in
effect on these Policies. Experience refunds paid to the Company as part of
any other reinsurance agreement in force on the Policies while this
Agreement is in effect shall be paid to the Reinsurer as part of the
settlements hereunder. Furthermore, the Company shall not enter into any
other reinsurance agreements that would cover the Policies, without the
express written approval of the Reinsurer. The Reinsurer will not
unreasonably withhold its approval as contemplated within this paragraph.
10.06 Policy Administration. The Company shall administer the Policies and
shall perform all accounting for such Policies.
10.07 Policy Changes. Should the Company make any material changes after
the Effective Date of this Agreement in the provisions and conditions of the
Policies, the Company shall, within a reasonable time, inform the Reinsurer
of such change. There shall then be a corresponding change in the related
reinsurance and appropriate cash adjustments shall be made consistent with
the changed rules of the Company.
10.08 Audit. The Company or the Reinsurer, their respective employees or
authorized representatives may audit, inspect and examine, during regular
business hours, at the home office of the Company or the Reinsurer, provided
that twenty-four (24) hour advance notice has been given to the other party,
any and all books, records, statements, correspondence, reports, trust
accounts and their related documents or other documents that relate to the
policies covered hereunder. The audited party agrees to provide a
reasonable work space for such audit, inspection or examination and to
cooperate fully and to faithfully disclose the existence of and produce any
and all necessary and reasonable materials requested by such auditors,
investigators, or examiners. The expense of the respective party's
employee(s) or authorized representative(s) engaged in such activities shall
be borne solely by such party.
10.09 Integration. This Agreement supersedes all prior discussions and
agreements between the parties with respect to the subject matter of this
Agreement, and this Agreement, including the Schedules attached hereto,
contains the sole and entire agreement between the parties with respect to
the subject matter hereof.
10.10 Law and Venue. This Agreement has been finally executed in the State
of Texas and is subject to and is to be interpreted in accordance with the
laws of the State of Texas except that it is agreed that the provisions of
Article VII shall be governed by the American Arbitration Association.
Venue for any action, suit or other proceeding shall be exclusively in
Harris County. The parties agree to waive any other venue.
10.11 Nonwaiver. No forbearance on the part of either party to insist upon
compliance by the other party with the terms of this Agreement shall be
construed as, or constitute a waiver of, any of the terms of this Agreement.
10.12 Counterparts. This Agreement may be executed simultaneously in any
number of counterparts, each of which shall be deemed an original, but all
of which shall constitute one and the same instrument.
10.13 Severability. In the event that any provision or term of this
Agreement shall be held by any court to be illegal or unenforceable, all of
the other terms and provisions shall remain in full force and effect, except
if the provision or term held to be illegal or unenforceable is also held to
be a material part of this Agreement such that the party in whose favor the
material term or provision was stipulated herein would not have entered into
this Agreement without such term or provision, then the party in whose favor
the material term or provision was stipulated shall have the right, upon
such holding, to terminate this Agreement.
10.14 Amendments. Any change or modification to the Agreement shall be null
and void unless made by amendment to the Agreement and signed by both
parties.
10.15 Schedules and Paragraph Headings. Schedules attached hereto are made
a part of this Agreement. Paragraph headings are provided for reference
purposes only and are not made a part of this Agreement.
10.16 Net Investment Income. For purposes of this Agreement the term Net
Investment Income as used for the experience refund calculation in Schedule
C.03 shall mean the result of: a) the amount of gross investment income
earned on the segregated asset account during the month calculated in a
manner consistent with the calculation of such amounts in Column 7, of
Exhibit 2 of the Company's NAIC convention blank, plus, b) any realized
capital gains for such month on such assets or (less) any realized capital
losses for such month on such assets, less, c) the investment expenses as
calculated for Exhibit 2, lines 11 and 12 of the Company's NAIC Convention
Blank on such assets (except that such investment expenses shall not exceed
.125%, on an annual basis of the average balance of the segregated asset
account defined in Schedule D), plus, d) the amount of investment income
paid to the Reinsurer by the Company on the outstanding policy loans on the
policies as defined in 3.08.
10.17 Financial Reports. The Company and the Reinsurer each agree to
furnish the other with their respective NAIC Convention Blank Statements, as
required by their respective state laws within 15 days after such reports
are due to be filed with such respective states.
10.18 Survival. The representations, warrants, covenants and agreements
respectively required to be made by the Company and the Reinsurer in this
Agreement shall survive the termination or expiration of this Agreement.
10.19 Service of Suit. It is agreed that in the event of the failure of the
Reinsurer to pay any amount claimed to be due under this Agreement,
Reinsurer, at the request of the Company, will submit to the jurisdiction of
any court of competent jurisdiction within the United States of America and
will comply with all requirements necessary to give such court jurisdiction,
and all matters arising hereunder shall be determined in accordance with the
law and practice of such court. Nothing in this clause constitutes or
should be understood to constitute a waiver of the Reinsurer's rights to
commence an action in any court of competent jurisdiction in the United
States, to remove an action to a United States District Court, or to seek a
transfer of a case to another court as permitted by the laws of the United
States or of any state in the United States. Service of process in any such
suit may be made upon any then duly elected officer of the Reinsurer at the
address specified in Schedule B (agent for service of process). In any suit
instituted against the Reinsurer upon this Agreement, the Reinsurer will
abide by the final decision of such court or of any appellate court in the
event of an appeal. The agent for service of process is authorized and
directed to accept service of process on behalf of the Reinsurer in any such
suit and/or, upon the request of the Company, to give a written undertaking
to the Company that the agent for service of process will enter a general
appearance on behalf of the Reinsurer in the event that such a suit shall be
instituted.
It is agreed that in the event of the failure of the Company to pay any
amount claimed to be due under this Agreement, Company, at the request of
the Reinsurer, will submit to the jurisdiction of any court of competent
jurisdiction within the United States of America and will comply with all
requirements necessary to give such court jurisdiction, and all matters
arising hereunder shall be determined in accordance with the law and
practice of such court. Nothing in this clause constitutes or should be
understood to constitute a waiver of the Company's rights to commence an
action in any court of competent jurisdiction in the United States, to
remove an action to a United States District Court, or to seek a transfer of
a case to another court as permitted by the laws of the United States or of
any state in the United States. Service of process in any such suit may be
made upon any then duly elected officer of the Company at the address
specified in Schedule B (agent for service of process). In any suit
instituted against the Company upon this Agreement, the Company will abide
by the final decision of such court or of any appellate court in the event
of an appeal. The agent for service of process is authorized and directed
to accept service of process on behalf of the Company in any such suit
and/or, upon the request of the Reinsurer, to give a written undertaking to
the Reinsurer that the agent for service of process will enter a general
appearance on behalf of the Company in the event that such a suit shall be
instituted.
10.20 Notices. All notices and other communications under this Agreement
must be in writing and will be deemed to have been duly given if delivered
personally or mailed, by certified mail, return receipt requested, first
class postage, prepaid, to the addresses and to the attention of the parties
described in Schedule B attached hereto.
ARTICLE XI
EXECUTION AND EFFECTIVE DATE
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in duplicate, with an Effective Date of January 1, 1998.
AMERICAN CAPITOL INSURANCE COMPANY (Company)
By: /s/John Cornett
------------------------------
John Cornett
Title: President
Date: March 3, 1998
Attest: /s/Dan R. Stites
----------------------
Dan R. Stites
Title: Vice President
Date: March 3, 1998
REPUBLIC-VANGUARD LIFE INSURANCE COMPANY (Reinsurer)
By: /s/Robert O. Holliday
-----------------------
Robert O. Holliday
Title: Vice President & Marketing Actuary
Date: March 3, 1998
Attest: /s/Colin Rainier
-----------------------
Colin Rainier
Title: Vice President & Group Actuary
Date: March 3, 1998
<PAGE>
SCHEDULE A
POLICIES AND RISKS REINSURED
Under this Agreement, the Reinsurer reinsures 100% of the risks on the
blocks of individual industrial and ordinary life insurance policies assumed
by the Company pursuant to that certain Coinsurance Agreement dated January
1, 1998 between American Capitol Insurance Company and Universal Life
Insurance Company.
<PAGE>
SCHEDULE B
NOTICES
IF TO THE COMPANY:
American Capitol Insurance Company
10555 Richmond Avenue
Houston, TX 77042
Attention: John Cornett, President
IF TO THE REINSURER:
Republic-Vanguard Life Insurance Company
2727 Turtle Creek Boulevard
Dallas, TX 75219
Attention: Robert O. Holliday, Vice President
<PAGE>
SCHEDULE C
EXPERIENCE REFUND FORMULA
C.01 Retrocession Option. After the first monthly settlement for which the
experience refund formula (defined in C.02) produces a positive result, the
Reinsurer will, if the Company requests in writing within ten years of such
settlement, at the Company's sole option, retrocede 100% of the Policies to
the Company.
Upon the retrocession described above, the Company agrees to pay the
Reinsurer a monthly experience refund, payable as part of the first monthly
settlement for which the following formula produces a positive amount, in
the amount of 30% of such positive amount and during the subsequent 120
calendar months that then produce a positive amount in the amount of 30% of
such then positive amount. No experience refunds will be made after those
120 subsequent calendar months have elapsed. For any and all calendar
months that such formula results in a negative amount such amount shall be
treated as zero (0) for the cash settlement purposes as defined in 5.03.
The terminal experience refund shall be calculated in accordance with the
following formula except the absolute value of a negative result shall be
paid in accordance with 9.04.
In no event will the Reinsurer be obligated to pay the Company an experience
refund.
C.02 Experience Refund Formula. The experience refund calculation shall be
made in accordance with the following formula:
The Current Month's Experience as defined C.03, below;
LESS
For the first month only, the Initial Consideration as defined in 3.02;
LESS
The negative experience refund carryforward, defined as the absolute
value of any negative result of this calculation for the immediately
preceding month.
C.03 Calculation of Current Month's Experience. The current month's
experience shall be made in accordance with the following formula.
The Premiums as defined in 3.03;
PLUS
The Net Investment Income as defined in 10.16;
PLUS
The Experience Refunds paid on other reinsurance agreements as defined
in 10.05;
PLUS
Any decrease in the Reserves as defined in 10.01 for the month. For
the final terminal experience refund calculation the ending reserve for the
terminal month shall be the reserve immediately prior to the actual
recapture or termination of this Agreement;
PLUS
Any increase in the amount of due and deferred asset on the Policies
LESS
Any decrease in the amount of due and deferred asset on the Policies;
LESS
The Reinsurer's profit retention as defined in C.04 below;
LESS
The net Benefits paid by the Reinsurer as defined in 4.02;
LESS
The Administration Fee as defined in 3.07;
LESS
The Commission Allowance as defined in 3.04;
LESS
The Premium Tax Allowance as defined in 3.05;
LESS
The Dividends to Policyholders as defined in 4.04;
LESS
Any increase in the Reserves as defined in 10.01 for the month. For
the final terminal experience refund calculation the ending reserve for the
terminal month shall be the reserve immediately prior to the actual
recapture or termination of this Agreement;
LESS
One month's interest on the absolute value of any negative result of
this calculation for the immediately preceding month at a monthly interest
rate of 0.52%.
C.04 Maximum Reinsurer's Profit Retention. The Reinsurer agrees to limit
the maximum profit it retains from the earning on the Policies, if any, to
an amount equal to 0.27% of the negative experience carryforward, as defined
in Schedule C.02, as of the end of such month for which this calculation is
being made, commencing with the month ending January 31, 1998 and for every
month thereafter for the duration of this Agreement.
<PAGE>
SCHEDULE D
SEGREGATED ASSET ACCOUNT
D.01 Purpose. The Company and the Reinsurer agree that the initial net
amount of assets transferred to the Reinsurer as provided for in 3.01 shall
be housed in a segregated asset account established by the Reinsurer for the
purpose of determining the Net Investment Income as defined in 10.16 and to
be used in the experience refund formula as defined in C.03.
D.02 Admissible Assets. The assets used to maintain this segregated asset
account shall consist of cash, certificates of deposit issued by any
national or state chartered bank or savings and loan association and/or
securities, in which the laws of the Reinsurer's state of domicile
authorizes domestic insurers to invest and which meet the Investment
Guidelines presented in Schedule F.
D.03 Determination of the Segregated Asset Account Balance. As of the
effective date of this Agreement the initial account balance shall be equal
to the difference between the initial premium as defined in 3.01 and the
initial consideration as defined in 3.02. Subsequently, as of the end of
every month thereafter, the account balance shall be calculated as: the
Reserves as defined in 10.01 as of the end of such month for which this
calculation is being made, less, the outstanding policy loans as defined in
3.08 as of the end of such month for which this calculation is being made,
less, the amount of due and deferred asset as of the end of the such month
for which this calculation is being made, less, the absolute value of the
negative experience refund carryforward, as defined in C.02, if any.
D.04 Management of Account Assets. The Company agrees to allow the
Reinsurer to provide for the management of such assets either directly by
the Reinsurer or its duly appointed third party asset manager. The account
assets shall be managed in strict accordance with the Investment Guidelines
presented in Schedule F. The Reinsurer, or its designated investment
advisor, may from time to time substitute or exchange assets contained
within this account provided such assets so substituted or exchanged are
admissible assets as defined herein and meet the Investment Guidelines
presented in Schedule F. The Reinsurer will immediately notify the Company
of such substituted or exchanged assets. The Company reserves the right to
challenge any so substituted or exchanged assets within five (5) working
days such asset first appeared in such account. Should the Company elect to
so challenge any such asset the Reinsurer agrees to replace such asset with
an admissible asset acceptable to the Company, which acceptance shall not be
unreasonably withheld.
D.05 Additions to or Withdrawals from the Account. Should the book value of
the assets contained within the account, as of the end of any month, exceed
the amount required by D.03, above, the Reinsurer shall be allowed to
withdraw such excess assets. The specific assets to be released shall be
those assets as designated by the Company and the Company shall make such
designation no later than ten (10) working days after the close of such
month for which this comparison is being made. Should the book value of the
assets contained within the account as of the end of any month be less than
the amount required by D.03 above, the Reinsurer shall deposit cash or its
equivalent into this account in an amount equal to such deficiency within
twelve (12) working days after the close of such month for which this
comparison is being made.
<PAGE>
SCHEDULE E
ADDITIONAL RECAPTURE AMOUNT
In the event the Company elects to recapture the Policies prior to the date
falling ten (10) years after the date on which the Negative Experience
Refund Carryforward first reaches zero, other than for a reason specified in
Article IX, the amount due from the Reinsurer to the Company as part of the
terminal monthly cash settlement specified in paragraph 9.04(b) shall be
reduced by the amount listed below (the "Additional Recapture Amount"),
which shall be calculated as $1,750,000 less the sum of Retained Experience
Profits, as defined below, received by the Reinsurer prior to the effective
date of such recapture.
Retained Experience Profits are all the Experience Refunds paid to
Republic-Vanguard by American Capitol under this treaty or any retrocession
treaty between the parties covering the blocks of business described in
Schedule A.
<PAGE>
SCHEDULE F
INVESTMENT GUIDELINES
1. General. These Investment Guidelines are developed with the
understanding that the parties depend upon a steady, secure and calculable
income generated by the assets in the segregated asset account to meet cash
flow needs, thus necessitating a well balanced, low risk portfolio. The
purpose of these investment guidelines is to maximize the yield on
investments within the limitations necessary to assure and secure a steady
investment income stream.
2. Objectives. The following objectives, ranked by priority, should be
accomplished:
(1) The investments should be secured. To provide safety of principal
and interest, investment instruments have to be of high quality.
(2) The maturity of the investments should be matched with the
expected future liquidity needs in order to avoid realized capital losses.
(3) A high return on investments on a before tax basis.
(4) The portfolio has to be well diversified by category as well as by
issuer.
3. Portfolio Guidelines.
(1) Portfolio duration must be managed to match projected liability
duration, plus or minus 1/2 year.
(2) Portfolio convexity should be maximized to a level as close as
possible to that of the liabilities, not to fall below -1.0.
(3) All investments have to be in US dollar denominated securities.
(4) Investments must be listed with the Securities Valuation Office of
the National Association of Insurance Commissioners ("NAIC"). If a given
security is not listed at the time of purchase, Reinsurer shall apply for
listing of such security prior to the end of the calendar quarter in which
the purchase is made.
(5) All investment must be rated a category 1 or category 2 by the
NAIC when purchased. No more than 10% of the portfolio shall be invested in
NAIC category 2 investments.
(6) Investments shall be limited to bonds and short term securities
(maturity of less than 1 year).
(7) Short term securities shall be limited to (a) US Treasury Bills,
Bonds, or Notes; commercial notes of US corporations, bankers acceptances
and loan participations having an A-1 or P-1 quality rating and not to
exceed 5% of the portfolio per issuer; interest-bearing accounts and
certificates of deposit of US banks and savings and loan associations not to
exceed FDIC or FSLIC limits; shares in money market mutual funds not to
exceed 5% of the portfolio.
(8) No investments will be made in mortgage backed security
derivatives (inverse-floaters, interest only strips, and principal only
strips).
(9) In regard to mortgage backed securities: no Z-Class, Accrual
Bonds, and similar tranches such as Jump-Z tranches should be held in the
portfolio; no inverse floating or super-floating CMOs should be held in the
portfolio; no synthetic mortgage securities should be held in the portfolio.
Mortgage backed securities will be managed so as to minimize prepayment
risk.
(10) No more than 25% of the portfolio will be invested in mortgage
backed and asset backed securities.
(11) No investments will be made in callable securities
(12) No investments will be made in municipal bonds.
(13) No more than 5% of the portfolio will be invested in any one
corporate issuer.
(14) No transaction that will result in a realized capital loss in
excess of $3,000 will be executed without the advance written approval of
the Company.
(15) No investment will be made in a security that is not publicly
traded without the advance written approval of the Company.
4. Reporting.
(1) Within 8 working days of the end of each calendar month, the
Reinsurer will provide the Company with the details of net investment income
for the portfolio and any realized capital gains and losses for such
calendar month.
(2) Within 45 calendar days of the end of each calendar quarter, the
Reinsurer will provide the Company with detailed and summary information
regarding the investments in the portfolio, the changes in the portfolio
since the preceding quarter, and any other information that the Company
might reasonably request.
LEASE AGREEMENT
This Lease Agreement is made and entered into on this 21st day of November,
1997, by and between REALTYCORP INTERNATIONAL GROUP LC (hereinafter called
"Landlord") and AMERICAN CAPITOL INSURANCE COMPANY, (hereinafter called
"Tenant").
WITNESSETH:
I
1.01 Leased Premises.
(a) Subject to and upon the terms hereinafter set forth, Landlord does
hereby lease and demise to Tenant and Tenant does hereby lease and take
from Landlord those certain premises containing approximately 13,087
square feet of "Net Rentable Area" (hereinafter defined) consisting of
the entire second (2nd) floor, of the building known as The American
Capitol Insurance Building (the "Building") which Building is located at
10555 Richmond Avenue, Houston, Harris County, Texas, on the tract of
land more particularly described on Exhibit A attached hereto and made
a part hereof for all purposes, which tract shall be referred to as the
"Land"). The space hereby leased in the Building by Tenant from
Landlord is hereinafter called the "Leased Premises" and is outlined on
the floor plan drawing attached hereto as Exhibit B and made a part
hereof for all purposes. The Land, Building, the Parking Facilities
(defined below) and all other improvements now or hereafter on the Land
and all appurtenances to the foregoing are sometimes collectively
referred to herein as the "Property."
(b) The term "Net Rentable Area," as used herein, shall refer to (i) in the
case of an entire floor leased to a single tenant, the total square
footage of all floor area measured from the inside surface of the
exterior glass line of the Building to the inside surface of the
opposite exterior glass line or finished outer walls, including balcony
areas, excluding only Service Areas (defined below) and General Common
Areas (defined below), plus an allocation of the square footage of the
General Common Areas, and (ii) in the case of a floor leased to more
than one tenant, the total square footage of all floor areas within the
inside surface of the exterior glass line of the Building enclosing the
Leased Premises and measured to the mid-point of demising walls (i.e.,
walls separating the Leased Premises from areas leased to or held for
lease to other tenants, from On-Floor Common areas (defined below), and
from General Common Areas) including balcony areas, excluding only
Service Areas, plus an allocation of the square footage of the General
Common Areas and an allocation of the square footage of the On-Floor
Common Areas. No deductions from Net Rentable Area shall be made for
columns or projections necessary to the Building. The term "Usable Area"
as used in this lease shall mean the Net Rentable Area of the leased
premises minus all On-Floor Common Areas and General Common Areas which
were included therein.
"Service Areas" shall mean the areas within (and measured from the
midpoint of the walls enclosing, or from the inside surface of the
exterior glass enclosing, as the case may be) Building stairs, elevator
shafts, flues, vents, stacks, pipe shafts, and vertical ducts. Areas
for the specific use of Tenant or other tenants of the Building or
installed at the request of Tenant such as special stairs or elevators
are not included within the definition of Service Areas.
"General Common Areas" shall mean those areas within (and measured from
the midpoint of the walls or from the inside surface of the exterior
glass enclosing) the Building's elevator machine rooms, main mechanical
rooms, electrical rooms, and public lobbies, engineering and cleaning
staging areas, and other areas not leased or held for lease within the
Building but which are reasonably necessary for the proper utilization
of the Building or to provide customary services to the Building. The
allocation of the square footage of the General Common Areas shall be
equal to the total square footage of the General Common Areas
multiplied by a fraction, the numerator of which is the Net Rentable
Area of the Leased Premises (excluding the allocation of the General
Common Areas) and the denominator of which is the total of all Net
Rentable Area contained in the Building (excluding the allocation of
the General Common Areas).
"On-Floor Common Areas" shall mean those areas within (and measured from
the midpoint of the walls enclosing) public corridors, elevator foyers,
rest rooms, mechanical rooms, janitor closets, telephone and equipment
rooms, and other similar facilities for the use of all tenants on the
floor on which the Leased Premises are located. The allocation of the
square footage of the On-Floor Common Areas shall be equal to the total
On-Floor Common Areas on said floor multiplied by a fraction, the
numerator of which is the Net Rentable Area of the portion of the
Leased Premises (excluding the allocations of General Common Areas and
On-Floor Common Areas) located on said floor and the denominator of
which is the total of all Net Rentable Area on said floor (excluding
the allocations of General Common Areas and On-Floor Common Areas).
"Building Standard" improvements shall mean the condition and quality of
the improvements existing in the Leased Premises on the Commencement
Date.
"Parking Facilities" shall mean the surface parking lot and any
structure(s) located on the Land from time to time, together with any
connecting walkways, covered walkways, or other means of access to the
Building, if any, the grounds related thereto and any additional
improvements at any time related thereto. Whenever Landlord adds to
the Parking Facilities as described in Section 3.04, "Parking
Facilities" shall include the additional area.
