SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [Fee Required]
For the fiscal year ended December 31, 1993
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
For the transition period from to
Commission file number 1-10522
PIONEER FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-2479273
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1750 East Golf Road, Schaumburg, Illinois 60173
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (815) 987-5000
Securities registered pursuant to Section 12(b) of the Act:
Name on Each Exchange
Title of Each Class on Which Registered
Common Stock, $1.00 par value New York Stock Exchange
and Midwest Stock Exchange
$2.125 Cumulative Convertible
Exchangeable Preferred Stock New York Stock Exchange
8% Convertible Subordinated Debentures New York Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act: None
Indicate by a check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports) and (2) has
been subject to such filing requirements for the past 90 days.
YES X NO
While it is difficult to determine the number of shares owned by non-
affiliates (within the meaning of the term under the applicable regulations
of the Securities and Exchange Commission), the registrant estimates that
the aggregate market value of the registrant's common stock held by non-
affiliates on March 24, 1994 (based upon an estimate that 76% of the shares
are so owned by non-affiliates and upon the closing price of the common
stock on the New York Stock Exchange) was $62,973,183.
The number of shares of the registrant's common stock, $1.00 par value
per share, outstanding as of March 24, 1994 was 6,387,102.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for the annual
meeting of stockholders to be held May 26, 1994 to be filed pursuant to
Regulation 14A are incorporated by reference into Part III of this Form
10-K.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K ( 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of the registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
[ ]
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PART 1
Item 1. Business
GENERAL
The Company, through its subsidiaries, provides health and life
insurance underwriting, marketing and managed healthcare services
throughout the nation.
In 1993 the Company was organized into three Business Divisions:
Insurance (Life & Health Units), Marketing and Managed Care. The Divisions
were designed to allow management to focus on the specific needs, problems,
customers and opportunities in each business area.
The Health Unit of the Insurance Division underwrites small group and
individual major hospital and medical policies, Medicare supplement, home
health care and other specialty products. Medicare supplement insurance,
which the Company began offering in 1966 at the inception of the federal
Medicare program, accounted for approximately 33% of the Company's health
insurance premiums written in 1993. Major hospital insurance plans
designed for small business owners and self-employed individuals accounted
for approximately 59% of the Company's health insurance premiums written in
1993.
The Life Unit underwrites term life, interest sensitive life,
universal life, and annuities. In 1990 the Company acquired Manhattan
National Life Insurance Company, which has now become the Company's major
life and annuity subsidiary. Manhattan National Life's products are
distributed primarily through 8,000 brokers throughout the nation. In 1992
all life and annuity administration was consolidated at this subsidiary to
enhance efficiency and service.
The Marketing Division provides insurance and non-insurance marketing
services for insurance companies, associations and financial institutions.
The Division operates through four distribution channels: a nationwide
network of approximately 1,500 career agents market insurance products to
self-employed individuals and small business owners. Senior insurance
products are marketed through nearly 15,000 independent agents. A network
of 8,000 brokers sells life and annuity products. In 1993 the Company
acquired Continental Marketing Corp. which provided a telemarketing system
marketing products directly to 8,000 brokers throughout the nation. The
Marketing Division markets the Company's insurance products as well as
insurance products of other unaffiliated companies. This allows the
Company to derive revenue in territories where it is not licensed and to
distribute policies not otherwise offered by the Company.
The Marketing Division also includes a non-insurance unit which
primarily designs benefit packages and provides membership management
services to associations across the nation. This unit also provides an
emergency air ambulance service for members of associations it manages.
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The Managed Care Division provides healthcare coordination to control
medical expense costs for insurance companies, government agencies, self-
insured businesses, unions, HMO's and third-party administrators. Services
include pre certification of care, provider networks and case management.
In early 1990 the Company acquired National Health Services, Inc. to
provide these types of services for its own subsidiaries as well as
unaffiliated companies and organizations. In 1993 the Company acquired
Healthcare Review Corporation which provides service primarily to
government agencies.
The Company was organized in Delaware in 1982 as a successor to an
Illinois holding company formed in 1957. The Company's largest operating
insurance subsidiary is Pioneer Life Insurance Company of Illinois (Pioneer
Life), a successor to a company organized in 1926. Health and Life
Insurance Company of America, National Group Life Insurance Company,
Manhattan National Life Insurance Company and Continental Life & Accident
Company were acquired in 1985, 1986, 1990 and 1993, respectively, primarily
for specialized marketing purposes.
In 1993 the Company relocated its corporate offices from Rockford,
Illinois to Schaumburg, Illinois. The executive offices of the Company are
now located at 1750 East Golf Road, Schaumburg, Illinois 60173 and its
telephone number is (708) 995-0400. The term "Company" refers to Pioneer
Financial Services, Inc. (PFS) and, unless the context otherwise requires,
its subsidiaries.
Information on revenue and income by Business Division is set forth
in Note 19 of the Notes to Consolidated Financial Statements.
PRODUCTS
Health Insurance Unit
The Company's accident and health insurance products, all of which are
individually underwritten and issued, include Medicare supplement
insurance, major hospital insurance plans, medical/hospital supplement
insurance, long term care, home health care and various specialty health
coverages. Medicare supplement insurance provides coverage for certain
hospital and other medical costs not covered by the Medicare program.
Major hospital insurance plans, which are offered on a group trust and
association basis as well as on an individual basis, provide coverage for
specified hospital costs. Medical/hospital supplemental policies provide
coverage for hospital, medical and surgical costs within various prescribed
policy deductible and benefit limits. Long term care policies provide
coverage for nursing home expenses and other extended care situations.
Home health care policies provide coverage for extended in-home medical
care. The Company's specialty health products include supplemental
medical/surgical plans. Product development efforts have generated new
versions of these products as market needs have changed.
The Company may adjust premium rates by class, policy form and state
in which the policy is issued in order to maintain anticipated loss ratios.
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Since premium rate adjustments can have the tendency to increase policy
lapses, conservation and customer service activities are emphasized. As a
result, the Company successfully avoided any significant increases in
policy lapses in either the small business or senior divisions.
The Health Insurance unit also has a distinct department to focus
solely on premium rate adjustments. This proactive approach involves
strict scrutiny of all health premium rates on a monthly basis. The
matching of pricing structure with actual claims experience varies by
product line and state. This ongoing analysis provides the time basis
necessary for orderly adjustment of premiums.
The Company's loss ratios have varied over the years reflecting
changes in medical claim costs and the frequency of benefit utilization by
its insureds. The following table sets forth the earned premiums, losses
and loss adjustment expenses incurred and loss ratios for the Company's
accident and health business. Earned premiums reflect written premiums
adjusted for reinsurance and changes in unearned premiums. In the
Company's statement of consolidated operations, premiums represent premiums
written, adjusted for reinsurance; the changes in unearned premiums are
reflected in benefits, together with losses and loss adjustment expenses.
Losses and loss adjustment expenses include losses incurred on insurance
policies and the expenses of settling insurance claims, including legal and
other related fees and expenses.
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Year Ended December 31,
1993 1992 1991 1990 1989
(Dollars in thousands)
Medicare Supplement
Earned premiums . . . . . $199,333 $211,756 $233,033 $197,771$146,707
Losses and loss adjustment
expenses . . . . . . . 126,300 143,181 159,423 136,093 93,809
Loss ratio . . . . . . . 63% 68% 68% 69% 64%
Medical/Hospital Supplement
Earned premiums . . . . . $ 9,410 $11,706 $ 15,725 $ 9,281$ 6,796
Losses and loss adjustment
expenses . . . . . . . 7,140 9,865 12,757 6,025 4,361
Loss ratio . . . . . . . 76% 84% 81% 65% 64%
Major Hospital
Earned premiums . . . . . $375,275 $302,881 $294,431 $234,004$124,744
Losses and loss adjustment
expenses . . . . . . . 251,955 200,781 176,222 168,939 61,951
Loss ratio . . . . . . . 67% 66% 60% 72% 50%
Specialty Health
Earned premiums . . . . . $34,739 $41,235 $ 49,895 $ 42,357$ 30,747
Losses and loss adjustment
expenses . . . . . . . 21,121 23,103 28,266 31,189 14,088
Loss ratio . . . . . . . 61% 56% 57% 74% 46%
Total Accident and Health
Earned premiums . . . . . $618,757 $567,578 $593,084 $483,413$308,994
Losses and loss adjustment
expenses . . . . . . . $406,516 $376,930 376,668 342,246 174,209
Loss ratio . . . . . . . 66% 66% 64% 71% 56%
Medicare Supplement. Since the inception of the Medicare program in
1966, the Company has offered policies designed to supplement Medicare
benefits. Such policies accounted for approximately 39% of health
insurance premiums in 1991, approximately 37% of health premiums in 1992,
and approximately 33% of health premiums in 1993. These policies provide
payment for deductibles and the excess over maximum limits of the federal
Medicare program. Under these policies, annual premiums are increased if
policy benefits increase as a result of changes in Medicare coverage. In
1991 the National Association of Insurance Commissioners (NAIC) defined 10
model Medicare supplement policies. In states which have adopted the NAIC
model, only those 10 policies can be sold. In anticipation of state
actions, the Company in 1991 developed 8 of the 10 model policies -- those
which the Company believes are most applicable to the Company's market.
This regulation, along with mandated changes to agent commissions, resulted
in marketing changes. By July 1992 all states were required to have
adopted the NAIC model or similar legislation which specifically defines
policy models. It is not possible to predict the impact which any future
Medicare legislation may have on the Company's Medicare supplement
business.
Medical/Hospital Supplement. The Company offers medical/hospital
policies which provide limited supplemental benefits for hospital, surgical
and medical expenses on either an individual or a family basis. Generally,
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these policies are automatically renewable at the option of the
policyholder, but the Company has the right to adjust premium rates on a
class basis. Policy benefits are limited to a specified aggregate amount
for all covered expenses. These policies generally provide a fixed benefit
for each day of hospitalization, a limited fee schedule for surgical
benefits and a limited amount payable for miscellaneous expenses depending
upon the length of hospital stay.
Major Hospital. The Company offers major hospital insurance plans on
an individual basis and on a group trust and association basis and has
issued master policies for such plans to several trusts and associations.
These plans, which are individually underwritten, are designed to cover in-
hospital expenses for small business owners, self employed individuals,
employees and their families. Hospital, surgical and other medical
expenses are covered on an expense incurred basis with certain benefit
limits after a prescribed deductible. Some plans offer a "reducing
deductible" which provides for the lowering of the deductible if no claims
are filed over a number of consecutive years. The Company has more
recently introduced new products with benefit alternatives such as
increased deductibles and different benefit structures designed to enable
policyholders to maintain insurance protection without increased premium
rates. In 1991 the Company introduced a new line of products called Design
Benefit Plans which provide greater flexibility of benefit structure for
policyholders.
In December of 1991, the NAIC adopted the Small Employers Availability
Act ("Act"). This act affects the rating and underwriting methodology that
can be applied to insurance coverage sold to small employers, generally
categorized as those employing 25 people or less. The Company does not
anticipate this Act will have a material impact on its existing business.
In response to the Act, the Company has modified its new products for sale
in those states adopting the Act.
Specialty Health. The Company offers various specialty health
products which typically are sold in conjunction with the Company's
principal accident and health products. Policies include hospital
indemnity, cancer and short-term disability plans, as well as fixed dollar
per diem payments for long-term convalescent care. The Company also offers
a short-term major medical policy which provides coverage for a limited
period of time. This policy is designed for recent school graduates,
individuals between jobs, and others with short term needs. The policy
does not cover any pre-existing conditions.
The Company also offers long term care and home health care products
designed principally for senior citizens. Long term care policies
generally provide specified per day benefits for nursing home confinements.
Home health care policies provide specified per day benefits for medically
necessary health services received in the home and may include benefits for
adult day care facility services. The Company also offers comprehensive
long term care coverages which provide benefits for all levels of nursing
home care, home health care and adult day care.
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Life Insurance Unit
Substantially all of the Company's life insurance policies and
annuities are individually and medically underwritten and issued, other
than small accidental death benefit policies, which are not material to the
Company.
The following table sets forth the breakdown of premiums collected
(including receipts not related to policy charges) among traditional life
policies, interest-sensitive and universal life policies and annuities for
the periods shown:
Year Ended December 31,
1993 1992 1991
Amount Percent Amount Percent Amount Percent
(Dollars in thousands)
Traditional . . . . . $26,353 50 $20,300 45 $17,968 34
Interest-Sensitive
& Universal Life. . 16,300 31 18,399 41 20,676 40
Annuities . . . . . . 10,004 19 6,212 14 13,479 26
Total . . . . . . . $52,657 100 $44,911 100 $52,123 100
For 1991, premiums collected from the Company's life insurance
products were approximately 26% first year and 74% renewal, for 1992
approximately 27% were first year and 73% renewal, and for 1993 premiums
collected were approximately 24% first year and 76% renewal. Traditional
policy types accounted for 52%, 49% and 59% of the renewal premiums in the
years 1991, 1992 and 1993, respectively.
The Company's gross life insurance in force was as follows at the
dates shown:
December 31,
1993 1992 1991
(Dollars in millions)
Traditional policies . . . . . . $10,320 $ 8,757 $ 7,507
Interest-sensitive and universal
life policies . . . . . . . . 1,503 1,582 1,634
Total . . . . . . . . . . $11,823 $10,339 $ 9,141
Interest-Sensitive and Universal Life. The Company's interest-
sensitive and universal life insurance provide whole life insurance with
rates of return which are adjusted in relation to prevailing interest
rates. The policies permit the Company to change the rate of interest
credited to the policy from time to time. The Company offers single
premium policies which provide for payment of the entire premium at time of
issuance, and also offers multiple premium policies, including universal
life. Universal life insurance products credit current interest rates to
cash value accumulations, permit adjustments in benefits and premiums at
the policyholder's option, and deduct mortality and expense charges
monthly. Under other interest-sensitive policies, premiums are flexible,
7
allowing the policyholders to vary the frequency and amount of premium
payments, but typically death benefit changes may not be made by the
policyholders. Some universal life products offer lower premiums for non-
smokers in good health. For both universal life and other interest-
sensitive policies, surrender charges are deducted from the policyholder's
account value, if any. No surrender charges are deducted if death benefits
are paid or if the policy remains in force for a specified period.
Traditional Life. The traditional life insurance sold by the Company
has consisted almost entirely of modified premium whole life policies,
which provide permanent coverage with payments of higher premiums in early
years than in subsequent years. These policies provide for cash values
which are relatively insignificant in early years and gradually increase
over the life of the policy. Modified premium whole life policies have
frequently been sold in conjunction with annuity riders which supplement
the accumulated cash values.
Manhattan National Life offers a variety of non-participating
individual life insurance policies, including universal, term and
traditional whole life products. Manhattan National Life does not offer
group life insurance. For a number of years, Manhattan National Life has
offered individually underwritten insurance on the lives of persons who, to
varying degrees, do not meet the requirements of standard insurability.
Higher premiums are charged for these "impaired" or "substandard" lives
and, where the amount of insurance is large or the risk is significant, a
portion of the risk is reinsured.
Annuities. The Company's single and flexible premium deferred
annuities are offered to individuals. An annuity contract generally
involves the accumulation of premiums at a compound interest rate until the
maturity date, at which time the policyholder can choose one of the various
payment options. Options include periodic payments during the annuitant's
lifetime or the lifetimes of the annuitant and spouse, with or without a
guaranteed minimum period; periodic payments for a fixed period regardless
of the survival of the annuitant; or lump sum cash payment of the
accumulated value. The Company's annuities typically provide for the
crediting of interest at rates set from time to time by the Company.
Marketing Division
The Company's Marketing Division includes two units: insurance
and non-insurance.
Insurance Unit. This unit markets products to self-employed
individuals and small employers through a nationwide network of over 1,500
career agents. Products include catastrophic hospital and major medical
expense plans, multiple employer trusts, group and individual dental
programs, managed care programs and a variety of supplemental products for
tax favored (Section 125 and 401(k)) use.
The division markets life and annuity products through
approximately 8,000 brokers nationwide. In 1993 the Company acquired
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Continental Marketing Corporation, which provided a new distribution system
- a telemarketing organization which markets products directly to 8,000
brokers throughout the nation.
The Marketing Division also operates its own telemarketing lead
generation company for both the self-employed and senior markets.
An established independent brokerage network of nearly 15,000
insurance brokers throughout the nation sells health insurance products to
senior Americans. Products include Medicare supplement, home health care,
long term care, cancer coverage, life and annuities. Some of these
products are underwritten by PFS insurance companies; others are
underwritten by non-affiliated carriers.
Non-Insurance Unit. This division designs benefit packages and
provides membership management services to associations across the nation.
Benefit packages include group discounts on eyewear, pharmaceuticals,
hearing aids, travel, legal and other services. Membership services can
range from recruitment campaigns to periodic billing and other
administrative services. This unit also provides an emergency air
ambulance service for the members of associations it manages.
Marketing Subsidiaries
Design Benefit Plans. The Company's group trust and association
major hospital plans for small business owners are marketed through Design
Benefit Plans, a subsidiary of National Benefit Plans, which contracts with
approximately 1,500 agents and managers who operate exclusively on behalf
of the organization through approximately 70 regional offices. The
marketing organization is responsible for recruiting, training and
supervising these agents. Policies issued under these plans are
individually underwritten and issued by the Company at its regional service
center in the Dallas, Texas metropolitan area. For 1991, 1992 and 1993,
marketing efforts to small businesses produced approximately $288,040,000,
$297,734,000, and $354,427,000 respectively, of the Company's written
premiums, almost all attributable to accident and health products. Through
this marketing organization, the Company has recently entered into
agreements with several other insurance companies to market certain
coverages which are designed to expand its product lines and marketing
territories. These products include large group plans (up to 99 lives),
disability income, and tax-deferred annuities.
The Company has an established telemarketing subsidiary with
facilities in Phoenix, Arizona, and Arlington, Texas. Currently, these
facilities, together with the Company's direct mail activity, provide
approximately 18,000 qualified leads a week to this division.
The Senior Brokerage offers products to the senior market. Currently
there are approximately 15,000 brokers associated with this unit. Major
products include Medicare Supplement, Long Term Care and Home Health Care,
as well as life and annuity products specifically designed for seniors.
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Continental Marketing. With the 1993 acquisition of Continental
Marketing Corporation (CMC), the Marketing Division added its fourth
distribution system. CMC conducts telemarketing at the brokerage-producer
level by providing product and market support. In addition to taking on
this new distribution system, the Company is expanding the portfolio
available to this group of producers.
Managed Care Division
The Managed Care Division of the Company provides health care
coordination to control costs for government agencies, self-insured
businesses, insurance companies, unions, HMO's and third-party
administrators.
Major services provided include pre certification of care, utilization
review, preferred or exclusive provider networks (PPOs, EPOs, and HMOs),
large case management, risk management and occupational medical management.
The Managed Care Division generated substantial claims savings for the
Company's insurance subsidiaries in 1993. These savings primarily were
passed on to policyholders in the form of lower premium rate adjustments.
In 1992 the division began to expand its product line, to include
additional products which meet the needs of small employers. These
occupational medical programs include specific management of worker's
compensation cases to lower employer medical costs and return the employee
to the workplace more quickly.
The division has also continued to expand its PPO (preferred provider
organization) network which is available to clients on a fee dependent on
savings achieved. By expanding the network, it becomes even more
attractive and more marketable to additional companies and organizations.
A new EPO (exclusive provider organization) was also successfully test
marketed late in 1992. The EPO was attached to a major medical insurance
policy underwritten by a health insurance subsidiary of the Company. The
EPO was used to reduce the insurance premiums on the policy by taking
advantage of lower negotiated medical expense rates with the exclusive
provider.
Premium Distribution
The Company's insurance subsidiaries collectively are licensed to sell
insurance in 49 states and the District of Columbia. The importance to the
Company of particular states may vary over time as the composition of its
agency network changes. The geographic distribution of collected premiums
(before reinsurance) of the Company's subsidiaries in 1993 was as follows:
Total Percent
(Dollars in thousands)
Florida $69,985 10.4
10
California 67,391 10.0
Texas 64,279 9.5
Illinois 51,436 7.6
North Carolina 28,925 4.3
Ohio 22,532 3.3
Georgia 21,619 3.2
Missouri 20,256 3.0
Other (1) 327,752 48.7
Total $674,175 100.0
(1) Includes 41 other states, the District of Columbia, and certain
U.S. territories and foreign countries, each of which account for
less than 3% of collected premiums.
UNDERWRITING
Substantially all of the Company's insurance coverages are
individually underwritten to assure that policies are issued by the
Company's insurance subsidiaries based upon the underwriting standards and
practices established by the Company. Applications for insurance are
reviewed to determine if any additional information is required to make an
underwriting decision, which depends on the amount of insurance applied for
and the applicant's age and medical history. Such additional information
may include medical examinations, statements from doctors who have treated
the applicant in the past and, where indicated, special medical tests. If
deemed necessary, the Company uses investigative services to supplement and
substantiate information. For certain coverages, the Company may verify
information with the applicant by telephone. After reviewing the
information collected, the Company either issues the policy as applied for,
issues the policy with an extra premium charge due to unfavorable factors,
issues the policy excluding benefits for certain conditions for a period of
time or rejects the application. For certain of its coverages, the Company
has adopted simplified policy issue procedures in which the applicant
submits a simple application for coverage typically containing only a few
health related questions instead of a complete medical history.
In common with other life and health insurance companies, the Company
may be exposed to the risk of claims based on AIDS. The Company's AIDS
claims to date have been insignificant. Because of its emphasis on
policies written for the senior citizen market and its underwriting
procedures and selection processes, the Company believes its risk of AIDS
claims is less than the risk to the industry in general.
REINSURANCE
The Company's insurance subsidiaries reinsure portions of the
coverages provided by their insurance products with other insurance
companies on both an excess of loss and co-insurance basis. Co-insurance
generally transfers a fixed percentage of the Company's risk on specified
coverages to the reinsurer. Excess of loss insurance generally transfers
the Company's risk on coverages above a specified retained amount. Under
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its excess of loss reinsurance agreements, the maximum risk retained by the
Company on one individual in the case of life insurance is $100,000
($250,000 in the case of Manhattan National Life) and in the case of
accident and health insurance is $250,000.
Reinsurance agreements are intended to limit an insurer's maximum loss
on the specified coverages. The ceding of reinsurance does not discharge
the primary liability of the original insurer to the insured, but it is the
practice of insurers (subject to certain limitations of state insurance
statutes) to account for risks which have been reinsured with other
approved companies, to the extent of the reinsurance, as though they are
not risks for which the original insurer is liable. See Note 5 of Notes to
Consolidated Financial Statements.
The Company has occasionally used assumption reinsurance to acquire
blocks of business from other insurers. In addition, the Company has from
time to time entered into agreements to assume certain insurance business
from companies for which it is marketing insurance products. The Company
intends to continue these programs if they assist in expanding product
lines and marketing territories.
INVESTMENTS
Investment income represents a significant portion of the Company's
total revenues. Insurance company investments are subject to state
insurance laws and regulations which limit the types and concentration of
investments. The following table provides information on the Company's
investments as of the dates indicated.
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December 31,
1993 1992
Amount % Amount %
(Dollars in thousands)
Fixed maturities to be held
to maturity:
U.S. Treasury $ 9,124 1% $ 15,363 3%
States and political
subdivisions 5,200 1 199 -
Corporate securities 119,276 18 98,836 17
Mortgage-backed securities 192,912 29 320,328 56
Total fixed maturities
to be held to maturity 326,512 49 434,726 76
Fixed maturities available
for sale:
U.S. Treasury 26,894 4 1,425 -
States and political
subdivisions 21,571 3 - -
Foreign governments 4,056 1 - -
Corporate securities 73,981 11 6,343 2
Mortgage-backed securities 131,215 19 30,983 6
Total fixed maturities
available for sale 257,717 38 38,751 8
Equity securities........... 17,436 3 19,537 3
Mortgage and policy loans... 27,189 4 21,969 4
Short-term investments...... 45,352 6 53,366 9
Total Investments...... $674,206 100% $568,349 100%
At December 31, 1993, the average expected term of the Company's fixed
maturity investments was approximately six years.
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The results of the investment portfolio for the periods shown were as
follows:
Year Ended December 31,
1993 1992 1991
(Dollars in thousands)
Average month-end investments . $592,546 $549,643 $532,336
Net investment income . . . . . 40,242 43,555 47,974
Average annualized yield on
investments (1) . . . . . . . 6.8% 7.9% 9.0%
Realized investment gains/
(losses) (2) . . . . . . . . . $(1,336) $ (47) $ 7,189
(1) Not computed on a taxable equivalent basis. Includes interest
income paid or accrued on debt securities and loans and dividends
on equity securities.
(2) See Note 3 of Notes to Consolidated Financial Statements for
information on unrealized appreciation on investments.
The Company's investment policy is to balance its portfolio between
long-term and short-term investments so as to achieve investment returns
consistent with preservation of capital and maintenance of liquidity
adequate to meet payment of policy benefits and claims. Current policy is
to invest primarily in fixed income securities of the U.S. government and
its agencies and authorities, and in fixed income corporate securities with
investment grade ratings of Baa or better. At December 31, 1993, less than
1% of the Company's total investment portfolio was below investment grade
or unrated. The Company intends to invest no more than 5% of its total
invested assets in securities below investment grade.
At December 31, 1993, approximately 2% of the Company's total
investment portfolio were mortgage-backed derivative securities. The
significant decline in interest rates during 1992 and 1993 caused the value
of these securities to deteriorate. The Company has partially written-down
the carrying value of these securities in 1992 and 1993. This write-down
was generally offset by realized gains on the remaining portfolio.
POLICY LIABILITIES
The Company records reserves for future policy benefits to meet future
obligations under outstanding policies. These reserves are amounts which
are calculated to be sufficient to meet policy and contract obligations as
they mature. The amount of reserves for insurance policies is calculated
using assumptions for interest, mortality and morbidity, expenses and
withdrawals. Reserves are established at the time the policy is issued and
adjusted periodically based on reported and unreported claims or other
information. See Note 1 of Notes to Consolidated Financial Statements.
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COMPETITION
The insurance business is highly competitive and includes a large
number of insurance companies, many of which have substantially greater
financial resources and larger and more experienced staffs than the
Company. The Company competes with other insurers to attract and retain
the allegiance of its independent agents and marketing organizations who at
this time are responsible for most of the Company's premiums. Methods of
competing for agents are described under "Marketing." Methods of
competition include the Company's ability to offer competitive products and
to service these programs efficiently. Other competitive factors
applicable to the Company's business include policy benefits, service to
policyholders and premium rates.
HEALTHCARE REFORM
The Company expects that a federal healthcare "reform" program will be
passed by Congress and will be implemented over the remainder of the
decade. It is most likely to include most of the following in some form:
universal access, minimum mandated benefits, coverage for pre-existing
conditions and guaranteed portability.
The Company's insurance subsidiaries have already adapted to state
small group healthcare reform programs by making the necessary adjustments
in our products and marketing structure. The Company also expects to adapt
and adjust to a federal reform program in much the same way.
The best-case "reform" scenario for the Company would be mandated
workplace medical coverage--required either of individuals or employers--
while retaining the current free market system and wide choices for
consumers. This would increase the market by over 30 million and allow the
Company to continue our current distribution system.
The worst-case scenario would be the elimination of current indemnity
"fee-for-service" medical policies for small groups by any but a handful of
insurance companies. This oligopoly would eliminate a major health
insurance market and revenue source for the Company. As a result, we are
now placing a major concentration on growth in supplemental and senior
health insurance and life insurance and annuities. These areas are not
likely to be adversely impacted by any of the reform programs currently
proposed.
If federal healthcare reforms are enacted that eliminate indemnity
"fee-for-service" health plans or limit our ability to adjust premium rates
(price controls), there could be a significant impact on our deferred
policy acquisition costs (DAC) on our small group major medical business
which represents approximately one-third of our DAC asset and is
significantly offset by benefit reserves. The larger part of our DAC asset
is in our senior health, life and annuity products, which should not be
impacted by healthcare reform. With federal healthcare reform, there could
be a material increase in the rate of amortization of DAC in the future for
our small employer medical insurance. While the Company must consider
15
alternative actions for worst case scenarios, we are optimistic that the
final compromise reform legislation will not have this type of impact on
our business.
GOVERNMENT REGULATION
In common with all domestic insurance companies, the Company's
insurance subsidiaries are subject to regulation and supervision in the
jurisdictions in which they do business under statutes which typically
delegate regulatory, supervisory and administrative powers to state
insurance commissions. The method of such regulation varies, but
regulation relates generally to the licensing of insurers and their agents,
the nature of and limitations on investments, approval of policy forms,
reserve requirements, the standards of solvency which must be met and
maintained, deposits of securities for the benefit of policyholders,
periodic examination of insurers, and trade practices, among other things.
The Company's accident and health coverages generally are subject to rate
regulation by state insurance commissions which in certain cases require
that certain minimum loss ratios be maintained.
Certain states also have insurance holding company laws which require
registration and periodic reporting by insurance companies controlled by
other corporations licensed to transact business within their respective
jurisdictions. The Company's insurance subsidiaries are subject to such
laws and are registered as controlled insurers in those jurisdictions in
which such registration is required. Such laws vary from state to state
but typically require periodic disclosure concerning the corporation which
controls the registered insurers and all subsidiaries of such corporation,
and prior notice to, or approval by, the state insurance commission of
intercorporate transfers of assets and other transactions (including
payments of dividends in excess of specified amounts by the insurance
subsidiary) within the holding company system.
EMPLOYEES
As of December 31, 1993, the Company employed approximately 1,900
persons on a full-time basis. The Company considers its employee relations
to be good.
EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the executive officers and directors of the
Company is set forth below:
Peter W. Nauert............... 50 Chairman, Chief Executive Officer,
President and Director
William B. Van Vleet.......... 69 Executive Vice President, General
Counsel and Director
Charles R. Scheper............ 41 Executive Vice President
16
Anthony J. Pino............... 46 Executive Vice President
Joan F. Boyle.................. 46 Senior Vice President
Philip J. Fiskow.............. 37 Senior Vice President
Ernest T. Giambra, Jr.......... 46 Senior Vice President
Thomas J. Brophy.............. 58 Senior Vice President
David I. Vickers.............. 33 Treasurer and Chief Financial
Officer
Michael A. Cavataio.......... 49 Director
Richard R. Haldeman.......... 50 Director
Nolanda S. Hill.............. 48 Director
Karl-Heinz Klaeser........... 61 Director
Michael K. Keefe............. 49 Director
Robert F. Nauert............. 69 Director
All executive officers are elected annually and serve at the pleasure
of the Board of Directors.
Peter W. Nauert has been Chief Executive Officer and a director of the
Company since its incorporation in 1982. He was President of the Company
from 1982 to 1988 and became Chairman of the Company in 1988. On September
1, 1991, he was again elected President. Since 1968, Mr. Nauert has been
employed in an executive capacity by one or more of the Company's insurance
subsidiaries.
William B. Van Vleet has been Executive Vice President of the Company
since 1986 and a director of the Company since 1982. He was General
Counsel of the Company from 1982 to 1988. In June 1991, he was again
elected General Counsel. Mr. Van Vleet has served Pioneer Life since 1948
as General Counsel and a Director. Mr. Van Vleet also serves as an Officer
and Director of other subsidiaries of the Company.
Charles R. Scheper has been Vice President of the Company since 1991
and was Chief Financial Officer from May 1993 to December 1993. In March
1992, he was elected Executive Vice President. Since February 14, 1992, he
has been President and Vice Chairman of the Board of Manhattan National
Life. Prior to the Company's acquisition of Manhattan National Life, Mr.
Scheper was Manhattan's Senior Vice President and Chief Financial Officer,
a position which he held from May 1987. Prior to joining Manhattan
National Life, Mr. Scheper was with Union Central Life from 1979, having
served as Vice President and Controller since 1985.
17
Anthony J. Pino was elected Executive Vice President of the Company in
May 1993. He was Senior Vice President of the Company from March 1992 to
May 1993 and was President of National Group Life Insurance Company from
July 1991 to June 1992. Mr. Pino has served as President of National
Health Services since 1992. Prior to joining the Company, Mr. Pino was
Chief Operating Manager of American Postal Workers' Union Health Plan, a
position which he held from October 1982.
Joan F. Boyle has been Senior Vice President since joining the Company
in September of 1992. She is also an Officer of other subsidiaries of the
Company. Prior to joining the Company, Ms. Boyle was Vice President of
Sales of Empire Blue Cross/Blue Shield from October 1991 to August 1992.
From 1969 to 1991, she was Executive Vice President and Chief Financial
Officer with New Jersey Blue Cross/Blue Shield.
Philip J. Fiskow has been Senior Vice President since May 1993 and the
Chief Investment Officer since joining the Company in 1991. He was Vice
President of the Company from June 1991 until May 1992. He is also an
officer of other subsidiaries of the Company. Mr. Fiskow was with Asset
Allocation and Management as an Investment Advisory Portfolio Manager from
January 1989 to June 1991. From May 1987 to December 1988 he was an
Investment Advisor with Van Kampen Merritt and a Portfolio Manager with Aon
Corporation from May 1981 to May 1987.
Ernest T. Giambra, Jr. was elected Senior Vice President of the
Company in June 1993. Prior to joining the Company, Mr. Giambra had been
with Bankers Life Holding Corporation since 1969 where he had served as
Vice President of Sales since 1988.
Thomas J. Brophy has been Senior Vice President since joining the
Company in November 1993. Prior to joining the Company, Mr. Brophy was
President and Chief Operating Officer of Southwestern Life Insurance
Company from June 1990 to September 1993. Mr. Brophy also held various
senior executive positions with various I.C.H. Corporation subsidiaries
from March 1974 to his joining of the Company in November 1993.
David I. Vickers has been with the Company since June 1992 and has
been a Vice President of the Company since December 1992, Treasurer since
May 1993 and Chief Financial Officer since January 1994. He is also an
Officer and Director of several subsidiaries of the Company. Prior to
joining the Company he was with the public accounting firm of Ernst & Young
since 1983 where he was a Senior Manager in the Insurance Division. Mr.
Vickers also serves as Treasurer for certain of the Company's insurance
subsidiaries.
Michael A. Cavataio has been a Director of the Company since 1986.
Mr. Cavataio has also been President of Lillians, a chain of retail
clothing stores, since 1980.
Richard R. Haldeman has been a Director of the Company since 1986 and
was Secretary from 1988 to June 1990. Mr. Haldeman has been a partner of
Haldeman & Associates, a law firm, since June 1990. He was a partner of
18
Williams & McCarthy, P.C., a law firm, from 1975 to May 1990.
Nolanda S. Hill has been a Director of the Company since May 1992.
Ms. Hill has been Chairman and Chief Executive Officer of Corridor
Broadcasting Corporation since 1984. From 1976 to 1984, Ms. Hill served as
Chief Executive Officer and Chief Financial Officer of National Business
Network, a television station.
Karl-Heinz Klaeser has been a Director of the Company since 1986. Mr.
Klaeser has also been a Director of LSW Holding Corporation and Insurance
Investors Life Insurance Company and the Chairman of the Board of Life
Insurance Company of the Southwest since 1989 and a Director of Personal
Assurance Company PLC (United Kingdom) since 1991.
Michael K. Keefe has been a Director of the Company since March 1994.
Mr. Keefe has been Chief Executive Officer and Chairman of the Board of
Keefe Real Estate, Inc., a family owned real estate brokerage operation
since 1982. Mr. Keefe has also been Chairman of the Board of Southern
Wisconsin Bankshares, Inc. since 1988.
Robert F. Nauert has been a Director of the Company since November
1991. Mr. Nauert has also been a Director and President of Pioneer Life
since 1988 and is a Director and Officer of various subsidiaries of the
Company. Mr. Nauert is the brother of Peter W. Nauert.
Item 2. Properties
The principal executive offices of the Company are located in
Schaumburg, Illinois in a building purchased by the Company in January
1994. The Company, through a subsidiary, owns three buildings in Rockford,
Illinois. The Company believes these facilities will adequately serve its
needs for the foreseeable future and could accommodate expansion of the
Company's business. The Company, through another subsidiary, also owns a
building in the Dallas, Texas metropolitan area which currently serves as
the main administrative office for the Company's small business market of
the Health Insurance unit. The Company leases the office of its other
regional service centers. The executive and administrative offices of
Manhattan National Life are located in Cincinnati, Ohio in leased space.
Item 3. Legal Proceedings
The Company and its subsidiaries are named as defendants in various
legal actions, some claiming significant damages, arising primarily from
claims under insurance policies, disputes with agents, and other matters.
The Company's management and its legal counsel are of the opinion that the
disposition of these actions will not have a material adverse effect on the
Company's financial position.
Item 4. Submission of Matters to a Vote of Security Holders
NONE
19
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholders
Matters
The Company's Common Stock is traded on the New York Stock Exchange
and Chicago Stock Exchange. The following table sets forth, for the
periods indicated, the high and low last reported sale prices for the
Common Stock on the New York Stock Exchange as reported on the consolidated
transaction reporting system.
High Low
Quarter ended:
March 31, 1992.............. 9 1/8 6 1/4
June 30, 1992............... 8 5/8 6 1/4
September 30, 1992.......... 6 3/4 4 7/8
December 31, 1992........... 6 4
March 31, 1993.............. 5 1/2 4 3/4
June 30, 1993............... 9 1/8 5 1/4
September 30, 1993.......... 10 7/8 8 3/8
December 31, 1993........... 14 10 1/2
As of December 31, 1993, there were approximately 600 holders of
record of the Company's Common Stock.
On March 18, 1994, the PFS Board of Directors announced a quarterly
common stock dividend of 3.75 cents per share with an expectation of a
total of 15 cents per share to be paid for 1994.
20
Item 6. Selected Consolidated Financial Data
The following selected consolidated financial data for the five years
ended December 31, 1993; are derived from the consolidated financial
statements of the Company. The data should be read in conjunction with the
consolidated financial statements, related notes, and other financial
information included herein. The comparability of the results for the
periods presented is affected by certain transactions as described in Note
18 of Notes to the Consolidated Financial Statements.
<TABLE>
<CAPTION>
(In thousands except per share amounts)
Year Ended December 31,
1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C>
Operating Data:
Accident and health premiums$601,684 $559,894 $593,236 $508,957 $327,143
Life and annuity premiums
and policy charges 43,878 35,219 33,321 30,693 10,836
Net investment income 40,242 43,555 47,974 48,416 27,853
Other income and realized
investment gains/losses 17,920 17,305 34,207 22,951 9,324
Total revenues 703,724 655,973 708,738 611,017 375,287
Accident and health benefits 397,963 368,046 376,820 367,790 192,358
Life and annuity benefits 44,015 47,622 46,128 46,889 20,929
Total benefits 441,978 415,668 422,948 414,679 213,631
Total benefits and
expenses 684,960 681,409 695,418 625,178 351,631
Income (loss) before
income taxes 18,764 (25,436) 13,320 (14,161) 23,525
Net income (loss) 12,145 (16,959) 8,872 (9,346) 15,525
Preferred stock dividends 2,021 2,039 2,039 2,164 802
Income (loss) applicable to
common stockholders $ 10,124 $(18,998) $ 6,833 $(11,510)$ 14,723
Net income (loss) per
common share
Primary $ 1.51 $(2.85) $ 1.02 $(1.72) $ 2.22
Fully diluted 1.26 (2.85) 1.02 (1.72) 2.13
Average common and common
equivalent shares
outstanding
Primary 6,724 6,660 6,699 6,690 6,632
Fully diluted 10,731 8,195 8,234 8,226 7,299
21
(In thousands except per share amounts)
December 31,
Balance Sheet Data 1993 1992 1991 1990 1989
Total investments $674,206 $568,349 $528,725 $563,807$357,744
Deferred policy acquisition
costs 260,432 269,674 313,453 309,016 208,124
Total assets 1,108,271 978,689 969,190 990,560 660,966
Policy liabilities 903,105 805,696 776,571 739,845 417,913
Short-term notes payable 5,575 12,931 6,371 16,218 19,680
Long-term notes payable 1,125 25,170 21,600 27,000 27,000
Subordinated Debentures 57,477 - - - -
Redeemable Preferred Stock 23,675 23,990 23,990 23,990 25,000
Stockholders' equity 68,872 62,732 75,470 64,738 80,548
Stockholders' equity
per common share $ 10.86 $ 9.21 $ 11.39 $ 9.77 $ 12.48
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
RESULTS OF OPERATIONS
1993 Compared to 1992
Division Overview
The income (loss) before income taxes by Division for 1993 and 1992
are as follows (in thousands):
1993 1992
Insurance:
Health Unit $ 8,578 $(26,613)
Life Unit 7,623 340
Marketing 10,205 3,345
Managed Care (1,211) 335
Corporate (6,431) (2,843)
Total $18,764 $(25,436)
Health
The significant increase in pre tax income for 1993 is due principally
to the $30 million pre tax write-down of deferred policy acquisition costs
in 1992. The remaining increase is due to the improved loss ratios on the
Medicare supplement business and stabilized loss ratios on major hospital
products. The improved loss ratios on Medicare supplement (63.4% in 1993
versus 67.6% in 1992) allowed the Company to freeze 1994 premiums for
certain of these products in many states. The Company has received
positive customer response to this action and expects that will increase
retention on this business. Cost reduction programs have reduced the
general insurance expense ratios (excludes commissions) down to 9.8% in
22
1993 from 10.2% in 1992 despite one-time consolidation costs of certain
operations.
Life
The consolidation of all life insurance administration to one location
on December 31, 1992, contributed to reduced general expenses in 1993 and
the resulting increase in pre tax income. The unit cost per policy in-
force decreased from $150 in 1992 to approximately $80 in 1993. In
addition, interest spreads on life and annuity business improved despite
the decline in investment yields in 1993. The mortality on the existing
block of life business continued to improve in 1993 from the levels
experienced in 1992. The Company is placing more emphasis on increasing
life and annuity business during the next five years to mitigate any
adverse effects due to healthcare reform.
Marketing
The increase in pre tax income was due to a 14% increase in revenue
over a relatively fixed expense base. The division continued to lower lead
generation costs and development costs associated with a new commission
payment system during 1993. The 1992 results were negatively affected by
approximately $2 million due to the settlement of certain disputes with
former agents. The Marketing Division currently receives the commission
overrides previously due these agents pursuant to the settlement.
Managed Care
The division experienced a pre tax loss of $1.2 million primarily due
to start-up costs associated with a new third-party administrator and
occupational medical management company formed in 1993, as well as costs of
a complete rewrite of the medical criteria. The division discontinued the
operation of the third-party administrator in the fourth quarter of 1993.
The core business of the division increased over 100% during 1993. The
significant increase in revenue was offset by sales development costs and
personnel additions to support a foundation for future growth.
Corporate
Interest expense increased from $2,189,000 in 1992 to $3,276,000 in
1993 due to the issuance of convertible debentures. Corporate expenses
also increased due to costs associated with new investor relations
programs, expenses related to the public offering, and reallocation of
certain senior management personnel who monitor and control division
profitability at the corporate level.
Consolidated Financial Condition and Results of Operations
The Company reported net income of $12,145,000 for the twelve months
ended December 31, 1993, compared to a net loss of $16,959,000 for the
comparable period in 1992. The net loss for 1992 was primarily
attributable to a $30,000,000 pre-tax write-down of deferred policy
23
acquisition costs. The remaining increase was due to improved loss ratios
on the Medicare supplement business, expense reductions in the Life
Insurance Unit and increased revenue and margins in the Marketing Division.
Total revenues increased $47,751,000 or 7% for the twelve month period
in 1993 as compared to 1992. The increase in revenue is due to the
increase in premiums and policy charges of $50,449,000 which was partially
offset by reduced levels of net investment income.
Accident and health insurance premiums increased $41,790,000, or 7%,
in 1993 as compared to 1992. Premiums from major hospital plans increased
$56,694,000 in 1993 as compared to 1992 due to rate increases implemented
in 1993, and approximately $11,000,000 from the acquisition of Continental
Life & Accident Company. Offsetting the increase was a decline in Medicare
supplement premiums of $9,176,000 due to lower than anticipated new sales
and a $3,496,000 decrease in premiums of specialty health care plans. Life
and annuity premiums and policy charges increased $8,659,000 due to an
increase in new life sales during 1993.
Net investment income decreased $3,313,000 or 8% in 1993 compared to
1992. Annualized investment yields decreased from 7.9% in 1992 to 6.8% in
1993. The decrease in investment yield was due to the general decline in
current interest rates and a higher quality portfolio with a shortened
duration.
Other income and realized investment gains and losses increased
$615,000, or 4% in 1993 as compared to 1992. Other income increased
$1,904,000 in 1993 due to increased sales to unaffiliated customers in both
the Marketing and Managed Care Divisions. Realized investment losses
increased $1,289,000 due to write-downs on certain mortgage-backed
derivative securities. As disclosed in Note 3 to the Consolidated
Financial Statements, the Company has established an allowance for losses
on investments held in the amount of $4,200,000, which the Company believes
is adequate to provide for other-than-temporary market declines.
Total benefits increased $26,310,000 or 6% in 1993 as compared to
1992. Life and annuity benefits decreased $3,607,000 or 8% due to the
general decline in credited rates during 1993 and improved mortality over
the higher levels experienced during 1992. Accident and health benefits,
which includes the change in unearned premiums, increased $29,917,000 or 8%
in 1993 as compared to 1992. The change was primarily due to the 7%
increase in accident and health premiums. The Company's accident and
health loss ratios were unchanged over 1992 at 66%. The improved loss
ratios on the Medicare supplement business were offset by the fourth
quarter loss ratio on Continental Life & Accident business of 79%. The
Company is attempting to control claim costs on this block of business by
implementing additional managed healthcare efforts.