(c) The Net Rentable Area in the Leased Premises is hereby stipulated and
agreed for all purposes to be 13,087 square feet of Net Rentable Area,
regardless of whether the same is actually more or less.
1.02 Term, Renewal Option and Third Floor Space Options.
(a) Subject to and upon the terms and conditions set forth herein, or in
any exhibit hereto, the term of this lease shall commence on the
Commencement Date (defined below) and shall expire sixty (60) months
after the Commencement Date or if Tenant exercises its option to renew
this lease as hereinafter provided, one hundred and twenty (120) months
after the Commencement Date.
(b) As used herein, "Commencement Date" means the date upon which Landlord
acquires title to the Property from Tenant.
(c) Tenant is hereby granted the option to renew the term of this lease for
a period of sixty (60) additional months ("Renewal Term"), to commence
at the expiration of the initial term of this lease. As long as Tenant
is not in default in the performance of its covenants under this lease,
Tenant may exercise its option to renew by delivering written notice of
such election to Landlord no earlier than twelve (12) months nor later
than six (6) prior to the expiration of the initial term of this lease.
Time is of the essence in the exercise of such renewal option. The
renewal of this lease shall be upon the same terms and conditions of
this lease, except (i) the Base Rental during the Renewal Term shall be
the prevailing Fair Market Rental Rate at the time the Renewal Term
commences, (ii) Tenant shall have no option to renew this lease beyond
the expiration of the Renewal Term, and (iii) Landlord shall contribute
up to Two and 00/100 Dollars ($2.00) per rental square foot for
Tenant's leasehold improvements (to be only used for improvements) upon
execution of a renewal addendum.
Whenever used in this Section 1.02(c), the term "Fair Market Rental Rate"
shall mean Landlord's and Tenant's determination of the annual gross
rental rate per square foot (inclusive of expense pass-through
additions) of Net Rental Area then being charged in comparable
buildings similarly situated to buildings located in the Westchase
Submarket, Houston, Harris County, Texas, for space comparable to the
space for which the Fair Market Rental Rate is being determined (taking
into consideration use, location, and/or floor level within the
applicable building, the definition of Net Rental Area, quality, age
and location of the applicable building, the provision of free or paid
unassigned parking, the time the particular rate under consideration
became effective, size of tenant, the then current operating expenses
of the Building (including resetting the Base Year), relative services
provided, etc). It is agreed that bona fide written offers to lease
comparable space located elsewhere in the Building from third parties
(at arm's length) and leases completed in the building within six (6)
months prior to delivery of the Amendment to Lease Agreement may be
used by Landlord as an indication of the Fair Market Rental Rate.
In the event of a dispute as to the Fair Market Rental rate, Landlord
and Tenant shall in good faith attempt to resolve such dispute in order
to avoid any delay in finalizing the rental for the Renewal Term. If
Landlord and Tenant are unable to agree upon the Fair Market Rental
Rate, the Fair Market Rental Rate shall be determined by two commercial
real estate brokers, one selected and paid for by Landlord and one by
Tenant. If such brokers are unable to agree upon the Fair Market
Rental Rate, such brokers shall agree upon and appoint a third
commercial real estate broker to determine the Fair Market Rental Rate,
whose determination shall be binding upon Landlord and Tenant.
Landlord shall pay one-half of the fee charged by such broker and
Tenant shall pay one-half of the fee charged by such broker.
(d) Tenant is hereby granted options to lease ("Lease Options" or "Lease
Option," as applicable) any available portion of the third (3rd) floor
of the Building ("Option Premises"). As long as Tenant is not in
default in the performance of its covenants under this lease, a Lease
Option may be exercised in respect to any portion of the Option
Premises (at Tenant's election) at any time upon written notice by
Tenant to Landlord identifying the specific space on the third floor
that is the subject of the election. Within thirty (30) days following
receipt of such notice, Landlord will prepare an amendment to this
lease in form and substance of Exhibit F ("Option Space Amendment")
attached hereto, inserting in the blanks, as appropriate, the
description of the specified space and the amount of rent applicable
thereto. The rental rate shall be the Fair Market Rental Rate in
existence at the time of Tenant's exercise of such Lease Option.
Whenever used in this Section 1.02(d), the term "Fair Market Rental Rate"
shall mean Landlord's and Tenant's determination of the annual gross
rental rate per square foot (inclusive of expense pass-through
additions) of Net Rental Area then being charged in comparable
buildings similarly situated to buildings located in the Westchase
Submarket, Houston, Harris County, Texas, for space comparable to the
space for which the Fair Market Rental Rate is being determined (taking
into consideration use, location, and/or floor level within the
applicable building, the definition of Net Rental Area, quality, age
and location of the applicable building, the provision of free or paid
unassigned parking, the time the particular rate under consideration
became effective, size of tenant, the then current operating expenses
of the Building (without resetting the Base Year), relative services
provided, etc). It is agreed that bona fide written offers to lease
comparable space located elsewhere in the Building from third parties
(at arm's length) and leases completed in the building within six (6)
months prior to delivery of the Option Space Amendment to Lease
Agreement may be used by Landlord as an indication of the Fair Market
Rental Rate.
In the event of a dispute as to the Fair Market Rental rate, Landlord
and Tenant shall in good faith attempt to resolve such dispute in order
to avoid any delay in finalizing the rental for the Option Space
Amendment. If Landlord and Tenant are unable to agree upon the Fair
Market Rental Rate, the Fair Market Rental Rate shall be determined by
two commercial real estate brokers, one selected and paid for by
Landlord and one by Tenant. If such brokers are unable to agree upon
the Fair Market Rental Rate, such brokers shall agree upon and appoint
a third commercial real estate broker to determine the Fair Market
Rental Rate, whose determination shall be binding upon Landlord and
Tenant. Landlord shall pay one-half of the fee charged by such broker
and Tenant shall pay one-half of the fee charged by such broker.
Pending resolution of the dispute, the rental rate proposed by Landlord
shall be in effect until the dispute is resolved, but the same shall be
adjusted ab initio when the Fair Market Rental Rate is determined as
hereinabove provided.
Tenant's Lease Options shall continue as to any space available on the
third floor of the Building at the Commencement Date or that comes
available after the Commencement Date during the period beginning with
the Commencement Date and ending one (1) year prior to the expiration
of the Term (which includes the Renewal Term, if applicable) of this
lease.
Notwithstanding the foregoing, within ten (10) days following receipt
of a written notice by Tenant from Landlord of Landlord's intention to
enter into a lease for a portion or all of the Option Premises, as the
case may be, (along with an identification of the unrelated third
party, the subject space and the terms of the proposed lease) with an
unrelated third party ("Landlord's Notification") Tenant's Lease
Options shall expire as to the space that is identified in Landlord's
Notification, unless Tenant gives written notice to Landlord of its
intention to exercise its Lease Option in respect to the subject space
upon the same terms as set forth in said Landlord's Notification
(except that the Option Space Amendment shall be for a term that is
coterminous with this lease). If Tenant does not exercise its Lease
Option in respect to the space identified in the Landlord's
Notification as aforesaid and if the identified third party does not
enter into a lease of the subject space in accordance with the terms
set forth in the Landlord's Notification, Tenant's Lease Option in
respect to the subject space shall be fully reinstated. If Tenant
exercises its Lease Option in respect to the subject space prior to the
expiration of the aforesaid ten (10) days, within thirty (30) days
following receipt of such notice of Tenant's exercise as aforesaid,
Landlord will prepare the Option Space Amendment, inserting in the
blanks, as appropriate, the description of the specified space and the
amount of rent applicable thereto.
1.03 Use.
The Leased Premises are to be used and occupied by Tenant (and its permitted
assignees and subtenants) solely for the purpose of office space and for no
other purpose. The Leased Premises shall not be used for any purpose which
would create unreasonable elevator loads or otherwise unreasonably interfere
with Building operations, and Tenant shall not engage in any activity which
is not in keeping with the first class standards of the Building. Tenant
will not keep any substance or carry on or permit any operation which might
emit offensive odors or conditions into other portions of the building, or
use any apparatus which might make undue noise or create vibrations in the
Building.
1.04 Survival.
Any claim, cause of action, liability or obligation arising under the term
of this lease and under the provisions hereof in favor of a party hereto
against or obligating the other party hereto shall survive the expiration or
any earlier termination of this lease.
1.05 Condition of Leased Premises.
As a material inducement to Landlord to execute and deliver this lease,
Tenant agrees that it will accept the Leased Premises and leasehold
improvements therein in its AS IS condition. Tenant acknowledges that
neither Landlord nor any of its purported representatives or agents has made
(and Landlord hereby specifically disclaims any and all) representations and
warranties of any kind or character as to the condition of the Leased
Premises, either express or implied, including without limitation,
warranties of fitness for any purposes or any particular use or commercial
habitability. Without limiting the foregoing, Tenant acknowledges that
Landlord does not warrant that the Leased Premises or the Building are free
from hazardous materials or substances (as defined in Section 4.05 (b)
below) and that no presence of any such materials shall constitute an
eviction, actual or constructive, of Tenant nor entitle Tenant to an offset
against its obligations hereunder.
II
2.01 Rental Payments.
(a) Commencing on the Commencement Date, and continuing thereafter
throughout the full term of this lease, Tenant hereby agrees to pay the
Base Rental (defined below) in accordance with this Section 2.01 and
Section 2.02, and Tenant's Forecast Additional Rental (defined below)
and Tenant's Additional Rental Adjustment (defined below) in accordance
with this Section 2.01 and Section 2.03. Upon execution of this lease
by Tenant, Tenant shall deliver to Landlord the Base Rental for the
first month of the lease. For purposes of this lease, the Base Rental,
Tenant's Forecast Additional Rental and Tenant's Additional Rental
Adjustment shall collectively be referred to as "Rent." The Base
Rental and Tenant's Forecast Additional Rental shall be due and payable
in equal monthly installments on the first day of each calendar month
during the initial term of this lease and any extensions or renewals
hereof, and Tenant hereby agrees to so pay such rent to Landlord at
Landlord's address as provided herein (or such other address as may be
designated by Landlord from time to time) monthly in advance.
(b) If the Commencement Date is other than the first day of a calendar
month or if this lease expires on other than the last day of a calendar
month, then the installments of Base Rental and Tenant's Forecast
Additional Rental for such month or months shall be prorated and the
installment or installments so prorated shall be paid in advance. Said
installments for such prorated month or months shall be calculated by
multiplying the equal monthly installment by a fraction, the numerator
of which shall be the number of days of the lease term occurring during
said commencement or expiration month, as the case may be, and the
denominator of which shall be the number of days in such month. If the
term of this lease commences or expires on other than the first day of
a calendar year, Tenant's Forecast Additional Rental and Tenant's
Additional Rental shall be prorated for such commencement or expiration
year, as the case may be, by multiplying Tenant's Forecast Additional
Rental and Tenant's Additional Rental by a fraction, the numerator of
which shall be the number of whole and partial months of the lease term
during the commencement or expiration year, as the case may be, and the
denominator of which shall be twelve (12). In such event, the
calculation described in Section 2.03(d) shall be made as soon as
possible after the termination of this lease. Landlord and Tenant
hereby agree that the provisions of this Section 2.01(b) shall survive
the expiration or termination of this lease.
(c) Tenant agrees to pay all rent and other sums of money as shall become
due from and payable by Tenant to Landlord under this lease at the
times and in the manner provided in this lease, without abatement,
demand, set-off or counterclaim. All rent and other sums of whatever
nature owed by Tenant to Landlord under this lease shall bear interest
from the fifth (5th) day after the date due thereof until paid at the
interest rate of 10% per annum.
2.02 Base Rental.
Throughout the full term of this lease, Tenant hereby agrees to pay a base
annual rental equal to Nine and 50/100 Dollars ($9.50) per square foot of
Net Rentable Area of the Leased Premises in accordance with the terms
hereof. As used herein, "Base Rental" shall mean Ten Thousand Three Hundred
Sixty ($10,360) per month as such dollar amount may be adjusted from lease
year to lease year pursuant to the terms of this lease
2.03 Additional Rental.
(a) Commencing with the calendar year in which the Commencement Date occurs
and continuing thereafter for each calendar year during the full term
of this lease, Landlord shall present to Tenant prior to the beginning
of said calendar year (or for the calendar year in which the lease term
commences, on the Commencement Date) a statement of Tenant's Forecast
Additional Rental.
(b) As used herein, "Tenant's Forecast Additional Rental" shall mean
Landlord's reasonable estimate of Tenant's Additional Rental (defined
below) for the coming calendar year (or, in the calendar year in which
the lease term commences, for such calendar year).
(c) "Tenant's Additional Rental," as that term is used herein, shall be
computed on a calendar year basis and shall mean the sum of Tenant's
Percentage Share (defined below) of Operating Expenses (defined below),
to the extent such sum exceeds Tenant's Percentage Share of Operating
Expenses during the "Base Year" There is established under this lease a
"Base Year," which for these purposes is the calendar year 1998. As used
herein, "Tenant's Percentage Share" shall mean a fraction, the numerator
of which is the total number of square feet of Net Rentable Area within
the Leased Premises and the denominator of which is the total square
footage of all Net Rentable Area in the Building. For the purposes of
this lease, the "Tenant's Percentage Share" shall be 25% provided,
however, that in the event that the amount of space leased by Tenant
shall increase or decrease subsequent to the beginning date of the term
of this lease, whether pursuant to an option to expand or otherwise,
Tenant's Proportionate Share shall be appropriately adjusted by
Landlord.
(d) No later than one hundred twenty (120) days after the end of the
calendar year in which the Commencement Date occurs and of each
calendar year thereafter during the term of this lease Landlord shall
provide Tenant a statement comparing the Base Year's Operating Expenses
and Operating Expenses for each such calendar year and a statement
prepared by Landlord comparing Tenant's Forecast Additional Rental with
Tenant's Additional Rental. In the event that Tenant's Forecast
Additional Rental actually paid by Tenant exceeds Tenant's Additional
Rental for said calendar year, Landlord shall pay Tenant (in the form
of a credit against rentals next due or, upon expiration of this lease
in the form of Landlord's check) an amount equal to such excess. In the
event that Tenant's Additional Rental exceeds Tenant's Forecast
Additional Rental for said calendar year, Tenant hereby agrees to pay
Landlord, within thirty (30) days of receipt of the statement, an
amount equal to such difference ("Tenant's Additional Rental
Adjustment"). The provisions of this paragraph shall survive any
expiration, termination or cancellation of this lease.
(e) Tenant, at Tenant's sole cost and expense, shall have the right to be
exercised by written notice given to Landlord within ninety (90) days
after receipt of aforesaid statement showing Operating Expenses for the
preceding two (2) calendar years, to audit, at the place within Harris
County, Texas where Landlord maintains its books and records,
Landlord's books and records pertaining only to such Operating Expenses
for such preceding two (2) calendar years, provided such audit (i)
commences within thirty (30) days after Tenant's notice to Landlord and
thereafter proceeds regularly and continuously to conclusion (ii) that
Landlord or Landlord's employee is invited to be present at all times
during the audit , (ii) such audit does not unreasonably interfere with
the conduct of Landlord's business, and (iv) Tenant signs a
nondisclosure agreement in favor of Landlord, acceptable to Landlord in
all respects which acceptance shall not be unreasonably withheld),
agreeing that information derived from such audit shall not be used
directly or indirectly in connection with soliciting additional
auditing business from other existing, previous or future tenants in
the Building.
2.04 Operating Expenses.
(a) "Operating Expenses," for each calendar year, shall consist of all
operating costs (defined below) for the Property.
(b) For the purposes of this lease, "Operating Costs" shall mean all (or
where specified by Landlord as hereinafter permitted or required, an
amortized portion of) expenses, costs and accruals (excluding
therefrom, however, specific costs billed to or otherwise incurred for
the particular benefit of specific tenants of the Building) of every
kind and nature, computed on an accrual basis, incurred or accrued in
connection with, or relating to, the ownership, maintenance, or
operation of the Property during each calendar year, including, but not
limited to, the following:
(1) Management fees of the building manager, if any;
(2) wages and salaries, including taxes, insurance and benefits, of
all on and off-site employees engaged in operations, maintenance
or access control, as reasonably allocated by Landlord;
(3) cost of all supplies, tools, equipment and materials to the extent
used in operations and maintenance, as reasonably allocated by
Landlord;
(4) cost of all utilities including, but not limited to, the cost of
electricity, the cost of water and the cost of power for heating,
lighting, air conditioning and ventilating;
(5) cost of all maintenance and service agreements and the equipment
therein, including, but not limited to, access control service,
parking lot operations, window cleaning, elevator maintenance,
janitorial service and landscaping maintenance;
(6) cost of repairs and general maintenance (excluding repairs,
alterations and general maintenance paid by proceeds of
insurance), or if and to the extent Landlord so elects in order to
reduce the amount of Operating Expenses paid by tenants of the
Property in any given year or years, Landlord may at its option
amortize such cost based upon any amortization schedule chosen by
Landlord in its sole and absolute discretion, in which event the
amortized portion of such repair and maintenance costs (whether
such costs were incurred in the same year or in any prior year)
shall be included as an Operating Cost in each year of the
amortization schedule as selected by Landlord;
(7) amortization of the cost (together with reasonable financing
charges and installation costs), based upon any amortization
schedule selected by Landlord in its reasonable discretion, of any
system, apparatus, device, or equipment which is installed for the
principal purpose of (i) reducing Operating Expenses, (ii)
promoting safety or (iii) complying with governmental requirements
which become effective after the Commencement Date, in each case
whether such costs were incurred in the same year or in any prior
year;
(8) the cost of all insurance, including, but not limited to, the cost
of casualty, flood, rental abatement and liability insurance, and
insurance on Landlord's personal property, plus the cost of all
deductible payments made by Landlord in connection therewith;
(9) the cost of reasonable legal and accounting fees;
(10) all taxes, assessments and governmental charges, whether or not
directly paid by Landlord, whether federal, state, county or municipal
and whether they be by taxing districts or authorities presently taxing
the Property and said common areas or by others subsequently created or
otherwise, and any other taxes and assessments attributable to the
Property and said common areas or their operation, excluding, however,
taxes and assessments attributable to the personal property of other
tenants, federal and state taxes on income, death taxes, franchise
taxes, and any taxes imposed or measured on or by the income of
Landlord from the operation of the Property; provided, however, that if
at any time during the term of this lease, the present method of
taxation or assessment shall be so changed that the whole or any part
of the taxes, assessments, levies, impositions or charges now levied,
assessed or imposed on real estate and the improvements thereon shall
be discontinued and as a substitute therefor, or in lieu of or in
addition thereto, taxes, assessments, levies, impositions or charges
shall be levied, assessed or imposed, wholly or partially, as a capital
levy or otherwise, on the rents received from the Property or the rents
reserved herein or any part thereof, then such substitute or additional
taxes, assessments, levies, impositions or charges, to the extent so
levied, assessed or imposed with respect to the Property, shall be
deemed to be included within the operating costs. Consultation, legal
fees and costs resulting from any challenge of tax assessments as
reasonably allocated by Landlord shall also be included in operating
costs. It is agreed that Tenant will be responsible for ad valorem
taxes on its personal property and on the value of the leasehold
improvements in the Leased Premises to the extent that the same exceed
Building standard allowances (and if the taxing authorities do not
separately assess Tenant's leasehold improvements, Landlord may make a
reasonable allocation of the ad valorem taxes allocated to the Property
to give effect to this sentence). In the case of special taxes and
assessments which may be payable in installments, only the amount of
each installment accruing during a calendar year shall be included in
the operating costs for such year.
(11) Notwithstanding any language contained herein to the contrary,
Operating Expenses shall not include (i) any expense that is
reimbursable to Landlord from a tenant or other party, (ii) any expense
that would be allocable to Landlord as a tenant of the space in the
Property (except the Leased Premises) if Landlord were the "Tenant"
under a lease like this lease, (iii) any legal or accounting expense
incurred with respect to negotiations, litigation or alternative
dispute resolution proceedings between Landlord and Tenant to resolve
disagreements, if any, (iv) expenditures classified as capital
expenditures for Federal income tax purposes (except as set forth in
Section 2.04(b) (10), (v) any leasing commission, and any non-cash
expense (including depreciation), legal, accounting or other expense
related to leasing activities, (vi) debt service on any indebtedness
secured by the Property (except debt service on indebtedness to
purchase or pay for items specified as permissible Basic Operating
Costs under Section 2.04(b)(1) through (10) above), (vii) any portion
of any expense in excess of what is commercially reasonable at the time
and place incurred, (viii) any expense incurred directly or indirectly
in installing tenant improvements for any tenant space or "Landlord
Space"and (ix) any portion of any expense that is not reasonably
allocable to the maintenance or operation of the Property.
(c) Notwithstanding any language contained herein to the contrary, Tenant
hereby agrees that, during any calendar year in which the entire
Building is not provided with Building Standard Services (as defined in
Section 3.01 below) or is not completely occupied, landlord shall
compute all Variable Operating Costs (defined below) for such calendar
year as though the entire Building was provided with Building Standard
Services and was 95% occupied. For purposes of this lease the term
"Variable Operating Costs" shall mean any operating cost that is variable
with the level of occupancy of the Building (e.g. tenant utilities and
tenant cleaning services). In the event that Landlord excludes from
"operating costs" any specific costs billed to or otherwise incurred or
the particular benefit of specific tenants of the Building, Landlord
shall have the right to increase "operating costs" by an amount equal to
the cost of providing standard services similar to the services for
which such excluded specific costs were billed or incurred.
(d) In respect to any provisions of this lease, in any instance in which
Landlord will use and occupy any portion of the space in the Building
("Landlord space"), such space shall be deemed to be leased to Landlord
as though Landlord is a tenant. As such, Landlord shall be obligated to
observe the Rules and Regulations applicable to the Tenant, to bear
expenses and costs and other repair and maintenance responsibilities
attributable to Landlord's space as Landlord's sole and separate
expense, cost, repair or maintenance responsibility, in like manner and
to the extent that the lease imposes same on Tenant. Landlord's space
shall be taken into account in computing the allocating Operating
Costs.
III
3.01 Services.
So long as Tenant is not in default hereunder, Landlord shall furnish the
following services to the Leased Premises during the term of this lease
("Building Standard Services"):
(a) Hot and cold domestic water and common use rest rooms, toilets and
lunchroom at locations provided for general use and as reasonably
deemed by Landlord for the comfortable use and occupancy of the
Building.
(b) Subject to curtailment as required by governmental laws, rules or
mandatory regulations, central heat and air conditioning in season, at
such temperatures and in such amounts as are reasonably deemed by
Landlord for the comfortable use and occupancy of the Building, and on
such dates and at such times as are more particularly described on
Exhibit D attached hereto and incorporated herein.
(c) Electric lighting service for all public areas and special service
areas of the Building in the manner and to the extent reasonably deemed
by Landlord for the comfortable use and occupancy of the Building.