In 1993 and 1992, managed healthcare efforts resulted in estimated net
savings to the Company's Health Insurance Unit of $41 million and $27
million, respectively. These savings were primarily used to lower the
amount of premium increases for policyholders, which the Company believes
24
generally has the effect of decreasing lapse rates of these policies. The
principal efforts and their approximate relative contributions to these
estimated savings were as follows:
1993* 1992* 1991*
PPOs (preferred provider organization) networks 49% 64% 72%
Precertification 5 17 16
Large case management 32 11 2
Other 14 8 10
100% 100% 100%
* Percent of total estimated savings from managed healthcare efforts.
The Company expects to continue to emphasize managed care procedures
to control claim costs. Although the Company cannot accurately determine
the amount savings which may be realized from such efforts in the future,
the Company believes that it will be increasingly difficult to maintain
this level of growth in cost savings due to the efficiencies that have
already been achieved.
Amortization of deferred policy acquisition costs (DAC) decreased
$23,840,000, or 24%, in 1993 as compared to 1992. The decrease was due to
the $30 million pre tax write-down of DAC in the fourth quarter of 1992
primarily on major medical policies sold in the self-employed and small
business owner market. The 1993 amortization rate on Medicare supplement
is higher than 1992 because of the accelerated rate increase implementation
which occurred in 1993. As discussed previously, the Company expects the
Medicare supplement persistency to improve in 1994 with the modest rate
action required. The Company continues to monitor persistency closely
since future rate increases and regulatory reforms could adversly impact
lapses in the future. Increased lapses resulting in an increase in the
amortization rate of DAC could adversely impact future earnings.
The Company's effective tax rate was approximately 35% in 1993. The
Company recorded a tax benefit for 1992 due to the operating loss incurred.
The effective federal income tax rate increased in 1993 due to the Revenue
Reconciliation Act of 1993.
Effective January 1, 1993 the Company adopted Financial Accounting
Standards Board (FASB) Statement No. 113 "Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration Contracts." FASB Statement
No. 113 requires that reinsurance receivables, including amounts related to
claims incurred but not reported, and prepaid insurance premiums, be
reported as assets as opposed to reductions in the related liabilities. As
a result of the adoption of FASB Statement No. 113, amounts on deposit and
due from reinsurers and policy liabilities each increased $19,453,000 at
December 31, 1993.
Effective January 1, 1993, the Company also changed its method of
accounting for income taxes from the deferred method to the liability
method required by FASB Statement No. 109 "Accounting For Income Taxes."
The cumulative effect of adopting FASB Statement No. 109 was not
25
significant.
President Clinton presented his health care reform policy in September
of 1993. Numerous proposals have been introduced to Congress and the state
legislatures to reform the current healthcare system. Proposals have
included, among other things, modifications to the existing employer-based
insurance system, a quasi-regulated system of "managed competition" among
health plans and a single payer, public program which would replace some of
the Company's current major hospital products. Changes in healthcare
policy could significantly affect the Company's Health Unit. The Company
is unable to accurately predict what effects these reforms may have on its
future operations and is unable to evaluate what impact the expectations of
such reforms may have had on past consumer behavior. The Company expects
the final package approved by Congress will differ significantly from the
program presented by President Clinton. (See Healthcare Reform Section)
Investments, equipment, policy liabilities, and general expenses and
other liabilities increased due to the acquisition of Continental Life &
Accident. Other assets increased primarily due to expenses capitalized in
conjunction with the public offering of the convertible subordinated
debentures.
RESULTS OF OPERATIONS
1992 Compared to 1991
The Company reported a net loss of $16,959,000 for the twelve months
ended December 31, 1992, compared to net income of $8,872,000 for the
comparable period in 1991. The net loss for 1992 was primarily
attributable to a $30,000,000 write-down of deferred policy acquisition
costs. The remaining decrease was primarily due to reduced levels of new
production of senior health insurance, the continued impact of medical
inflation, increased utilization of medical services in the health
insurance small business market, and lower other income and realized
investment gains.
Total revenues decreased $52,649,000 or 7% in 1992 as compared to
1991. The decrease was primarily due to reduced writings of accident and
health insurance policies principally in the senior market and lower other
income and realized gains.
Total premiums and policy charges decreased $31,444,000, or 5%, in
1992 as compared to 1991. During 1992 and 1991, in an effort to control
the volume and quality of the business produced, the Company reduced the
number of brokers and agents selling its products and restructured certain
of its agency relationships. These changes resulted in reduced levels of
new business being written.
Accident and health insurance premiums decreased $33,342,000, or 6%,
in 1992 as compared to 1991. Premiums from the Company's Medicare
supplement plans decreased approximately $35,203,000. In addition,
$7,135,000 of the decrease was attributable to a decrease in premium in
26
specialty health care plans. Somewhat offsetting the decrease were
premiums from major hospital plans which increased $9,694,000 in 1992 as
compared to 1991. Life and annuity premium and policy charges were
relatively unchanged for the twelve month period in 1992 as compared to
1991.
Net investment income decreased $4,303,000, or 9%, in 1992 compared to
1991. Annualized investment yields decreased from 9.0% in 1991 to 7.9% in
1992. The decrease in net investment income was primarily due to the
general decline in interest rates, and also the sale of a subsidiary, Union
Benefit Life Insurance Company on September 1, 1991.
Other income and realized investment gains and losses decreased
$16,902,000, or 49%, in 1992 as compared to 1991. Other income decreased
$8,957,000 in 1992 as compared to 1991. The decrease is principally due to
reduced revenues from the Company's non-insurance marketing subsidiaries.
The Company's Marketing Division experienced a $6,287,000, or 32%, decrease
in revenues, which reflected the discontinuation of certain agent programs.
The Company does not expect further declines in revenue from the
discontinuation of these agent programs. The Company's Managed Care
Division contributed revenues comparable to those in 1991. Realized
investment gains, excluding the sale of a subsidiary, decreased $7,236,000
in 1992 as compared to 1991. This is primarily due to the write-down of
$5,700,000 on mortgage-backed derivative securities in 1992. As disclosed
in Note 3 to the Consolidated Financial Statements, the Company has
established an allowance for losses on investments held in the amount of
$1,900,000, which the Company believes is adequate to provide for any
other-than-temporary market declines.
Total benefits decreased $7,280,000, or 2%, in 1992 as compared to
1991 due to the reduced writings of accident and health insurance policies.
Life and annuity benefits were relatively unchanged in 1992 as compared to
1991. Accident and health benefits, which include the increase in unearned
premiums, decreased $8,774,000, or 2%, in 1992 as compared to 1991. In
1992 the Company's accident and health loss ratio increased to 66% as
compared to 64% in 1991. The increase was due to the continued impact of
medical inflation and increased utilization of medical services in the
small business market. The Company is attempting to minimize the effect of
medical inflation and control claim costs by implementing certain managed
healthcare efforts.
In 1992 and 1991, managed healthcare efforts resulted in estimated net
savings to the Company's Health Insurance Unit of $27 million and $13
million, respectively. These savings were primarily used to lower the
amount of premium increases for policyholders, which the Company believes
generally has the effect of decreasing lapse rates of these policies. The
principal efforts and their approximate relative contributions to these
estimated savings were as follows:
27
1992* 1991*
PPOs (preferred provider organization) networks 64% 72%
Precertification 17 16
Large case management 11 2
Other 8 10
100% 100%
* Percent of total estimated savings from managed healthcare efforts.
The Company expects to continue to emphasize managed care procedures
to control claim costs. Although the Company cannot accurately determine
the amount of any savings which may be realized from such efforts in the
future, the Company believes that it will be increasingly difficult to
maintain this level of cost savings due to the efficiencies that have
already been achieved.
The Company initiated group medical premium rate adjustments in
September 1992. These adjustments were intended to offset the impact of
increased benefits and to improve loss ratios. These adjustments helped
stabilize loss ratios in the fourth quarter. Policy lapses increased only
modestly in the fourth quarter due to the Company's aggressive conservation
activities.
Insurance and general expenses decreased $10,853,000, or 6%, in 1992
as compared to 1991. The reduction in these expenses is primarily due to
the reduced level of new business being written and the corresponding cost
reduction programs in the insurance units, which was partially offset by an
increase in the level of expenses incurred by the Company's non-insurance
subsidiaries.
Interest expense decreased $727,000, or 25%, in 1992 as compared to
1991 due to a decrease in the weighted average notes payable outstanding
and a decrease in interest rates. However, notes payable increased from
December 31, 1991, as Pioneer Life Insurance Company of Illinois entered
into a loan agreement in March of 1992.
Amortization of deferred policy acquisition costs increased
$4,967,000, or 5%, in 1992 as compared to 1991. In the fourth quarter of
1992 the Company wrote off approximately $30,000,000 of deferred policy
acquisition costs. The adjustment was primarily the result of certain
policies sold in the self-employed and small business owner market. These
were policies issued without managed care and cost containment features
(including scheduled benefits) which are part of all of the Company's
policies now issued. The adjustment included primarily individual policy
contracts issued in certain states where strict regulatory approval
requirements have delayed implementation of necessary premium adjustments.
In all other states, the Company sells group medical plans to the small
business owner market. While these group policies are individually
underwritten, they provide more latitude for expedient rate adjustments
that correspond with actual claims experience.
Recently, the Company has experienced improved persistency, primarily
28
on the policies issued in 1991 and 1992, which has resulted in decreased
amortization of deferred acquisition costs in 1992 as compared to 1991 on
this block of business. The Company continues to monitor persistency
closely since general economic conditions and future premium rate
adjustments could adversely impact lapses in the future. Increased lapses
resulting in an increase in the amortization rate of deferred policy
acquisition costs could adversely impact future earnings.
The Company recorded a net tax benefit for 1992 due to the operating
loss incurred.
Investments increased during 1992 as a result of the investment of
loan proceeds received in March of 1992 and a reduced level of ceded
reinsurance. Premiums and other receivables, accrued investment income,
and general expenses and other liabilities decreased due to reduced levels
of new business. Deferred policy acquisition costs decreased as a result
of the fourth quarter write-down and the decrease in 1992 new business
issues. Other assets increased due to federal income tax recoverables and
the prepayment of certain agent compensation.
Federal legislation required all states to adopt certain standardized
benefit provisions for the sale of Medicare supplement policies. The
Company has introduced new Medicare supplement plans in response to this
legislation. In addition, in 1991, the National Association of Insurance
Commissioners adopted the Small Employers Availability Act (Act). The Act
affects the rating and underwriting methodology that can be applied to
insurance coverage sold to small employers, generally categorized as those
employing 25 people or less.
The Company believes the Act will not have a material impact on its
existing business. In response to the Act, the Company has modified its
products, and will continue to modify products (if required) for sale in
those states adopting the Act.
Deferred Policy Acquisition Costs
Under generally accepted accounting principles, a deferred acquisition
cost asset (DAC) is established to properly spread the acquisition costs
for a block of policies against the expected future revenues from the
policies. The acquisition costs which are capitalized and amortized
consist of first year commissions in excess of renewal commissions and
certain home office expenses related to selling, policy issue, and
underwriting.
The deferred acquisition costs for accident and health policies and
traditional life policies are amortized over future revenues of the
business to which the costs are related. The rate of amortization depends
on the expected pattern of future revenues for the block of policies. The
scheduled amortization for a block of policies is established when the
policies are issued.
The amortization schedule is based on the expected persistency of the
29
policies. The actual amortization of DAC reflects the actual persistency
of the business. For example, if actual policy terminations are higher
than expected, DAC will be amortized more rapidly than originally
scheduled.
Effect of Inflation
In pricing its insurance products, the Company gives effect to
anticipated levels of inflation; however, the Company believes that the
high rate of medical cost inflation during the last three years had an
adverse impact on its major hospital accident and health claims experience.
The Company has implemented rate increases in response to this experience.
Liquidity and Capital Resources
The Company's consolidated liquidity requirements are created and met
primarily by operations of its insurance subsidiaries. The primary sources
of cash are premiums, investment income, proceeds from public offerings and
investment sales and maturities. The primary uses of cash are operating
costs, repayment of notes payable, policy acquisition costs, payments to
policyholders and investment purchases.
In addition, liquidity requirements of the Company are created by
dividend requirements of the $2.125 Preferred Stock and debt service
requirements. The Company's liquidity requirements are met primarily by
dividends declared by its non-insurance subsidiaries. As disclosed in Note
9 of Notes to Consolidated Financial Statements, payment of dividends by
the insurance subsidiaries to the Company is subject to certain regulatory
restrictions.
The Company's life and health insurance subsidiaries require capital
to fund acquisition costs incurred in the initial year of policy issuance
and to maintain adequate surplus levels for regulatory purposes. These
capital requirements have been met principally from internally generated
funds, including premiums and investment income, and capital provided from
reinsurance and the financing or sale of agent debit balances. The Company
has terminated existing financial reinsurance agreements with respect to
policies issued subsequent to July 1991. The current reinsurance
agreements in force have been approved by the appropriate regulatory
authorities and the Company believes they meet the current NAIC model
regulations. If circumstances arose that would affect the Company's
continued ability to include capital provided from reinsurance in the
insurance subsidiaries' statutory capital and surplus, it could have an
adverse impact on the Company's business. The Company is not aware of any
circumstances that would have such an effect.
Certain subsidiaries of the Company have entered into agreements for
the sale of agent debit balances. Proceeds from such sales during 1993 and
1992 were $25.4 million and $20.3 million, respectively. The Company's
agent debit balance program has been reviewed without objection by
applicable regulatory authorities. If restrictions are imposed on
including in capital the proceeds from this type of financing in the
30
future, the Company would consider alternative financing arrangements or
discontinue its agent advancing program.
In the past, the Company has obtained funds from public stock and debt
offerings and bank borrowings and contributed a portion of the proceeds to
the insurance subsidiaries to support the growth of its insurance business.
The level of premium volume of the Company's insurance subsidiaries will
depend on the amount of their statutory capital and surplus. The statutory
basis premium to surplus ratio for 1993 for the Company's major insurance
subsidiaries were as follows: Manhattan National Life: 1.5 times; Pioneer
Life Insurance Company of Illinois: 4.4 times; Continental Life & Accident
Company 6.8 times; and National Group Life Insurance Company: 3.3 times.
The concept of risk-based capital has been adopted for regulatory
monitoring of the life and health insurance industry. The risk-based
capital rules for life and health insurance companies were effective for
1993 annual statement filings.
Risk based capital standards will be used by regulators to set in
motion appropriate regulatory actions relating to insurers which show signs
of weak or deteriorating conditions. The Company's insurance subsidiaries
total adjusted capital, authorized control risk based capital, and related
ratio by company as disclosed in the 1993 annual statement are as follows:
Authorized
Adjusted Control
Company Capital Level RBC RBC Ratio
(Dollars in thousands)
Pioneer Life Insurance
Company of Illinois $77,460 $23,080 336%
Manhattan National
Life Insurance Company 24,424 4,316 566%
National Group Life
Insurance Company 34,756 9,016 385%
Continental Life &
Accident Company 11,791 4,996 236%
Health & Life Insurance
Company of America 3,803 240 1,585%
The Company has offered agent commission financing to certain of its
agents and marketing organizations which consists primarily of
annualization of first year commissions. This means that when the first
year premium is paid in installments, the Company will advance a percentage
of the commissions that the agent would otherwise receive over the course
of the first policy year. On October 31, 1990, the Company through a
subsidiary entered into an agreement with an unaffiliated corporation to
provide financing for its agent commission financing program through the
sale of agent receivables. This financing program was replaced with an
amended agreement which was executed on October 1, 1992, to provide such
31
subsidiary with the same type of financing. Pursuant to this amended
agreement the termination date of the program is December 31, 1994, subject
to extension or termination as provided therein.
In April 1992, the Company settled certain disputes with several
former agents and in addition to certain cash payments issued promissory
notes representing future commission. The remaining total of $1,490,000 at
December 31, 1993 was repaid in January 1994.
In July 1993 the Company issued $57.5 million of 8% convertible
subordinated debentures due 2000. Interest on the debentures is payable in
January and July of each year. Net proceeds from the offering totaled
approximately $54 million. The debentures are convertible into the
Company's common stock at any time prior to maturity, unless previously
redeemed, at a conversion price of $11.75 per share. The proceeds were
used in part to repay the $15,000,000 and $10,000,000 term loans
outstanding.
In August 1993 the Company borrowed $1,500,000 to finance the
acquisition of Healthcare Review Corporation. Interest on the note is
payable quarterly at six percent. The note requires principal repayments
of $75,000 per quarter through July 31, 1998.
Interest paid amounted to $1,023,000, $2,274,000 and $2,416,000 for
1993, 1992, and 1991, respectively.
Management believes that the diversity of the Company's investment
portfolio and the liquidity attributable to the large concentration of
investments in highly liquid United States government agency securities
provide sufficient liquidity to meet foreseeable cash requirements. In the
fourth quarter of 1992 the Company segregated the fixed maturity portfolio
into two components: fixed maturities held to maturity and fixed
maturities available for sale. Because the Company's insurance
subsidiaries experience strong positive cash flows, including sizeable
monthly cash flows from mortgage-backed securities, the Company does not
expect its insurance subsidiaries to be forced to sell the held to maturity
investments prior to their maturities and realize material losses or gains.
However, if the Company experiences changes in credit risk, it may be
required to sell assets whose fair value is less than carrying value and
incur losses.
Life insurance and annuity liabilities are generally long term in
nature although subject to earlier surrender as a result of the
policyholder's ability to withdraw funds or surrender the policy, subject
to surrender and withdrawal penalties. The Company believes its
policyholder liabilities should be backed by an investment portfolio that
generates predictable investment returns. The Company seeks to limit
exposure to risks associated with interest rate fluctuations by
concentrating its invested assets principally in high quality, readily
marketable debt securities of intermediate duration and by attempting to
balance the duration of its invested assets with the estimated duration of
benefit payments arising from contract liabilities.
32
The Company has no material commitments for capital expenditures at
the present time. The Company acquired its corporate headquarters in
Schaumburg, Illinois in January 1994 which will be primarily used for
investment real estate.
Investment Portfolio
At December 31, 1993, the Company had invested assets of $674 million,
compared to $568 million at December 31, 1992. The Company manages all of
its investments internally with resource and evaluation assistance provided
by independent investment consultants. Government and mortgage-backed
obligations and corporate fixed maturity securities collectively comprised
approximately 87% and 84% of the Company's investment portfolio at December
31, 1993 and 1992, respectively. The remainder of the invested assets were
in short-term investments, equity securities, policy loans and mortgage
loans.
Fixed Maturity Investments. With the adoption of risk based capital
rules and consumer concerns over insurance company solvency and financial
stability, the asset quality of insurance companies' investment portfolios
has become of greater concern to policyholders and has come under closer
scrutiny by insurance regulators and investors. In response, the Company
reduced its investments in below-investment grade fixed maturity securities
to less than 1% of its invested assets at December 31, 1993, and 3.4% at
December 31, 1992, down from 4.5% at December 31, 1991, and 5.0% at
December 31, 1990. These reductions resulted from sales and write-downs of
the carrying value of such securities in each of these periods, and the
elimination of new purchases. The Company has a policy not to invest more
than 5% of its total invested assets in securities below investment grade.
Investments in below-investment grade fixed maturity securities
generally have greater risks (and potentially greater returns) than other
corporate fixed maturity investments. Risk of loss upon default by the
issuer is significantly greater for these securities because they are
generally unsecured and are often subordinated to other creditors of the
issuer, and because these issuers usually have high levels of indebtedness
and are more sensitive to adverse economic conditions, such as recession or
increasing interest rates, than are investment grade issuers. Also, the
market for below-investment grade securities is less liquid and not as
actively traded as the market for investment grade securities.
The investment objectives of the Company are to maximize investment
yield without sacrificing high investment quality and matched liquidity.
The Company continually evaluates the creditworthiness of each issuer
of securities held in its portfolio. When the fair value of an individual
security declines materially, or when the Company's ongoing evaluation
indicates that it may be likely that the Company will be unable to realize
the carrying value of its investment, significant review and analytical
procedures are performed to determine the extent to which such declines are
attributable to changing market expectations regarding general interest
rates and inflation and other factors, such as a perceived increase in the
33
credit risk of the issuer, a general decrease in a particular industry
sector or an overall economic decline.
Declines in fair value attributable to factors other than market
expectations regarding general interest rates and inflation are reviewed
and analyzed in further detail to determine if the decline in value is
other than temporary, and the carrying amount of the investment is reduced
to its net realizable value based upon estimated non-discounted cash flows.
The amount of the reduction is reported as a realized loss on investments
and the net realizable value becomes the new cost basis of the investment.
In addition, the Company reverses any accrued interest income previously
recorded for the investment and records future interest income only when
cash is received.
The Company's use of non-discounted cash flows to evaluate net
realizable value may result in lower realized losses in the current period
than if the Company had elected to use discounting in its evaluation
process. Also, yields recognized in future periods on such investments may
be less than yields recognized on other investments and will be less than
the yield expected when the fixed maturity security was originally
purchased. The affect on net income from declines in interest income and
portfolio yield from impaired securities in future periods will depend on
many factors, including, in life insurance business, the level of interest
rates credited to policyholder account balances. Inasmuch as interest
rates credited to the Company's policyholders are typically only guaranteed
for one year, the Company does not expect any material adverse affect on
net income in future periods from declines in yields from impaired
securities.
Mortgage-Related Securities. At December 31, 1993, the Company had
$324 million, or 55%, of its fixed maturities portfolio in mortgage-related
securities ($351 million at December 31, 1992). The yield characteristics
of mortgage-related securities differ from those of traditional fixed
income securities. The major differences typically include more frequent
interest and principal payments, usually monthly, and the possiblity that
prepayments of principal may be made at any time. Prepayment rates are
influenced by changes in current interest rates and a variety of economic,
geographic, social and other factors and cannot be predicted with
certainty. The yields to maturity of the mortgage-related securities will
be affected by the actual rate of payment (including prepayments) of
principal of the underlying mortgage loans.
In general, prepayments on the underlying mortgage loans, and
subsequently the mortgage-related securities backed by these loans,
increases when the level of prevailing interest rates declines
significantly below the interest rates on such loans. When declines in
interest rates occur, the proceeds from the prepayment of such securities
are likely to be reinvested at lower rates than the Company was earning on
such securities.
Prior to 1991, the Company's investments in mortgage-related
securities consisted primarily of pass-through certificates which provide
34
for regular monthly principal and interest payments. During 1991 and 1992,
the Company restructured its portfolio by investing in principal only and
inverse floaters/interest only tranches of collateralized mortgage
obligations (CMOs) and accrual bonds (derivative securities) and other CMOs
by selling pass-through certificates. The Company also purchased
additional CMO investments with cash flows generated by policyholder
premium collections, reinvestment of investment income and scheduled
principal payments or maturities of investments and proceeds from the sales
of fixed maturity investments, including significant sales of higher-coupon
mortgage-related securities in 1991 and 1992.
The Company's mortgage-related securities portfolio is well
diversified as to collateral, maturity/duration and other characteristics.
The majority of the mortgage-related securities portfolio has the guarantee
or backing of agencies of the United States government. Generally, the
mortgage-related securities consist of pools of single-family, residential
mortgages.
The derivative securities were acquired to protect the Company in the
event of adverse interest rate fluctuations. The yields and fair values of
the derivative securities are generally more sensitive to changes in
interest rates and prepayments than other mortgage-related securities.
Accrual bonds are CMOs structured such that the payments of coupon
interest is deferred until principal payments begin on the bonds. On each
accrual date, the principal balance is increased by the amount of the
interest (based upon the stated coupon rate) that otherwise would have been
payable. As such, these securities act much the same as zero coupon bonds
until cash payments begin. Cash payments typically do not commence until
earlier classes in the CMO structure have been retired, which can be
significantly influenced by the prepayment experience of the underlying
mortgage loan collateral in the CMO structure. Because of the zero coupon
element of these securities and the potential uncertainty as to the timing
of cash payments, their fair values and yields are more sensitive to
changing interest rates than pass-through securities and coupon bonds.
The Company's mortgage-related securities portfolio at December 31,
1993, also included $37 million of CMOs and pass-through certificates
issued by non-government agencies ($57 million at December 31, 1992). The
Company's holdings consist solely of senior securities in the CMO
structures which are collateralized by first mortgage liens on single
family residences. These securities are rated AAA or AA by Standard &
Poor's, or the comparable equivalent rating by another independent
nationally recognized rating agency.
The credit worthiness of these securities is based solely on the
underlying mortgage loan collateral and credit enhancements in the form of
senior/subordinated structures, letters of credit, mortgage insurance or
surety bonds. The underlying mortgage loan collateral principally consists
of whole loan mortgages that exceed the $202,000 maximum imposed by both
the Federal National Mortgage Associaton and the Federal Home Loan Mortgage
Corporation and, as such, the collateral tends to be concentrated in states
35
with the greatest number of higher priced single family residences,
including California, New York, New Jersey, Maryland, Virginia and
Illinois. The maximum average loan-to-value ratio for the collateral is
80%.
The following table summarizes the components of the Company's
mortgage-related securities portfolio at December 31, 1993, and December
31, 1992 (in thousands):
December 31, 1993 December 31, 1992
Estimated Estimated
Carrying Fair Carrying Market
Value Value (1) Value Value (1)
Inverse floaters and interest
only CMO tranches $ 18,954 $ 16,003 $ 30,810 $ 24,632
Accrual bonds:
U.S. government agency 6,968 7,386 7,852 8,215
Other CMOs:
U.S. government agency 187,871 190,141 200,860 204,161
Non-government agency 21,154 21,919 40,635 41,772
Total other CMOs 209,025 212,060 241,495 245,933
U.S. government agency pass-through73,285 74,004 54,902 56,104
Non-government agency pass-through 15,895 16,041 16,252 16,584
Total mortgage-backed securities $324,127 $325,494 $351,311 $351,468
(1) Fair values are generally derived from independent pricing services.
Fair values for principal only and inverse floater/interest only tranches
of CMOs at December 31, 1993, and 1992 reflect a discounted cash flow due
to a lack of a liquid market for these securities.
Recently Issued Accounting Standards
For a discussion of a new income tax accounting standard and a new
reinsurance accounting standard and the impact these standards had on the
financial statements of the Company, see Note 2 of Notes to Consolidated
Financial Statements.
Item 8. Financial Statements and Supplementary Data
Consolidated Financial Statements are included in Part IV, Item 14 of
this report.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
Not applicable.
36
Part III
Item 10. Directors and Executive Officers of the Registrant
The section of the definitive proxy statement to be filed with the
Securities and Exchange Commission and mailed to stockholders before April
1, 1994, in connection with the Company's 1994 annual meeting of
stockholders entitled "Election of Directors" is incorporated herein by
this reference.
For information on executive officers of the registrant, reference is
made to the item entitled "Executive Officers of the Registrant" in Part I
of this report.
Item 11. Executive Compensation
The section of the definitive proxy statement to be filed with the
Securities and Exchange Commission and mailed to stockholders before April
1, 1994, in connection with the Company's 1994 annual meeting of
stockholders entitled "Executive Compensation" is incorporated herein by
this reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The section of the definitive proxy statement to be filed with the
Securities and Exchange Commission and mailed to stockholders before April
1, 1994, in connection with the Company's 1994 annual meeting of
stockholders entitled "Principal Holders of Securities" is incorporated
herein by this reference.
Item 13. Certain Relationships and Related Transactions
The section of the definitive proxy statement to be filed with the
Securities and Exchange Commission and mailed to stockholders before April
1, 1994, in connection with the Company's 1994 annual meeting of
stockholders entitled "Certain Transactions" is incorporated herein by this
reference.
37
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
(a) Documents filed as a part of this report:
PIONEER FINANCIAL SERVICES, INC.
1. Financial Statements
Report of Independent Auditors . . . . . . . . . . . . F-1
Consolidated Financial Statements . . . . . . . . . . .
Statements of Consolidated Operations . . . . . . F-2
Consolidated Balance Sheets . . . . . . . . . . . F-3
Statements of Consolidated Stockholders' Equity. . F-5
Statements of Consolidated Cash Flows . . . . . . F-6
Notes to Consolidated Financial Statements . . . . F-7
2. Financial Statement Schedules
Schedule I - Consolidated Summary of Investments -
Other Than Investments in Related Parties . . . . . . F-30
Schedule II - Amounts Receivable From Related
Parties and Underwriters, Promoters, and
Employees Other Than Related Parties . . . . . . F-31
Schedule III - Condensed Financial Information of
Registrant - Condensed Balance Sheets . . . . . . F-32
Schedule III - Condensed Financial Information of
Registrant - Condensed Statements of Operations . . . F-33
Schedule III - Condensed Financial Information of
Registrant - Condensed Statements of
Cash Flows. . . . . . . . . . . . . . . . . . . . . . F-34
Schedule III - Note to Condensed Financial Statements F-35
Schedule V - Supplementary Insurance Information. . . F-36
Schedule VI - Reinsurance . . . . . . . . . . . . . . F-38
Schedule VIII - Valuation and Qualifying Accounts . . F-39
Schedule IX - Short-Term Borrowings . . . . . . . . . F-40
All other schedules are omitted because they are not applicable, or not
required, or because the required information is included in the financial
statements or notes thereto.
38
3. Exhibits
See Exhibit Index below.
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during
the fourth quarter of 1993.
(c) Index to Exhibits
Exhibit Sequentially
Number Description of Document Numbered Page
3 (a) Certificate of Incorporation
of the Company (filed as Exhibit 3(a)
to the Company's Registration Statement
on Form S-1 [No. 33-7759] and incorporated
herein by reference)
3 (b) Amended Bylaws of the Company (filed as
Exhibit 3(b) to Amendment No. 1 to the
Company's Registration Statement
on Form S-1 [No. 33-30017] and incorporated
herein by reference)
4 (a) Certificate of Designations with respect
to the Company's $2.125 Cumulative
Convertible Exchangeable Preferred Stock
("Preferred Stock") (filed as Exhibit 4(a)
to Post-Effective Amendment No. 1 to the
Company's Registration Statement on Form S-1
[No. 33-30017] and incorporated herein by
reference)
4 (b) Proposed form of Indenture with respect
to the Company's 8 1/2% Convertible
Subordinated Debentures due 2014 into which
the Preferred Stock is exchangeable (filed
as Exhibit 4(b) to Post-Effective Amendment
No. 1 to the Company's Registration Statement
on Form S-1 [No. 33-30017] and incorporated
herein by reference)
4 (c) Rights Agreement dated as of December 12,
1990 between the Company and First Chicago
Trust Company of New York as Rights
Agent (including exhibits thereto)
(filed as Exhibit 1 to the Company's
registration statement on Form 8-A
dated December 14, 1990 and incorporated
herein by reference)
39
10 (a) Form of contract with independent agents
(filed as Exhibit 10(f) to the Company's
Registration Statement on Form S-1
[No. 33-7759] and incorporated herein by
reference)
10 (b) Nonqualified Stock Option Plan (filed as
Exhibit 10(g) to the Company's Registration
Statement on Form S-1 [No. 33-7759] and
incorporated herein by reference)
10 (c) Amendment to the Nonqualified Stock Option
Plan of the Company (filed as Exhibit 10(d)
to the Company's Registration Statement on
Form S-8 [No. 33-26455] and incorporated
herein by reference)
10 (d) Amendment to the Nonqualified Stock Option
Plan of the Company (filed as Exhibit 10(c)
to the Company's Registration Statement on
Form S-1 [No. 33-17011] and incorporated
herein by reference)
10 (e) Amendment to the Nonqualified Stock Option
Plan of the Company (filed as Exhibit 10(e)
to the Company's registration statement on
Form S-8 [No. 33-37305] and incorporated
herein by reference)
10 (f) Amended and Restated Receivables purchase
agreement dated as of October 1, 1992 by
and between Design Benefit Plans, Inc.
(formerly National Group Marketing Corporation)
and National Funding Corporation
(filed herewith)
*10 (g) Employment Agreement dated December 3, 1993
by and between the Company and Peter W. Nauert
(filed herewith)
10 (h) Administrative Service Agreement dated
December 23, 1991, by and between
Administrative Service Corporation and
Pioneer Life Insurance Company of Illinois
(filed as Exhibit 10(v) to the Company's
Annual Report on Form 10-K [No. 0-14977]
and incorporated herein by reference)
10 (i) Administrative Service Agreement dated
December 23, 1991, by and between
Administrative Service Corporation and
National Group Life (filed as Exhibit 10(w)
40
to the Company's Annual Report on Form 10-K
[No. 0-14977] and incorporated herein
by reference)
*10 (j) Employment Agreement dated December 31,
1991 by and between National Benefit
Plans, Inc. and Peter W. Nauert (filed
as Exhibit 10(x) to the Company's Annual
Report on Form 10-K [No. 0-14977] and
incorporated herein by reference)
*10 (k) Amendment to Employment Agreement dated
March 26, 1993 by and between National
Benefit Plans, Inc. and Peter W. Nauert
(filed herewith)
*10 (l) Employment Agreement dated December 31,
1991 by and between Direct Financial
Services, Inc. and Peter W. Nauert
(filed as Exhibit 10(y) to the Company's
Annual Report on Form 10-K [No. 0-14977]
and incorporated herein by reference)
*10 (m) Amendment to Employment Agreement dated March 26,
1993 by and between Direct Financial Services, Inc.
and Peter W. Nauert (filed herewith)
10 (n) Credit Agreement dated as of December 22, 1993 by and
among the Company and American National Bank and Trust
Company of Chicago, as Agent and American National
Bank and Trust Company of Chicago, Firstar Bank
Milwaukee, N.A. and Bank One, Rockford, NA, as Banks
(filed herewith)
11 Statement of Computation of per share net income
or loss (filed herewith) __
21 List of subsidiaries (filed herewith) __
23 Consent of Ernst & Young (filed herewith) __
____________________
* Indicates management employment contracts or compensatory plans or
arrangements.
41
Pioneer Financial Services, Inc. and Subsidiaries
Financial Statements
Year ended December 31, 1993
Contents
Report of Independent Auditors . . . . . . . . . . . . . . . F-1
Financial Statements
Statements of Consolidated Operations . . . . . . . . . . . . F-2
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . F-3
Statements of Consolidated Stockholders Equity . . . . . . . F-5
Statements of Consolidated Cash Flows . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements . . . . . . . . . F-7
Report of Independent Auditors
Board of Directors
Pioneer Financial Services, Inc.
We have audited the accompanying consolidated balance sheets of Pioneer
Financial Services, Inc. and subsidiaries as of December 31, 1993 and 1992,
and the related statements of consolidated operations, stockholders'
equity, and cash flows for each of the three years in the period ended
December 31, 1993. Our audits also included the financial statement
schedules listed in the Index at Item 14(a). These financial statements
and schedules are the responsibility of the Company s management.
Our responsibility is to express an opinion on these financial statements
and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Pioneer
Financial Services, Inc. and subsidiaries at December 31, 1993 and 1992,
and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1993, in
conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedules, when considered in
relation to the consolidated financial statements taken as a whole, present
fairly in all material respects the information set forth therein.
ERNST & YOUNG
Chicago, Illinois
March 2, 1994
F-1
Pioneer Financial Services, Inc. and Subsidiaries
Statements of Consolidated Operations
(In Thousands, Except Per Share Amounts)
Year ended December 31
1993 1992 1991
Revenues
Premiums and policy charges (Note 5):
Accident and health $ 601,684 $ 559,894 $ 593,236
Life and annuity 43,878 35,219 33,321
645,562 595,113 626,557
Net investment income (Note 3) 40,242 43,555 47,974
Other income and realized investment
gains and losses (Note 3) 17,920 17,305 34,207
703,724 655,973 708,738
Benefits and expenses
Benefits:
Accident and health 397,963 368,046 376,820
Life and annuity 44,015 47,622 46,128
441,978 415,668 422,948
Insurance and general expenses 162,831 162,837 173,806
Interest expense (Note 7 and 10) 3,276 2,189 2,916
Amortization of deferred policy
acquisition costs (Notes 3 and 8) 76,875 100,715 95,748
684,960 681,409 695,418
Income (loss) before income taxes 18,764 (25,436) 13,320
Income taxes (benefit) (Note 4):
Current 10,858 2,878 7,228
Deferred (4,239) (11,355) (7,780)
6,619 (8,477) 4,448
Net income (loss) 12,145 (16,959) 8,872
Preferred stock dividends (Note 11) 2,021 2,039 2,039
Income (loss) applicable to common
stockholders $ 10,124 $ (18,998) $ 6,833
Net income (loss) per common share:
Primary $ 1.51 $ (2.85) $ 1.02
Fully diluted 1.26 (2.85) 1.02
Average common and common equivalent
shares outstanding:
Primary 6,724 6,660 6,699
Fully diluted 10,731 8,195 8,234
See notes to consolidated financial statements.
F-2
Pioneer Financial Services, Inc. and Subsidiaries
Consolidated Balance Sheets
(In Thousands, Except Share and Per Share Amounts)
December 31
1993 1992
Assets
Investments (Note 3):
Fixed maturities:
Held to maturity - principally
at amortized cost
(fair value: 1993 $325,540;
1992 - $434,195) $326,512 $434,726
Available for sale - at lower of
aggregate amortized
cost or fair value (fair value: 1993 -
$ 263,263; 1992 - $39,992) 257,717 38,751
Equity securities at fair value (cost:
1993 - $12,382; 1992 $14,925) 17,436 19,537
Mortgage loans at unpaid balance 3,201 583
Policy loans at unpaid balance 23,988 21,386
Short-term investments at cost,
which approximates fair value 45,352 53,366
Total investments 674,206 568,349
Cash 23,379 18,686
Premiums and other receivables, less allowance
for doubtful accounts (Notes 6 and 17) 20,734 22,056
Reinsurance receivables and amounts
on deposit with reinsurers (Note 2 and 5) 74,366 56,931
Accrued investment income 8,482 7,164
Deferred policy acquisition costs (Note 8) 260,432 269,674
Land, building, and equipment at cost, less
accumulated depreciation (Note 17) 22,248 18,210
Deferred federal income taxes (Note 4) 3,922 -
Other 20,502 17,619
$1,108,271 $978,689
F-3
December 31
1993 1992
Liabilities, redeemable preferred stock,
and stockholders equity
Policy liabilities (Note 2):
Future policy benefits:
Life $244,249 $232,940
Annuity 208,155 180,553
Accident and health 158,330 144,922
Unearned premiums 87,945 90,880
Policy and contract claims 189,389 148,141
Other 15,037 8,260
903,105 805,696
General liabilities:
General expenses and other liabilities 48,442 48,011
Deferred federal income taxes (Note 4) - 159
Short-term notes payable (Note 7) 5,575 12,931
Long-term notes payable (Note 7) 1,125 25,170
Convertible subordinated debentures (Note 10) 57,477 -
Total liabilities 1,015,724 891,967
Commitments and contingencies (Notes 4 to 9 and 14)
Redeemable Preferred Stock, no par value (Note 11):
$2.125 cumulative convertible exchangeable
preferred stock:
Authorized: 5,000,000 shares
Issued and outstanding: (1993 - 947,000
shares; 1992 - 959,600 shares) 23,675 23,900
Stockholders equity (Notes 4 and 9 to 13):
Common Stock, $1 par value:
Authorized: 20,000,000 shares
Issued, including shares in treasury
(1993 - 6,900,000; 1992 - 6,820,000) 6,900 6,820
Additional paid-in capital 28,814 28,399
Unrealized appreciation
of equity securities (Note 3) 3,285 3,044
Retained earnings 34,645 24,521
Less treasury stock at cost (1993 - 556,800
shares; 1992 - 10,600 shares) (4,772) (52)
Total stockholders equity 68,872 62,732
$1,108,271 $978,689
See notes to consolidated financial statements.
F-4
<TABLE>
Pioneer Financial Services, Inc. and Subsidiaries
Statements of Consolidated Stockholders' Equity
(In Thousands, Except Share and Per Share Amounts)
<CAPTION>
Unrealized
Appreciation Total
Additional(Depreciation) Stock-
Common Paid-In of Equity Retained Treasury holders
Stock Capital Securities Earnings Stock Equity
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1991 $ 6,626 $27,711 $(6,285) $36,686 $ 64,738
1991 transactions:
Net income - - - 8,872 - 8,872
Cash dividends - Preferred
Stock ($2.125 share) - - - (2,039) - (2,039)
Appreciation of equity
securities - - 3,899 - - 3,899
Balance at December 31, 1991 6,626 27,711 (2,386) 43,519 - 75,470
1992 transactions:
Net loss - - - (16,959) - (16,959)
Cash dividends - Preferred
Stock ($2.125 per share) - - - (2,039) - (2,039)
Conversion of National Benefit
Plans, Inc. shares
(163,566 shares) (Note 15) 164 553 - - - 717
Stock options exercised
(30,000 shares) 30 135 - - - 165
Appreciation of equity
securities - - 5,430 - - 5,430
Purchase of treasury stock
(10,600 shares) - - - - (52) (52)
Balance at December 31, 1992 6,820 28,399 3,044 24,521 (52) 62,732
1993 transactions:
Net income - - - 12,145 - 12,145
Cash dividends - Preferred
Stock ($2.125 per share) - - - (2,021) - (2,021)
Stock options exercised
(72,000 shares) 72 379 - - - 451
- 451
Appreciation of equity
securities - - 241 - - 241
Purchase of treasury stock
(546,200 shares) - - - - (4,720) (4,720)
Issuance of shares pursuant
to Agent Stock Purchase
Plan (8,057 shares) (Note 15) 8 36 - - - 44
Balance at December 31, 1993 $6,900 $28,814 $3,285 $34,645 $(4,772) $68,872
</TABLE>
See notes to consolidated financial statements.
F-5
Pioneer Financial Services, Inc. and Subsidiaries
Statements of Consolidated Cash Flows
(In Thousands)
Year ended December 31
1993 1992 1991
Operating activities
Net income (loss) $ 12,145 $ (16,959)$ 8,872
Adjustments to reconcile net income or loss
to net cash provided by operating activities:
Decrease (increase) in premiums receivable(3,912) 5,673 6,782
Increase in policy liabilities 31,132 12,734 51,280
Deferral of policy acquisition costs (67,633) (56,936) (102,824)
Amortization of deferred policy
acquisition costs (Note 8) 76,875 100,715 95,748
Deferred income tax benefit (4,239) (11,355) (2,780)
Change in other assets and liabilities (13,423) (10,597) (4,107)
Depreciation, amortization, and accretion 9,795 10,303 2,761
Realized losses (gains) (Note 3) 1,336 47 (7,897)
Net cash provided by operating activities 42,076 33,625 47,835
Investing activities
Net decrease (increase) in short-term
investments 28,792 (21,403) 57,883
Purchases of investments and loans made (382,339) (621,017) (400,871)
Sales of investments 192,697 451,422 294,333
Maturities of investments and receipts from
repayment of loans 118,620 151,042 32,734
Net purchases of property and equipment (3,956) (4,434) (3,470)
Sale of subsidiary, net of cash sold of $166 - - 8,386
(Note 18)
Purchase of subsidiaries including a cash
overdraft of $1,019 (Note 18) (9,685) - -
Net cash used by investing activities (55,871) (44,390) (11,005)
Financing activities
Net proceeds from issuance of convertible
subordinated debentures (Note 10) 54,055 - -
Increase in notes payable - 14,030 -
Repayment of notes payable (31,401) (3,900) (15,247)
Proceeds from sale of agent
receivables (Note 6) 25,376 20,347 36,950
Transfer of collections on previously sold
agent receivables (Note 6) (22,981) (22,437) (43,539)
Dividends paid (2,021) (2,039) (2,039)
Stock options exercised 451 165 -
Purchase of treasury stock (4,720) (52) -
Retirement of preferred stock (315) - -
Other 44 717 -
Net cash provided (used) by financing
activities 18,488 6,831 (23,875)
Increase (decrease) in cash 4,693 (3,934) 12,955
Cash at beginning of year 18,686 22,620 9,665
Cash at end of year $ 23,379 $ 18,686 $ 22,620
See notes to consolidated financial statements.
F-6
Pioneer Financial Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles (GAAP) and include
the accounts and operations, after intercompany eliminations, of Pioneer
Financial Services, Inc. (PFS) and its subsidiaries.
Investments
PFS's fixed maturity portfolio is segregated into two components: fixed
maturities held to maturity and fixed maturities available for sale. Fixed
maturities, where the intent is to hold to maturity, are carried at
amortized cost, adjusted for other-than-temporary impairments. In cases
where there are changes in credit risk, fixed maturities that are carried
at amortized cost may be liquidated prior to maturity. Fixed maturities
that are available for sale are carried, on an aggregate basis, at the
lower of amortized cost or fair value. Changes in aggregate unrealized
depreciation on fixed maturities available for sale are reported directly
in stockholders' equity, net of applicable deferred income taxes.
The amortized cost of fixed maturities classified as held to maturity or
available for sale is adjusted for amortization of premiums and accretion
of discounts to maturity, or, for mortgage-backed securities, over the
estimated life of the security. Such amortization is included in net
investment income. To the extent that the estimated lives of mortgage-
backed securities change as a result of changes in prepayment rates, the
accumulated amortization of premiums and the accretion of discounts is
adjusted retrospectively with a charge or credit to current operations.
As regards equity securities, changes in unrealized appreciation or
temporary depreciation, after deferred income tax effects, are reported
directly in stockholders equity. Realized gains and losses on the sale of
investments are determined on the specific identification basis and are
included in other income in the statements of operations.
Revenues
Revenues for interest-sensitive life insurance and annuities consist of
charges assessed against policy account values. For accident and health
and other life insurance, premiums are recognized as revenue when due.
Accident and health group association dues and fees, included in other
revenues, are recognized as revenue when received.