(d) Janitor service shall be provided five (5) days per week, exclusive of
holidays, in a manner that Landlord reasonably deems to be consistent
with that provided in buildings similarly situated to the Building;
provided, however, if Tenant's floor coverings or other improvements
are other than Building Standard, Tenant shall pay one hundred and
fifteen percent (115%) of the actual additional cleaning cost, if any,
attributable thereto.
(e) Access control services for the Property comparable as to coverage,
control and responsiveness (but not necessarily as to means for
accomplishing same) to other similarly situated multi-tenant office
buildings in suburban Houston, Texas; provided, however, Landlord shall
have no responsibility to prevent, and shall not be liable to Tenant
for, any liability or loss to Tenant, its agents, employees, guests,
invitees and visitors arising out of losses due to theft, burglary, or
damage or injury to persons or property caused by persons gaining
access to the Leased Premises or the Property, and Tenant hereby
releases Landlord from all liability for such losses, damages or
injury.
(f) Sufficient electrical capacity to operate (i) incandescent lights,
typewriters, calculating machines, photocopying machines and other
machines of similar low voltage electrical connected load (120/208
volts), provided that the total rated electrical design load for said
lighting and machines of low electrical voltage shall not exceed one
(1.00) watt per square foot of Usable Area; and (ii) lighting and
equipment of high voltage electrical connected load (277/480 volts),
provided that the total rated electrical design load for said lighting
and equipment of high electrical voltage shall not exceed three and
five tenths (3.50) watts per square foot of Usable Area (each such
rated electrical design load to be hereinafter referred to as the
"Building Standard Rated Electrical Design Load".) Tenant shall be
allocated Tenant's pro rata share of the circuits provided on the
floor(s) Tenant occupies ("Building Standard Circuits").
Should Tenant's total rated electrical design load exceed the Building
Standard Rated Electrical Design Load for either low or high voltage
electrical consumption, or if Tenant's electrical design requires low
voltage or high voltage circuits in excess of Tenant's share of the
Building Standard Circuits, Landlord may elect, at its option, (and at
Tenant's expense) to install one (1) additional high voltage panel
and/or one (1) additional low voltage panel with associated feeders and
equipment, based on a maximum of two (2) such additional panels per
floor for all tenants on the floor (which additional panels, feeders
and equipment shall be hereinafter referred to as the "Additional
Electrical Equipment"). If the additional electrical equipment is
installed because Tenant's low or high voltage rated electrical design
load exceeds the applicable Building Standard rated electrical design
load, then a meter shall also be added (at Tenant's expense) to measure
the electricity used through the additional electrical equipment.
The design and installation of any additional electrical equipment (or
any related meter) required by Tenant shall be subject to the prior
approval of Landlord (which approval shall not be unreasonably
withheld). All expenses incurred by Landlord in connection with the
review and approval of any additional electrical equipment shall also
be reimbursed to Landlord by Tenant. Tenant shall also pay on demand
the actual metered cost of electricity consumed through the additional
electrical equipment (if applicable), plus any actual accounting
expenses incurred by Landlord in connection with the metering thereof.
If any of Tenant's electrical equipment requires conditioned air in
excess of air conditioning in the amounts, times and specifications
normally provided by Landlord in accordance with this Section 3.01(f),
the same shall be installed by Landlord (on Tenant's behalf), and
Tenant shall pay all design, installation, metering and operating costs
relating thereto.
If Tenant requires that certain areas within Tenant's demised premises
must operate in excess of the normal Building Operating Hours (as
defined in Exhibit D attached hereto), the electrical service to such
areas shall be separately circuited and metered such that Tenant shall
be billed the costs associated with electricity consumed during hours
other than Building Operating Hours.
(g) All building standard fluorescent bulb replacement and all incandescent
bulb replacement previously existing in General Common Areas.
(h) Non-exclusive passenger elevator service to the Leased Premises twenty-
four (24) hours per day and non-exclusive freight elevator service
during Building Operating Hours (as defined in Exhibit E) (all subject
to temporary cessation for ordinary repair and maintenance and during
times when life safety systems override normal building operating
systems) with such freight elevator service available at other times
upon reasonable prior notice by Tenant to Landlord.
To the extent the services described in subsection 3.01 (a), (b), (c), (f)
and (h) above require electricity and water supplied by public utilities,
Landlord's covenants thereunder shall only impose on Landlord the obligation
to use its good faith, reasonable efforts to cause the applicable public
utilities to furnish the same. Upon receipt of written notice of any failure
by Landlord to furnish the services described in this Section 3.01, Landlord
shall commence restoration of such services within seven (7) business days
after such notice and pursue the restoration of such services with due
diligence to completion. If any such condition prevents Tenant from making
normal use of the Leased Premises, then Tenant shall be relieved of all of
its obligations under this lease (including the obligation to pay Rent) from
the date such condition commenced until normal use of the Leased Premises is
restored, and if such condition continues for more than twenty-five (25)
consecutive days, then Tenant may terminate this lease by providing written
notice to Landlord and Tenant shall have no further liability under this
lease; provided, however, that if Landlord is using commercially reasonable
diligence in restoring such services and such services cannot with the
exercise of such diligence be restored within twenty-five (25) days, or if
such restoration is beyond the control of Landlord, then Tenant shall not be
entitled to terminate this lease.
3.02 Keys and Locks.
Landlord shall furnish Tenant with an appropriate number of keys for the
exterior door to the Building. Tenant acknowledges that Tenant currently has
keys to the Building Standard lockset on code required doors entering the
Leased Premises from public areas. Additional keys to the exterior door to
the Building will be furnished by Landlord upon an order signed by Tenant
and at Tenant's expense. All such keys shall remain the property of
Landlord. No additional locks shall be allowed on any door of the Leased
Premises without Landlord's permission, and Tenant shall not make or permit
to be made any duplicate keys, provided that Tenant shall provide Landlord
with copies of all such keys in Tenant's possession upon the execution of
this lease. Upon termination of this lease, Tenant shall surrender to
Landlord all keys to any locks or doors entering or within the Leased
Premises, and give to Landlord the explanation of the combination of all
locks for safes, safe cabinets and vault doors, if any, in the Leased
Premises. Tenant has previously installed a "doorbell" signal device at the
exterior of the main entrance door (to allow a signal to its offices "after
hours") and an intercom at the exterior of the rear door (for purpose of
receiving deliveries) connected to its reception station, and such equipment
shall be permitted to remain in place and shall be maintained by Tenant at
Tenant's sole cost.
3.03 Graphics, Building Directory Board and Name
Landlord shall provide and install all graphics, letters, and numerals at
the entrance to the Leased Premises and one (1) identification strip(s)
containing a listing of Tenant's name and such other information as Tenant
shall reasonably require on the Building directory board to be placed in the
main lobby of the Building. All such letters and numerals shall be in the
Building Standard graphics. Tenant agrees that Landlord shall not be liable
for any inconvenience or damage occurring as a result of any error or
omission in any directory or graphics. Except as provided herein, no signs,
numerals, letters or other graphics shall be used or permitted on the
exterior of, or may be visible from outside, the Leased Premises, unless
approved in writing by Landlord.
Notwithstanding any language to the contrary herein contained and subject to
existing or future applicable signage ordinances, the parties acknowledge
that Tenant's name appears on a "monument" type sign between the Building
and Richmond Avenue, and on a sign next to the entrance to the parking area
from Rogerdale Road. The latter sign will be allowed to stay in place and no
obstruction within Landlord's reasonable control will be allowed to block
its view as the same exists immediately prior to the Commencement Date.
Landlord may install other names on the monument sign in which case Tenant's
name on the monument sign shall not be smaller (in terms of size of the
graphics) than any other such name, and such other name(s) shall be
similarly displayed on the monument; but if a new monument sign (or
comparable sign) is installed in place of the existing monument, such other
name(s) and Tenant's name shall be installed on the new monument sign, in
which case such other name(s) may be larger than Tenant's name provided that
Tenant's name is not smaller than it is on the monument sign immediately
prior to the Commencement Date.
3.04 Parking.
(a) Landlord agrees to provide to Tenant for the term forty eight (48)
parking spaces (eleven [11] of which shall be assigned covered spaces
and thirty seven [37] of which shall be uncovered spaces) for the
parking of automobiles in spaces and locations from time to time
designated by Landlord in the Parking Facilities.
Notwithstanding any contrary provisions hereof, the rights of Tenant
hereunder shall terminate or expire simultaneously with the
termination, cancellation or expiration of this lease. Tenant shall
provide to Landlord such information and documentation evidencing the
number of Tenant's full-time employees located within the Leased
Premises as Landlord shall reasonably request, from time to time.
(b) In the event the aforesaid assigned covered parking spaces are not
available to Tenant due to causes beyond the control of Landlord during
any portion of the term of this lease, then Landlord shall make
available to Tenant sufficient unassigned spaces (not to exceed the
total number of parking spaces set forth above) to meet Tenant's needs
until a replacement number of covered parking spaces can be made
available to Tenant. Landlord shall use its good faith efforts to
insure that the parking spaces called for in this lease are available
to Tenant throughout the term of this lease.
(c) Landlord may make, modify and enforce reasonable rules and regulations
relating to the parking of vehicles in the Parking Facilities, and
Tenant agrees to abide by such rules and regulations. Tenant shall
indemnify and hold harmless Landlord from and against all claims,
losses, liabilities, damages, costs and expenses (including, but not
limited to, attorneys' fees and court costs) arising or alleged to
arise out of Tenant's use of any such parking spaces or the use thereof
by Tenant's personnel, agents, employees, contractors, guests or
invitees.
(d) Notwithstanding any language to the contrary herein contained, the
parking spaces designated for Tenant (at no charge) shall be as
follows:
Said eleven (11) covered spaces shall be assigned to and reserved for
use exclusively by Tenant and the fact that they are reserved parking
spaces shall be indicated by appropriate signage. Said covered spaces
shall be the five (5) spaces on the first row (most northerly row) and
the six (6) spaces on the next row located therein as indicated on
Exhibit C attached hereto. (However, Landlord shall have no duty to
monitor or enforce whether or not the assigned covered parking spaces
are used by unauthorized parties.) Regarding the aforesaid thirty-
seven (37) uncovered spaces, initially parking will be permitted in any
available (non-covered) parking spaces within the Parking Facilities
(i.e., the existing area under concrete heretofore established as a
parking facility for the Building) but at any time either Landlord or
Tenant has the option to require (as herein provided) that a section of
said Parking Facilities be designated as parking spaces dedicated to
and reserved exclusively for Tenant and will be stripped, labeled and
maintained appropriately by Landlord at Landlord's expense, such
section containing said thirty-seven (37) spaces, available for
Tenant's employees, invitees and visitors. Such section shall be
located in the southeast portion of the existing Parking Facilities.
Such section shall be designated and prepared as above stated within
thirty (30) days following the exercise of such option, which shall be
exercised by giving of a written notice requesting the establishment of
the dedicated parking section as aforesaid.
IV
4.01 Care of Leased Premises.
Tenant shall not commit or allow to be committed by Tenant's employees,
agents, visitors invitees or contractors, any waste or damage to any portion
of the Leased Premises, or the Property. Upon the expiration or any earlier
termination of this lease, Tenant shall surrender the Leased Premises to
Landlord in as good condition as existed on the date of possession by
Tenant, ordinary wear and tear excepted. Upon such expiration or termination
of this lease, Landlord shall have the right to re-enter and resume
possession of the Leased Premises immediately.
4.02 Entry for Repairs and Inspection.
Tenant shall permit Landlord and its contractors, agents or representatives
to enter into and upon any part of the Leased Premises during reasonable
hours to inspect or clean the same, make repairs, alterations or additions
thereto, and, upon reasonable prior notice to Tenant, for the purpose of
showing the same to prospective tenants or purchasers and Tenant shall not
be entitled to any abatement or reduction of rent by reason thereof.
Landlord shall use its reasonable efforts not to interfere materially with
the operation of Tenant's business during any such entry. Any waste or
damage to any portion of the Leased Premises committed by Landlord its
contractors, agents or representatives, or allowed to be committed by
Landlord shall be promptly repaired by Landlord at Landlord's sole expense.
4.03 Nuisance.
Tenant shall conduct its business and control its agents, employees,
invitees, contractors and visitors in such a manner as not to create any
nuisance, or interfere with, annoy or disturb any other tenant or Landlord
in its use, enjoyment or operation of the Property. Landlord shall conduct
its business and control its agents, employees, invitees, contractors and
visitors in such a manner as not to create any nuisance, or interfere with,
annoy or disturb Tenant or any other tenant in its use, enjoyment or
operation of the Property, and shall use reasonable efforts to require the
same standard of conduct from other tenants in the Building.
4.04 Laws and Regulations; Rules of Building.
Tenant shall comply with, and Tenant shall cause its employees, contractors
and agents to comply with, and shall use its best efforts to cause its
visitors and invitees to comply with, all laws, ordinances, orders, rules
and regulations of all state, federal, municipal and other governmental or
judicial agencies or bodies relating to the use, condition or occupancy of
the Leased Premises, and with the rules of the building reasonably adopted
and altered by Landlord from time to time for the safety, care and
cleanliness of the Leased Premises and Building and for the preservation of
good order therein. The initial rules of the Building are attached hereto
and incorporated herein as Exhibit F. Landlord shall employ its good faith
efforts to enforce such rules in a consistent and even-handed manner as to
all tenants of the Building and Landlord, in respect to any "Landlord
Space," shall observe such rules.
4.05 Legal Use and Violations of Insurance Coverage; Hazardous
Materials.
(a) Tenant shall not occupy or use the Leased Premises, or permit any
portion of the Leased Premises to be occupied or used, for any business
or purpose which is, directly or indirectly, forbidden by law,
ordinance, or governmental or municipal regulation or order, or which
may be dangerous to life, limb or property, or permit the maintenance
of any public or private nuisance, or do or permit any act or thing
which may disturb the quiet enjoyment of any other tenant of the
Building, or permit anything to be done which would in any way increase
the rate of fire, liability, or any other insurance coverage on the
Property or its contents.
(b) Tenant shall not (either with or without negligence) cause or permit
the escape, disposal or release of any biologically or chemically
active or other hazardous substances or materials. Tenant shall not
allow the storage or use of such substances or materials in any manner
not sanctioned by law or by the highest standards prevailing in the
industry for the storage and use of such substances or materials, nor
allow to be brought into the Property any such materials or substances
except to use in the ordinary course of Tenant's business, and then
only after written notice is given to Landlord of the identity of such
substances or materials. Without limitation, hazardous substances and
materials shall include those described in the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as
amended, 42 U.S.C. Section 9601 et seq., the Resource Conservation and
Recovery Act, as amended, 42 U.S.C., Section 6901 et seq., any
applicable state or local laws and the regulations adopted under these
acts. If any lender or governmental agency shall ever require testing
to ascertain whether or not there has been any release of hazardous
materials due to the acts or omissions of Tenant or any of its agents
or employees, then the reasonable costs thereof shall be reimbursed by
Tenant to Landlord upon demand as additional charges if such
requirement applies to the Property. In addition, Tenant shall execute
affidavits, representations and the like from time to time at
Landlord's request concerning Tenant's best knowledge and belief
regarding the presence of hazardous substances or materials on the
Property. In all events, Tenant shall indemnify Landlord in the manner
elsewhere provided in this lease from any release or storage of
hazardous materials in the Leased Premises occurring while Tenant is in
possession, or elsewhere in or about the Property if caused by Tenant
or persons acting under Tenant. These covenants shall survive the
expiration or earlier termination of the term.
(c) Landlord agrees, regarding any "Landlord Space," to observe and comply
with the same constraints and requirements that are set forth above as
applicable to Tenant, and to use reasonable efforts to cause other
tenants to observe and comply with the same constraints and
requirements.
V
5.01 Leasehold Improvements.
(a) Tenant shall not make or allow to be made any alterations or physical
additions in or to the Leased Premises, or place safes, vaults or other
heavy furniture or equipment within the Leased Premises, without first
obtaining the written consent of Landlord. Tenant shall deliver to
Landlord a copy of the "as built" plans and specifications for all
alterations or physical additions so made in or to the Leased Premises.
Tenant further specifically agrees that no food, soft drink or other
vending machine will be installed within the Leased Premises without
the written consent of Landlord except for such machines as are in
place on the Commencement Date.
(b) All alterations, physical additions, or improvements in or affixed to
the Leased Premises (including fixtures) shall become the property of
Landlord upon the expiration or any earlier termination of this lease;
provided, however, that this subsection shall not apply to Tenant's
trade fixtures, or movable equipment or furniture.
(c) Tenant shall indemnify, defend and hold Landlord harmless from and
against all costs (including reasonable attorney's fees and costs of
suit), losses, liabilities, or causes of action arising out of or
relating to any alterations, additions or improvements made by Tenant
to the Leased Premises, including, but not limited to, any mechanics'
or materialmen's liens asserted in connection therewith, which
indemnification obligations shall survive any termination or
cancellation of this lease.
(d) Should any mechanic's or other liens be filed against any portion of
the Property by reason of Tenant's acts or omissions or because of a
claim arising by, through or under Tenant, Tenant shall cause the same
to be cancelled or discharged of record by bond or otherwise within
thirty (30) days after notice by Landlord. If Tenant shall fail to
cancel or discharge said lien or liens, within said thirty (30) day
period, Landlord may, at its sole option, cancel or discharge the same
and upon Landlord's demand, Tenant shall promptly reimburse Landlord
for all reasonable costs incurred in canceling or discharging such
liens.
5.02 Repairs by Landlord.
All repairs, alterations or additions that affect the Property's structural
components or the Property's mechanical, electrical and plumbing systems,
excluding Tenant's personal property, fixtures and appliances, shall be made
solely by Landlord or its contractor. In the event of any damage to such
components or systems caused by the act or omission of Tenant or Tenant's
agents, contractors, or employees, the cost of repair or restoration of such
damage shall be paid for solely by Tenant in an amount equal to Landlord's
costs plus fifteen percent (15%) for administrative cost recovery. Landlord
shall make such repairs to Building Standard improvements as may be deemed
necessary by Landlord for normal maintenance operations and Landlord shall
not otherwise be obligated to make improvements to, or repairs of, the
Leased Premises; provided, however, Landlord shall, at Tenant's expense,
make such improvements to, or repairs of, the Leased Premises as Tenant
shall request in writing, at a cost equal to the costs incurred by Landlord
in such maintenance or such repairs, plus an additional charge of fifteen
percent (15%) for administrative cost recovery.
5.03 Repairs by Tenant.
Subject to Section 5.02, Tenant shall at its own cost and expense, keep the
Leased Premises and all leasehold improvements in a condition similar to the
condition as of the Commencement Date, normal wear and tear excepted.
VI
6.01 Condemnation.
If the Leased Premises, Building, Property or any part thereof shall be
taken or condemned for any public purpose (or conveyed in lieu of in
settlement thereof) to such an extent as to render the remainder of the
Building, Property or Leased Premises not reasonably suitable for occupancy,
this lease shall, at the option of either party, forthwith cease and
terminate, and all proceeds from any taking or condemnation of the Building,
Property or the Leased Premises, as the case may be, shall belong to and be
paid to Landlord. If a party elects to terminate this lease as aforesaid,
such election shall be by giving written notice to the other party within
thirty (30) days following the date such taking or condemnation becomes
definitely and finally fixed by the legal or other proceedings that
establish the right to take or condemn, or at least ninety (90) days prior
to the date targeted by such taking or condemnation as the date on which the
taking condemnation will impact the Property, whichever date is later. If
this Lease is not so terminated, then Landlord shall repair any damage
resulting from such taking, to the extent, in the manner, and following the
procedure provided in Section 6.03 hereof as though such damage were
"Damaged Property" as defined therein and Base Rental, Tenant's Forecast
Additional Rental and Tenant's Additional Rental shall be abated to the
extent the Leased Premises, Building or Property are rendered untenantable
during the period or repair, and thereafter be adjusted on an equitable
basis considering the areas of the Leased Premises, Building or Property
taken and remaining.
6.02 Damages from Certain Causes.
Landlord shall not be liable or responsible to Tenant or any of its
employees, guests, invitees or agents for any loss or damage to any property
or injury to any person occasioned by theft, fire, act of God, public enemy,
riot, strike, insurrection, trespasser, other tenants in the Building, war,
requisition or order of governmental body or authority, court order or
injunction, or any such cause beyond Landlord's reasonable control.
6.03 Casualty Clause.
(a) In the event any portion of the Leased Premises, the Building or any
portion of the General Common Areas is damaged by fire or other
casualty, earthquake, flood or by any other cause of any kind or nature
(hereinafter collectively referred to as the "Damaged Property," Landlord
shall obtain within five (5) days from the date of such casualty from
an architect an opinion stating a best estimate of the length of time
that will be reasonably required for the Damaged Property to be
repaired, which opinion shall be provided by the architect to both
Landlord and Tenant as hereinafter provided. If the Damaged Property
can, in the opinion of Landlord's architect, be repaired within ninety
(90) calendar days from the date of Landlord's architect's opinion,
then, the lease shall not be terminated and Landlord shall proceed to
rebuild or restore the damaged property to Building Standard condition,
subject to subsection (d) hereof.
(b) In the event the damaged property cannot, in the opinion of Landlord's
architect, be repaired within ninety (90) days from the date of notice
of Landlord's architect's opinion, Landlord and Tenant shall each have
the option to terminate this lease to be exercised by giving written
notice to the other party of such termination within twenty (20) days
from the date on which Tenant receives a copy of the architect's
opinion. If such option is not exercised by either party within the
allowed time, Landlord shall proceed with commercially reasonable
diligence to rebuild or restore the Damaged Property to Building
Standard condition, subject to subsection (d) hereof.
(c) Notwithstanding any language herein to the contrary, if at the time of
any such damage, less than one (1) year remains in the term of this
lease, exclusive of any renewal options, then Landlord, at Landlord's
sole option, shall have the right to terminate this lease.
(d) Notwithstanding any language contained herein to the contrary, in the
event this lease is not terminated as provided hereunder, (i) if the
damaged property is all or any portion of the Leased Premises, Landlord
shall be obligated to rebuild or restore the damaged property
substantially to the condition which existed immediately prior to such
damage, and (ii) Tenant shall be entitled to a pro rata abatement of
Base Rental, Tenant's Forecast Additional Rental, and Tenant's
Additional Rental during the period of time the Leased Premises, or any
portion thereof, are untenable due to such damage. Landlord's
architect's opinion shall be given to both Landlord and Tenant in
accordance with Section 9.01 within thirty (30) days from the date of
any such damage. In the event of any termination of this lease under
this Section 6.03, this lease shall cease and terminate as if the date
of such damage was the expiration date of the term of this lease.