F-7
Pioneer Financial Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (consolidated)
1. Accounting Policies (continued)
Future Policy Benefits
The liabilities for future policy benefits related to the annuity and
interest-sensitive life insurance policies are calculated based on
accumulated fund values. As of December 31, 1993, interest credited during
the contract accumulation period ranged from 5.0% to 8.0%. Investment
spreads and mortality gains are recognized as profits when realized, based
on the difference between actual experience and amounts credited or charged
to policies.
The carrying amounts of PFS's liabilities for investment-type insurance
contracts were $200,894,000 and $173,930,000 at December 31, 1993 and 1992,
respectively. The fair values of these liabilities at December 31, 1993
and 1992 were $191,816,000 and $165,739,000, respectively.
The liabilities for future policy benefits on other life and accident and
health insurance policies have been computed by a net level method based on
estimated future investment yield, mortality or morbidity, and withdrawals,
including provisions for adverse deviation. Interest rate assumptions
range from 3.5% to 8.5% depending on the year of issue. The provisions for
future policy benefits and the deferral and amortization of policy
acquisition costs are intended to result in benefits and expenses being
associated with premiums proportionately over the policy periods.
Unearned Premiums
Unearned premiums are calculated using the monthly pro-rata basis.
Deferred Policy Acquisition Costs
Costs that vary with, and are primarily related to, the production of new
business are deferred. Such costs are primarily related to accident and
health business and principally include the excess of new business
commissions over renewal commissions and underwriting and sales expenses.
For annuities and interest-sensitive life insurance policies, deferred
costs are amortized generally in proportion to expected gross profits
arising from the difference between investment and mortality experience and
amounts credited or charged to policies. That amortization is adjusted
retrospectively when estimates of current or future gross profits
(including the impact of realized investment gains and losses) to be
realized from a group of products are revised. For other life and accident
and health policies, costs are amortized over the premium-paying period of
the policies, using the same mortality or morbidity, interest, and
withdrawal assumptions that are used in calculating the liabilities for
future policy benefits.
F-8
1. Accounting Policies (continued)
The unamortized cost of purchased insurance in force is included in
deferred policy acquisition costs ($23,078,000 and $20,200,000 at December
31, 1993 and 1992, respectively). Amortization of these amounts is in
relation to the present value of estimated gross profits over the estimated
remaining life of the related insurance in force.
Policy and Contract Claims
The liabilities for policy and contract claims, principally accident and
health, are determined using case-basis evaluations and statistical
analyses based on past experience and represent estimates of the ultimate
net cost of incurred claims and the related claim adjustment expenses.
Although considerable variability is inherent in such estimates, management
believes that these liabilities are adequate. The estimates are
continually reviewed and adjusted as necessary; such adjustments are
included in current operations.
Reinsurance
Reinsurance premiums, commissions, expense reimbursements, and receivables
related to reinsured business are accounted for on bases consistent with
those used in accounting for the original policies issued and the terms of
the reinsurance contracts. Premiums reinsured to other companies have been
reported as reductions of premium revenues. Amounts recoverable for
reinsurance related to future policy benefits, unearned premium reserves,
and claim liabilities have been reported as reinsurance receivables;
expense allowances received in connection with reinsurance have been
accounted for as a reduction of the related deferred policy acquisition
costs and are deferred and amortized accordingly.
Acquisition costs relating to the production of new business result in a
reduction of statutory-basis net income. PFS had entered into certain
financial reinsurance agreements that have the effect of deferring this
statutory-basis reduction and amortizing costs over future periods. The
remaining effect of such reinsurance has been eliminated from the
accompanying consolidated financial statements.
F-9
1. Accounting Policies (continued)
Federal Income Taxes
Federal income tax provisions are based on income or loss reported for
financial statement purposes and tax laws and rates in effect for the years
presented. For 1992 and 1991, deferred federal income taxes were provided
for the differences between the recognition of income and loss determined
for financial reporting purposes and income tax purposes. Effective
January 1, 1993, deferred federal income taxes have been provided using the
liability method an accordance with Financial Accounting Standards Board
(FASB) Statement No. 109 "Accounting for Income Taxes" (See Note 2). Under
this method deferred tax assets and liabilities are determined based on the
differences between their financial reporting and their tax bases and are
measured using enacted tax rates.
Depreciation
Building and equipment are recorded at cost and are depreciated using
principally the straight-line method.
Net Income or Loss Per Common Share
Primary net income or loss per share of Common Stock is determined by
dividing net income or loss, less dividends on Preferred Stock, by the
weighted-average number of Common Stock and Common Stock equivalents
(dilutive stock options) outstanding. Where the effect of Common Stock
equivalents on net income or loss per share would be antidilutive, they are
excluded from the average shares outstanding. Fully diluted net income or
loss per share is computed as if the Preferred Stock and Convertible
Subordinated Debentures had been converted to Common Stock. Where the
effect of the assumed conversion on net income or loss per share would be
antidilutive, fully diluted net income or loss per share represents the
primary amount.
F-10
1. Accounting Policies (continued)
Cost in Excess of Net Assets of Companies Acquired
The cost in excess of net assets of companies acquired (goodwill)
($5,449,000 and $3,776,000 at December 31, 1993 and 1992, respectively) is
included in other assets and is being amortized principally on a straight-
line basis over periods from seven to forty years.
Treasury Stock
The board of directors has authorized PFS to buy back shares of its own
common and preferred stock on the open market from time to time. During
1993 and 1992, PFS repurchased 546,200 and 10,600 shares, respectively, of
their common stock. During 1993, PFS repurchased 12,600 shares of their
preferred stock. Treasury stock is accounted for using the cost method.
Cash Flow Information
Cash includes cash on hand and demand deposits.
Fair Values of Financial Instruments
The following methods and assumptions were used by PFS in estimating its
fair values for financial instruments:
Cash, short-term investments, short-term notes payable, and accrued
investment income: The carrying amounts reported in the balance sheets for
these instruments approximate their fair values.
Investment securities: Fair values for fixed maturity securities
(including redeemable preferred stocks) are based on quoted market prices,
where available. For fixed maturity securities not actively traded, fair
values are estimated using values obtained from
F-11
independent pricing services, or, in the case of private placements, are
estimated by discounting expected future cash flows using a current market
rate applicable to the yield,quality, and maturity of the investments. The
fair values for equity securities are based on quoted market prices and are
recognized in the balance sheets.
Mortgage loans and policy loans: The carrying amount of PFS's mortgage
loans approximates their fair values. The fair values for policy loans are
estimated using capitalization of earnings methods, using interest rates
currently being offered for similar loans to borrowers with similar credit
ratings.
Investment contracts: Fair values for PFS's liabilities under investment-
type insurance contracts are based on current cash surrender values.
Fair values for PFS's insurance policies other than investment contracts
are not required to be disclosed. However, the fair values of liabilities
under all insurance policies are taken into consideration in PFS's overall
management of interest rate risk, which minimizes exposure to changing
interest rates through the matching of investment maturities with amounts
due under insurance policies.
Long-term notes payable: The fair value of PFS's long-term notes payable
approximates the carrying value.
Convertible subordinated debentures: The fair value of PFS's convertible
subordinated debentures is based on quoted market prices.
New Accounting Standard
In 1993 the FASB issued Statement No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," which PFS must adopt
prospectively effective January 1, 1994. Under the new rules, fixed
maturities that PFS has both the positive intent and ability to hold to
maturity will be carried at amortized cost. Fixed maturities that PFS does
not have the positive intent and ability to hold to maturity and all
F-12
marketable equity securities will be classified as available-for-sale or
trading and carried at fair value. Unrealized holding gains and losses on
securities classified as available-for-sale will be included as a separate
component of stockholders' equity. Unrealized holding gains and losses on
securities classified as trading will be reported in earnings. PFS does
not anticipate categorizing any fixed maturities as trading.
In connection with the adoption of the Statement No. 115, PFS may
reclassify certain investments in fixed maturities between the available
for sale and held to maturity categories. Accordingly, as of January 1,
1994, although the carrying value of investments in fixed maturities is
expected to increase based on the December 31, 1993 fair values, the net
effect on stockholders' equity has not been determined. Previously
reported financial statements are not permitted to be restated for this
Statement.
Reclassifications
Certain amounts in the 1991 and 1992 financial statements have been
reclassified to conform to the 1993 presentation.
2. Changes in Accounting Principles
Federal Income Taxes
Effective January 1, 1993, PFS changed its method of accounting for income
taxes from the deferred method to the liability method required by FASB
Statement No. 109, "Accounting for Income Taxes". As permitted under the
new rules, prior years' financial statements have not been restated.
The cumulative effect of adopting Statement No. 109 as of January 1, 1993
was not significant and has not been separately disclosed (See Note 4 for
further income tax disclosures).
F-13
Reinsurance
Effective January 1, 1993, PFS changed its method of accounting for
reinsurance contracts in accordance with FASB Statement No. 113,
"Accounting and Reporting for Reinsurance of Short-Duration and Long-
Duration Contracts". Under Statement No. 113, all assets and liabilities
related to reinsured insurance contracts are reported on a gross basis
rather than the previous practice of reporting such assets and liabilities
net of reinsurance.
The effect of adopting Statement No. 113 was to increase both assets and
liabilities by $19,453,000 and $16,391,000 at December 31, 1993 and 1992,
respectively. The amounts recoverable from reinsurers are now classified
as reinsurance receivables on the balance sheets. As permitted under
Statement No. 113, the accompanying December 31, 1992 balance sheet has
been reclassified to the gross basis. The adoption of Statement No. 113
had no effect on net income.
3. Investments
Realized investment gains (losses), including provisions for losses on
investments held, and unrealized appreciation (depreciation) on equity
securities, fixed maturities, and other investments are summarized as
follows:
F-14
Fixed Equity
Maturities Securities Other Total
(In Thousands)
1993
Realized $ (1,638) $ 293 $ 9 $(1,336)
Unrealized 3,864 442 - 4,306
$ 2,226 $ 735 $ 9 2,970
1992
Realized $ (91) $ 44 $ - $ (47)
Unrealized (11,144) 6,998 - (4,146)
$(11,235) $ 7,042 $ - $(4,193)
1991
Realized $ 7,280 $ (244) $ 861 $ 7,897
Unrealized 15,379 3,899 - 19,278
$ 22,659 $ 3,655 $ 861 $ 27,175
For annuities and interest-sensitive life insurance policies, GAAP requires
that deferred policy acquisition costs be amortized in proportion to the
estimated profits, including realized investment gains, expected to be
realized over the life of the policies. In 1991, PFS sold investments
related to this life and annuity business and realized a substantial amount
of gains. As required by GAAP, realizing these higher-than-expected gains
caused additional deferred policy acquisition cost amortization totaling
$3,800,000 in 1991.
At December 31, 1993 and 1992, the allowance for losses on investments
held amounted to $4,200,000 and $1,900,000, respectively.
F-15
At December 31, 1993, gross unrealized appreciation pertaining to equity
securities was $5,067,000 and gross unrealized depreciation was $13,000.
Deferred taxes of $1,769,000 and $1,568,000 have been provided on the net
unrealized appreciation at December 31, 1993 and 1992, respectively.
A comparison of amortized cost to fair value of fixed maturity investments
by category is as follows:
Gross Gross
Amortized UnrealizedUnrealized Fair
Cost Gains Losses Value
(In Thousands)
At December 31, 1993:
Held to Maturity
U.S. Treasury $ 9,124 $ 100 $ (61) $ 9,163
States and political
subdivisions 5,200 - - 5,200
Corporate securities 119,276 2,653 (312) 121,617
Mortgage-backed securities 192,912 1,908 (5,260) 189,560
$326,512 $4,661 $(5,633) $325,540
Available for Sale
U.S. Treasury $ 26,894 $ 570 $ (26) $ 27,438
States and political
subdivisions 21,571 121 - 21,692
Foreign governments 4,056 2 (119) 3,939
Corporate securities 73,981 744 (465) 74,260
Mortgage-backed securities 131,215 5,029 (310) 135,934
$257,717 $6,466 $ (920) $263,263
F-16
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In Thousands)
At December 31, 1992:
Held to Maturity
U.S. Treasury $ 15,363 $ 406 $ (71) $ 15,698
States and political
subdivisions 199 12 - 211
Corporate securities 98,836 1,344 (1,366) 98,814
Mortgage-backed securities 320,328 7,140 (7,996) 319,472
$434,726 $8,902 $(9,433) $434,195
Available for Sale
U.S. Treasury $ 1,425 $ 109 $ - $ 1,534
Corporate securities 6,343 181 (62) 6,462
Mortgage-backed securities 30,983 1,263 (250) 31,996
$ 38,751 $1,553 $(312) $ 39,992
The amortized cost and fair value of fixed maturities at December 31, 1993,
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 prepayment penalties.
Amortized Fair
Cost Value
Held to Maturity: (In Thousands)
Due in 1994 $ 657 $ 673
Due 1995-1998 16,707 17,254
Due 1999-2003 67,455 68,611
Due after 2003 48,781 49,442
Mortgage-backed securities 192,912 189,560
$326,512 $325,540
Available for Sale:
Due in 1994 $ 2,308 $ 2,378
Due 1995-1998 36,109 36,544
Due 1999-2003 61,750 62,036
Due after 2003 26,335 26,371
Mortgage-backed securities 131,215 135,934
$257,717 $263,263
F-17
The fair value of PFS's investment in policy loans was estimated to be
$21,011,000 and $18,037,000 at December 31, 1993 and 1992, respectively.
Proceeds from sales of investments (principally fixed maturities) during
1993, 1992 and 1991 were $192,697,000, $451,422,000 and $294,333,000,
respectively. Gross gains of $10,834,000, $8,073,000 and $7,808,000 and
gross losses of $12,472,000, $8,164,000 and $528,000 were realized on fixed
maturity sales in 1993, 1992 and 1991, respectively.
Major categories of net investment income are summarized as follows:
1993 1992 1991
(In Thousands)
Fixed maturities $34,529 $39,384 $38,687
Short-term investments 2,691 2,083 6,311
Other 4,069 3,733 4,079
Total investment income 41,289 45,200 49,077
Investment expenses (1,047) (1,645) (1,103)
Net investment income $40,242 $43,555 $47,974
At December 31, 1993, securities with a carrying value of $92,624,000 were
on deposit with various government authorities to meet regulatory
requirements.
At December 31, 1993, the carrying value of investments in any one entity
and/or in their affiliates which exceeded 10% of PFS s consolidated
stockholders equity were as follows:
Fixed Maturities
Ford Capital $18,684,000
GMAC 17,472,000
State of Washington 10,023,000
Associates Corporation 7,242,000
At December 31, 1993, PFS held unrated or less-than-investment-grade
securities of $803,000, net of reserves for losses, with an aggregate fair
value of $824,000. Those holdings amounted to less than 1% of PFS s total
investments at December 31, 1993.
F-18
At December 31, 1993, fixed maturities with a carrying value of $18,129,000
had been non-income producing for the preceding 12-month period.
4. Federal Income Taxes
As discussed in Note 2, PFS adopted FASB Statement No. 109 as of
January 1, 1993. The cumulative effect of the change in accounting for
income taxes was not significant. Deferred income taxes reflect the net
tax effects of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used for
income tax purposes. Significant components of PFS's deferred tax
liabilities and assets as of December 31, 1993 are as follows (in
thousands):
Deferred tax liabilities
Deferred policy acquisition costs $86,545
Net unrealized appreciaton on marketable
equity securities 1,769
Other 1,367
Total deferred tax liabilities 89,681
Deferred tax assets
Policy liabilities 77,493
Financial reinsurance 11,150
Other 8,833
Total deferred tax assets 97,476
Valuation allowance for deferred tax assets (3,873)
Deferred tax assets net of valuation allowance
allowance 93,603
Net deferred tax asset $ 3,922
The nature of PFS's deferred tax assets and liabilities are such that the
reversal pattern for these temporary differences should generally result in
realization of PFS's deferred tax assets. PFS establishes a valuation
allowance for any portion of the deferred tax asset that management
believes may not be realized. In 1993, the valuation allowance was
increased by $1,221,000 principally due to the acquisition of Continental
Life & Accident Company (See Note 18).
F-19
The deferred tax benefit for 1992 and 1991 includes the effects of the
following items:
1992 1991
(Dollars in thousands)
Deferred policy acquisition costs $(16,232) $ (440)
Policy liabilities 2,966 (5,967)
Decrease in operating loss carryforward 143 2,050
General expenses 1,537 522
Financial statement capital gains
greater than tax capital gains 148 743
Other 83 312
Deferred federal income tax benefit $(11,355) $(2,780)
PFS s effective federal income tax rate varied from the statutory federal
income tax rate as follows:
Deferred Method Liability Method
1993 1992 1991
Amount % Amount % Amount %
(Dollars in Thousands)
Statutory federal income
tax rate applied to
income or loss
before income taxes $6,567 35.0% $(8,648) 34.0% $ 4,529 34.0%
Nondeductible goodwill
amortization 319 1.7 192 (.8) 212 1.6
Realized gain on sale of
subsidiary in excess of
tax-basis gain (Note 18) - - - - (247) (1.9)
Tax exempt interest (99) (.5) - - - -
Other (168) (.9) (21) .1 (46) (.3)
Income taxes (benefit) and
effective rate $ 6,619 35.3% $(8,477) 33.3% $ 4,448 33.4%
Taxes paid amounted to $5,735,000, $8,828,000, and $2,566,000 for 1993,
1992, and 1991, respectively.
F-20
Under pre-1984 life insurance company income tax laws, a portion of a life
insurance company s gain from operations was not subjected to current
income taxation but was accumulated, for tax purposes, in a memorandum
account designated as the policyholders surplus account. The balance in
this account at December 31, 1993 for PFS s life insurance subsidiaries was
$10,040,000. Should the policyholders surplus accounts of PFS s life
insurance subsidiaries exceed their respective maximums, or should
distributions in excess of their tax-basis shareholders surplus account
be made by the life insurance subsidiaries, such excess or distribution
would be subject to federal income taxes at rates then in effect. Deferred
taxes of $3,500,000 have not been provided on amounts included in the
policyholders surplus accounts, since PFS contemplates no such taxable
events in the foreseeable future.
As of December 31, 1993, PFS s life insurance subsidiaries had combined
tax-basis shareholders surplus accounts of $36,100,000. Distributions up
to that amount would result in no income tax liability.
5. Reinsurance
PFS s insurance subsidiaries reinsure risks with other companies to permit
the recovery of a portion of the direct losses. These reinsured risks are
treated as though, to the extent of the reinsurance, they are risks for
which the subsidiaries are not liable. PFS remains liable to the extent
that the reinsuring companies do not meet their obligations under these
reinsurance treaties.
PFS's premiums were reduced for reinsurance premiums by $40,592,000,
$30,469,000, and $33,789,000 in 1993, 1992, and 1991, respectively. Under
various reinsurance arrangements, PFS's premiums were increased by
$19,338,000, $15,403,000, and $13,933,000 in 1993, 1992, and 1991,
respectively. PFS's policy benefits have been reduced for reinsurance
recoveries of $21,871,000 in 1993, $22,171,000 in 1992, and $28,714,000 in
1991. At December 31, 1993, approximately 67% of PFS's reinsurance
receivables and amounts on deposit with reinsurers were due from Employers
Reinsurance Corporation.
6. Sale of Agent Receivables
In 1993, 1992, and 1991 a subsidiary of PFS sold agent receivables to an
unaffiliated company for proceeds of $25,376,000, $20,347,000, and
$36,950,000, respectively.
F-21
The outstanding balances of such agent receivables sold that remained
uncollected at December 31, 1993 and 1992 were $9,815,000 and $6,339,000,
respectively. PFS remains subject to a maximum credit exposure under this
agreement amounting to 10% of agent receivables at December 31, 1993.
7. Notes Payable
In 1992, PFS settled certain disputes with several former agents and in
addition to certain cash payments issued promissory notes representing
future commissions. A final payment of $1,490,000 is payable for these
notes in 1994.
At December 31, 1993, PFS had $3,785,000 of short-term debt liability for
which a PFS agency subsidiary s future renewal commissions were pledged as
collateral.
At December 31, 1993, a PFS subsidiary had an unsecured loan of $1,425,000.
The portion of the loan due in 1994 of $300,000 is included in short-term
notes payable. The remainder of the note is included in long-term notes
payable. The note bears interest currently at 6% per annum and is payable
quarterly with the final payment due July 1998.
Interest paid amounted to $1,023,000, $2,274,000, and $2,416,000 for 1993,
1992, and 1991, respectively.
8. Accident and Health Business
In making the determination that policy liabilities, future premiums, and
anticipated investment income will be adequate to provide for future claims
and expenses (including the amortization of deferred policy acquisition
costs), PFS has made assumptions with regard to each of these items.
Although there is significant variability inherent in these estimates,
management believes that these assumptions are reasonable.
Pursuant to an actuarial study performed in the fourth quarter of 1992, PFS
revised certain of these assumptions to reflect present and anticipated
future experience. This study resulted in increased amortization of
deferred policy acquisition costs of approximately $30,000,000 in the
fourth quarter of 1992.
F-22
9. Statutory-Basis Financial Information
The following tables compare combined net income and stockholders' equity
for PFS's insurance subsidiaries determined on the basis as prescribed or
permitted by regulatory authorities (statutory basis) with consolidated net
income (loss) and stockholders' equity reported in accordance with GAAP.
Statutory basis accounting emphasizes solvency rather than matching
revenues and expenses during an accounting period. The significant
differences between statutory basis accounting and GAAP are as follows:
Deferred Policy Acquisition Costs. Costs of acquiring new policies
are expensed when incurred (statutory basis) rather than
capitalized and amortized over the term of the related polices
(GAAP).
Policy Liabilities. Certain policy liabilities are calculated
based on statutorily required methods and assumptions (statutory
basis) rather than on estimated expected experience or, for annuity
and interest-sensitive life insurance, actual account balances
(GAAP).
Financial Reinsurance. The effects of certain financial
reinsurance transactions are included in the statutory basis
financial statements but are eliminated from the GAAP financial
statements.
Deferred Federal Income Taxes. Deferred federal income taxes are
not provided on a statutory basis for differences between financial
statement and tax return amounts.
Surplus Notes. Surplus notes are reported in capital and surplus
(statutory basis) rather than as liabilities (GAAP).
Non-insurance Companies' Equity. Contributions by PFS to the
capital and surplus of its insurance subsidiaries increases the
stockholders' equity of those insurance subsidiaries on a statutory
basis but does not effect the consolidated stockholders' equity on
a GAAP basis.
F-23
1993 1992 1991
(in thousands)
Combined net income on a statutory basis $10,155 $ 3,629 $15,150
Adjustments for:
Deferred policy acquisition costs (12,842) (43,779) 7,076
Policy liabilities (18,494) (19,957) (28,530)
Financial reinsurance 34,017 33,118 3,862
Deferred federal income taxes 4,239 11,355 2,780
Non-insurance companies, eliminations,
and other adjustments (4,930) (1,325) 8,534
Consolidated net income (loss) in accordance
with GAAP $12,145 $(16,959) $ 8,872
December 31
1993 1992
(in thousands)
Combined stockholders' equity on a statutory
basis $ 106,567 $ 82,432
Adjustments for:
Deferred policy acquisition costs 260,432 269,674
Policy liabilities (206,966) (184,862)
Financial reinsurance (30,292) (64,309)
Deferred federal income taxes 3,922 (159)
Non-admitted assets 11,743 19,160
Surplus - (29,128)
Non-insurance companies' equity, eliminations,
and other adjustments (76,534) (30,076)
Consolidated stockholders' equity in
accordance with GAAP $ 68,872 $ 62,732
Dividends from PFS's insurance subsidiaries are limited to the greater of
the prior-year statutory-basis net gain from operations or 10% of
statutory-basis surplus. The total amount of dividends that could be paid
without regulatory approval was $10,117,000 at December 31, 1993. At
December 31, 1993, PFS's retained earnings is $20,861,000 in excess of the
combined statutory-basis unassigned surplus of the insurance subsidiaries.
F-24
PFS is required to maintain adequate amounts of statutory-basis capital and
surplus to satisfy regulatory requirements and provide capacity for
production of new business. Acquisition costs relating to the production
of new business result in a reduction of statutory-basis net income and
capital and surplus.
10. Convertible Subordinated Debentures
In July 1993 PFS issued $57,477,000 of 8% convertible subordinated
debentures due in 2000. Interest on the debentures is payable in January
and July of each year. Net proceeds from the offering totaled
approximately $54,000,000 and were used, in part, to repay the long-term
notes payable. The debentures are convertible into PFS's Common Stock at
any time prior to maturity, unless previously redeemed, at a conversion
price of $11.75 per share. The fair value of the debentures was
$70,122,000 at December 31, 1993.
The debentures are redeemable by PFS under certain conditions after July
1996.
At December 31, 1993, 4,891,660 shares of PFS's Common Stock were reserved
for conversion of the outstanding convertible subordinated debentures.
11. Redeemable Preferred Stock
In 1989, PFS issued 1,000,000 shares of $2.125 Cumulative Convertible
Exchangeable Preferred Stock. The proceeds of the public offering were
$23,337,000 after reduction for expenses of $1,663,000, which expenses were
charged to additional paid-in capital. The Preferred Stock is carried on
PFS s balance sheet at the redemption and liquidation value of $25 per
share.
Each share of Preferred Stock is convertible by the holders at any time
into 1.6 shares of PFS Common Stock. Annual cumulative dividends of $2.125
per share are payable quarterly. The preferred stock is nonvoting unless
dividends are in arrears. At December 31, 1993, 1,515,200 shares of PFS's
Common Stock were reserved for conversion of the outstanding preferred
stock.
The Preferred Stock is redeemable at the option of the holders upon certain
acquisitions or other business combinations involving PFS Common Stock.
The Preferred Stock is redeemable by PFS at redemption prices of $26.275
per share in 1993, declining to $25 in 1999. The Preferred Stock is
exchangeable in whole at PFS s option on any dividend payment date for
PFS s 8 1/2% Convertible Subordinated Debentures due in 2014 at the rate of
$25 principal amount of Subordinated Debentures for each share of Preferred
Stock.
F-25
12. Shareholder Rights Agreement
In 1990, PFS distributed one preferred share purchase right for each
outstanding share of Common Stock. The rights are intended to cause
substantial dilution to a person or group that attempts to acquire PFS on
terms not approved by PFS s directors. The rights expire in 2000 or PFS
may redeem the rights prior to exercise for $.01 per right.
The rights are not exercisable unless a person or group acquires, or offers
to acquire, 20% or more of PFS s Common Stock under certain circumstances.
The rights, when exercisable, entitle the holder to purchase one-tenth of a
share of a new series of PFS Series A Junior Preferred Stock at a purchase
price of $45. Such preferred shares, of which 2,000,000 are authorized,
would be voting and would be entitled to distributions that are ten times
the distributions to common shareholders. Subsequent to exercise of the
rights, in the event of certain business combinations involving PFS, a
holder of rights would have the right to receive PFS Common Stock with a
value of two times the exercise price of the rights.
13. Stock Options and Rights
PFS has a nonqualified stock option plan principally for directors and key
employees of PFS and its subsidiaries. PFS s Board of Directors grants the
options and specifies the conditions of the options. Options expire ten
years after grant. Information with respect to these options is as
follows:
1993 1992
Number Number
of Exercise of Exercise
Shares Price Shares Price
Options outstanding at
beginning of year 594,250 $5.50-$12.00 799,750 $5.50- $12.00
Granted 225,000 5.50 35,000 7.25
Exercised 72,000 5.50- 12.00 30,000 5.50
Canceled/repurchased 14,000 5.50 210,000 5.50-12.00
Options outstanding at end
of year 733,250 $5.50-$12.00 594,250 $5.50-$12.00
Options exercisable at end
of year 573,250 471,750
Unoptioned shares available
for granting of options 22,900 233,900
F-26
14. Commitments and Contingencies
PFS and its subsidiaries are named as defendants in various legal actions,
some claiming significant damages, arising primarily from claims under
insurance policies, disputes with agents, and other matters. PFS s
management and its legal counsel are of the opinion that the disposition of
these actions will not have a material adverse effect on PFS s financial
position.
PFS leases various office facilities and computer equipment under
noncancelable operating leases on an annual basis. Rent expense was
$4,516,000, $3,700,000, and $3,653,000 in 1993, 1992, and 1991,
respectively. Minimum future rental commitments in connection with
noncancelable operating leases are as follows:
1994 $2,075,000
1995 1,637,000
1996 969,000
1997 619,000
1998 130,000
PFS has entered into employment agreements with certain officers.
15. Benefit Plan
PFS has a defined-contribution employee benefit plan that covers
substantially all home office employees who have attained age 21 and
completed one year of service. Plan participants may contribute from 1% to
10% of their total compensation subject to an annual maximum. The plan
also provides for PFS to match participants contributions up to $1,000 per
year and 50% of participants contributions above $1,000 up to the annual
Internal Revenue Service limit ($8,994 in 1993). PFS makes employer
contributions to the plan in cash or in PFS Common Stock at the discretion
of PFS s Board of Directors. At December 31, 1993 the Plan's assets
included PFS Common Stock of $3,478,000, at fair value. PFS's contibutions
charged to operations were $1,073,000 in 1993, $852,000 in 1992, and
$831,000 in 1991.
A PFS subsidiary, which owns insurance and agency companies, had a stock
purchase plan that allowed certain eligible agents to purchase common stock
in the subsidiary at the subsidiary s per share book value. The plan was
terminated in November 1992. In accordance with the plan's provisions,
agents became fully vested. Eligible agents were given the option to
participate in a new agent stock purchase plan. This new plan allows
agents to purchase PFS Common Stock. Stock purchases are limited to a
specific
F-27
percentage of the agent's commission as determined by PFS but in no event
to be less than 3%. Under the plan the agents are also credited with
additional shares of PFS Common Stock as determined by PFS. In 1993 and
1992, 8,057 shares and 163,566 shares, respectively, of PFS Common Stock
were issued under this plan. The subsidiary received proceeds of $499,000
in 1991 relating to the minority stock sales and paid $353,000 in 1992, and
$1,862,000 in 1991 relating to repurchases of these shares from the agents
at book value.
In addition, in 1991, in connection with stock option agreements, the
subsidiary issued shares to agents. Proceeds on these sales amounted to
$559,000 and a charge to operations of $47,000 was recognized. The
subsidiary subsequently repurchased the shares in 1991 at book value in the
amount of $606,000.
16. Related Party Transactions
PFS paid, on a per use basis, a transportation company owned by an officer,
a total of $81,000, $127,000, and $130,000 in 1993, 1992, and 1991,
respectively, for transportation of employees and agents.
In 1993, certain of PFS's marketing subsidiaries paid rent of approximately
$107,000 and parking fees of approximately $12,000 to a partnership in
which an officer owns a 50% interest. PFS believes that the rates charged
to PFS's subsidiaries were the same as those charged to unaffiliated third
parties.
In 1991, PFS paid commissions of $2,135,000 to an agent training company.
That company s expenses included distributions to the agents, the cost of
marketing leads purchased from PFS of $774,000 in 1991, and training and
other expenses. Certain officers had interests in the agent training
company.
In 1991 PFS paid a company in which certain officers had interests,
$2,450,000 for telecommunication, printing, and mailing services.
17. Allowances and Accumulated Depreciation
Allowances for doubtful accounts related to other receivables amounted to
$1,271,000
at December 31, 1993 and $1,504,000 at December 31, 1992.
Accumulated depreciation related to building and equipment amounted to
$16,891,000 at December 31, 1993 and $11,646,000 at December 31, 1992.
F-28
18. Purchase and Sale of Subsidiaries
In August 1993, PFS purchased 80% of the outstanding common stock of
Continental Life & Accident Company and 100% of the outstanding common
stock of Continental Marketing Corporation for $7,100,000 in cash. The
total assets acquired at the purchase date were approximately $80,000,000.
Also in August 1993, PFS purchased Healthcare Review Corporation, a managed
care company for $1,566,000 in cash. The total assets acquired at the
purchase date were approximately $2,000,000.
Revenues included in PFS's 1993 consolidated statements of operations
relating to these acquired entities were $25,671,000. The operations of
the entities did not have a material effect on PFS's 1993 net income.
In September 1991, PFS sold a subsidiary for proceeds of $8,552,000 and
recorded a gain of $708,000. Revenues included in PFS's consolidated
statements of operations relating to the subsidiary's operations were
$4,689,000 in 1991. The subsidiary represented a portion of the life and
annuity segment.
19. Segment Information
PFS has three business segments: insurance, managed care and marketing.
The segments are based on PFS's strategic business units.
Allocations of investment income and certain general expenses are based on
various assumptions and estimates, and reported operating results by
segment would change if different methods were applied. Assets are not
individually identifiable by segment and have been allocated based on the
amount of policy liabilities by segment and by other formulas.
Depreciation expense and capital expenditures are not considered material.
Realized investment gains and losses are allocated to the appropriate
segment. General corporate expenses are not allocated to the individual
segments. Revenues, income or loss before income taxes, and identifiable
assets by business segment are as follows:
F-29
Revenues
1993 1992 1991
(in thousands)
Insurance:
Accident and health $ 611,822 $ 572,280 $ 612,215
Life and annuity 72,376 68,411 80,059
Marketing:
Unaffiliated 15,020 13,361 14,630
Inter-segment 30,439 26,500 35,054
Managed care:
Unaffiliated 4,506 1,921 1,834
Inter-segment 4,358 2,041 409
738,521 684,514 744,201
Eliminations 34,797 28,541 35,463
Total $ 703,724 $ 655,973 $ 708,738
Income (loss) before income taxes
Insurance:
Accident and health $ 8,578 $ (26,613) $ 1,886
Life and annuity 7,623 340 5,838
Marketing 10,205 3,345 8,556
Managed care (1,211) 335 62
Corporate expenses (6,431) (2,843) (3,022)
Total $ 18,764 $ (25,436) $ 13,320
Identifiable assets at year-end
Insurance:
Accident and health $ 571,169 $ 489,053 $ 496,493
Life and annuity 514,154 478,529 460,752
Marketing 18,244 9,590 10,585
Managed care 4,704 1,517 1,360
Total $1,108,271 $ 978,689 $ 969,190
20. Credit Arrangements
PFS has a line of credit arrangement for short-term borrowings with three
banks amounting to $20,000,000 through April 1996, all of which all was
unused at December 31, 1993. The line of credit arrangement can be
terminated, in accordance with the agreement, at PFS's option.
F-30
21. Quarterly Financial Data (Unaudited)
A summary of unaudited quarterly results of operations for 1993 and 1992 is
as follows:
1993
1st 2nd 3rd 4th
Premiums and
policy
charges $155,343 $154,189 $154,132 $181,898
Net investment
income and
other 14,369 13,928 15,802 14,063
Net income 2,295 2,627 3,128 4,095
Net income
per share:
Primary .26 .31 .40 .54
Fully diluted .26 .31 .31 .37
F-31
1992
1st 2nd 3rd 4th
Premiums and
policy
charges $144,054 $149,969 $143,973 $157,117
Net investment
income and
other 17,131 17,286 14,876 11,567
Net income
(loss) 1,495 357 710 (19,521)
Net income
(loss) per
share:
Primary .15 (.02) .03 (2.98)
Fully diluted .15 (.02) .03 (2.98)
See Note 8 for a discussion of a 1992 fourth quarter adjustment.
F-32
SCHEDULE I
PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS
IN RELATED PARTIES
December 31, 1993
Amount
Shown in the
Consolidated
Amortized Fair Balance
Type of Investment Cost Value Sheet
(in thousands)
Fixed maturities to be held
to maturity:
U.S. Treasury $ 9,124 $ 9,163 $ 9,124
States and political
subdivisions 5,200 5,200 5,200
Corporate securities 119,276 121,617 119,276
Mortgage-backed securities 192,912 189,560 192,912
TOTAL FIXED MATURITIES
TO BE HELD TO MATURITY 326,512 $325,540 326,512
Fixed maturities available
for sale:
U.S. Treasury 26,894 $ 27,438 26,894
States and political
subdivisions 21,571 21,692 21,571
Foreign governments 4,056 3,939 4,056
Corporate securities 73,981 74,260 73,981
Mortgage-backed securities 131,215 135,934 131,215
TOTAL FIXED MATURITIES
AVAILABLE FOR SALE 257,717 $263,263 257,717
Equity securities:
Common stocks:
Banks, trusts, and
insurance companies 6,632 $ 11,536 11,536
Nonredeemable preferred
stocks 5,750 5,900 5,900
TOTAL EQUITY SECURITIES 12,382 $ 17,436 17,436
Mortgage loans on real estate 3,201 3,201
Policy loans 23,988 23,988
Short-term investments 45,352 45,352
TOTAL INVESTMENTS $669,152 $674,206
F-33
SCHEDULE II
PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES
AMOUNTS RECEIVABLE FROM RELATED PARTIES AND
UNDERWRITERS, PROMOTERS, AND EMPLOYEES
OTHER THAN RELATED PARTIES
Balance at Balance
Beginning of at End of
Year Additions Collected Year
(in thousands)
Year Ended December 31, 1993
Tim O'Keefe mortgage loan
from Pioneer Life Insurance Co.
due October, 1997 $ - $140 $ 2 $138
Year Ended December 31, 1992: None
Year Ended December 31, 1991:
William McRee note payable
to Design Benefit Plans, Inc.
(formerly National Group
Marketing)--
5% due on demand $125 $ - $125 $ -
F-34
SCHEDULE III
PIONEER FINANCIAL SERVICES, INC. (Parent Company)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
(In thousands, except share and per share amounts)
December 31
1993 1992
ASSETS
Investments in subsidiaries* $107,620 $ 83,606
Cash 1,711 543
Note receivable and accrued interest
from Pioneer Life Insurance Company
of Illinois (PLIC)* - 29,128
Notes receivable from United Group Holdings,
Inc. (UGH)* 37,495 -
Other notes receivable from subsidiaries* 403 3,994
Due from affiliates* 1,014 1,190
Prepaid expenses 573 454
Deferred debenture offering expenses 3,799 -
Other assets 363 181
$152,978 $119,096
LIABILITIES, REDEEMABLE PREFERRED STOCK AND, STOCKHOLDERS' EQUITY
Liabilities:
General expenses and other liabilities $ 2,444 $ 264
Preferred stock dividends payable 510 510
Short-term notes payable - 7,850
Long-term notes payable - 23,750
Convertible subordinated debentures 57,477 -
60,431 32,374
Redeemable Preferred Stock, no par value:
$2.125 cumulative convertible exchangeable
preferred stock
Authorized: 5,000,000 shares
Issued and outstanding: (1993 - 947,000 shares;23,675 23,990
1992 - 959,600 shares)
Stockholders' equity:
Common Stock, $1 par value:
Authorized: 20,000,000 shares
Issued, including shares in treasury
(1993 - 6,900,000 shares; 1992 -
6,820,000 shares) 6,900 6,820
Additional paid-in capital 28,814 28,399
Unrealized appreciation
of equity securities 3,285 3,044
Retained earnings 34,645 24,521
Less treasury stock at cost (1993 -
556,800 shares;
1992 - 10,600 shares) (4,772) (52)
Total stockholders' equity 68,872 62,732
$152,978 $119,096
See note to condensed financial statements.
*Eliminated in consolidation.
F-35
SCHEDULE III
PIONEER FINANCIAL SERVICES, INC. (Parent Company)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT--Continued
CONDENSED STATEMENTS OF OPERATIONS
(In thousands)
Year Ended December 31
1993 1992 1991
Revenues:
Interest income from subsidiaries* $ 1,090 $ 1,835 $ 1,209
Other investment income 62 15 243
Dividends from consolidated
subsidiaries* 10,345 10,482 15,672
11,497 12,332 17,124
Expenses:
Operating and administrative
expenses 4,702 2,154 1,681
Interest expense 3,204 2,206 2,893
7,906 4,360 4,574
Income before equity in
undistributed net income or
loss of subsidiaries 3,591 7,972 12,550
Equity in undistributed net
income (loss) of subsidiaries* 8,554 (24,931) (3,678)
Net income (loss) 12,145 (16,959) 8,872
Preferred stock dividends 2,021 2,039 2,039
Income (loss) applicable to
common stockholders $ 10,124 $(18,998) $ 6,833
See note to condensed financial statements.
*Eliminated in consolidation.
F-36
SCHEDULE III
PIONEER FINANCIAL SERVICES, INC. (Parent Company)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT--Continued
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31
1993 1992 1991
OPERATING ACTIVITIES
Net income (loss) $ 12,145 $(16,959) $ 8,872
Adjustments to reconcile net
income or loss to net cash provided
by operating activities:
Change in other assets and
liabilities 1,678 (929) 4,289
Equity in undistributed net
(income) loss of subsidiaries* (8,554) 24,931 3,678
NET CASH PROVIDED
BY OPERATING ACTIVITIES 5,269 7,043 16,839
INVESTING ACTIVITIES
Additional investment in
consolidated subsidiaries* (15,219) (13) (83)
FINANCING ACTIVITIES
Decrease (increase) in notes receivable
from PLIC 29,128 (11,597) (1,012)
Increase in notes receivable from UGH (37,495) - -
Net proceeds from issuance of convertible
subordinated debentures 54,055 - -
Increase in notes payable - 10,000 -
Repayment of notes payable (31,600) (3,900) (13,000)
Decrease (increase) in other notes receivable
from subsidiaries* 3,591 (447) (218)
Stock options exercised 451 165 -
Dividends paid (2,021) (2,039) (2,039)
Purchase of treasury stock (4,720) (52) -
Retirement of preferred stock (315) - -
Other 44 717 -
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES 11,118 (7,153) (16,269)
INCREASE (DECREASE) IN CASH 1,168 (123) 487
CASH AT BEGINNING OF YEAR 543 666 179
CASH AT END OF YEAR $ 1,711 $ 543 $ 666
See note to condensed financial statements.
*Eliminated in consolidation.
F-37
SCHEDULE III
PIONEER FINANCIAL SERVICES, INC. (Parent Company)
NOTE TO CONDENSED FINANCIAL STATEMENTS
The accompanying condensed financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
of Pioneer Financial Services, Inc.
At December 31, 1992, the notes receivable from Pioneer Life Insurance
Company of Illinois ("PLIC") represented $15,000,000 and $10,000,000 in
surplus debentures and $4,128,000 of accrued interest. The interest rate
on the $15,000,000 surplus debenture was 6.75% through June 30, 1992 and
was 7% thereafter. The interest rate on the $10,000,000 surplus
debenture was 7%. The payment of principal and interest to the parent
company from PLIC requires regulatory approval. The surplus
debentures were repaid in the third quarter of 1993.
At December 31, 1993, the notes receivable from United Group Holdings of
Delaware (UGH) represents the purchase of National Group Life Insurance
Company from the parent company. The note bears interest at the rate of
8% and matures on December 31, 1998.
F-38
SCHEDULE V
PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
(In thousands)
December 31
Deferred Future Policy
Policy Benefits and
Acquisition Policy and Unearned Other Policy
Segment Costs Contract Claims Premiums Liabilities
1993:
Insurance:
Accident and
health $203,861 $341,916 $ 87,945 $ 8,066
Life and annuity 56,571 458,207 - 6,971
Marketing - - - -
Managed care - - - -
$260,432 $800,123 $ 87,945 $ 15,037
1992:
Insurance:
Accident and
health $215,157 $288,966 $ 90,880 $ 2,832
Life and annuity 54,517 417,590 - 5,428
Marketing - - - -
Managed care - - - -
$269,674 $706,556 $ 90,880 $ 8,260
1991:
Insurance:
Accident and
health $257,695 $266,430 $ 99,748 $ 2,075
Life and annuity 55,758 404,189 - 4,129
Marketing - - - -
Managed care - - - -
$313,453 $670,619 $ 99,748 $ 6,204
F-39
SCHEDULE V (continued)
PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
(In thousands)
<TABLE>
<CAPTION>
Amortization
Net of
Premiums Investment Deferred
and Income and Policy Other
Policy Realized Gains Acquisition Other Operating
Segment Charges and Losses* Benefits Costs Income Expenses*
<S> <C> <C> <C> <C> <C> <C> <C>
1993:
Insurance:
Accident and Health
$601,684 $ 10,394 $397,963 $ 66,321 $ (263) $138,960
Life and Annuity 43,878 28,478 44,015 10,554 27 10,184
Marketing - 32 - - 14,988 4,815
Managed Care - 2 - - 4,504 5,717
Corporate Expenses - - - - - 6,431
$645,562 $ 38,906 $441,978 $ 76,875 $ 19,256 $166,107
1992:
Insurance:
Accident and
Health $559,894 $ 10,166 $368,046 $ 91,629 $ 2,220 $139,218
Life and Annuity 35,219 33,222 47,622 9,086 (30) 11,363
Marketing - 116 - - 13,245 10,016
Managed Care - 4 - - 1,917 1,586
Corporate Expenses - - - - - 2,843
$595,113 $ 43,508 $415,668 $100,715 $ 17,352 $165,026
1991:
Insurance:
Accident and
Health $593,236 $ 9,798 $376,820 $ 87,439 $ 9,181 $146,070
Life and Annuity 33,321 45,244 46,128 8,309 1,494 19,784
Marketing - 828 - - 13,802 6,074
Managed Care - 1 - - 1,833 1,772
Corporate Expenses - - - - - 3,022
$626,557 $ 55,871 $422,948 $ 95,748 $ 26,310 $176,722
*Allocations of net investment income and other operating expenses are based on a number of
assumptions and estimates and results would change if different methods were applied. Interest
expense has been included with other operating expenses. Realized investment gains and losses were
allocated to the appropriate segment.