Notwithstanding any contrary language in this Section 6.03, if the
Leased Premises, the Property, or any portion thereof shall be damaged
through any act of negligence or willful misconduct of Tenant, its
agents or employees, such Damage shall be repaired by Landlord at the
sole expense of Tenant and rent shall continue hereunder unabated.
6.04 Casualty Insurance.
Landlord shall maintain standard fire and extended coverage insurance on the
Property and on all Building Standard improvements. Said insurance shall be
maintained with an insurance company authorized to do business in Texas, in
amounts desired by Landlord and payments for losses thereunder shall be made
solely to Landlord, subject to rights of Landlord's mortgagee. Tenant shall
maintain at its expense standard fire and extended coverage insurance on all
its personal property, including removable trade fixtures, located in the
Leased Premises and all other additions and improvements (including
fixtures) made by Tenant and not required to be insured by Landlord above.
If the annual premiums to be paid by Landlord shall exceed the standard
rates because of Tenant's operations within, or contents of, the Leased
Premises or because the improvements to the Leased Premises are in excess of
Building Standard improvements, Tenant shall promptly pay the excess amount
of the premium upon request by Landlord (and if necessary, Landlord may
allocate the insurance costs of the Property to give effect to this
sentence). Upon the request of Landlord, a duly executed certificate of
insurance, reflecting Tenant's maintenance of the insurance required under
this Section 6.04 and Section 6.05, shall be delivered to Landlord.
6.05 Liability Insurance.
Landlord and Tenant shall each maintain a policy or policies of
comprehensive general liability insurance with the premiums thereon fully
paid on or before the due date, issued by and binding upon a solvent
insurance company authorized to transact business in Texas. Such insurance
shall afford minimum protection (which may be affected by primary and/or
excess coverage) of not less than $1,000,000.00 combined single limit for
bodily injury or property damage in any one occurrence and not less than
$2,000,000.00 aggregate for all occurrences; provided, however, Tenant shall
carry such greater limits of coverage as Landlord may reasonably request
from time to time so long as Landlord maintains similar limits of coverage.
6.06 Hold Harmless.
Tenant and Landlord will indemnify the other party, as the case may be, and
hold harmless the other party, as the case may be, from and against (i) all
fines, suits, claims, demand, liabilities, and actions (including costs and
expenses of defending against such claims) resulting or alleged to result
from any breach, violation or non-performance of any covenant or condition
hereof and (ii) all claims, demands, actions, damages, loss, cost,
liabilities, expenses and judgments suffered by, recovered from or asserted
against either party on account of injury or damage to person or property to
the extent that any such damage or injury may be incident to, arise out of,
or be caused, either proximately or remotely, wholly or in part, by an act,
omission, negligence or misconduct on the part of either party, as the case
may be, or any of their respective agents, servants, employees, contractors,
patrons, guests, licensees or invitees or of any other person entering upon
the Property under or with the express or implied invitation or permission
of either party, as the case may be, or when any such injury or damage is
the result, proximately or remotely, of the violation by the other party as
the case may be, or any of their respective agents, servants, employees,
contractors, patrons, guests, licensees or invitees of any law, ordinance or
governmental order of any kind or of any of the Building Rules and
Regulations described in Exhibit E included in this lease (as such Rules
and Regulations may hereinafter at any time or from time to time be amended
supplemented), or when any such injury or damage may in any other way arise
from or out of the occupancy or use by the other party, as the case may be,
their respective agents, servants, employees, contractors, patrons, guests,
licensees or invitees of the Property. Notwithstanding anything to the
contrary contained herein, in no event shall the liability of Landlord or
Tenant under this Section 6.06 exceed the amount of insurance Landlord and
Tenant are required to maintain pursuant to Section 6.05 above.
6.07 Waiver of Subrogation Rights.
Anything in this lease to the contrary notwithstanding, Landlord and Tenant
each hereby waives any and all rights of recovery, claim, action or cause of
action, against the other, its agents servants, partners, shareholders,
officers or employees, for any loss or damage that may occur to the Leased
Premises, the Property or any improvements thereto or thereon, or any
personal property of such party therein or thereon, by reason of fire, the
elements, or any other cause which is insured against under the terms of the
standard fire and extended coverage insurance policies referred to in
Section 6.04 hereof, regardless of cause or origin, including negligence of
the other party hereto, its agents, officers, partners, shareholders
servants or employees, and covenants that no insurer shall hold any right of
subrogation against such other party.
VII
7.01 Default and Remedies.
(a) The occurrence of any of the following shall constitute events of
default:
(1) Base Rental, Tenant's Forecast Additional Rental, Tenant's
Additional Rental Adjustment, or any other sum of money payable
under this lease is not paid when due; or
(2) Tenant materially breaches or fails to comply with any term,
provision, condition, or covenant of this lease, other than as
described in Section 7 01(a)(1), or with any of the Rules and
Regulations now or any reasonable Rule or Regulation hereafter
established to govern the operation of the Building or Property;
or
(3) Tenant's interest in the lease or the Leased Premises shall be
subjected to any attachment, levy, or sale pursuant to any order
or decree entered against Tenant in any legal proceeding and such
order or decree shall not be vacated within thirty (30) days of
notice to Tenant entry thereof; or
(4) Tenant shall file a petition under any section or chapter of the
Bankruptcy Code or under any similar law or statute of the United
State or any State thereof or Tenant shall be adjudged bankrupt or
insolvent in proceedings filed against Tenant thereunder; or a
petition or answer proposing the adjudication of Tenant as a
bankrupt or its reorganization under any present or future federal
or state bankruptcy or similar law shall be filed in any court and
such petition or answer shall not be discharged or denied within
thirty (30) days after the filing thereof; or
(5) A receiver or trustee shall be appointed for all or substantially
all of the assets of Tenant of the Leased Premises or any of
Tenant's property located thereon any proceeding brought by
Tenant, or any such receiver or trustee shall be appointed in any
proceeding brought against Tenant and shall not be discharged
within thirty (30) days after such appointment or Tenant shall
consent to or acquiesce in such appointment.
(b) Upon the occurrence of any event of default and (i) if the event of
default described in Section 7.01(a)(1) is not cured within five (5)
days after written notice from Landlord of such default, or (ii) the
event of default described in Sections 7.01(a)(2) is not cured within
thirty (30) days after written notice from Landlord of such default, or
(iii) the event of default described in Sections 7.01(a)(3), (4) and
(5) is not cured immediately, Landlord shall have the option to do and
perform any one or more of the following in addition to and not to
limitation of, any other remedy or right permitted it by law or in
equity or by this lease:
(1) Terminate this lease by giving thirty (30) days advance written
notice thereof to Tenant in which event Tenant shall immediately
surrender the Leased Premises to Landlord and if Tenant fails to
do so Landlord may, without prejudice to any other remedy which it
may have for possession or arrearages in Base Rent, Tenant's
Forecast Additional Rental, and Tenant's Additional Rental
Adjustment, (hereinafter collectively referred to as "Rent") enter
upon and take possession of the Leased Premises and expel or
remove Tenant and any other person who may be occupying the Leased
Premises, or any part thereof, by force, if necessary, without
being liable for prosecution or any claim of damages therefor; or
(2) Without terminating this lease, enter upon and take possession of
the Leased Premises and expel or remove Tenant or any other person
who may be occupying the Leased Premises, or any part thereof, by
force, if necessary, without having any civil or criminal
liability therefor, without terminating this lease; or
(3) Without terminating this lease, enter upon the Leased Premises by
force if necessary without having any civil or criminal liability
therefor, and do whatever Tenant is obligated to do under the
terms of this lease and Tenant agrees to reimburse Landlord on
demand for any expenses which Landlord may incur in thus effecting
compliance with Tenant's obligations under this lease and Tenant
further agrees that Landlord shall not be liable for any damages
resulting to Tenant from such action unless caused by the
negligence or willful misconduct of Landlord.
(4) If Landlord repossesses the Leased Premises without terminating
the Lease, then Tenant shall pay to Landlord all Rent and other
indebtedness accrued to the date of such repossession, plus Rent
and other sums required to be paid by Tenant as the same becomes
due during the remainder of the term, diminished by any net sums
thereafter received by Landlord through reletting the Leased
Premises during said period (after deducting expenses incurred by
Landlord as provided below); re-entry by Landlord will not affect
the obligations of Tenant for the unexpired Term. In such event,
Landlord shall proceed promptly to use commercially reasonable
efforts to mitigate Tenant's damages by reletting the whole or any
part of the Leased Premises. Expenses of such reletting, as well
as costs of tenant improvements relating to same, shall be evenly
amortized over the duration of the new lease and Tenant's
liability shall be limited to the prorata portion thereof
corresponding to the remainder of the Term of this lease.
Landlord's duty to relet the Leased Premises as stated herein
shall not apply if the remainder of the Term of this lease is less
then three (3) months, and in such event Tenant shall be liable
only for the Rent applicable to such remaining period of the Term
of this lease. Actions to collect any amounts due by Tenant may
be brought on one or more occasions, without the necessity of
Landlord's waiting until expiration of the Term.
(5) If Landlord repossesses the Leased Premises without terminating
the Lease, to the extent the same were not paid or deducted, as
appropriate, under Section 7.01(b)(4), Tenant shall also pay to
Landlord; (i) broker's fees incurred by Landlord in connection
with reletting the whole or any part of the Leased Premises; (ii)
the costs of removing and storing Tenant's or any other occupant's
property; (iii) and the cost of repairing, altering, remodeling or
otherwise putting the Leased Premises into "building standard"
condition; and (iv) all reasonable expenses incurred by Landlord
in enforcing Landlord's remedies, including reasonable attorney's
fees and court costs. For purposes of this sub-section 7.01(b)(5),
"building standard" shall mean the quality and type of tenant
improvements that are customarily provided by a landlord at the
landlord's expense to a new tenant at the initial stage of a
lease.
(6) If the Landlord repossesses the Leased Premises and terminates the
lease, then such termination shall be in lieu of Landlord's remedy
set forth in Section 7.01(b)(4) and (5) above, and no further Rent
shall accrue or be due from the date of such repossession, and
Landlord shall be entitled to use and occupy the Leased Premises
for its own purposes or to relet the Leased Premises.
(7) Except as otherwise provided in this Lease, no repossession of or
re-entering on the Leased Premises or any part thereof and no
reletting of the Leased Premises or any part thereto shall relieve
Tenant of its liabilities and obligations hereunder, all of which
survive such repossession or re-entering.
(8) If the Landlord repossesses the Leased Premise, Landlord shall
have the right and option to change the locks and other security
devices within or about the Leased Premises without notice to
Tenant. Landlord shall have no obligation to provide Tenant access
to the Leased Premises subsequent thereto or provide Tenant keys
therefor; provided, however, Landlord shall, upon reasonable
notification, retrieve from the Leased Premises personal affects
of Tenant's employees and Tenant's personal property which are not
subject to Landlord's lien.
(9) No right or remedy herein conferred upon or reserved to Landlord
is intended to be exclusive of any other right or remedy (except
as stated in subsection (b)(6)), and each and every right and
remedy shall be cumulative and in addition to any other right or
remedy given hereunder or now or hereafter existing at law or in
equity or by statute. In addition to other remedies provided in
this lease, Landlord shall be entitled, to the extent permitted by
applicable law, to injunctive relief in case of the violation, or
attempted or threatened violation, of any of the covenants,
agreements, conditions or provisions of this lease, or to a decree
compelling performance of any of the covenants, agreements,
conditions or provisions of this lease, or to any other remedy
allowed to Landlord at law or in equity.
(10) No provision of this lease shall be deemed to have been waived by
Landlord or Tenant unless such waiver is in writing and signed by
Landlord or Tenant as the case may be, nor shall any custom or practice
arising between the parties in the administration of the terms of this
lease be construed to waive or lessen Landlord's or Tenant's right to
insist upon strict performance of the terms of this lease.
7.02 Lien for Rent.
Tenant hereby grants to Landlord a security interest in and to all of
Tenant's personal property now or hereafter located within the Leased
Premises (such contractual security interest being in addition to and
cumulative of any other lien granted Landlord by statute or otherwise), and
upon repossession of the Leased Premises by Landlord as herein provided,
Landlord may, in addition to any other remedies provided herein, take
possession of any and all such goods, wares, equipment, fixtures, furniture,
improvements and other personal property owned by Tenant and situated on the
Leased Premises, without liability for trespass or conversion (and Tenant
hereby waives any right to notice or hearing prior to such taking of
possession by Landlord), foreclose the security interest hereby granted and
sell the same at public or private sale, with or without having such
property at the sale, after giving Tenant reasonable notice of the time and
place of any public sale or of the time after which any private sale is to
be made, at which sale Landlord or its assigns may purchase unless otherwise
prohibited by law. Unless otherwise provided by law, the requirement of
reasonable notice shall be met if such notice is given in the manner
prescribed in this lease at least fifteen (15) days before the date of sale.
Any sale made pursuant to the provision of this Section 7.02 shall be deemed
to have been a public sale conducted in a commercially reasonable manner if
held in the Leased Premises after the time, place and method of sale and a
general description of the types of property to be sold have been advertised
in a daily newspaper published in the county where the Property is located
for five (5) consecutive days prior to the date of sale. The proceeds from
any such disposition, less any and all expenses connected with the taking of
possession, holding and selling of the property (including reasonable
attorneys fees and other expenses) shall be applied as a credit against the
indebtedness secured by the security interest granted in this Section 7.02.
Landlord shall have all of the rights of a secured party under the Texas
Business and Commerce Code, as the same may be amended from time to time.
Any surplus shall be paid to Tenant or as otherwise required by law within
sixty (60) days after the completion of such sale; and Tenant shall pay any
deficiency forthwith.
7.03 Late Payments.
Tenant shall pay as a late charge in the event any installation of Base
Rental, Tenant's Forecast Additional Rental, Tenant's Additional Rental
Adjustment or any other charge owed by Tenant hereunder is not paid when
due, an amount equal to five percent (5%) of the amount due (but in no event
shall the amount of such late charge exceed an amount based upon the highest
legally permissible rate chargeable at any time by Landlord under the
circumstances). Should Tenant make a partial payment of past due amounts,
the amount of such partial payment shall be applied first to reduce all
accrued and unpaid late charges, in inverse order of their maturity.
7.04 Attorney's Fees.
In the event Landlord or Tenant reasonably incurs any legal, accounting or
other expense for the purpose of enforcing or defending its rights under
this lease, then the non-prevailing party shall reimburse the other party
the amount of such legal, accounting or other expense to the extent that the
same are reasonable and attributable solely to such enforcement or defense
activities.
7.05 No Waiver of Rights.
No failure or delay of Landlord or Tenant to exercise any right or power
given it herein or to insist upon strict compliance by Tenant of any
obligation imposed on either of them herein and no custom or practice of
either party hereto at variance with any term hereof shall constitute a
waiver or a modification of the terms hereof by Landlord or Tenant or any
right either of them has herein to demand strict compliance with the terms
hereof. No waiver of any right of Landlord or Tenant or any default by
Landlord or Tenant on one occasion shall operate as a waiver of any of the
other party's other rights or of any subsequent default by Landlord or
Tenant. No express waiver shall affect any condition, covenant, rule, or
regulation other than the one specified in such waiver and then only for the
time and in the manner specified in such waiver. No person has or shall have
any authority to waive any provision of this lease unless such waiver is
expressly made in writing and signed by an authorized officer of Landlord or
Tenant.
7.06 Holding Over.
In the event of holding over by Tenant after expiration or termination of
this lease without the written consent of Landlord, Tenant shall pay as
liquidated damages, solely for such holding over, one hundred and fifty
percent (150%) of the rent (including, without limitation, all Base Rental,
Tenant's Forecast Additional Rental and Tenant's Additional Rental
Adjustment) as would have been payable if this lease had not so terminated
or expired for the entire hold over period. No holding over by Tenant after
the term of this lease shall be construed to extend this lease. In the event
of any unauthorized holding over, Tenant shall indemnify Landlord against
all claims for damages by any other tenant to whom Landlord shall have
leased all or part of the Leased Premises effective upon the termination of
this lease. Any holding over with the express written consent of Landlord
shall therefore constitute this lease to be a lease from month to month at a
Base Rental, Tenant's Forecast Additional Rental, and all other sums
required to be paid by Tenant prior to the expiration or termination of this
lease as may be reasonably determined by Landlord.
7.07 Subordination.
Tenant agrees that the rights of Tenant under this lease are subject and
subordinate to, and upon the request of Landlord made in writing, Tenant
will confirm the subordination of this lease to, each ground or land lease
now or hereafter covering all or any part of the Land and to each mortgage
or deed to secure debt which may now or hereafter encumber the Property
and/or the Land, as well as to all renewals, modifications, consolidation,
replacements and extensions thereof in a written form reasonably acceptable
to the lessor under any such ground or land lease and the holder of any such
mortgage or deed to secure debt; provided, however, that the lessor under
any such ground or land lease and the holder of any such mortgage or deed to
secure debt shall, so long as Tenant shall not be in default under this
lease, not disturb Tenant in its possession of the Leased Premises or
terminate Tenant's rights hereunder. Tenant expressly recognizes and agrees
that the lessor under any such ground or land lease and the holder of any
such mortgage or deed to secure debt or any of their successors or assigns
or any other holder of such instrument may sell the Property or the Land in
the manner provided for by law in such instrument; and further, such sale
may be made subject to this lease. In the event of the enforcement by the
lessor under any such ground or land lease or the grantee under any such
mortgage or deed to secure debt of the remedies provided for by law or by
such land or ground lease, mortgage or deed to secure debt, Tenant will,
upon request of any person or party succeeding to the interest of said
lessor or grantee, as a result of such enforcement, automatically become
Tenant of such successor in interest without change in the terms or
provisions of this lease; provided, however, that such successor in interest
shall not be bound by (i) any payment of rent for more than one month in
advance except prepayments in the nature of security for the performance by
Tenant of its obligations under this lease, or (ii) any amendment or
modification of this lease made without the written consent of such lessor
or grantee or such successor in interest if such lessor, grantee or
successor in interest had previously notified Tenant in writing of its
interest. Upon request by such successor in interest, Tenant shall execute
and deliver an instrument or instruments confirming the attornment herein
provided for in a form reasonably acceptable to such successor in interest.
Notwithstanding anything contained in this lease to the contrary, in the
event of any default by Landlord in performing its covenants or obligations
hereunder which would give Tenant the right to terminate this lease, Tenant
shall not exercise such right unless and until (i) Tenant gives written
notice of such default (which notice shall specify the exact nature of said
default and how the same may be cured) to any lessor under any such land or
ground lease and any holder(s) of any mortgage or deed to secure debt who
has heretofore notified Tenant in writing of its interest and the address to
which notices are to be sent, and (ii) said lessor and holder(s) fail to
undertake action to cure said default within thirty (30) days from the
giving of such notice by Tenant. The provisions of Section 9.01 shall govern
the manner and effective date of any notice to be given by Tenant to any
such parties.
7.08 Estoppel Certificate or Three-Party Agreement.
At the request of Landlord, Tenant will execute, from time to time, an
estoppel certificate certifying to such facts (if true) as Landlord may
reasonably require. In the event Tenant fails to execute and deliver the
same within five (5) business days after request therefor, Landlord shall
have the right (and Tenant hereby empowers Landlord) to execute and deliver
such certificate for and on behalf of and as the binding act of Tenant.
VIII
8.01 Sublease or Assignment by Tenant.
(a) Tenant shall not, without Landlord's prior written consent (which
consent shall not be unreasonably withheld), (i) assign, convey,
mortgage, pledge, encumber, or otherwise transfer (whether voluntarily,
by operation of law, or otherwise) this lease or any interest
hereunder; (ii) allow any lien to be placed upon Tenant's interest
hereunder; (iii) sublet the Leased Premises or any part thereof; or
(iv) permit the use or occupancy of the Leased Premises or any part
thereof by any one other than Tenant. Any attempt to consummate any of
the foregoing without Landlord's consent shall be of no force or
effect.
(b) Notwithstanding anything herein to the contrary, if at any time or from
time to time during the term of this lease Tenant desires to sublet all
or any portion of the Leased Premises or assign all or any portion of
Tenant's interest in this lease, Tenant shall notify Landlord in
writing (hereinafter referred to in this Section 8.01 as the "Notice")
of the terms of the proposed subletting or assignment, the identity of
the proposed sublessee or assignee, the area proposed to be sublet or
covered by the assignment (hereinafter referred to as "Sublet Space"),
and such other information as Landlord may reasonably request to
evaluate Tenant's request to sublet or assign. Landlord shall then
have the option to approve or disapprove the proposed sublease or
assignment subject only to the final review for approval as provided in
subsection (c) hereof. Landlord's option to approve or disapprove the
proposed sublease or assignment subject to final review, as the case
may be, shall be exercisable by Landlord in writing within a period of
thirty (30) calendar days after receipt of the Notice and such other
information as Landlord may reasonably request to evaluate Tenant's
request to sublet or assign, and any failure by Landlord to exercise
such option within said thirty (30) day period shall be deemed to
constitute Landlord's approval of such proposed sublease or assignment.
(c) If Landlord elects or is deemed to have elected to approve the proposed
sublease or assignment subject to Landlord's review, within twenty (20)
calendar days after receipt of Landlord's notice of election (or the
expiration of said thirty (30) day period if no such election is made),
a copy of the proposed sublease or assignment agreement will be
delivered to Landlord, and such sublease or assignment agreement must
provide for the assumption of all Tenant's obligations under this
lease.
(d) If Landlord approves in writing the proposed sublease or assignment (or
such approval is deemed approved as a result of the expiration of the
aforesaid thirty [30] day period) and the terms of the proposed
sublease or assignment, but a fully executed counterpart of such
sublease or assignment is not delivered to Landlord within thirty (30)
calendar days or such approval, then Landlord's approval of the
proposed sublease or assignment shall be deemed null and void and
Tenant shall again comply with all the conditions of this Section 8.01
as if the Notice and option hereinafter referred to had not been given,
received or exercised. If Landlord fails to approve the form of
sublease or assignment or the sublessee or assignee, Tenant shall have
the right to submit amended forms or other sublessees or assignees to
Landlord to review for approval.
(e) Notwithstanding the approval of any sublease or assignment as provided
herein or any language contained in such lease sublease or assignment
to the contrary, Tenant shall not be relieved of any of Tenant's
obligations or covenants under this lease and Tenant shall remain fully
liable hereunder.
(f) If, with the consent of Landlord, the Leased Premises or any part
thereof is sublet or occupied by other than Tenant or this lease is
assigned, Landlord may, after default by Tenant, collect rent from the
subtenant, assignee or occupant, and apply the net amount collected to
the Base Rental, Tenant's Forecast Additional Rental, Tenant's
Additional Rental Adjustment, and any other sums herein reserved. No
such subletting, assignment, occupancy, or collection shall be deemed
(i) a waiver or any of Tenant's covenants contained in this lease, (ii)
a release of Tenant from further performance by Tenant of its covenants
under this lease, or (iii) a waiver of any of Landlord's other rights
hereunder.