</TABLE>
F-40
SCHEDULE VI
PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES
REINSURANCE
(In thousands)
Assumed Percentage
Ceded to from of Amount
Gross Other Other Net Assumed
Amount Companies Companies Amount to net
Year Ended December 31, 1993:
Life insurance in
force* $11,823,127$3,859,945 $ - $7,963,182 -
Premiums and Policy Charges:
Insurance:
Accident and health
$ 606,788$ 24,154 $ 19,050$ 601,684 3.2%
Life and annuity 60,028 16,438 288 43,878 .7
Marketing - - - - -
Managed care - - - - -
$ 666,816$ 40,592 $ 19,338$ 645,562 3.9%
Year Ended December 31, 1992:
Life insurance in
force* $10,338,557$3,929,621 $ - $6,408,936 -
Premiums and Policy Charges:
Insurance:
Accident and health
$ 558,847$ 14,328 $ 15,375$ 559,894 2.7%
Life and annuity 51,332 16,141 28 35,219 .1
Marketing - - - - -
Managed care - - - - -
$ 610,179$ 30,469 $ 15,403$ 595,113 2.8%
Year Ended December 31, 1991:
Life insurance in
force* $ 9,140,882$4,579,278 $ - $4,561,604 -
Premiums and Policy Charges:
Insurance:
Accident and health
$ 597,046$ 17,726 $ 13,916$ 593,236 2.3%
Life and annuity 49,367 16,063 17 33,321 .1
Marketing - - - - -
Managed care - - - - -
$ 646,413$ 33,789 $ 13,933$ 626,557 2.4%
*At end of year
F-38
SCHEDULE VIII
PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Deductions-
Doubtful
Accounts
Written
Balance at Additions- off During Balance
Beginning Charged to the Year at End
of Year Expense /Disposals of Year
Description
Year Ended December 31, 1993:
Allowance for doubtful accounts $1,504 $1,171 $1,404 $1,271
Accumulated depreciation on
building and equipment 11,646 5,515 270 16,891
Year Ended December 31, 1992:
Allowance for doubtful accounts 147 1,475 118 1,504
Accumulated depreciation on
building and equipment 9,122 3,245 721 11,646
Year Ended December 31, 1991:
Allowance for doubtful accounts 40 147 40 147
Accumulated depreciation on
building and equipment 6,488 2,844 210 9,122
F-39
SCHEDULE IX
PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES
SHORT-TERM BORROWINGS
(Dollars in thousands)
<TABLE>
Weighted
<CAPTION>
Weighted Average Average
Average Maximum Amount Interest
Interest Amount Outstanding Rate
Balance Rate at Outstanding During During
at End End of During the the
of Year Year the Year Year** Year***
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1993--
bank borrowings* $ 3,785 4.98% $ 4,218 $ 3,693 4.91%
Year Ended December 31, 1992--
bank borrowings* 3,661 5.58 3,715 2,941 5.17
Year Ended December 31, 1991--
bank borrowings* 2,471 5.51 13,843 10,144 9.08
</TABLE>
* Bank borrowing represents short term arrangements generally at prime
rates. These amounts exclude current portion of long-term notes
payable.
** The average amounts outstanding during the year were computed
based on the month-end principal balances.
*** The weighted average interest rates during the year were computed
by dividing the actual interest expense by average short-term debt
outstanding.
F-40
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
PIONEER FINANCIAL SERVICES, INC.
BY: /S/ Peter W. Nauert
Peter W. Nauert, Chairman/President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: March 30, 1993
/S/ Peter W. Nauert /S/ Michael A. Cavataio
Peter W. Nauert, Chairman, Michael A. Cavataio
Chief Executive Officer, and Director
Director
/S/ William B. Van Vleet /S/ Nolanda S. Hill
William B. Van Vleet, Executive Nolanda S. Hill
Vice President and Director Director
/S/ David I. Vickers /S/ Karl-Heinz Klaeser
David I. Vickers, Treasurer Karl-Heinz Klaeser
and Chief Financial Officer Director
/S/ Robert F. Nauert /S/ Richard R. Haldeman
Robert F. Nauert Richard R. Haldeman
Director Director
/S/ Michael K. Keefe
Michael K. Keefe
Director
Index to Exhibits
Exhibit Sequentially
Number Description of Document Numbered Page
3 (a) Certificate of Incorporation
of the Company (filed as Exhibit 3(a)
to the Company's Registration Statement
on Form S-1 [No. 33-7759] and incorporated
herein by reference)
3 (b) Amended Bylaws of the Company (filed as
Exhibit 3(b) to Amendment No. 1 to the
Company's Registration Statement
on Form S-1 [No. 33-30017] and incorporated
herein by reference)
4 (a) Certificate of Designations with respect
to the Company's $2.125 Cumulative
Convertible Exchangeable Preferred Stock
("Preferred Stock") (filed as Exhibit 4(a)
to Post-Effective Amendment No. 1 to the
Company's Registration Statement on Form S-1
[No. 33-30017] and incorporated herein by
reference)
4 (b) Proposed form of Indenture with respect
to the Company's 8 1/2% Convertible
Subordinated Debentures due 2014 into which
the Preferred Stock is exchangeable (filed
as Exhibit 4(b) to Post-Effective Amendment
No. 1 to the Company's Registration Statement
on Form S-1 [No. 33-30017] and incorporated
herein by reference)
4 (c) Rights Agreement dated as of December 12,
1990 between the Company and First Chicago
Trust Company of New York as Rights
Agent (including exhibits thereto)
(filed as Exhibit 1 to the Company's
registration statement on Form 8-A
dated December 14, 1990 and incorporated
herein by reference)
10 (a) Form of contract with independent agents
(filed as Exhibit 10(f) to the Company's
Registration Statement on Form S-1
[No. 33-7759] and incorporated herein by
reference)
10 (b) Nonqualified Stock Option Plan (filed as
Exhibit 10(g) to the Company's Registration
Statement on Form S-1 [No. 33-7759] and
incorporated herein by reference)
10 (c) Amendment to the Nonqualified Stock Option
Plan of the Company (filed as Exhibit 10(d)
to the Company's Registration Statement on
Form S-8 [No. 33-26455] and incorporated
herein by reference)
10 (d) Amendment to the Nonqualified Stock Option
Plan of the Company (filed as Exhibit 10(c)
to the Company's Registration Statement on
Form S-1 [No. 33-17011] and incorporated
herein by reference)
10 (e) Amendment to the Nonqualified Stock Option
Plan of the Company (filed as Exhibit 10(e)
to the Company's registration statement on
Form S-8 [No. 33-37305] and incorporated
herein by reference)
10 (f) Amended and Restated Receivables purchase
agreement dated as of October 1, 1992 by
and between Design Benefit Plans, Inc.
(formerly National Group Marketing Corporation)
and National Funding Corporation
(filed herewith)
*10 (g) Employment Agreement dated December 3, 1993
by and between the Company and Peter W. Nauert
10 (h) Administrative Service Agreement dated
December 23, 1991, by and between
Administrative Service Corporation and
Pioneer Life Insurance Company of Illinois
(filed as Exhibit 10(v) to the Company's
Annual Report on Form 10-K [No. 0-14977]
and incorporated herein by reference)
10 (i) Administrative Service Agreement dated
December 23, 1991, by and between
Administrative Service Corporation and
National Group Life (filed as Exhibit 10(w)
to the Company's Annual Report on Form 10-K
[No. 0-14977] and incorporated herein
by reference)
*10 (j) Employment Agreement dated December 31,
1991 by and between National Benefit
Plans, Inc. and Peter W. Nauert (filed
as Exhibit 10(x) to the Company's Annual
Report on Form 10-K [No. 0-14977] and
incorporated herein by reference)
*10 (k) Amendment to Employment Agreement dated
March 26, 1993 by and between National
Benefit Plans, Inc. and Peter W. Nauert
(filed herewith)
*10 (l) Employment Agreement dated December 31,
1991 by and between Direct Financial
Services, Inc. and Peter W. Nauert
(filed as Exhibit 10(y) to the Company's
Annual Report on Form 10-K [No. 0-14977]
and incorporated herein by reference)
*10 (m) Amendment to Employment Agreement dated March 26,
1993 by and between Direct Financial Services, Inc.
and Peter W. Nauert (filed herewith)
10 (n) Credit Agreement dated as of December 22, 1993 by and
among the Company and American National Bank and Trust
Company of Chicago, as Agent and American National
Bank and Trust Company of Chicago, Firstar Bank
Milwaukee, N.A. and Bank One, Rockford, NA, as Banks
11 Statement of Computation of per share net income
or loss . . . . . . . . . . . . . . . . . __
21 List of subsidiaries . . . . . . . . . . . __
23 Consent of Ernst & Young . . . . . . . . . __
Exhibit 10(g)
EMPLOYMENT AGREEMENT
This Agreement is made this December 3, 1993, by and between
PIONEER FINANCIAL SERVICES, INC., a Delaware corporation, having its
principal place of business at 304 N. Main Street, Rockford, Illinois,
61101 (hereinafter "Pioneer Financial"); and PETER W. NAUERT, an individual
residing at 5019 Parliament Place, Rockford, Illinois 61107.
W I T N E S S E T H:
WHEREAS, Pioneer Financial is an insurance holding company which
has life insurance subsidiaries and affiliated administrative service and
marketing companies; and
WHEREAS, Nauert is current Chairman and Chief Executive Officer of
Pioneer Financial and Nauert possesses valuable skills, expertise and
abilities in the life and accident and health insurance business; and
WHEREAS, Pioneer Financial is desirous of retaining the services
of Nauert as a key managerial employee; and
WHEREAS, Nauert desires to be employed by Pioneer Financial on the
terms set forth herein:
NOW, THEREFORE, for and in consideration of the covenants
contained herein, Pioneer Financial hereby employs Nauert and Nauert
accepts such employment with Pioneer Financial upon the terms and
conditions hereinafter set forth.
1. Employment. Pioneer Financial hereby employs Nauert and
Nauert hereby agrees to be employed by Pioneer Financial for a term of
three (3) calendar years commencing on the first day of January, 1994, and
continuing through the 31st day of December, 1996 and for successive three-
year periods thereafter until terminated as provided herein, to perform the
duties set forth herein.
2. Duties. Subject to the control of the Board of Directors of
Pioneer Financial, Nauert shall serve during the Term as Chairman and Chief
Executive Officer of Pioneer Financial and in such capacity shall render
such services as the Board of Directors of Pioneer Financial shall direct.
In addition, Nauert shall serve in such other offices or capacities as the
Board of Directors of Pioneer Financial may from time to time determine.
Nauert shall have such executive powers and authority as may reasonably be
required by him in order to discharge such duties in an efficient and
proper manner.
3. Compensation. Pioneer Financial shall in the aggregate pay to
Nauert for all services to be rendered hereunder:
1
(a) an annual salary in the amount of $600,000; provided that
the Board of Directors of Pioneer Financial shall annually make a
review of Nauert's salary and increase such annual salary as it
deems appropriate; and
(b) an annual bonus, as determined by the compensation
committee of the Board of Directors of Pioneer Financial, based
upon achieving the Pioneer Financial's company-wide performance
standards as established by such committee.
4. Loan. As further compensation to Nauert for his employment
hereunder, Pioneer Financial agrees to make available to Nauert at any time
prior to June 30, 1994, a three-year term loan not in excess of $1,300,000
of principal indebtedness at an annual rate of interest of 3.71% payable
annually, said loan to provide Nauert forgiveness not in excess of 50% of
the initial principal indebtedness dependent on PFSI's attaining, as of
12/31/96, either of the following specified performance goals of PFSI's
compensation committee:
Specified 12/31/96 Amount of Loan
PFSI Performance Goals Forgiveness at 12/31/96
Cumulative, fully diluted $325,000, loan
PFSI GAAP net income per forgiveness
common share ("Cumulative
EPS") from 1/1/94 through
12/31/96, inclusive, of
$4.50
Cumulative EPS from From Cumulative EPS (but
1/1/94 through 12/31/96, not to exceed $7.50)
inclusive, greater than subtract $4.50, divide
$4.50 the result by $3.00 and
multiply the resulting
quotient by $975,000.
Add the amount so
produced to $325,000 to
arrive at loan
forgiveness.
Said loan shall be evidenced by a Note in a form substantially similar to
Exhibit "A" hereto.
5. Benefits. During his employment hereunder, Nauert shall be
entitled to participate in all employee benefits made available to
management personnel of Pioneer Financial and its subsidiaries.
6. Death. Nauert's employment by Pioneer Financial will
terminate immediately upon his death. No compensation for any period after
Nauert's death will be payable to Nauert's estate.
7. Disability. If during Nauert's employment hereunder, Nauert
2
becomes totally or partially disabled, Pioneer Financial shall continue to
pay to Nauert as long as such disability continues during the Term (or
until Nauert's employment is terminated by Pioneer Financial in accordance
with Section 8 (if earlier)) the level of annual salary payable to Nauert
at the date his disability is determined, reduced dollar-for-dollar to the
extent of any disability insurance payments paid to Nauert through
insurance programs, the premiums for which were paid by Pioneer Financial
or its Subsidiaries or affiliates. For purposes of this Agreement, the
term "total disability" shall mean Nauert's inability due to illness,
accident or other physical or mental incapacity to engage in the full time
performance of his duties under this Agreement as reasonably determined by
the Board of Directors of Pioneer Financial based on such evidence as such
Board shall deem appropriate. For purposes of this Agreement, "partial
disability" shall mean Nauert's ability due to illness, accident or other
physical or mental incapacity to engage in only the partial performance of
his duties under this Agreement, as reasonably determined by the Board of
Directors of Pioneer Financial based on such evidence as such Board shall
deem appropriate.
8. Termination.
(a) For Cause. Pioneer Financial shall have the right to
terminate Nauert's employment hereunder at any time during the Term "for
cause". For purposes of this Agreement, "for cause" shall mean any of the
following actions (or inactions) by Nauert: illegal conduct of a severity
greater than a misdemeanor, gross neglect of, and the continued failure to
perform substantially, Nauert's duties under this Agreement.
Notwithstanding anything herein to the contrary, Nauert's inability to
perform the duties of his position due to his total or partial disability
(as defined herein) shall not be deemed to constitute cause.
If, in the opinion of the Board of Directors of Pioneer
Financial, Nauert's employment shall become subject to termination for
cause, such Board of Directors shall give Nauert notice to that effect,
which notice shall describe the matter or matters constituting such cause.
Thereafter, for a period of thirty (30) days from the receipt of such
notice, Nauert shall have the opportunity to eliminate or cure the matter
or matters constituting such cause. If at the end of such thirty (30) day
period, Nauert has not substantially eliminated or cured each such matter
or matters, then Pioneer Financial shall have the right to give Nauert
notice of the termination of his employment. Nauert's employment hereunder
shall be considered terminated for cause as of the date specified in such
notice of termination unless and until there is a final determination by a
court of competent jurisdiction that the cause of termination of Nauert's
employment did not exist at the time of giving said notice of termination.
Upon termination of Nauert's employment "for cause," this Agreement shall
terminate without further obligations to Nauert other than Pioneer
Financial's obligation (a) to pay to Nauert in a lump sum in cash within 30
days after the date of termination Nauert's base salary through the date of
termination to the extent not theretofore paid and (b) to the extent not
theretofore paid or provided, to pay or provide, to Nauert on a timely
basis any other amounts or benefits required to be paid or provided or
3
which Nauert is eligible to receive under any plan, program, policy or
practice or contract or agreement of Pioneer Financial.
(b) Without Cause. Pioneer Financial shall have the right to
terminate Nauert's employment hereunder without cause at any time during
the Term. If the Board of Directors determines to terminate Nauert's
employment without cause, Pioneer Financial shall give notice of the
termination to Nauert and Nauert's employment hereunder shall be considered
terminated without cause as of the date specified in such notice of
termination. Upon the date of the termination of Nauert's employment
without cause, Nauert shall be paid an amount equal to the present value,
discounted to the present at an annual rate of 8%, of the salary which
would have been payable during a period of twenty-four (24) months
commencing on the date of termination at the level of annual salary payable
to Nauert at the date of termination.
(c) By Nauert. Nauert may terminate his employment hereunder at
any time by retirement or resignation, upon notice to Pioneer Financial.
Upon such termination by Nauert, no compensation for any period after the
date of such termination shall be payable to Nauert; provided, however,
that if such termination by Nauert is for "good reason" (as defined in
Section 9(c)), then Nauert shall be entitled to the payment described in
the last sentence of Section 8(b).
(d) Change in Control Effect. No payments shall be made to
Nauert pursuant to this Section 8 in the event that Nauert is entitled to
Change in Control Compensation pursuant to Section 9.
9. Change in Control.
(a) Change in Control Severance Compensation. If, within two
years following a "change in control", Nauert's employment is terminated by
Pioneer Financial other than "for cause" (as defined in Section 8(a)) or is
terminated by Nauert for "good reason" (as defined in Section 9(c)), Nauert
shall be entitled to receive from Pioneer Financial a lump sum cash payment
in an amount equal to three times his annual salary for the year in which
such termination occurs ("Change in Control Compensation"). Pioneer
Financial shall pay such amount to Nauert within ten (10) days of the date
of termination. If Nauert's employment is terminated by Pioneer Financial
for cause, by reason of Nauert's death or retirement, or by Nauert without
good reason, the Change in Control Compensation will not be paid. If
Nauert was totally or partially disabled as of the Change in Control, the
Change in Control Compensation will not be paid.
(b) Change in Control. For purposes of this Agreement, "Change
in Control" shall mean the occurrence of any of the following events:
(i) any person or persons acting as a group, other than a
person which as of the date of this Agreement is the beneficial
owner of voting securities of Pioneer Financial and other than
Nauert or a group including Nauert, shall become the beneficial
owner of securities of Pioneer Financial representing at least
4
twenty percent (20%) of the combined voting power of Pioneer
Financial's then outstanding securities; or
(ii) any consolidation or merger to which Pioneer Financial
is a party, if following such consolidation or merger,
stockholders of Pioneer Financial immediately prior to such
consolidation or merger shall not beneficially own securities
representing at least eighty-one percent (81%) of the combined
voting power of the outstanding voting securities of the
surviving or continuing corporation; or
(iii) any sale, lease, exchange or other transfer (in one
transaction or in a series of related transactions) of all, or
substantially all, of the assets of Pioneer Financial, other than
to an entity (or entities) of which Pioneer Financial or the
stockholders of Pioneer Financial immediately prior to such
transactions beneficially own securities representing at least
eighty-one percent (81%) of the combined voting power of the
outstanding voting securities.
(c) Good Reason. For purposes of this Agreement, "good reason"
shall mean any of the following:
(i) the assignment to Nauert of any duties or
responsibilities which are inconsistent with Nauert's status and
position in effect immediately prior to the Change in Control, or
a reduction in the duties and responsibilities exercised by
Nauert immediately prior to the Change in Control;
(ii) any action by Pioneer Financial which renders Nauert
unable to effectively discharge the duties and responsibilities
exercised by Nauert immediately prior to the Change in Control;
(iii) a reduction in Nauert's level of annual salary as in
effect immediately prior to the Change in Control or failure to
maintain Nauert's minimum annual salary in accordance with
Section 3(a);
(iv) a failure by Pioneer Financial to continue in effect,
without material change, any benefit or incentive plan or
arrangement in which Nauert participated immediately prior to the
Change in Control, or the taking of any action by Pioneer
Financial which would materially and adversely affect Nauert's
participation in or materially reduce Nauert's benefits under any
such plan or arrangement;
(v) a relocation of Nauert's workplace by Pioneer Financial
to any place more than twenty-five (25) miles from the location
at which Nauert performed his duties immediately prior to the
Change in Control, except for required travel by Nauert on
Pioneer Financial's business to an extent substantially
consistent with Nauert's business travel obligations immediately
5
prior to the Change in Control;
(vi) a failure by Pioneer Financial to provide to Nauert paid
vacation benefits on the basis and to extent provided immediately
prior to the Change in Control; or
(vii) any failure by Pioneer Financial to obtain the
assumption of this Agreement by any successor or assignee
thereto.
(d) Gross-Up. In the event that any payment received or to be
received by Nauert in connection with a Change in Control of Pioneer
Financial or the termination of Nauert's employment (whether payable
pursuant to the terms of this Agreement or any other plan, arrangement or
agreement with Pioneer Financial or any person whose actions result in a
Change in Control of Pioneer Financial or any person affiliated with
Pioneer Financial or such person (the "Change in Control Payments") will be
subject to the tax (the "Excise Tax") imposed by Section 4999 of the
Internal Revenue Code, as amended (the "Code"), Pioneer Financial shall pay
to Nauert, upon payment of the Change in Control Compensation, an
additional amount (the "Gross-Up Payment") such that the net amount
retained by Nauert, after deduction of any Excise Tax on the Change in
Control Payments and any federal and state and local income tax and Excise
Tax upon the Gross-Up Payment, shall be equal to the Change in Control
Payments. For purposes of determining whether any of the Change in Control
Payments will be subject to the Excise Tax and the amount of such Excise
Tax, any Change in Control Payments shall be treated as a "parachute
payment" within the meaning of Section 280G(b)(2) of the Code, and all
"parachute payments" in excess of the "base amount" within the meaning of
Section 280G(b)(3) of the Code shall be treated as subject to the Excise
Tax, unless in the opinion of tax counsel selected by Pioneer Financial and
acceptable to Nauert such Change in Control Payments (in whole or in part)
do not constitute parachute payments, or such parachute payments in excess
of the base amount (in whole or in part) are otherwise not subject to the
Excise Tax. For purposes of determining the amount of the Gross-Up
Payment, Nauert shall be deemed to pay federal income taxes at the highest
marginal rate of federal income taxation in the calendar year in which the
Gross-Up Payment is to be made and state and local income taxes at the
highest marginal rate of taxation in the state and locality of his
residence on the date of termination, net of the maximum reduction in
federal income taxes which could be obtained from deduction of such state
and local taxes. In the event that the Excise Tax is subsequently
determined to be less than the amount originally taken into account
hereunder Nauert shall repay to Pioneer Financial at the time that the
amount of such reduction in Excise Tax is finally determined, the portion
of the Gross-Up Payment attributable to such reduction plus interest on the
amount of such repayment at the rate provided in Section 1274(b)(2)(B) of
the Code. In the event that the Excise Tax is determined to exceed the
amount originally taken into account hereunder, Pioneer Financial shall
make an additional Gross-Up Payment in respect of such excess at the time
that the amount of such excess is finally determined. Nauert shall notify
Pioneer Financial of any audit or review by the Internal Revenue Service of
6
Nauert's federal income tax return for the year in which a Change in
Control Payment or Gross-Up Payment under this Agreement is made within ten
(10) days of Nauert's receipt of notification of such audit or review. In
addition, Nauert shall also notify Pioneer Financial of the final
resolution of such audit or review within ten (10) days of such resolution.