8.02 Assignment by Landlord.
Landlord shall have the right to transfer and assign, in whole or in part,
all its rights and obligations hereunder, in the Property, the Land and all
other property referred to herein, and in such event and upon such transfer
(any such transferee to have the benefit of, and be subject to, the
provisions of Sections 8.03 and 8.04 hereof) no further liability or
obligation shall thereafter accrue against Landlord hereunder; provided,
however, that such transferee or assignee shall assume and be responsible
for all of Landlord's obligations and liabilities under this lease.
8.03 Peaceful Enjoyment.
Landlord covenants that Tenant shall and may peacefully have, hold and enjoy
the Leased Premises, subject to the other terms hereof, provided that Tenant
pays the rental and other sums herein recited to be paid by Tenant and
performs all of Tenant's covenants and agreements herein contained. It is
understood and agreed that this covenant and any and all other covenants of
Landlord contained in this lease shall be binding upon Landlord and its
successors only with respect to breaches occurring during the ownership of
Landlord's interest hereunder.
8.04 Force Majeure.
Landlord and Tenant (except with respect to the payment of Base Rental,
Tenant's Forecast Additional Rental, Tenant's Additional Rental Adjustment,
or any other monetary obligation under this lease), shall be excused for the
period of any delay and shall not be deemed in default with respect to the
performance of any of the terms, covenants and conditions of this lease when
prevented from so doing by a cause or causes beyond Landlord's or Tenant's
(as the case may be) control, which shall include, without limitation, all
labor disputes, governmental regulations or controls, fire or other
casualty, inability to obtain any material or services, acts of God, or any
other cause not within the reasonable control of Landlord or Tenant (as the
case may be).
IX
9.01 Notices.
Any notice or other communications required or permitted to be given under
this lease must be in writing and shall be effectively given or delivered if
hand delivered to the addresses for Landlord and Tenant stated below or if
sent by certified or registered United States Mail, return receipt
requested, to said addresses. Any notice mailed shall be deemed to have been
given upon the earlier of (i) receipt or refusal thereof, or (ii) three days
after depositing the same in the U.S. Mail as aforesaid. Notice effected by
hand delivery shall be deemed to have been given at the time of actual
delivery. Notice may also be given by facsimile transmission at the
facsimile numbers shown below and shall be deemed to be delivered on the day
of transmission if prior to 5 p.m. on a business day (or, if after 5 p.m. or
on a non-business day, on the next succeeding business day). For notice
purposes, a facsimile transmission shall be as effective as the original
document used to effect the facsimile transmission. Either party shall have
the right to change its address or facsimile number to which notices shall
thereafter be sent and the party to whose attention such notice shall be
directed by giving the other party notice thereof in accordance with the
provisions of this Section 9.01. Additionally, Tenant agrees to send copies
of all notices required or permitted to be given to Landlord and to each
lessor under any ground or land lease covering all or part of the Land and
each holder of a mortgage or deed to secure debt encumbering the Property
and/or the Land that notifies Tenant in writing of its interest and the
address to which notices are to be sent.
To Landlord:
Realtycorp International Group LC
2900 Wilcrest Drive
Suite 205
Houston, Texas 77042
Attention: Mr. Ayaz I. Nasser
President
Fax: (713) 784-5307
To Tenant:
American Capitol Insurance Company
10555 Richmond
Suite 200
Houston, Texas 77042
Attention: Mr. William F. Guest
Fax: (713) 953-7920
9.02 Miscellaneous.
(a) This lease shall be binding upon and inure to the benefit of the
successors and assigns of Landlord, and shall be binding upon and inure
to the benefit of Tenant, its successors, and, to the extent assignment
may be approved by Landlord hereunder, Tenant's assigns. Where
appropriate the pronouns of any gender shall include the other gender,
and either the singular or the plural shall include the other.
(b) All rights and remedies of Landlord and Tenant under this lease shall
be cumulative and none shall exclude any other rights or remedies
allowed by law. This lease is declared to be a contract, and all of the
terms hereof shall be construed according to the laws of the state of
Texas. This lease may not be altered, changed or amended, except by an
instrument in writing executed by all parties hereto. Further, the
terms and provisions of this lease shall not be construed against or in
favor of a party hereto merely because such party is the "Landlord" or
the "Tenant" hereunder or such party or its counsel is the draftsman of
this lease.
(c) If Tenant is a corporation, partnership or other entity, Tenant
warrants that all consents or approvals required of third parties
(including but not limited to its Board or Directors or partners) for
the execution, delivery and performance of this lease have been
obtained and that Tenant has the right and authority to enter into and
perform its covenants contained in this lease. Likewise, if Landlord is
a corporation, partnership or other entity, Landlord warrants that all
consent or approvals required of third parties (including but not
limited to its Board of Directors or partners) for the execution,
delivery and performance of this lease have been obtained and that
Landlord has the right and authority to enter into and perform its
covenants contained in this lease.
(d) Wherever in this lease there is imposed upon Landlord the obligation to
use best or reasonable efforts or due diligence, Landlord shall be
required to do so only to the extent the same is economically feasible
and otherwise will not impose upon Landlord extreme financial or other
burdens. Landlord shall have no obligation to use best or reasonable
efforts or due diligence when the application of such standard of care
to persons or circumstances is invalid or unenforceable under
applicable law. Every provision of this lease shall be valid and shall
be enforceable to only the extent permitted by law.
(e) The obligation of Tenant to pay all rent and other sums due from time
to time hereunder constitutes an independent, unconditional covenant
and is not dependant upon performance by Landlord of its obligations
and agreements or covenants, express or implied, hereunder.
(f) If any term or provision of this lease, or the application thereof to
any person or circumstance, shall to any extent be invalid or
unenforceable, the remainder of this lease, or the application of such
provision to persons or circumstances other than those as to which it
is invalid or unenforceable, shall not be affected thereby, and each
provision of this lease shall be valid and shall be enforceable to the
extent permitted by law.
(g) Time is of the essence in this lease agreement.
(h) Tenant agrees not to record any memorandum or other evidence of this
lease in the Real Property Records of Harris County, Texas without
Landlord's prior written consent.
(i) Landlord reserves and retains the right at anytime and from time to
time to change the name by which the Building is designated. Upon
sixty (60) days advance written notice by Tenant, Landlord shall change
the name by which the Building is designated to a name that does not
include the words "American Capitol' or confusingly similar words.
(j) This lease shall become effective only upon execution by all parties
hereto and delivery thereof by each party to the other.
(k) All monetary obligations of Landlord and Tenant (including, without
limitation, any monetary obligation of Landlord or Tenant for damages
for any breach of the respective covenants, duties or obligation of
Landlord or Tenant hereunder) are performable exclusively in Harris
County, Texas.
(I) There shall be no merger of this lease or of the leasehold estate
hereby created with the fee estate in the Leased Premises or any part
thereof by reason of the fact that the same person may acquire or hold,
directly or indirectly, this lease or the leasehold estate hereby
created or any interest in this lease or in such leasehold estate as
well as the fee estate in the Leased Premises or any interest in such
fee estate.
(m) Nothing contained herein shall be deemed or construed as creating any
partnership or joint venture relationship between Landlord and Tenant,
or any other relationship other than that of landlord and tenant.
9.03 Real Estate Broker.
Each party hereto warrants and represents to the other that no real estate
broker and/or salesman has been involved in this lease and each party agrees
to indemnify and hold the other harmless from and against any and all costs,
expenses, attorney's fees and other liability for commissions or other
compensation claimed by any other real estate broker and/or salesman
claiming by, through or under the indemnifying party or its representatives.
IN WITNESS WHEREOF, Landlord and Tenant, acting herein by duly authorized
individuals, have caused this lease to be executed as of the date first
written above..
TENANT:
AMERICAN CAPITOL INSURANCE COMPANY
By: /s/William F. Guest
-----------------------------
William F. Guest, Chairman
LANDLORD:
REALTYCORP INTERNATIONAL GROUP LC
By: Zenith Real Estate Services, Inc.
Agent for REALTYCORP INTERNATIONAL GROUP LC
By: /s/Ayaz I. Nasser
--------------------------
Ayaz I. Nasser, President
Exhibit A Property Description
Exhibit B Leased Premises
Exhibit C Covered Parking Spaces Assigned to Tenant
Exhibit D Air Conditioning and Heating Services
Exhibit E Building Rules and Regulations
Exhibit F Option Space Amendment
<PAGE>
EXHIBIT A
BEGINNING at a 5/8-inch iron rod with cap set for the northeast corner
of said tract herein described and for the northeast corner of said
Restricted Reserve "C" located at the north end of a cutback for the
intersection of the south right-of-way line of Richmond Avenue (100 feet
wide) and the west right-of-way of Rogersdale Road (60 fee wide);
THENCE 47 degrees 44'51" East with said cutback, a distance of 14.14
feet to a 5/8 inch iron rod with cap set in the west right-of-way line of
said Rogersdale Road for the most easterly northeast corner of said tract
herein described;
THENCE South 02 degrees 44' 51" East with the east line of said
Restricted Reserve "C" and the west right-of-way line of said Rogersdale
Road, a distance of 402.10 feet to a point for the southeast corner of said
tract herein described from which a found 5/8-inch iron rod bears East,
THENCE South 87 degrees 17' 34" West, a distance of 449.95 feet to a
5/8-inch iron rod found for the southwest corner of said tract herein
described;
THENCE North 02 degrees 44' 13" West, a distance of 180.12 feet to a
point for the most westerly northwest corner of said tract herein described
from which a found 5/8-inch iron rod bears South, 0.1 feet;
THENCE North 87 degrees 17' 34" East, a distance of 209.71 feet to a
point for an interior corner of said tract herein described from which a
found 5/8-inch iron rod bears South, 0.4 feet;
THENCE North 02 degrees 45' 01" Wet, a distance of 233.60 feet to a
point located in the north line of said Restricted Reserve "C" and the
south right-of-way line of said Richmond Avenue for the most northerly
northwest corner of said tract herein described from which a found 5/8-inch
iron rod bears South, 0.2 feet and West, 0.1 feet;
THENCE in a northeasterly direction with the north line of said
Restricted Reserve "C", the south right-of-way lien of said Richmond Avenue
and with said curve to the left whose central angle is 01 degrees 42' 04"
and whose radius is 4050.00 feet (North 88 degrees 06' 11" East, a distance
of 120.24 feet) for a curve length of 120.24 feet to a 5/8-inch iron rod
with cap set for the point of tangency;
THENCE North 87 degrees 15' 09" East continuing with the north line of
said Restricted Reserve "C" and the south right-of-way line of said Richmond
Avenue, a distance of 110.00 feet to the POINT OF BEGINNING and continuing
3.1398 acres (136,769 square feet) of land, more or less.
Note: This metes and bounds description is referenced to a survey
drawing prepared by Cobb, Fendley & Associates, Inc. dated July 18, 1997.
COBB, FENDLEY & ASSOCIATES, INC. /s/Steve Wright
5300 Hollister, Suite 400 Job No. 97Z028-01
Houston, TX 77040 July 18, 1997
EXHIBIT B
This exhibit is an Autocad drawing of the second floor of the American
Capitol Building at 10555 Richmond Avenue, Houston, Texas 77042.<PAGE>
EXHIBIT C
AMERICAN CAPITOL BUILDING
COVERED PARKING ALLOCATION TO
AMERICAN CAPITOL INSURANCE COMPANY ("AC")
AC 1
Handicap 2
Handicap 3 28 AC 29
AC 4 27 AC 30
AC 5 26 AC 31
AC 6 25 AC 32
AC 7 24 AC 33
8 23 AC 34
9 22 35
10 21 36
11 20 37
12 19 38
13 18 39
14 17 40
16 41
15 42
<PAGE>
EXHIBIT D
AIR CONDITIONING AND HEATING SERVICES
Subject to the provisions of Section 3.1.1, Landlord will furnish Building
standard air conditioning and heating between 7 A.M. and 6 P.M. from Monday
through Friday and, between 7 A.M. and 1 O'clock on Saturdays, all exclusive
of Holidays (as defined below). Upon request of Tenant, made in accordance
with the rules and regulations for the Building, Landlord will furnish air
conditioning and heating at other times (that is, at times other than the
times specified above), in which event Tenant shall reimburse Landlord for
the cost of furnishing such services. Landlord agrees to maintain (subject
to events of force majeure or curtailment as required by governmental laws,
rules or regulations)the condition of the Leased Premises during the above
described hours between the temperature of 70 and 75 degrees Fahrenheit.
The following dates shall constitute "Holidays" as said term is used in this
Lease:
1. New Year's Day
2. Memorial Day
3. Independence Day
4. Labor Day
5. Thanksgiving Day
6. Friday following Thanksgiving Day
7. Christmas
8. Any other holiday recognized by the Federal Regulators for the Savings
and Loan Industry.
If, in the case of any holiday described in (1) through (8) above, a day
shall be observed other than the respective day described above, then that
day which constitutes the day observed by national banks in Houston, Texas
on account of such holiday shall constitute the holiday under this lease.<PAGE>
EXHIBIT E
BUILDING RULES AND REGULATIONS
1. Landlord has already furnished Tenant a certain number of door keys,
card keys, men's and women's restroom keys without charge. Additional door
keys will be furnished at a nominal charge. additional card keys will be
furnished to Tenant at a rate of $15.00 each. Tenant shall not change locks
or install additional locks on doors without prior written consent of
Landlord. Tenant shall not make or cause to be made, duplicates of Keys
procured from Landlord without prior approval of Landlord. All keys to
Leased Premises shall be surrendered to Landlord upon termination of this
Lease.
2. Tenant will refer all contractors, contractor's representatives and
installation technicians rendering any service on or to the Leased Premises
for Tenant to Landlord for Landlord's approval before performance of any
contractual service. Tenant's contractors and installation technicians
shall comply with Landlord's rules and regulations pertaining to
construction and installation. This provision shall apply to all work
performed on or about the Leased Premises or Project, including installation
of telephones, electrical devices and attachments and installations of any
nature affecting floors, walls, woodwork, trim, windows, ceilings and
equipment or any other physical portion of the Leased Premises or Project.
3. Tenant shall not at any time occupy any part of the Leased Premises or
Project as sleeping or lodging quarters.
4. Tenant shall not place, in stall or operate on the leased premises or
in any part of the Building any engine, stove or machinery, or conduct
mechanical operations or cook thereon or therein, or place or use in or
about the Leased Premises or Project any explosives, gasoline, kerosene,
oil, acids, caustics, or any flammable, explosive or hazardous material
without written consent of Landlord.
5. Landlord will not be responsible for lost or stolen personal property,
equipment, money or jewelry from the Leased Premises or the Project
regardless of whether such loss occurs when the area is locked against entry
or not.
6. No dogs, cats, flow, or other animals shall be brought into or kept in
or about the Leased Premises or Project.
7. Employees of Landlord shall not receive or carry messages for or to any
tenant or other person or contract with or render free or paid services to
any Tenant or to any of tenant's agents, employees or invitees.
8. None of the parking, plaza, recreation or lawn areas, entries,
passages, doors, elevators, hallways or stairways shall be blocked or
obstructed or any rubbish, litter, trash, or material of any nature placed,
emptied or thrown into these areas or such area used by Tenant's agents,
employees or invitees at any item for purposes inconsistent with their
designation by Landlord.
9. The water closets and other water fixtures shall not be used for any
purpose other than those for which they were constructed, and any damage
resulting in them from misuse or by the defacing or injury of any part of
the Building shall be borne by the person who shall occasion it. No person
shall waste water by interfering with the faucets or other trim.
10. No person shall disturb occupants of the Building by the use of any
radios, record players, tape recorders, musical instruments, the making of
unseemly noises or any unreasonable use.
11. Nothing shall be thrown down stairways or other passages and the
breakdown of crates or cardboard boxes for removal to the dumpster shall be
the responsibility of the Tenant.
12. Tenant and its employees, agents and invitees shall park their vehicles
only in those parking areas designated by Landlord. Tenant shall furnish
Landlord with state automobile license numbers of Tenant's vehicles and its
employees' vehicles within five days after taking possession of the Leased
Premises and shall notify Landlord of any changes within five days after
such change occurs. Tenant shall not leave any vehicle in a state of
disrepair (including without limitation, flat ires, out of date inspection
stickers, or license plates) on Premises or Project. If Tenant or its
employees, agents or invitees park their vehicles in areas other than the
designated parking areas or leave any vehicle in a state of disrepair,
Landlord, after giving written notice to Tenant of such violation, shall
have the right to remove such vehicles at Tenant's expense.
13. Parking in a parking garage or areas shall be in compliance with all
parking rules and regulations including any sticker or other identification
system established by Landlord. Failure to observe the rules and
regulations shall terminate Tenant's right to use the parking garage or area
and subject the vehicle in violation of the parking rules and regulations to
removal and impoundment. No termination of parking privileges or removal or
impoundment of a vehicle shall create any liability on Landlord or be deemed
to interfere with Tenant's right to possession of its Leased Premises.
Vehicles must be parked entirely with the stall lines and all directional
signs, arrows and posted speed limits must be observed. Parking is
prohibited in areas not striped for parking, in aisles, where "No Parking"
are posted, and only vehicles with handicapped certification prominently
displayed may park in a handicapped designated parking space. Parking
stickers or other forms of identification supplied by Landlord shall remain
the property of the Landlord and not the property of Tenant and they are not
transferable. Every person is required to park and lock his vehicle. All
responsibility for damage to vehicles or persons is assumed by the owner of
the vehicle or its driver.
14. Movement in or out of the Building of furniture or office supplies and
equipment, or dispatch or receipt by Tenant of any merchandise or material
which requires use of elevators or stairways, or movement through the
building entrances or lobby shall be restricted to hours designated by
Landlord. All such movement shall be under the supervision of Landlord and
carried out in the manner agreed between Tenant and Landlord by
prearrangement before performance. Such prearrangement will include
determination by Landlord of time, method, and routing of movement and
limitations imposed by safety or other concerns which may prohibit any
articles, equipment or any other item from being brought into the Building.
Tenant assumes, and shall indemnify Landlord against all risks and claims of
damage to persons and properties arising in connection with any said
movement.
15. Landlord shall not be liable for any damages from the stoppage of
elevators for necessary or desirable repairs or improvements or delays of
any sort or duration in connection with the elevator service.
16. Tenant shall not lay floor covering within the Leased Premises without
written approval of the Landlord. The use of cement or other similar
adhesive materials not easily removed with water is expressly prohibited.
17. Tenant agrees to cooperate and assist Landlord in the prevention of
canvassing, soliciting and peddling within the Building or Project.
18. Landlord reserves the right to exclude from the Building or Project,
between the hours of 6:00 P.M. and 7:00 A.M. on weekdays and at all hours on
Saturday, Sunday and legal holidays, all persons who are not known to the
Building or Project security personnel and who do not present a pass to the
Building signed by the Tenant. Each Tenant shall be responsible for all
persons for whom he supplies a pass.
19. It is Landlord's desire to maintain in the Building or Project the
highest standard of dignity and good taste consistent with comfort and
convenience for Tenants. Any action or condition not meeting this standard
should be reported directly to Landlord. Your cooperation will be mutually
beneficial and sincerely appreciated. Landlord reserves the right to make
such other and further reasonable rules and regulations as in its judgment
may from time to time be necessary, for the safety, care and cleanliness of
the leased premises and for the preservation of good order therein.
Landlord reserves the right to rescind any of these rules and regulations
and to make such other and further rules and regulations as, in its
reasonable judgment, shall, form time to time, be required for the safety,
protection, care and cleanliness of the Building or Project, the operation
thereof, the preservation of good order therein and the protection and
regulation, when made and written notice thereof is given to Tenant, shall
be binding upon it in like manner as if originally herein prescribed.<PAGE>
EXHIBIT F
OPTION SPACE AMENDMENT
This amendment agreement is made and entered into on this ---- day of -----
by and between REALTYCORP INTERNATIONAL GROUP LC (a Texas Limited Liability
Company)("Landlord") and AMERICAN CAPITOL INSURANCE COMPANY ("Tenant") to
amend the original "Lease Agreement" between the parties dated November,
1997.
This amendment ("Amendment") is made with reference to, and is hereby made a
part of, the above identified Lease Agreement and, except as set forth
therein, the Lease Agreement shall govern this Amendment.
Subject to and upon the terms hereinafter set forth, Landlord does hereby
lease and demise to Tenant and Tenant does hereby lease and take from
Landlord those certain premises containing approximately ------- square feet
of net rentable area on the ----- floor of the Building (the "Expansion
Space"). The Expansion Space is identified on Exhibit "A" attached hereto.
The term of the lease of the Expansion Space shall commence on ------ and
shall expire on the same date on which the Lease Agreement expires. The
Expansion Space shall be subject to the renewal option set forth in the
Lease Agreement.
If the commencement date of the Expansion Space lease is within the first
sixty (60) months of the Lease Agreement, then, for the remainder of said
sixty (60) month period, the Base Rental shall be $-------- per square foot
of Rentable Are or $------- per month as such dollar amount may be adjusted
from lease year pursuant to the terms of the Lease Agreement. The Base
Rental, Tenant's Forecast Additional Rental and Tenant's Additional Rental
Adjustment shall be added to the Rent required in the Lease Agreement,
payable as part of the Rent provided in the Lease Agreement. If the Tenant
exercises its option to renew in respect to the Expansion Space, the Base
Rent for the Expansion Space shall be determined as provided in the Lease
Agreement. Tenant has the option to include, or exclude, the Expansion
Space upon the exercise of its option to renew. If the commencement date of
the Expansion Space lease is within the Renewal Term of the Lease Agreement,
the Base Rental shall be $------- per square foot of Net Rentable Area, or
$---------- per month as such dollar amount may be adjusted from lease year
to lease year pursuant to the terms of the Lease Agreement.
To refurbish the Expansion Space, Landlord hereby agrees, at its sole cost
and expense to furnish and install the leasehold improvement items set forth
in Exhibit "B" attached hereto.
IN WITNESS WHEREOF, Landlord and Tenant have caused this ------- Amendment
to be executed as of the date first written above.
LANDLORD: TENANT:
REALTYCORP INTERNATIONAL GROUP LC AMERICAN CAPITOL INSURANCE COMPANY
By: By:
------------------------------ -------------------------------
Name: Name:
Title: Title:
ACAP CORPORATION
CONTENTS President's Report 1
Management's Financial Analysis 3
Consolidated Balance Sheet 10
Consolidated Statements of Operations 11
Consolidated Statements of Stockholders' Equity 12
Consolidated Statements of Cash Flows 13
Notes to Consolidated Financial Statements 14
Independent Auditors' Report 31
Stockholder Information 32
Directors and Officers 33
<PAGE>
CORPORATE PROFILE
Acap Corporation is a life insurance holding company that focuses on the
acquisition of existing life insurance policies, either through direct
purchase or the acquisition of life insurance companies. Adjuncts to the
acquisition-oriented growth strategy include using financial leverage and
reinsurance to make more acquisitions and to maximize the return to
stockholders, consolidating and streamlining the operations of acquired
businesses, concentrating on a limited number of lines of business and
providing superior customer service to improve policy retention.
Acap was formed in 1985. Acap's life insurance operations are conducted
through its wholly-owned life insurance subsidiaries. All operations are
conducted from the corporate headquarters in Houston, Texas. Acap's common
stock is quoted on the NASD Electronic Bulletin Board under the symbol AKAP.
<PAGE>
PRESIDENT'S REPORT
CORPORATE DEVELOPMENTS DURING 1997
During 1997, the Company's subsidiary, American Capitol Insurance Company
("American Capitol"), completed a process of acquiring a block of life
insurance policies from World Service Life Insurance Company ("World
Service") and its subsidiary, South Texas Bankers Life Insurance Company
("South Texas") that began as a coinsurance arrangement, coupled with a
policy administrative contract, as follows. As reported in last year's
annual report, during 1996 American Capitol coinsured 94% of all of World
Service's life insurance policies. Effective January 1, 1997, World Service
assumed all of the life insurance policies of South Texas which were then
added to the World Service policies coinsured by American Capitol, and the
coinsurance percentage was changed to 91%. At the time of coinsuring the
World Service policies, American Capitol assumed the administration of the
World Service policies and the South Texas policies. Effective August 1,
1997, American Capitol acquired all of the above policies through assumption
reinsurance, increasing the percentage to 100%. The policies that were
coinsured as above described were concurrently retroceded to an unrelated
reinsurer on the same coinsurance percentage, although the increased amount,
from 91% to 100%, resulting from the change from coinsurance to the
assumption of the policies was not retroceded. As part of the assumption
reinsurance transaction, World Service transferred to American Capitol $2.5
million in cash.
On November 21, 1997, American Capitol sold its home office building and
adjacent land to an unrelated third party. While American Capitol realized
a pre-tax gain on the sale of $522,194, since the Company leased a quarter
of the building, the Company is required, for accounting purposes, to defer
$468,698 of the gain to be recognized over the term of the five year lease.
<PAGE>
RESULTS OF OPERATIONS
The Company s net income for 1997 of $1,348,031, or $154.43 per basic common
share, compares to net income for 1996 of $658,267, or $57.30 per basic
common share. The 1997 net income includes $204,709 in net realized
investment gains, whereas the 1996 net income included $275,525 in net
realized investment gains. Excluding net realized investment gains, pre-tax
operating income for the year 1997 was $529,567, compared to pre-tax
operating income in 1996 of $385,727.
Following American Capitol's acquisition of Texas Imperial Life Insurance
Company ("Texas Imperial") in 1994, the Company has continued, on a
relatively modest scale, Texas Imperial's marketing of preneed funeral
contracts funded by life insurance policies, and continues to explore the
potential of expanding its marketing efforts. Texas Imperial s premium
income for 1997 was 33% higher than its premium income for 1996.
A more complete analysis of the results of operations is included in the
Management's Financial Analysis section of this Annual Report. Stockholders
are urged to read the entire Annual Report to gain a better understanding of
the Company, its recent financial performance and its prospects.
UNIVERSAL LIFE COINSURANCE
On March 5, 1998, American Capitol closed a coinsurance transaction with
Universal Life Insurance Company ("Universal Life"). Pursuant to the
coinsurance agreement, American Capitol coinsured 100% of the individual
life insurance policies of Universal Life in force at January 1, 1998. The
coinsurance is effective January 1, 1998. At the same time, American
Capitol contracted to provide specified administrative functions for
Universal Life related to the coinsured policies. The coinsurance covers
approximately 260,000 policies.
Concurrent with the coinsurance of the Universal Life policies, American
Capitol retroceded the business to an unaffiliated reinsurance company. So,
while Universal Life transferred $40.9 million in assets to American Capitol
in connection with the coinsurance, American Capitol transferred $40.4
million in assets to the reinsurer in connection with the retrocession. The
reinsurer will pay American Capitol an expense allowance for administering
the policies. The Company s profits from the Universal Life transaction
will initially be determined by the Company s ability to administer the
policies for less than the expense allowance received from the reinsurer.
In the future, once the reinsurer has recovered the initial ceding fee, the
Company is entitled to 70% of the profits generated by the policies. Also,
the Company has the right to recapture the retrocession under certain terms
and conditions.
OUTLOOK
We remain committed to the pursuit of synergies and economies of scale
through consolidation in the insurance industry. For instance, primarily as
a result of the Company s recent acquisitions, the Company s per policy
general expenses are less than 30% of what they were just five years ago.
The Universal Life transaction is expected to lower the Company s per policy
cost further. While competition for life insurance acquisition candidates
remains intense, we believe that the Company will be able to continue its
progress in its business plan.
William F. Guest
President
April 6, 1998
<PAGE>
ACAP CORPORATION
MANAGEMENT'S FINANCIAL ANALYSIS
SIGNIFICANT TRANSACTIONS
During 1996 and 1997, the Company entered into a number of significant
transactions that affect various components of income and expense. The more
significant transactions are described below.
WORLD SERVICE TRANSACTION
Effective June 1, 1996, American Capitol Insurance Company ("American
Capitol"), a wholly-owned subsidiary of Acap Corporation, assumed through
reinsurance 93.6% of all of the policies of World Service Life Insurance
Company of America ("World Service") pursuant to a coinsurance agreement
(the "Coinsurance Agreement"). American Capitol paid World Service an
initial ceding commission of approximately $1.7 million. The assets
transferred to American Capitol were approximately $19.4 million in cash,
approximately $1.9 million of mortgage loans and approximately $.1 million
of other assets.
Contemporaneous with the signing of the Coinsurance Agreement, the parties
executed an administrative agreement (the "Administration Agreement")
whereby American Capitol agreed to provide specified administrative
functions for the 18,000 World Service policies as well as approximately
8,000 policies owned by World Service s subsidiary, South Texas Bankers Life
Insurance Company ("South Texas"), and the preneed funeral contracts
associated with the South Texas policies.
Effective June 30, 1996, American Capitol retroceded all of the World
Service policies in force at June 1, 1996 on a 100% coinsurance basis by
amending an existing reinsurance agreement (the "Crown Agreement") with an
unaffiliated reinsurer. American Capitol retained the coinsurance on all
policies issued by World Service subsequent to June 1, 1996. American
Capitol also retained the administration of the policies, for which it
received an expense allowance from the reinsurer.
On January 31, 1997, World Service assumed all of the policies of South
Texas with a retroactive effective date of June 1, 1996. Under the terms of
the Coinsurance Agreement, World Service s assumption of the South Texas
policies automatically made the South Texas policies subject to the
Coinsurance Agreement and adjusted the coinsurance percentage relative to
all of the World Service policies to 91.4%. American Capitol paid World
Service an initial ceding commission of approximately $100,000 related to
the South Texas policies. At the same time, the South Texas policies also
automatically became subject to the Crown Agreement. In anticipation of the
assumption by World Service and the resulting coinsurance to American
Capitol, South Texas had transferred $6.8 million in assets to American
Capitol in 1996.
Effective July 31, 1997, American Capitol acquired through assumption
reinsurance all of the World Service policies (the "Assumption
Transaction"). While 91.4% of the acquired policies continue to be
coinsured under the Crown Agreement, American Capitol did not coinsure the
balance of the policies following the Assumption Transaction. World Service
transferred to American Capitol $2.5 million in cash in connection with the
Assumption Transaction.
REAL ESTATE SALES
On September 10, 1996, American Capitol sold 50,000 square feet of
undeveloped land to an unaffiliated third party (the "Land Sale"). The
Company realized a pre-tax capital gain of $222,025 on the sale.
On November 21, 1997, American Capitol sold its home office building and
2.37 acres of undeveloped land adjacent to the home office building to an
unaffiliated third party (the " Home Office Sale"). While the Company
realized a pre-tax capital gain of $522,194 on the sale, since the Company
leased 25% of the building, only $53,496 of the gain was recognized in 1997.
The deferred gain of $468,698 will be recognized over the term of the five
year lease.
RESULTS OF OPERATIONS
Premiums and other considerations were essentially unchanged for 1997 in
comparison to 1996. Pursuant to the Coinsurance Agreement with World
Service discussed above under "Significant Transactions," American Capitol
coinsured 91.4% of all business produced by World Service on or after June
1, 1996. American Capitol did not retrocede these policies. World Service
terminated writing new business on September 1, 1997. Premiums from new
business written by World Service were $744,790 during 1997 in comparison to
$1,072,227 during 1996. The decline in premiums from new business written
by World Service was largely offset by an increase in premiums generated by
Texas Imperial Life Insurance Company ("Texas Imperial"), the wholly-owned
subsidiary of American Capitol. Texas Imperial markets final expense life
insurance and insurance-funded prepaid funeral service contracts. Texas
Imperial s premiums during 1997 were $1,117,191 in comparison to $841,630
during 1996. Also, the Assumption Transaction discussed above under
"Significant Transactions" resulted in an increase in 1997 s premiums from
the acquisition of the 8.6% portion of the World Service policies that
American Capitol had not previously coinsured.
Net investment income was 18% higher during 1997 in comparison to 1996. The
larger asset base during 1997, primarily resulting from the Assumption
Transaction, was a significant factor in the increase in net investment
income. Investment expenses for 1997 include approximately $27,000 related
to repairs on American Capitol s home office building made in preparing the
building for sale. Investment income for 1997 also includes $50,000 in
forfeited earnest money American Capitol received when a prospective
purchaser of the home office building could not complete the transaction.
Investment expenses in 1996 include a $72,000 nonrecurring item.
Realized investment gains were $204,709 for 1997 in comparison to $275,525
for 1996. The realized investment gains for 1997 were primarily related to
the gains from fixed maturity sales and the Home Office Sale discussed
above under Significant Transactions. The realized investment gains for
1996 were primarily related to the Land Sale discussed above under
"Significant Transactions."
A major source of revenue for the Company is the expense allowance the
Company receives for administering certain blocks of reinsured policies.
The expense allowance for 1997 was 3% higher than the expense allowance
received during 1996. During 1996, the World Service policies were included
in the Crown Agreement (and therefore the Company received an expense
allowance related to those policies) for only six months, whereas, the
Company received an expense allowance related to the World Service policies
for all of 1997. The additional expense allowance related to the World
Service policies was partially offset by the decline in the expense
allowance due to normal policy attrition of the reinsured policies.
As a result of the factors noted above, total revenue, including realized
investment gains, was 3% higher during 1997 than during 1996. Excluding
realized investment gains, total revenue was 4% higher during 1997 than
during 1996. When used below, "total revenue" excludes realized investment
gains.
Total policy benefit expense (death and other benefits) was 40% of total
revenue during 1997 in comparison to 44% of total revenue during 1996.
Total expenses (i.e., total benefits and expenses less total policy
benefits) were 52% of total revenue for 1997 in comparison to 50% of total
revenue for 1996. The increase in expenses was primarily attributable to
additions made to the Company s staff made in anticipation of future growth.
Total expenses for 1996 include approximately $59,000 in finder's fees
related to the World Service transaction and a $40,000 charge related to the
settlement of a long-standing agent commission dispute.
The Company realized the benefit of approximately $550,000 in deferred tax
assets upon which the Company had previously established a valuation
reserve.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY OF INSURANCE SUBSIDIARIES
Acap's insurance subsidiaries have a significant portion of their assets
invested in debt instruments, short-term investments, or other marketable
securities. Although there is no present need or intent to dispose of such
investments, the insurance subsidiaries could liquidate portions of the
investments should the need arise. These assets should be sufficient to
meet the insurance subsidiaries' anticipated long-term and short-term
liquidity needs.
As of December 31, 1997, 99.7% of the insurance subsidiaries' portfolios of
publicly-traded bonds are invested in securities that are rated investment
grade (i.e., rated BBB-/Baa3 or higher by Standard & Poor or Moody). The
Company's investment policy prohibits making any new investment in below
investment grade securities without the advance approval of the applicable
insurance subsidiary's Board of Directors. All of the Company's bonds are
classified as available for sale and are, accordingly, reflected in the
financial statements at fair value. The insurance subsidiaries' liabilities
are primarily long term in nature. Therefore, long-term assets can be
purchased with the general intent to hold such assets to maturity. It has
not been the Company's investment practice in the past to be an active
trader with its bond portfolios. It is not expected that the insurance
subsidiaries' investment practices will change in the future.
A significant portion (28%) of the Company's bond portfolio is invested in
mortgage-backed securities, with 95% of such mortgage-backed securities
classified as collateralized mortgage obligations and 5% classified as
pass-through securities. Mortgage-backed securities are purchased to
diversify the portfolio from credit risk associated with corporate bonds.
The majority of mortgage-backed securities in the Company's investment
portfolio have minimal credit risk because the underlying collateral is
guaranteed by specified government agencies (e.g., GNMA, FNMA, FHLMC).
The principal risks inherent in holding mortgage-backed securities are
prepayment and extension risks that arise from changes in the general level
of interest rates. As interest rates decline and homeowners refinance their
mortgages, mortgage-backed securities prepay more rapidly than anticipated.
Conversely, as interest rates increase, underlying mortgages prepay more
slowly, causing principal repayment of mortgage-backed securities to be
extended. In general, mortgage-backed securities provide for higher yields
than corporate debt securities of similar credit quality and expected
maturity to compensate for this greater amount of cash flow risk. Due to
the underlying structure of the individual securities, the majority of
mortgage-backed securities in the Company's investment portfolio have
relatively low cash flow variability.
The Company's investments in collateralized mortgage obligations are
primarily of the planned amortization class (55%), Z (20%) and sequential
(23%) types. A planned amortization class tranche is structured to provide
more certain cash flows and is therefore subject to less prepayment and
extension risk than other forms of mortgage-backed securities. Planned
amortization class securities derive their stability at the expense of cash
flow risk for other tranches as early repayments are applied first to other
tranches, and cash flows originally applicable to other tranches are first
applied to the planned amortization class tranche if that tranche's
originally scheduled cash flows are received later than expected. The Z
tranche defers all interest to other tranches until those tranches are paid
down, at which time accumulated interest and principal are paid to this
class. The cash flows associated with sequential tranches can vary as
interest rates fluctuate, since these tranches are not supported by other
tranches.
Under an accounting standard adopted in 1993, the Company records its fixed
maturity and equity securities at fair value with unrealized gains and
losses, net of taxes, reported as a separate component of stockholders'
equity. Primarily as a result of decreasing interest rates during the year,
the fair value of the Company's fixed maturity and equity securities
increased $344,417 during 1997, following a $512,422 decrease during 1996.
The accounting standard does not permit the Company to restate its
liabilities for changes in interest rates.
As of December 31, 1997, the Company held 27 mortgage loans as investments.
The Company s investment policy generally prohibits making new investments
in mortgage loans (although mortgage loans may be acquired as approved
assets in connection with an acquisition). In addition to the real estate
collateral, approximately $1.4 million of the mortgage loans are guaranteed
by an individual that management has reason to believe has a net worth well
in excess of the balance of the guaranteed loans. The average principal
balance of the Company's mortgage loans at December 31, 1997 was
approximately $80,000 and the weighted average maturity was 9 years.
Mortgage loans on Tennessee properties represent 37% of the mortgage loan
balances at December 31, 1997, Texas properties 32%, Alabama properties 21%,
with Louisiana, Florida and Kentucky properties representing the remainder
of the mortgage loan balances. Residential mortgages represent 55% of the
mortgage loan balances at December 31, 1997 with commercial mortgages
constituting the balance. In general, the performance of commercial
mortgages is more subject to changing U.S. and regional economic conditions
than residential mortgages. Mortgage loans are far less liquid an
investment than publicly-traded securities.
LIQUIDITY OF THE PARENT COMPANY
On January 31, 1995, Acap borrowed $1.5 million from Central National Bank
of Waco, Texas. At December 31, 1997, the outstanding principal balance of
the loan was $812,500. The loan is renewable each April 30 until fully
repaid. The loan bears interest at a rate equal to the base rate of a bank
plus 1%. Principal payments on the loan are due quarterly. The loan
agreement contains certain restrictions and financial covenants. Without
the written consent of the bank, Acap may not incur any debt, pay common
stock dividends or sell any substantial amounts of assets. Also, American
Capitol is subject to minimum statutory earnings and capital and surplus
requirements during the loan term. The Company is in compliance with all of
the terms of the loan. The principal payments on the bank loan are matched
by the principal payments on a surplus debenture issued by American Capitol
to Acap.
The primary sources of funds for Acap are payments on the surplus debenture
from American Capitol and dividends from American Capitol. American Capitol
may pay dividends in any one year without the prior approval of regulatory
authorities as long as such dividends do not exceed certain statutory
limitations. As of December 31, 1997, the amount of dividends available to
the parent company from American Capitol not limited by such restrictions is
approximately $500,000. Payments on the surplus debenture may only be made
to the extent statutory capital and surplus exceeds $2 million. At December
31, 1997, American Capitol's statutory capital and surplus was $3,540,343.
The determination of statutory surplus is governed by accounting practices
prescribed or permitted by the State of Texas. Statutory surplus therefore
bears no direct relationship to surplus as would be determined under
generally accepted accounting principles.
REINSURANCE
Reinsurance plays a significant role in the Company's operations. In
accounting for reinsurance, the Company has reported ceded reserve credits
and reinsurance claim credits as reinsurance receivables. The cost of
reinsurance related to long-duration contracts is accounted for over the
life of the underlying reinsured policies using assumptions consistent with
those used to account for the underlying policies. At December 31, 1997,
reinsurance receivables with a carrying value of $50 million were associated
with a single reinsurer, Crown Life Insurance Company ("Crown"). At
December 31, 1996, Crown had assets in excess of $6.6 billion and
stockholders' equity of approximately $0.5 billion. Crown is rated
"Excellent" by A.M. Best Company, an insurance company rating organization.
At December 31, 1997, reinsurance receivables with a carrying value of $2.9
million were associated with Alabama Reassurance Company ("Alabama Re").
The Alabama Re reinsurance receivables are secured by a trust account
containing a $5.8 million letter of credit granted in favor of an insurance
subsidiary of the Company.
With regard to the policies not 100% reinsured with Crown or Alabama Re, the
Company seeks to limit its exposure to loss on any single insured by
reinsuring the portion of risks in excess of $50,000 on the life of any
individual through various reinsurance contracts, primarily of the
coinsurance and yearly renewable term type.
The Company is contingently liable for amounts ceded to reinsurers in the
event the reinsurers are unable to meet their obligations assumed under the
reinsurance agreements. Acap evaluates the financial condition of its
reinsurers and monitors concentrations of credit risk to minimize its
exposure to significant losses from reinsurer insolvencies.
ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of." SFAS No. 121 established accounting standards for the
impairment of long-lived assets, certain identifiable intangibles, and
goodwill related to (1) those assets to be held and used in the business,
and (2) for assets to be disposed of. The Company adopted SFAS No. 121 in
1996. In connection with the review of goodwill required by SFAS No. 121,
management determined that, due to changes in market conditions, the
remaining amortization period of a significant portion of the goodwill
should be reduced from 33 years to 10 years. This change increased the
annual amortization by $135,368 beginning in 1996.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 provides a choice for accounting for employee
stock compensation plans. A company can elect to use the new
fair-value-based method of accounting for employee stock compensation plans,
under which compensation cost is measured and recognized in results of
operations, or continue to account for these plans under the current
accounting standards. Entities electing to remain with the present
accounting method must make disclosures of what net income and earnings per
share would have been if the fair-value-based method of accounting had been
applied. The provisions of SFAS No. 123 were adopted, but did not have a
material impact on the financial statements.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share." SFAS
No. 128, which must be adopted for fiscal years ending after December 15,
1997, established standards for computing and presenting earnings per share
("EPS") and applies to entities with publicly-held common stock or potential
common stock. It replaces the presentation of primary EPS with a
presentation of basic EPS. It also requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with
complex capital structures and requires a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation, with all prior period EPS data
presented restated.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and
losses) in a full set of general-purpose financial statements. This
statement requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. This statement does not require a specific format for
that financial statement but requires that an enterprise display an amount
representing total comprehensive income for the periods in that financial
statement. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. As such, the Company will adopt SFAS No. 130 in 1998.
In June, 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards
for the way that public business enterprises report information about
operating segments in interim financial reports issued to shareholders. The
provisions of SFAS No. 131 will not be adopted since the Company does not
have different operating segments .
SUBSEQUENT EVENT
On March 5, 1998, American Capitol closed a coinsurance transaction with
Universal Life Insurance Company ("Universal Life"). Pursuant to the
coinsurance agreement, American Capitol coinsured 100% of the individual
life insurance policies of Universal Life in force at January 1, 1998. The
coinsurance is effective January 1, 1998. At the same time, American
Capitol contracted to provide specified administrative functions for
Universal Life related to the coinsured policies. The coinsurance covers
approximately 260,000 policies.
Concurrent with the coinsurance of the Universal Life policies, American
Capitol retroceded the business to an unaffiliated reinsurance company. So,
while Universal Life transferred $40.9 million in assets to American Capitol
in connection with the coinsurance, American Capitol transferred $40.4
million in assets to the reinsurer in connection with the retrocession. The
reinsurer will pay American Capitol an expense allowance for administering
the policies. The Company s profits from the Universal Life transaction
will initially be determined by the Company's ability to administer the
policies for less than the expense allowance received from the reinsurer.
In the future, once the reinsurer has recovered the initial ceding fee, the
Company is entitled to 70% of the profits generated by the policies. Also,
the Company has the right to recapture the retrocession under certain terms
and conditions.
YEAR 2000 STATUS
The Company s policies are administered on two policy administration
systems. One of the policy administration systems was internally developed.
The Company has performed what it believes to be a reasonable degree of
testing of the system and believes that the system is year 2000 compliant.
The other policy administration system is a vendor developed and supported
system. The vendor has represented that the system is year 2000 compliant.
Certain of the Company's subsystems are not currently year 2000 compliant
and will either be remediated or replaced. The Company believes that all of
its systems will be year 2000 compliant by the end of 1998, and that the
cost to reach such compliance will not be material.<PAGE>
Acap Corporation
Consolidated Balance Sheet
December 31,
1997
------------
Assets
Investments:
Fixed maturities available for sale
(amortized cost $35,222,663) $36,547,159
Mortgage loans 2,150,163
Policy loans 6,209,737
Short-term investments 880,103
------------
Total investments 45,787,162
Cash 97,714
Accrued investment income 567,809
Reinsurance receivables 55,790,538
Accounts receivable
(less allowance for uncollectible accounts of $88,343) 226,311
Deferred acquisition costs 1,569,969
Property and equipment
(less accumulated depreciation of $398,345) 179,935
Costs in excess of net assets of acquired business
(less accumulated amortization of $952,129) 1,721,647
Other assets 329,939
------------
Total assets $106,271,024
============
Liabilities
Policy liabilities:
Future policy benefits $90,773,968
Contract claims 924,702
------------
Total policy liabilities 91,698,670
------------
Other policyholders' funds 1,857,988
Other liabilities 913,911
Note payable 812,500
Net deferred tax liability 931,388
Deferred gain on reinsurance 2,216,556
Deferred gain on sale of real estate 468,698
------------
Total liabilities 98,899,711
============
<PAGE>
Stockholders' Equity
Series A preferred stock, par value $.10 per share,
authorized, issued and outstanding 74,000 shares
(involuntary liquidation value $2,035,000) 1,850,000
Common stock, par value $.10 per share,
authorized 10,000 shares, issued 8,754 shares 876
Additional paid-in capital 6,259,189
Accumulated deficit (1,231,992)
Treasury stock, at cost, 1,308 common shares (450,482)
Net unrealized investment gains, net of taxes of $380,774 943,722
------------
Total stockholders' equity 7,371,313
------------
Total liabilities and stockholders equity $106,271,024
=============
See accompanying notes to consolidated financial statements.
<PAGE>
Acap Corporation
Consolidated Statement of Operations
Years Ended December 31,
1997 1996
----------- -------------
Revenues
Premiums and other considerations $2,521,103 2,556,529
Net investment income 1,536,008 1,304,791
Net realized investment gains 204,709 275,525
Reinsurance expense allowance 1,938,314 1,884,578
Amortization of deferred gain on reinsurance 193,682 198,933
Other income 53,167 50,411
---------- --------------
Total revenues 6,446,983 6,270,767
========== ==============
Benefits and Expenses
Death benefits 1,083,921 685,537
Other benefits 1,403,058 1,943,758
Commissions and general expenses 2,801,552 2,514,726
Interest expense 90,330 110,930
Amortization of costs in excess of net
acquired business 239,662 239,662
Amortization of deferred acquisition costs 94,184 114,902
---------- --------------
Total benefits and expenses 5,712,707 5,609,515
========== ==============
Earnings
Income before federal income tax
expense (benefit) 734,276 661,252
Federal income tax expense (benefit):
Current 261,870 111,605
Deferred (875,625) (108,620)
------------------------
Net income $1,348,031 658,267
========================
Earnings Per Share
Basic earnings per common share $154.43 57.30
=======================
Diluted earnings per common share $145.45 55.08
=======================
See accompanying notes to consolidated financial statements.
<PAGE>
Acap Corporation
Consolidated Statements of Stockholders' Equity
Years Ended December 31,
------------------------
1997 1996
------------------------
Preferred Stock
(Including Additonal Paid-in Capital) $1,850,000 1,850,000
Common Stock 876 876
Additional Paid-in Capital
Balance, beginning of year 6,259,189 6,259,069
Change during year -- 120
------------------------
Balance, end of year 6,259,189 6,259,189
------------------------
Accumulated Deficit
Balance, beginning of year (2,388,086) (2,854,416)
Net income 1,348,031 658,267
Preferred stock cash dividends (191,937) (191,937)
------------------------
Balance, end of year (1,231,992) (2,388,086)
------------------------
Treasury Stock
Balance, beginning of year (426,419) (105,853)
Change during year (24,063) (320,566)
------------------------
Balance, end of year (450,482) (426,419)
------------------------
Net Unrealized Investment Gains
Balance, beginning of year 599,305 1,111,727
Change during year 344,417 (512,422)
------------------------
Balance, end of year 943,722 599,305
------------------------
Total Stockholders' Equity $7,371,313 5,894,865
========================
See accompanying notes to consolidated financial statements.
Acap Corporation
Consolidated Statements of Cash Flow
Years Ended Deceember 31,
1997 1996
----- ----
Cash Flows from Operating Activities
Net income $1,348,031 658,267
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 336,752 325,998
Amortization of deferred acquistion costs 94,184 114,902
Amortization of deferred gain on reinsurance (193,682) (198,933)
Premium and discount amortization 29,945 13,702
Net realized investment gains (204,709) (275,525)
Deferred federal income tax benefit (875,625) (108,620)
Decrease in reinsurance receivables 1,814,662 1,851,696
Increase in accrued investment income (7,997) (333,623)
Decrease (increase) in accounts receivable 116,973 (9,461)
Decrease in other assts 107,003 2,857
Increase (decrease) in policy liabilities (1,056,006) 551,695
Increase in other liabilities 192,982 54,637
-------------------------
Net cash provided by operating activities 1,702,513 2,647,592
-------------------------
Cash Flows from Investing Activities
Proceeds from sales of invetments available for
sale and principal repayments on mortgage loans 6,214,388 3,751,347
Purchases of investments available for sale (12,177,281) (24,360,337)
Proceeds from sale of real estate 1,928,769 338,845
Net decrease (increase) in policy loans (18,779) 536,707
Net decrease (increase) in short-term investments 789,313 (626,365)
Proceeds from sale of subsidiary -- 50,000
Proceeds from coinsurance/assumption agreement 2,495,774 19,371,962
Purchases of property and equipment (93,099) (224,040)
--------------------------
Net cash used in investing activities (860,915) (1,161,881)
--------------------------
Cash Flows from Financing Activities
Principal payments on note payable (250,000) (250,000)
Deposits on policy contracts 1,591,091 1,135,278
Withdrawals from policy contracts (1,929,391) (2,266,312)
Preferred dividends paid (191,937) (191,937)
--------------------------
Net cash used in financing activities (780,237) (1,572,971)
Net increase (decrease) in cash 61,361 (87,260)
Cash at beginning of year 36,353 123,613
--------------------------
Cash at end of year $97,714 36,353
==========================
See accompanying notes to consolidated financial statements.
ACAP CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND NATURE OF OPERATIONS
The consolidated financial statements of Acap Corporation ("Acap" or "the
Company"), include its wholly-owned subsidiaries, American Capitol Insurance
Company ("American Capitol"); through November 22, 1996, Family Life
Insurance Company of Texas ("Family"); Imperial Plan, Inc. ("Imperial
Plan"); Texas Imperial Life Insurance Company ("Texas Imperial") and, from
February 2, 1995 through December 31, 1996, Oakley-Metcalf Insurance Company
("Oakley"). All significant intercompany transactions and accounts have
been eliminated in consolidation. Controlling interest in the Company,
approximately 45% at December 31, 1997, is owned by InsCap Corporation
("InsCap").
Acap is a life insurance holding company that focuses on the acquisition of
existing life insurance policies, either through direct purchase or the
acquisition of insurance companies. Acap's life insurance operations are
conducted through its wholly-owned life insurance subsidiaries. Operations
are conducted from the corporate headquarters in Houston, Texas.
Approximately half of the Company's direct collected premium comes from
residents of the State of Texas, with no other state generating as much as
10% of the Company's direct collected premium.
BASIS OF PRESENTATION
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles. Such accounting principles differ
from prescribed statutory reporting practices used by the insurance
subsidiaries in reporting to state regulatory authorities. The more
significant differences from statutory accounting principles are:
(a) acquisition costs related to acquiring new business are deferred and
amortized over the expected lives of the policies rather than being charged
to operations as incurred; (b) future policy benefits are based on
estimates of mortality, interest and withdrawals generally representing the
Company's experience, which may differ from those based on statutory
mortality and interest requirements without consideration of withdrawals;
(c) deferred federal income taxes are provided for temporary differences
between assets and liabilities reported for financial reporting purposes and
reported for federal income tax purposes; (d) certain assets (principally
furniture and equipment, agents' debit balances and certain other
receivables) are reported as assets rather than being charged to accumulated
deficit; (e) investments in fixed maturities available for sale are recorded
at fair value rather than at amortized cost; (f) for acquisitions accounted
for as a purchase, the identified net assets of the acquired company are
valued at their fair values and the excess of the value of the consideration
over the net assets assumed is amortized over a period not to exceed nine
years, whereas, for statutory purposes, this excess is not allowed and
acquisitions are accounted for as equity investments; (g) two investment
related reserves, the Asset Valuation Reserve ("AVR") and the Interest
Maintenance Reserve ("IMR") are recorded under the statutory basis of
accounting; (h) assets and liabilities are reported gross of reinsurance;
(i) at the time of the initial ceding of a block of business, a deferred
gain is set up and amortized over the life of the policies ceded; and (j)
the decrease in surplus relief from reinsurance ceded agreements is
amortized through net income with an offset in surplus netting to a zero
effect on surplus under the statutory basis of accounting.
Generally, the net assets of the Company's insurance subsidiaries available
for transfer to the parent company are limited to the amounts that the
insurance subsidiaries' statutory net assets exceed minimum statutory
capital requirements; however, payment of the amounts as dividends may be
subject to approval by regulatory authorities. As of December 31, 1997, the
amount of dividends available to the parent company from subsidiaries not
limited by such restrictions is approximately $500,000. The combined net
income of the Company's insurance subsidiaries (where applicable, from the
date such subsidiary was acquired), as determined using statutory accounting
practices, was $2,689,622 and $812,871 for the years ended December 31, 1997
and 1996, respectively. The consolidated statutory stockholders' equity of
the Company's insurance subsidiaries amounted to $3,540,343 and $3,160,508
at December 31, 1997 and 1996, respectively. The total adjusted statutory
stockholders' equity of the Company's insurance subsidiaries exceeds the
applicable Risk-Based Capital requirements.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Certain prior year amounts have been reclassified to conform to the current
year presentation. Such reclassifications had no impact on net income or
stockholders' equity as previously reported.
INVESTMENTS
Investments are reported on the following bases:
All of the Company's debt and equity securities are accounted for in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115
and are classified as available-for-sale securities. Accordingly, such
securities are reported at fair value, with unrealized gains and losses, net
of taxes, excluded from earnings and reported as a separate component of
stockholders' equity.
Mortgage loans on real estate are carried at unpaid principal balances.
Policy loans are carried at their unpaid principal balances. Policy loans
consist primarily of automatic borrowings against a policy's cash surrender
value to pay policy premiums. Interest accrues at rates ranging from 5% to
10%.
Short-term investments, consisting primarily of commercial paper, are
carried at cost.
Write-downs and other realized gains and losses, determined on the specific
identification method, are accounted for in the consolidated statements of
operations in net realized investment gains.
DEFERRED ACQUISITION COSTS
Deferred acquisition costs are the cost of policies acquired through the
purchase of insurance companies, representing the actuarially determined
present value of projected future profits from policies in force at the
purchase date.
For interest-sensitive whole life contracts, deferred costs are amortized in
relation to the present value of expected future gross profits from the
contracts. For traditional contracts, deferred costs are amortized in
relation to future anticipated premiums. The deferred costs are reviewed to
determine that the unamortized portion of such costs does not exceed
recoverable amounts. Management believes such amounts are recoverable.
The deferred acquisition costs for the year ended December 31, 1997 are
summarized as follows:
Balance at December 31, 1996 . . . . . . . . . . . . $1,664,153
Amortized during the year. . . . . . . . . . . . . . . . 94,184
-----------
Balance at December 31, 1997 . . . . . . . . . . . . $1,569,969
The amortization of deferred acquisition costs is expected to be consistent
with the above amortization level over the next five years.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation is computed using
the straight-line method over the estimated useful lives, which range from
five to ten years. Depreciation expense was $50,936 and $42,678 for the
years ended December 31, 1997 and 1996, respectively. When assets are
retired or otherwise disposed of, the cost and related accumulated
depreciation are removed from the accounts, and any resulting gains or
losses are recognized in income for the period. The cost of maintenance and
repairs is charged to income as incurred; significant renewals and
betterments are capitalized.
COSTS IN EXCESS OF NET ASSETS OF ACQUIRED BUSINESS
The costs in excess of net assets of acquired business are amortized on a
straight-line basis over remaining terms of four years and eight years.
RECOGNITION OF PREMIUM REVENUE AND RELATED EXPENSES, LIABILITY FOR FUTURE
POLICY BENEFITS AND CONTRACT CLAIMS
For traditional insurance contracts, premiums are recognized as revenue when
due. Benefits and expenses are associated with earned premiums so as to
result in their recognition over the premium paying period of the contracts.
Such recognition is accomplished by means of the provision for future policy
benefits and the amortization of deferred policy acquisition costs.
For contracts with mortality risk that permit the Company to make changes in
the contract terms (such as interest-sensitive whole life policies), premium
collections and benefit payments are accounted for as increases or decreases
to a liability account rather than as revenue and expense. In addition,
decreases to the liability account for the costs of insurance and policy
administration and for surrender penalties are recorded as revenues.
Interest credited to the liability account and benefit payments made in
excess of a contract liability account balance are charged to expense.
For investment contracts without mortality risk (such as deferred
annuities), net premium collections and benefit payments are recorded as
increases or decreases to a liability account rather than as revenue and
expense. Surrender penalties are recorded as revenues. Interest credited
to the liability account is charged to expense.
Reserves for traditional contracts are calculated using the net level
premium method and assumptions as to investment yields, mortality,
withdrawals and dividends. The assumptions are based on past and expected
experience and include provisions for possible unfavorable deviation. These
assumptions are made at the time the contract is issued or, for contracts
acquired by purchase, at the purchase date. Interest assumptions used to
compute reserves ranged from 4% to 9% at December 31, 1997.
Reserves for interest-sensitive whole life policies and investment contracts
are based on the contract account balance if future benefit payments in
excess of the account balance are not guaranteed, or the present value of
future benefit payments when such payments are guaranteed.
The liability for contract claims represents the liability for claims
reported in excess of the related policy benefit reserve plus an estimate of
claims incurred but not reported.
EARNINGS PER SHARE
Earnings per common share for 1997 were computed as follows:
Income Shares Per Share
(Numerator)(Denominator) Amount
----------- --------- -------
Net income $1,348,031
Preferred dividends (191,937)
---------------
BASIC EARNINGS PER SHARE
Income available to
common stockholders 1,156,094 7,486 $154.43
EFFECT OF DILUTIVE SECURITIES
Stock options (58,976) 57
-------------------------------
$1,097,118 7,543 $145.45
DILUTED EARNINGS PER SHARE
Income available to common
stockholders plus assumed
exercise $1,097,118 7,543 $145.45
===============================
Earnings per common share were computed for 1996 were computed as follows:
Income Shares Per Share
(Numerator) (Denominator) Amount
--------------- ------------- -------
Net income $658,267
Preferred dividends (191,937)
-------------
BASIC EARNINGS PER SHARE
Income available to
common stockholders 466,330 8,139 $57.30
EFFECT OF DILUTIVE SECURITIES
Stock options (17,188) 15
-------------------------------
DILUTED EARNINGS PER SHARE
Income available to common stockholders
plus assumed exercise $449,142 8,154 $55.08
===============================
PARTICIPATING POLICIES
Acap maintains both participating and nonparticipating life insurance
policies. Participating business represented approximately 23% and 13% of
the life insurance in force, and 28% and 11% of life insurance premium
income at December 31, 1997 and 1996, respectively. Dividends to
participating policyholders are determined annually and are payable only
upon declaration of the Boards of Directors of the insurance subsidiaries.
FEDERAL INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109 which
requires that a deferred tax liability be recognized for all taxable
temporary differences and a deferred tax asset be recognized for an
enterprise's deductible temporary differences and operating loss and tax
credit carryforwards. A deferred tax asset or liability is measured using
the marginal tax rate that is expected to apply to the last dollars of
taxable income in future years. The effects of enacted changes in tax laws
or rates are recognized in the period that includes the enactment date.
STATEMENT OF CASH FLOWS
For purposes of reporting cash flows, cash includes cash on hand, in demand
accounts, in money market accounts and in savings accounts.
STOCK BASED COMPENSATION
The Company grants stock options to employees for a fixed number of shares
with an exercise price equal to the fair market value of the shares at the
date of grant. The Company accounts for stock options in accordance with
APB Opinion No. 25, "Accounting for Stock Issued to Employees," and
accordingly recognizes no compensation expense for the stock option grants.
ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." SFAS No. 121 establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles, and goodwill related to (1) those assets to be held and used in
the business, and (2) for assets to be disposed of. The Company adopted
SFAS No. 121 in 1996. In connection with the review of goodwill required by
SFAS No. 121, management determined that, due to changes in market
conditions, the remaining amortization period of a significant portion of
the goodwill should be reduced from 33 years to 10 years. This change
increased the annual amortization by $135,368 beginning in 1996.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 provides a choice for accounting for employee
stock compensation plans. A company can elect to use the new
fair-value-based method of accounting for employee stock compensation plans,
under which compensation cost is measured and recognized in results of
operations, or continue to account for these plans under the intrinsic-value
method. Entities electing to remain with the intrinsic-value method must
make disclosures of what net income and earnings per share would have been
if the fair-value-based method of accounting had been applied. The
provisions of SFAS No. 123 were adopted, but did not have a material impact
to the financial statements.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share." SFAS
No. 128, which must be adopted for fiscal years ending after December 15,
1997, established standards for computing and presenting earnings per share
("EPS") and applies to entities with publicly held common stock or potential
common stock. It replaces the presentation of primary EPS with a
presentation of basic EPS. It also requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with
complex capital structures and requires a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation, with all prior period EPS data
presented restated.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and
losses) in a full set of general-purpose financial statements. This
statement requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. This statement does not require a specific format for
that financial statement but requires that an enterprise display an amount
representing total comprehensive income for the periods in that financial
statement. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. As such, the Company will adopt SFAS No. 130 in 1998.
In June, 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards
for the way that public business enterprises report information about
operating segments in interim financial reports issued to shareholders. The
provisions of SFAS No. 131 will not be adopted since the Company does not
have different operating segments.
2. INVESTMENTS
FIXED MATURITY AND EQUITY SECURITIES
The amortized cost and fair values of investments in fixed maturity
securities as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Gross
Amortized Unrealized
Cost Gains
------------- ------------
<S> <C> <C>
Government securities 3,399,080 100,866
Corporate securities 19,046,460 470,980
Asset-backed securities 3,322,342 59,050
Mortgage-backed securities 9,454,781 741,365
------------ -----------------
$35,222,663 1,372,261
<CAPTION>
Gross
Unrealized Fair
Losses Value
---------- -----
<S> <C> <C>
Government securities (394) 3,499,552
Corporate securities (18,429) 19,499,011
Asset-backed securities (4,857) 3,376,535
Mortgage-backed securities (24,085) 10,172,061
------------ -----------------
(47,765) 36,547,159
==============================
</TABLE>
A summary of proceeds from the sales of investments in fixed maturity
securities, exclusive of proceeds from maturities, and the gross gains and
losses realized on those sales follows:
1997 1996
----- -----
Proceeds on sales $5,603,725 2,571,322
Gross realized gains on sales $154,017 37,123
Gross realized losses on sales -- (34,109)
------------ ------------
Net realized gains on sales 154,017 3,014
------------ ------------
Realized gains on transactions
other than sales 399 833
------------ ------------
Net realized gains $154,416 3,847
=========================
The amortized cost and estimated fair value of fixed maturity securities at
December 31, 1997, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
Amortized Fair
Cost Value
-------------------------
Maturing in one year or less $854,316 857,979
Maturing after one year
through five years 8,388,076 8,504,166
Maturing after five years
through ten years 10,809,536 11,074,504
Maturing after ten years 5,715,954 5,938,449
--------------------------
25,767,882 26,375,098
Mortgage-backed securities 9,454,781 10,172,061
----------- ------------
$35,222,663 36,547,159
=========== ============
A summary of the fair value of mortgage-backed securities by type as of
December 31, 1997 follows:
Collateralized mortgage obligations:
Planned amortization class $5,301,545
Z 1,955,659
Sequential 2,236,760
Other 137,750
9,631,714
----------
Pass-through securities 540,347
----------
$10,172,061
===========
With a planned amortization class security, early repayments are applied
first to other tranches, and cash flows originally applicable to other
tranches are first applied to the planned amortization class tranche if that
tranche's originally scheduled cash flows are received later than expected.
The Z tranche defers all interest to other tranches until those tranches are
paid down, at which time accumulated interest and principal are paid to this
class. Sequential tranches are not supported by other tranches.
As of December 31, 1997, 99.7% of the Company's fixed maturity securities
were rated investment grade (i.e., rated BBB-/Baa3 or higher by Standard &
Poor or Moody).
MORTGAGE LOANS
The weighted average interest rate of mortgage loans held as of December 31,
1997 was 8.7%.
The distribution of principal balances on mortgage loans held as of December
31, 1997 by contractual maturity follows. Actual maturities may differ from
contractual maturities because borrowers may have the right to prepay
obligations with or without penalties.
Principal
Balance
---------
Maturing in one year or less $203,618
Maturing after one year through five years 655,031
Maturing after five years through ten years 634,324
Maturing after ten years 657,190
----------
$2,150,163
==========
The distribution of mortgage loans by class of loan and geographic
distribution follows:
Principal
Balance
---------
Commercial loans:
Texas $598,200
Tennessee 274,096
Louisiana 71,133
Alabama 20,974
---------
$964,403
=========
Residential loans:
Tennessee $524,911
Alabama 432,902
Texas 91,832
Florida 65,434
Louisiana 35,067
Kentucky 35,614
----------
$1,185,760
==========
INVESTMENT INCOME
A summary of net investment income follows:
1997 1996
---- ----
Interest on fixed maturities $1,356,634 1,300,036
Interest on mortgage loans 256,959 165,819
Interest on policy loans 49,327 39,315
Interest on cash and short-term
investments 37,396 55,558
Real estate income 26,582 53,461
Miscellaneous investment income 139,860 59,767
---------- ------------
1,866,758 1,673,956
Investment expense (330,750) (369,165)
------------------------
$1,536,008 1,304,791
========== =============
UNREALIZED INVESTMENT GAINS(LOSSES)
The change between cost and fair value for fixed maturity and equity
securities, net of taxes, follows:
Fixed Equity
Maturities Securities Total
---------- ---------- -----
Balance, January 1, 1996 $1,289,227 (177,500) 1,111,727
Change during the year (689,784) 177,362 (512,422)
---------------------------------
Balance, December 31, 1996 599,443 (138) 599,305
Change during the year 344,279 138 344,417
---------------------------------
Balance, December 31, 1997 $943,722 -- 943,722
=================================
NET REALIZED INVESTMENT GAINS
A summary of net realized investment gains follows:
1997 1996
---- ----
Fixed maturities $154,416 3,847
Equity securities
(including investment in subsidiaries) (3,203) 49,653
Real estate 53,496 222,025
-------- ------------
$204,709 275,525
======== ============
OTHER INVESTMENT DISCLOSURES
At December 31, 1997, bonds with a fair value of $5,461,154 were on deposit
with various regulatory authorities.
Investment income was not accrued on non-income producing investments of
$450,000 in 1997 and 1996.
Investments, other than investments issued or guaranteed by the United
States Government or a United States Government agency or authority, in
excess of 10% of stockholders' equity at December 31, 1997 were as follows:
Balance
Sheet Amount Category
------------ ----------
Home Equity $1,481,702 Fixed maturity
Merrill Lynch 1,113,736 Fixed maturity
AT&T 1,084,450 Fixed maturity
Ingersoll Rand 1,010,300 Fixed maturity
Bank America 954,127 Fixed maturity
Goldman Sachs 830,240 Fixed maturity
Rast 759,375 Fixed maturity
3. FAIR VALUES
The carrying values and estimated fair values of the Company's financial
instruments as of December 31, 1997 are as follows:
Carrying Amount Fair Value
--------------- ----------
Assets:
Fixed maturities $36,547,159 36,547,159
Mortgage loans 2,150,163 2,178,849
Policy loans 6,209,737 6,209,737
Short-term investments 880,103 880,103
Liabilities:
Note payable 812,500 812,500
Estimated market values of publicly-traded fixed maturity securities are as
reported by an independent pricing service. Estimated market values of
fixed maturity securities not actively traded in a liquid market are
estimated using a third party pricing system, which uses a matrix
calculation assuming a spread over U.S. Treasury bonds.
Fair values of mortgage loans are estimated by discounting expected cash
flows, using market interest rates currently being offered for similar
loans.
Policy loans have no stated maturity dates and are a part of the related
insurance contracts. Accordingly, it is not practicable for the Company to
estimate a fair value for them.
For short-term investments, the carrying amount is a reasonable estimate of
fair value.
In that the note payable is a floating rate instrument, the principal
balance is a reasonable estimate of the note's fair value.
4. NOTE PAYABLE
On January 31, 1995, the Company borrowed $1.5 million from Central National
Bank of Waco, Texas. The note is renewable by the bank each April 30 until
fully repaid. The note bears interest at a rate equal to the base rate of a
bank plus 1%. Principal payments on the note of $62,500 are due quarterly
(a six year amortization) beginning April 30, 1995. The loan agreement
contains certain restrictions and financial covenants. Without the written
consent of the bank, Acap may not incur any debt, pay common stock dividends
or sell any substantial amounts of assets. Also, American Capitol is
subject to minimum statutory earnings and capital and surplus requirements
during the loan term. The Company is in compliance with all of the terms of
the loan.
During 1997, American Capitol and Texas Imperial obtained revolving lines of
credit from a bank by signing unsecured promissory notes in the amount of
$200,000 and $150,000, respectively. Interest on both notes are at the base
interest rate of the bank. Both notes mature in 1998. As of December 31,
1997, no funds have been borrowed on these notes.
5. COMMITMENTS AND CONTINGENCIES
LEASES
The Company had no material leases in 1996. In conjunction with the sale of
American Capitol s home office building on November 21, 1997, American
Capitol entered a lease agreement with the new owner of the building to
lease approximately one quarter of the net rentable area of the building,
the area it currently occupies, for five years at an annual rental of
$124,320. American Capitol has the option to extend the lease for an
additional five years at the end of the initial term of the lease. American
Capitol paid $13,840 in rental payments in 1997.
REINSURANCE
The Company accounts for reinsurance in accordance with Statement of
Financial Accounting Standards No. 113. In accounting for reinsurance, the
Company has reported ceded reserve credits and reinsurance claim credits as
reinsurance receivables. The cost of reinsurance related to long-duration
contracts is accounted for over the life of the underlying reinsured
policies using assumptions consistent with those used to account for the
underlying policies.
At December 31, 1997, reinsurance receivables with a carrying value of $50
million were associated with a single reinsurer, Crown Life Insurance
Company ("Crown"). At December 31, 1996, Crown had assets in excess of $6.6
billion and stockholders' equity of approximately $0.5 billion. Crown is
rated "Excellent" by A.M. Best Company, an insurance company rating
organization. At December 31, 1997, reinsurance receivables with a carrying
value of $2.9 million were associated with Alabama Reassurance Company
("Alabama Re"). While Alabama Re is currently rated "Fair" by A.M. Best
Company, the Alabama Re reinsurance receivables are secured by a trust
account containing a $5.8 million letter of credit granted in favor of an
insurance subsidiary of the Company. At December 31, 1997, the remaining
reinsurance receivables were associated with various other reinsurers.
The Crown and Alabama Re reinsurance treaties are representative of a key
use of reinsurance by the Company. Immediately following the purchase of a
block of life insurance policies through the Company's acquisition program,
the Company may reinsure all or a portion of the acquired policies. By
doing so, the Company seeks to recover all or a portion of the purchase
price of the acquired policies and transfer the risks associated with the
policies to the reinsurer. The Company retains the administration of the
reinsured policies and seeks to profit from the compensation the Company
receives from the reinsurer for such policy administration. The Company is
entitled, but not obligated, to recapture the policies at a price determined
by a formula in the reinsurance treaty.
With regard to the policies not 100% reinsured with Crown or Alabama Re, the
purpose of reinsurance is to limit the Company's exposure to loss on any
single insured. The Company reinsures the portion of risks in excess of a
maximum of $50,000 on the life of any individual through various reinsurance
contracts, primarily of the coinsurance and yearly renewable term type.
The Company is contingently liable for amounts ceded to reinsurers in the
event the reinsurers are unable to meet their obligations assumed under the
reinsurance agreements. The Company evaluates the financial condition of
its reinsurers and monitors concentrations of credit risk to minimize its
exposure to significant losses from reinsurer insolvencies. Other than its
exposure to Crown and Alabama Re as discussed above, management does not
believe the Company has significant concentrations of credit risk related to
reinsurance, or otherwise.
Prior to June 1, 1996, the Company had an immaterial amount of reinsurance
in force whereby the Company was the assuming party. Effective June 1,
1996, the Company, through American Capitol, reinsured all of the policies
in force of World Service Life Insurance Company of America ("World
Service") on a 93.6% coinsurance basis. American Capitol retroceded all of
the World Service policies in force at June 1, 1996 to Crown, effective June
30, 1996. American Capitol retained the coinsurance on all policies issued
by World Service subsequent to June 1, 1996. On January 31, 1997, World
Service assumed all of the policies of South Texas Bankers Life Insurance
Company ("South Texas"), the wholly-owned subsidiary of World Service, with
a retroactive effective date of June 1, 1996. Under the terms of American
Capitol's coinsurance agreement with World Service, World Service s
assumption of the South Texas policies automatically made the South Texas
policies subject to the coinsurance agreement. Effective August 1, 1997,
the coinsurance was converted to assumption reinsurance.
The effect of reinsurance on premiums and benefits follows:
Years ended December 31,
1997 1996
---- ----
Direct premiums $7,227,841 6,375,153
Reinsurance assumed 1,761,954 1,919,915
Reinsurance ceded (6,468,692) (5,738,539)
----------- -----------
Net premiums 2,521,103 2,556,529
Direct policy benefits $7,871,643 5,740,316
Reinsurance assumed 2,771,068 1,420,751
Reinsurance ceded (8,155,732) (4,531,772)
Net policy benefits $2,486,979 2,629,295
LITIGATION
Acap and its subsidiaries are involved in various lawsuits and legal actions
arising in the ordinary course of operations. Management is of the opinion
that the ultimate disposition of the matters will not have a material
adverse effect on Acap's results of operations or financial position.
6. SUPPLEMENTAL INFORMATION REGARDING CASH FLOWS
Cash payments for interest expense for the years ended December 31, 1997 and
1996 were $92,176 and $115,578, respectively. Net cash payments of $282,779
and $73,764 for federal income taxes were made during the years ended
December 31, 1997 and 1996, respectively.
The following reflects assets acquired and liabilities assumed by the
Company relative to the coinsurance agreement covering the policies of World
Service, the consideration given for such reinsurance and the net cash flow
relative to such coinsurance on June 1, 1996.
Assets acquired $21,399,538
Liabilities assumed (23,098,650)
------------
Cost of reinsurance ($1,699,112)
============
Cash paid for reinsurance ($1,699,112)
============
Net cash from coinsurance:
Cash acquired $21,071,074
Cash paid for reinsurance (1,699,112)
------------
Net cash provided from coinsurance $19,371,962
============
The following reflects assets and liabilities transferred in connection with
a coinsurance treaty whereby all policies assumed from World Service were
100% retroceded to an unaffiliated reinsurer, the ceding commission received
and the net cash flow related to the coinsurance treaty on June 30, 1996.
Assets transferred $21,519,743
Liabilities transferred (23,218,855)
------------
Net cash transferred ($1,699,112)
============
Ceding commission received $1,699,112
Net cash provided from coinsurance $-0-
============
The following reflects assets transferred and cash received on the sale of
the Company's wholly-owned subsidiary, Family Life Insurance Company of
Texas, to an unaffiliated third party during the year ended December 31,
1996.
Assets transferred ($307,231)
Sales price received 357,231
----------
Net cash provided from sale $50,000
==========
The following reflects assets acquired and liabilities assumed relative to
the assumption reinsurance of all of the policies of World Service by the
Company, the consideration given for such reinsurance and the net cash flow
relative to such reinsurance on July 31, 1997.
Assets acquired $2,754,819
Liabilities assumed (2,767,109)
-----------
Cost of reinsurance ($12,290)
===========
Cash paid for reinsurance ($12,290)
===========
Net cash from reinsurance:
Cash acquired $2,508,064
Cash paid for reinsurance (12,290)
-----------
Net cash provided from reinsurance $2,495,774
===========
7. FEDERAL INCOME TAXES
Acap and American Capitol file a consolidated federal income tax return.
The other subsidiaries of the Company file separate federal income tax
returns. At December 31, 1997, Acap had a remaining tax net operating loss
carryover of approximately $900,000 that will expire during the years 2001
through 2011 if not previously utilized. At December 31, 1997, the Company
had alternative minimum tax carryforwards of approximately $500,000 that are
available for an indefinite period to reduce future regular federal income
taxes.
A portion of life insurance taxable income generated prior to 1984 is not
taxable unless it exceeds certain statutory limitations or is distributed to
stockholders, in which case it becomes taxable at ordinary corporate rates.
Such income is accumulated in a Policyholders' Surplus account that, at
December 31, 1997, had a balance of approximately $4,800,000. No provision
has been made for income taxes related to this accumulation.
A reconciliation of income tax expense (benefit) for 1997 and 1996 computed
at the applicable federal tax rate of 34% to the amount recorded in the
consolidated financial statements is as follows:
1997 1996
Federal income tax expense
at statutory rate $249,654 224,826
Small life insurance company
special deduction (307,981) (204,124)
Change in valuation allowance (620,895) 247,385
Tax underpayment (refund) 10,617 (32,478)
Other, net 54,850 (232,624)
---------------------
Total federal income tax
expense (benefit) ($613,755) 2,985
=====================
The small life insurance company special deduction noted above is available
to life insurance companies with assets under $500 million. The deduction
is 60% of life insurance taxable income under $3 million. The deduction is
phased out for life insurance taxable income between $3 million and $15
million, with the deduction reduced by 15% of the life insurance taxable
income in excess of $3 million.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1997 are as follows:
Deferred Tax Assets:
Deferred gain on reinsurance $746,881
Deferred gain on home office building
159,357
Net operating loss carryforwards 318,520
Alternative minimum tax credit carryforwards 498,271
Other 47,014
-----------
Total gross deferred tax assets 1,770,043
Less: Valuation allowance (1,175,722)
-----------
Deferred tax assets 594,321
-----------
Deferred Tax Liabilities:
Net unrealized gains on
available-for-sale securities 380,774
Deferred policy acquisition costs 143,718
Policy reserves and policy funds 968,686
Other 32,531
-----------
Deferred tax liabilities 1,525,709
-----------
Net deferred tax liability ($931,388)
===========
A valuation allowance for the net operating loss carryforward, alternative
minimum tax credit carryforward, and a portion of other deferred tax assets
of $1,175,722 was established at December 31, 1997 against the deferred tax
asset. The net change in the total valuation allowance for the years ended
December 31, 1997 and 1996 was a decrease of $620,895 and an increase of
$247,385, respectively. Management believes that it is more likely than not
that the deferred tax assets that are not provided for in the valuation
allowance are recoverable.
8. AMERICAN CAPITOL KEY EMPLOYEE STOCK OPTION PLAN
On July 18, 1988, the Board of Directors of American Capitol approved a
non-qualified stock option plan (the "1988 Plan"). Under the terms of the
1988 Plan, stock options could only be granted on shares of common stock of
Acap owned by American Capitol. The options enabled the grantee to purchase
the common stock to which the options relate at the fair market value of the
common stock on the date the options were granted. During 1997, all of the
outstanding options granted under the 1988 Plan were exercised and the 1988
Plan was terminated.
Effective September 2, 1997, the Board of Directors of American Capitol
adopted an incentive stock option plan (the "1997 Plan"). The 1997 Plan
provides that the Board of Directors of American Capitol or the Compensation
Committee of the Board of Directors may grant stock options to any employee
determined to be a key employee. The stock options may only be granted on
shares of common stock of Acap owned by American Capitol. The options
enable the grantee to purchase the common stock to which the options relate
at the fair market value of the common stock on the date of granting the
options. The options vest five years from the date of grant and must be
exercised within ten years from the date of grant. As of December 31, 1997,
options to purchase 500 of the 534 shares of Acap common stock owned by
American Capitol had been granted, with a weighted average option price of
$244.80 per share.
Stock options granted for Acap Corporation common stock are summarized as
follows:
Number of Shares
Option Price 1997 1996
------------ ----- -----
Outstanding at January 1 $187.50 68 68
Granted during the year $244.80 500 --
Exercised during the year $187.50 (68) --
----- ----------
Outstanding at December 31 $244.80 500 68
================
Available for future grant 34 377
================
9. CAPITAL STOCK
Acap has two classes of capital stock: preferred stock ($.10 par value,
authorized 80,000 shares), which may be issued in series with such dividend,
liquidation, redemption, conversion, voting, and other rights as the Board
of Directors may determine, and common stock ($.10 par value, authorized
10,000 shares), the "Common Stock." The only series of preferred stock
outstanding is the Cumulative Exchangeable Preferred Stock, Series A, $2.50
(Adjustable), the "Series A Preferred Stock."
SERIES A PREFERRED STOCK
There are 74,000 shares of Series A Preferred Stock authorized, issued and
outstanding. Acap pays dividends quarterly on the Series A Preferred Stock
(when and as declared by the Board of Directors). The amount of the
dividend is based on the prime rate of a Pittsburgh bank plus 2%. Acap has
the right, if elected by the Board of Directors, to redeem the Series A
Preferred Stock at the fixed redemption price of $27.50 per share. The
holders of Series A Preferred Stock are entitled to liquidating
distributions of $27.50 per share. The cumulative dividends and liquidating
distributions of the Series A Preferred Stock are payable in preference to
the Common Stock. The Series A Preferred Stock is nonvoting, except as
required by law and except that, if six quarterly dividends are unpaid and
past due, the holders of the Series A Preferred Stock may elect two
directors to Acap's Board of Directors. Prior to August 26, 1996, the
Series A Preferred Stock had been exchangeable, at the option of the
holders, into shares of common stock of Fortune National Corporation
("Fortune"). Effective August 26, 1996, Fortune adopted a plan of
dissolution and liquidation. Consequently, the exchange option of Series A
Preferred Stock expired. There was no activity related to the Series A
Preferred Stock for the two years ended December 31, 1997 other than
payments of dividends.
COMMON STOCK
Fortune, formerly the owner of 63.7% of the Company's outstanding Common
Stock, adopted a plan of dissolution and liquidation at its annual
stockholder meeting on August 26, 1996. At that date, Fortune had no assets
other than its holding of the Company's Common Stock. Under the plan, no
fractional shares of the Company's Common Stock were issued. Fortune
stockholders who did not buy from the Company enough Fortune common stock to
round up their holdings elected to sell their "odd lot" shares of Fortune
common stock to the Company. As a result of the Company's purchase of the
"odd lot" shares and the conversion of the Company's holding of Fortune
common stock into company Common Stock, the Company added $320,566 (910
shares) to treasury stock, reducing the number of outstanding shares of
Company Common Stock to approximately 7,603. During 1997, the Company added
another 225 shares to treasury stock, reducing the number of outstanding
shares of Company Common Stock.
10. SUBSEQUENT EVENT
On March 5, 1998, American Capitol closed a coinsurance transaction with
Universal Life Insurance Company ("Universal Life"). Pursuant to the
coinsurance agreement, American Capitol coinsured 100% of the individual
life insurance policies of Universal Life in force at January 1, 1998. The
coinsurance is effective January 1, 1998. At the same time, American
Capitol contracted to provide specified administrative functions for
Universal Life related to the coinsured policies. The coinsurance covers
approximately 260,000 policies.
Concurrent with the coinsurance of the Universal Life policies, American
Capitol retroceded the business to an unaffiliated reinsurance company. So,
while Universal Life transferred $40.9 million in assets to American Capitol
in connection with the coinsurance, American Capitol transferred $40.4
million in assets to the reinsurer in connection with the retrocession. The
reinsurer will pay American Capitol an expense allowance for administering
the policies. The Company s profits from the Universal Life transaction
will initially be determined by the Company's ability to administer the
policies for less than the expense allowance received from the reinsurer.
In the future, once the reinsurer has recovered the initial ceding fee, the
Company is entitled to 70% of the profits generated by the policies. Also,
the Company has the right to recapture the retrocession under certain terms
and conditions.
<PAGE>
ACAP CORPORATION
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Acap Corporation
We have audited the accompanying consolidated balance sheet of Acap
Corporation and subsidiaries as of December 31, 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for the years ended December 31, 1997 and 1996. These consolidated
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our 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 Acap
Corporation and subsidiaries as of December 31, 1997, and the results of
their operations and their cash flows for the years ended December 31, 1997
and 1996, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Houston, Texas
March 20, 1998<PAGE>
Acap Corporation
Stockholder Information
MARKET INFORMATION
The common stock of Acap is traded over-the-counter with activity in the
stock reflected nationally on the OTC Bulletin Board electronic quotation
system of the National Association of Securities Dealers. The Company's
stock symbol is AKAP.
The table below presents the range of closing bid quotations for Acap's
common stock during the two most recent fiscal years.
1997 1996
------------ ------------
High Low High Low
First quarter 290 240 230 180
Second quarter 275 240 231 230
Third quarter 350 247 245 230
Fourth quarter 370 360 325 245
The prices presented are bid prices, which reflect inter-dealer transactions
and do not include retail markups and markdowns or any commission to the
parties involved. As such, the prices may not reflect prices in actual
transactions.
HOLDERS
The approximate number of holders of record of Acap's common stock as of
March 23, 1998 was 785.
DIVIDENDS
Acap declared no common stock dividends in 1997 or 1996. At present,
management anticipates that no dividends will be declared or paid with
respect to Acap's common stock during 1998.
FORM 10-KSB
Stockholders may receive without charge a copy of the Company's Annual
Report on Form 10-KSB filed with the Securities and Exchange Commission by
writing to Lana S. Vaughn, Stockholder Services, Acap Corporation, 10555
Richmond Avenue, Houston, TX 77042.
TRANSFER AGENT
The registrar and transfer agent for the Company's common stock is
Continental Stock Transfer & Trust Company, 2 Broadway, New York, NY 10004.
For a change of name or address, or to replace lost stock certificates,
write to Continental at the address above or call (212) 509-4000.
INVESTOR RELATIONS
Requests for information should be directed by mail to Lana Vaughn,
Stockholder Services, Acap Corporation, 10555 Richmond Avenue, Houston, TX
77042 or by calling (713) 974-2242.
INDEPENDENT AUDITORS
The Company's consolidated financial statements for 1997 were audited by the
independent accounting firm of KPMG Peat Marwick LLP, 700 Louisiana,
Houston, TX 77002.
ANNUAL MEETING
Stockholders are invited to attend the Annual Meeting of Stockholders which
will be held on Monday, May 4, 1998 at 8:00 a.m. at the Company's office at
10555 Richmond Avenue, Houston, Texas, on the second floor.
<PAGE>
ACAP CORPORATION
DIRECTORS AND OFFICERS
BOARD OF DIRECTORS OF ACAP
R. Wellington Daniels
Investor; Retired Director of National Accounts, American Cyanamid
William F. Guest
Chairman of the Board and President, Acap Corporation
C. Stratton Hill, Jr., M.D.
Physician
Officers of Acap
William F. Guest
Chairman of the Board and President
John D. Cornett
Executive Vice President and Treasurer
H. Kathleen Musselwhite
Secretary and Assistant Treasurer
OFFICERS OF AMERICAN CAPITOL AND TEXAS IMPERIAL
William F. Guest
Chairman of the Board
John D. Cornett
President
H. Kathleen Musselwhite
Secretary, Treasurer and Controller
G. Mike Rambo
Vice President
Richard M. Ridley
Vice President
Dan R. Stites
Vice President
Carolyn M. Rawlins
Assistant Secretary
Linda G. Stark
Assistant Vice President
C. Stratton Hill, Jr., M.D.
Medical Director
ACAP CORPORATION
10555 Richmond Avenue - Houston, Texas 77042
EXHIBIT 21
SUBSIDIARIES OF ACAP CORPORATION
WHOLLY OWNED SUBSIDIARY OF ACAP CORPORATION:
American Capitol Insurance Company (Texas)
WHOLLY OWNED SUBSIDIARIES OF AMERICAN CAPITOL INSURANCE COMPANY
Imperial Plan, Inc. (Texas)
Texas Imperial Life Insurance Company (Texas)
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
DECEMBER 31, 1997 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 36,547,159
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 2,150,163
<REAL-ESTATE> 0
<TOTAL-INVEST> 45,787,162
<CASH> 97,714
<RECOVER-REINSURE> 55,790,538
<DEFERRED-ACQUISITION> 1,569,969
<TOTAL-ASSETS> 106,271,024
<POLICY-LOSSES> 90,773,968
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 924,702
<POLICY-HOLDER-FUNDS> 1,857,988
<NOTES-PAYABLE> 812,500
0
1,850,000
<COMMON> 876
<OTHER-SE> 5,520,437
<TOTAL-LIABILITY-AND-EQUITY> 106,271,024
2,521,103
<INVESTMENT-INCOME> 1,536,008
<INVESTMENT-GAINS> 204,709
<OTHER-INCOME> 53,167
<BENEFITS> 2,486,979
<UNDERWRITING-AMORTIZATION> 94,184
<UNDERWRITING-OTHER> 2,801,552
<INCOME-PRETAX> 734,276
<INCOME-TAX> (613,755)
<INCOME-CONTINUING> 1,348,031
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,348,031
<EPS-PRIMARY> 154.43
<EPS-DILUTED> 145.45
<RESERVE-OPEN> 789,393
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 1,083,921
<PAYMENTS-PRIOR> 685,537
<RESERVE-CLOSE> 924,702
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