10. Confidential Information and Trade Secrets.
(a) Nature. During Nauert's employment by Pioneer Financial,
Nauert will enjoy access to Pioneer Financial's "confidential information"
and "trade secrets". For purposes of this Agreement, "confidential
information" shall mean information which is not publicly available,
including without limitation, information concerning customers, material
sources, suppliers, financial projections, marketing plans and operation
methods, Nauert's access to which derives solely from Nauert's employment
with Pioneer Financial. For purposes of this Agreement, "trade secrets"
shall mean Pioneer Financial's processes, methodologies and techniques
known only to those employees of Pioneer Financial who need to know such
secrets in order to perform their duties on behalf of Pioneer Financial.
Pioneer Financial take numerous steps, including these provisions, to
protect the confidentiality of its confidential information and trade
secrets, which it considers unique, valuable and special assets.
(b) Restricted Use and Non-Disclosure. Nauert, recognizing
Pioneer Financial's significant investment of time, efforts, and money in
developing and preserving its confidential information, shall not, during
his employment hereunder and for a two (2) year period after the end of
Nauert's employment hereunder, use for his direct or indirect personal
benefit any of Pioneer Financial's confidential information or trade
secrets. For a two (2) year period after the end of Nauert's employment
hereunder, Nauert shall not disclose to any person any of Pioneer
Financial's confidential information or trade secrets.
(c) Return of Pioneer Financial Property. Upon termination of
Nauert's employment with Pioneer Financial, for whatever reason and in
whatever manner Nauert shall return to Pioneer Financial all copies of all
writings and records relating to Pioneer Financial's business, confidential
information or trade secrets, which are in Nauert's possession at such
time.
11. Non-Competition and Non-Solicitation.
(a) Pioneer's Financial Investment. Pioneer Financial is
spending and will spend much time, money and effort in building
relationships with agents and insureds, and will pay Nauert valuable
consideration pursuant hereto in exchange for Nauert's promises herein,
including without limitation the covenants in Section 10 and in this
Section 11. Pioneer Financial has engaged Nauert as Chairman and Chief
Executive Officer of Pioneer Financial in order to, among other reasons,
take advantage of Nauert's unique knowledge of, and contacts within, the
life and accident and health insurance industry. Further, Pioneer
Financial will invest significant time and money in the further development
7
of Nauert's business ability, image and standing. As Nauert is Chairman
and Chief Executive Officer of Pioneer Financial, the reputation and
success of Nauert will be closely tied to the reputation and success of
Pioneer Financial and, during the Term, Nauert will be heavily identified
with Pioneer Financial's business.
(b) Non-Competition. During Nauert's employment hereunder and
for a twelve (12) month period after termination of such employment, unless
such termination is made by Pioneer Financial without cause or unless there
has been a Change in Control prior to such termination, Nauert shall not
engage, directly or indirectly, whether as an owner, partner, employee,
officer, director, agent, consultant or otherwise, in any location where
Pioneer Financial or any of its subsidiaries is engaged in business after
the date hereof and prior to the termination of Nauert's employment, in a
business the same as, or similar to, any business now, or at any time after
the date hereof and prior to Nauert's termination, conducted by Pioneer
Financial or any of its subsidiaries, provided, however, that the mere
ownership of 5% or less of the stock of a company whose shares are traded
on a national securities exchange or are quoted on the National Association
of Securities Dealers Automated Quotation System shall not be deemed
ownership which is prohibited hereunder.
(c) Non-Solicitation. During the twenty-four (24) month period
following termination of Nauert's employment with Pioneer Financial, Nauert
shall not, directly or indirectly induce employees of Pioneer Financial or
any of its subsidiaries to leave such employment with the result that such
employees would engage in business activities which are substantially
similar or are closely related to the business activities such employee
performed on behalf of Pioneer Financial and which compete against Pioneer
Financial. Notwithstanding the above, in the event Nauert is terminated by
Pioneer Financial without cause, then the twenty-four (24) month period
referred to in this Section 11(c) shall be reduced to twelve (12) months.
(d) Enforceability. The necessity of protection against the
competition of Nauert and the nature and scope of such protection has been
carefully considered by the parties hereto. The parties hereto agree and
acknowledge that the duration, scope and geographic areas applicable to the
non-competition covenant in this Section 11 are fair, reasonable and
necessary, that adequate compensation has been received by Nauert for such
obligations, and that these obligations do not prevent Nauert from earning
a livelihood. If, however for any reason any court determines that the
restrictions in this Agreement are not reasonable, that consideration is
inadequate or that Nauert has been prevented from earning a livelihood,
such restrictions shall be interpreted, modified or rewritten to include as
much of the duration, scope and geographic area identified in this Section
11 as will render such restrictions valid and enforceable.
12. Retention of PFSI Stock. During the Term, Nauert shall
retain, directly or indirectly, ownership of not less than 1,000,000 shares
of PFSI Common Stock unless, and except to the extent, released from this
obligation by a written release from Pioneer Financial. For purposes of
this Agreement, "retain indirectly" shall mean and refer to any shares of
8
PFSI Common Stock, which would be considered to be owned by Nauert under
Section 267(c), or the income of which would be taxable to Nauert, his
spouse or his children, or to any trust of which Nauert would be deemed the
owner under any of Sections 671 through 677, inclusive, of the Internal
Revenue Code of 1986.
13. Rights of First Refusal. During the Term, Nauert shall not
transfer any shares of stock of Pioneer Financial for consideration to any
person other than a relative of Nauert, unless Nauert has offered to
transfer such shares to Pioneer Financial on the same terms, provided,
however, that this provision shall not apply at any time when the average
last reported sale price for Common Stock of Pioneer Financial on the New
York Stock Exchange for the immediately preceding five trading days is
greater than or equal to $12.00 per share.
14. Related Company Agreements and Options. Parties hereto
recognize that Pioneer Financial has a number of related companies and that
Nauert currently has employment agreements with two such companies, namely,
Direct Financial Services, Inc. and National Benefit Plans, Inc. This
agreement in no way supersedes or modifies any of the terms, undertaking,
responsibilities or rights of any of the parties to said employment
agreements. Notwithstanding the foregoing, and in consideration of Pioneer
Financial's execution of this Agreement, Nauert agrees to forego his right
to certain bonuses equal to 10% of net income under his current employment
agreements with Pioneer Financial's subsidiaries National Benefit Plans,
Inc. and Direct Financial Services, Inc.
15. Breach or Threatened Breach of Non-Competition Covenant. In
the event of a breach or threatened breach by Nauert of any provision of
Section 10 or 11 hereof, Nauert acknowledges that the remedy at law would
be inadequate and that Pioneer Financial shall be entitled to an injunction
restraining Nauert from such act or threatened breach. Nothing herein
contained shall be construed as prohibiting Pioneer Financial from pursuing
any other remedies available to it for such breach or threatened breach,
including the recovery of monetary damages.
16. Business Days. Any date specified in this Agreement which
is a Saturday, Sunday or legal holiday shall be extended to the first
regular business day after such date which is not a Saturday, Sunday or
legal holiday.
17. Choice of Law. This Agreement has been executed and made in
accordance with the laws of the State of Illinois and is to be construed,
enforced and governed in accordance therewith.
18. Counterparts. This Agreement may be executed in several
counterparts, each of which shall be an original, but all of which together
shall constitute one and the same instrument.
19. Entire Agreement Amendments. This Agreement contains the
entire agreement among the parties hereto with respect to the subject
matter hereof. No change or modification of this Agreement, or any waiver
9
of the provisions hereof, shall be valid unless same is in writing and
signed by the parties hereto. Waiver by any party hereto of a breach by
the other party of any provisions of this Agreement shall not operate or be
construed as a waiver of any subsequent breach by such party.
20. Headings. The headings used herein are for each of
interpretation and shall have no effect on the interpretation of any
provision of this Agreement.
21. Notices. All notices, requests, demands and other
communications hereunder shall be in writing and shall, until receipt of
contrary written instructions, be delivered personally to, or mailed by
certified or registered mail with proper postage prepaid, to the party at
the address as follows:
To Pioneer Financial:
Pioneer Financial Services, Inc.
304 N. Main Street
Rockford, Illinois 61101
To Nauert:
Mr. Peter W. Nauert
5019 Parliament Place
Rockford, Illinois 61107
22. Severability. If any provision of this Agreement is held
for any reason to be invalid, it will not invalidate any other provisions
of this Agreement which are in themselves valid, nor will it invalidate the
provisions of any other agreement between the parties hereto. Rather, such
invalid provision shall be construed so as to give it the maximum effect
allowed by applicable law. Any other written agreement between the parties
hereto shall be conclusively deemed to be an agreement independent of this
Agreement.
23. Successors and Assigns. This Agreement and all the
provisions hereof shall be binding upon and inure to the benefit of the
parties hereto and their respective heirs, legal representatives,
successors and permitted assigns. This Agreement and the rights and
obligations hereunder may not be assigned by either party without the prior
written consent of the other.
24. Time of the Essence. Time is of the essence of this
Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this
Employment Agreement to be executed on the date first above written.
Attest: "Pioneer Financial"
PIONEER FINANCIAL SERVICES, INC.
10
/s/ Chuck R. Scheper By: /s/ Karl-Heinz Klaeser
Title: Chairman - Compensation
Committee
Witness: "Nauert"
/s/ Philip J. Urbanek /s/ Peter W. Nauert
Peter W. Nauert
11
EXHIBIT A
$1,300,000 Rockford, Illinois
January 1, 1994
NON-NEGOTIABLE PROMISSORY NOTE
______________________________
For value received, PETER W. NAUERT ("Nauert") hereby promises to
pay to PIONEER FINANCIAL SERVICES, INC., a Delaware corporation ("PFSI"),
at its principal office at 304 N. Main Street, Rockford, Illinois or such
other address as the holder hereof may designate, the sum of One Million,
Three Hundred Thousand and No/One Hundredths Dollars ($1,300,000.00).
Payment shall be made in a single payment on the last day of December,
1996. In addition, on the 31st day of December, 1994, 1995 and 1996,
Nauert shall pay PFSI interest at the rate of 3.71 percent per annum on the
principal balance outstanding from time to time computed from the date
hereof until paid.
This Note is the note referred to in, and is being issued to
Nauert by PFSI in accordance with Paragraph 14 of that certain Employment
Agreement dated __________, 1993 by and between Nauert and PFSI, and is
subject thereto.
Any payment due under this Note may be prepaid in whole or in
part at any time and from time to time before its payments date. Any such
prepayment shall be first applied against the principal amount of this Note
and then against interest accrued thereon.
Notwithstanding the foregoing, in the event either of the
following specified performance goals of PFSI's compensation committee is
achieved, the initial principal indebtedness of $1,300,000 shall be
forgiven as of 12/31/96 as follow:
Specified 12/31/96 Amount of Loan
PFSI Performance Goals Forgiveness at 12/31/96
______________________ _______________________
Cumulative, fully diluted $325,000, loan
PFSI GAAP net income per forgiveness
common share ("Cumulative
EPS") from 1/1/94 through
12/31/96, inclusive, of
$4.50
12
Specified 12/31/96 Amount of Loan
PFSI Performance Goals Forgiveness at 12/31/96
______________________ _______________________
Cumulative EPS from From Cumulative EPS (but
1/1/94 through 12/31/96, not to exceed $7.50)
inclusive, greater than subtract $4.50, divide
$4.50 the result by $3.00 and
multiply the resulting
quotient by $975,000.
Add the amount so
produced to $325,000 to
arrive at loan
forgiveness.
In the event that PFSI's GAAP financial results as of 12/31/96
are not determinable with reasonable accuracy on 12/31/96, or even upon the
due date of this Notice if such date is after 12/31/96, the PFSI's
compensation committee may estimate the amount of forgiveness for purposes
of Nauert's timely payoff of this Note, less the forgiveness. In such
event, not later than June 30, 1997, PFSI's compensation committee shall
obtain certified GAAP financial results for PFSI as of 12/31/96 and submit
such certified financial results to Nauert. At such time, the difference
between the amount of forgiveness previously estimated and allowed Nauert
at the time of this Note's repayment and the amount of such forgiveness
indicated by said certified financial results shall be reimbursed by PFSI
to Nauert, or paid by Nauert to PFSI, as the case may be, together with
interest thereon at the rate of 8% per annum from the date of this Note's
repayment to the date of said reimbursement, or payment, as the case may
be.
The following shall be deemed events of default hereunder: (a)
failure by Nauert to make any payment hereunder within five (5) business
days of the due date of such payment; (b) the filing by Nauert of a
voluntary petition, or the filing against Nauert of an involuntary petition
which is not dismissed within sixty (60) days, under the provisions of
Title 11 of the United State Code or any state insolvency law; (c)
application for or appointment of a receiver for Nauert; (d) issuance of a
warrant of attachment or writ of execution against Nauert or his property;
(e) any assignment by Nauert for the benefit of his creditors; or (f)
termination by Nauert of his employment under the above referenced
Employment Agreement, except for "good reason" (as defined in Section 9(c)
of said Employment Agreement). Upon the occurrence of an event of default
hereunder, the holder may, at his option, declare the entire unpaid balance
of the principal hereunder, together with interest thereon, immediately due
and payable by delivering to Nauert written notice of such effect.
Nauert hereby waives presentment for payment, notice of dishonor,
protest or diligence in bringing suit hereon. In the event any payments
herein provided for shall not be made at the time they shall become due,
Nauert shall reimburse the holder hereof for all costs of collection and
for reasonable attorneys' fees incurred to obtain such payments.
13
This Note shall be construed in accordance with and governed in
all respects by the laws and decisions of the State of Illinois.
/s/ Peter W. Nauert
Peter W. Nauert
14
Exhibit 10(n)
CREDIT AGREEMENT
Dated as of December 22, 1993
among
PIONEER FINANCIAL SERVICES, INC.,
AMERICAN NATIONAL BANK AND TRUST
COMPANY OF CHICAGO,
as Agent
and
AMERICAN NATIONAL BANK AND TRUST
COMPANY OF CHICAGO,
FIRSTAR BANK MILWAUKEE, N.A.
and
BANK ONE, ROCKFORD, NA
TABLE OF CONTENTS
Page
SECTION 1
CERTAIN DEFINITIONS . . . . . . . . . . . . . . 1
SECTION 1.1 Terms Defined in this Agreement . . . . . . . . . . 1
SECTION 2
BANK'S COMMITMENT; BORROWING PROCEDURES; LCs . . . . . . . 11
SECTION 2.1 Bank's Commitment to Make Loans . . . . . . . . . . 11
SECTION 2.3 Procedure for Borrowing . . . . . . . . . . . . . . 12
SECTION 2.4 Conversion and Continuation Elections. . . . . . . 13
SECTION 2.5 LC Documentation. . . . . . . . . . . . . . . . . . 15
SECTION 2.6 Agreement to Repay LC Drawings. . . . . . . . . . . 17
SECTION 2.6A Participations. . . . . . . . . . . . . . . . . . . 17
SECTION 2.7 Mandatory Payment of LC Liability. . . . . . . . . 20
SECTION 2.8 LC Operations. . . . . . . . . . . . . . . . . . . 20
SECTION 2.9 Voluntary Termination or Reduction of
Commitments. . . . . . . . . . . . . . . . . . . . . . . . . 21
SECTION 2.11 Mandatory Prepayment. . . . . . . . . . . . . . . . 21
SECTION 2.12 Repayment. . . . . . . . . . . . . . . . . . . . . 21
SECTION 3
NOTES EVIDENCING THE LOANS . . . . . . . . . . . . . 22
SECTION 3.1 Notes . . . . . . . . . . . . . . . . . . . . . . . 22
SECTION 4
INTEREST, FEES AND COSTS . . . . . . . . . . 22
SECTION 4.1 Interest . . . . . . . . . . . . . . . . . . . . . 22
SECTION 4.2 Fees. . . . . . . . . . . . . . . . . . . . . . . . 23
(a) Closing Fee. . . . . . . . . . . . . . . . . . . . . . . 23
(b) Unused Commitment Fees. . . . . . . . . . . . . . . . . 23
(c) Letter of Credit Fees. . . . . . . . . . . . . . . . . . 23
(d) Letter of Credit Issuance Fees. . . . . . . . . . . . . 23
SECTION 4.3 Computation of Fees and Interest. . . . . . . . . . 24
SECTION 4.4 Increased Costs; Capital Adequacy . . . . . . . . . 24
SECTION 4.5 Funding Losses. . . . . . . . . . . . . . . . . . . 26
SECTION 5
MAKING OF PAYMENTS . . . . . . . . . . . . . . . 26
SECTION 5.1 Payments by the Company . . . . . . . . . . . . . . 26
SECTION 5.2 Payments by the Banks to the Agent. . . . . . . . . 27
SECTION 5.3 Setoff . . . . . . . . . . . . . . . . . . . . . . 28
SECTION 5.4 Sharing of Payments. . . . . . . . . . . . . . . . 29
SECTION 6
REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . 29
SECTION 6.1 Corporate Organization . . . . . . . . . . . . . . 29
SECTION 6.2 Authorization; No Conflict . . . . . . . . . . . . 30
SECTION 6.3 Validity and Binding Nature . . . . . . . . . . . . 30
SECTION 6.4 Financial Statements . . . . . . . . . . . . . . . 30
i
SECTION 6.5 Litigation and Contingent Liabilities . . . . . . . 30
SECTION 6.6 Employee Benefit Plans . . . . . . . . . . . . . . 31
SECTION 6.7 Investment Company Act . . . . . . . . . . . . . . 32
SECTION 6.8 Regulation U . . . . . . . . . . . . . . . . . . . 32
SECTION 6.9 Accuracy of Information . . . . . . . . . . . . . . 32
SECTION 6.10 Labor Controversies . . . . . . . . . . . . . . . . 32
SECTION 6.11 Tax Status . . . . . . . . . . . . . . . . . . . . 32
SECTION 6.12 No Default . . . . . . . . . . . . . . . . . . . . 33
SECTION 6.13 Compliance with Applicable Laws . . . . . . . . . . 33
SECTION 6.14 Insurance . . . . . . . . . . . . . . . . . . . . . 33
SECTION 6.15 Solvency. . . . . . . . . . . . . . . . . . . . . . 33
SECTION 6.16 Use of Proceeds. . . . . . . . . . . . . . . . . . 34
SECTION 6.17 Subsidiaries. . . . . . . . . . . . . . . . . . . . 34
SECTION 7
COVENANTS . . . . . . . . . . . . . . . . . 34
SECTION 7.1 Reports, Certificates and Other Information . . . . 34
(a) Annual Report. . . . . . . . . . . . . . . . . . . . . . 35
(b) Interim Reports. . . . . . . . . . . . . . . . . . . . . 35
(c) Statutory Statements. . . . . . . . . . . . . . . . . . 35
(d) Reports to SEC. . . . . . . . . . . . . . . . . . . . . 35
(e) Certificates . . . . . . . . . . . . . . . . . . . . . . 35
(f) Notice of Default, Litigation and ERISA Matters . . . . 35
(g) Other Information . . . . . . . . . . . . . . . . . . . 36
SECTION 7.2 Corporate Existence and Franchises . . . . . . . . 36
SECTION 7.3 Books, Records and Inspections . . . . . . . . . . 36
SECTION 7.4 Insurance . . . . . . . . . . . . . . . . . . . . . 36
SECTION 7.5 Taxes and Liabilities . . . . . . . . . . . . . . . 37
SECTION 7.6 Cash Flow Coverage . . . . . . . . . . . . . . . . 37
SECTION 7.7 Net Worth. . . . . . . . . . . . . . . . . . . 37
SECTION 7.8 Funds for Refinancing. . . . . . . . . . . . . 37
SECTION 7.9 Indebtedness. . . . . . . . . . . . . . . . . 37
SECTION 7.10 Risk-Based Capital . . . . . . . . . . . . . . . . 38
SECTION 7.11 Real Estate Concentration. . . . . . . . . . . . . 38
SECTION 7.12 Investment Quality. . . . . . . . . . . . . . . . . 38
SECTION 7.13 Intentionally Omitted. . . . . . . . . . . . . . . 38
SECTION 7.14 Insurance Company Leverage Ratio. . . . . . . . . 38
SECTION 7.15 Intentionally Omitted. . . . . . . . . . . . . . . 38
SECTION 7.17 Change in Nature of Business . . . . . . . . . . . 39
SECTION 7.18 Depository Relationship . . . . . . . . . . . . . . 39
SECTION 7.19 Employee Benefit Plans . . . . . . . . . . . . . . 40
SECTION 7.20 Use of Proceeds . . . . . . . . . . . . . . . . . . 40
SECTION 7.21 Other Agreements . . . . . . . . . . . . . . . . . 40
SECTION 7.22 Compliance with Applicable Laws . . . . . . . . . . 40
SECTION 7A
UNRESTRICTED SUBSIDIARIES . . . . . . . . . . . . . 40
SECTION 7A.1 Unrestricted Subsidiaries. . . . . . . . . . . . . 40
SECTION 7A.2 Additional Unrestricted Subsidiaries. . . . . . . . 41
SECTION 7A.3 Effectiveness of Designation. . . . . . . . . . . . 42
SECTION 8
ii
CONDITIONS TO MAKING LOANS AND ISSUING LCS . . . . . . . . 42
SECTION 8.1 Initial Loans. . . . . . . . . . . . . . . . . . . 42
(a) Fees and Expenses . . . . . . . . . . . . . . . . . . . 42
(b) Documents . . . . . . . . . . . . . . . . . . . . . . . 42
SECTION 8.2 All Loans and LCs. . . . . . . . . . . . . . . . . 43
(a) No Default, etc. . . . . . . . . . . . . . . . . . . . . 44
(b) Notice. . . . . . . . . . . . . . . . . . . . . . . . . 44
SECTION 9
EVENTS OF DEFAULT AND THEIR EFFECT . . . . . . . . . . . 44
SECTION 9.1 Events of Default . . . . . . . . . . . . . . . . . 44
(a) Nonpayment of the Loan . . . . . . . . . . . . . . 44
(b) Nonpayment of Other Indebtedness . . . . . . . . . . . . 44
(c) Bankruptcy or Insolvency . . . . . . . . . . . . . . . . 45
(d) Specified Noncompliance with this Agreement . . . . . . 45
(e) Other Noncompliance with this Agreement . . . . . . . . 45
(f) Representations and Warranties . . . . . . . . . . . . . 45
(g) Employee Benefit Plans . . . . . . . . . . . . . . . . . 46
(h) Judgments . . . . . . . . . . . . . . . . . . . . . . . 46
SECTION 9.2 Effect of Event of Default . . . . . . . . . . . . 46
SECTION 9A
THE AGENT . . . . . . . . . . . . . . . . . 47
SECTION 9A.1 Appointment and Authorization . . . . . . . . . . . 47
SECTION 9A.2 Delegation of Duties . . . . . . . . . . . . . . . 47
SECTION 9A.3 Liability of Agent . . . . . . . . . . . . . . . . 47
SECTION 9A.4 Reliance by Agent . . . . . . . . . . . . . . . . . 47
SECTION 9A.5 Notice of Default . . . . . . . . . . . . . . . . . 48
SECTION 9A.6 Credit Decision . . . . . . . . . . . . . . . . . . 48
SECTION 9A.7 Indemnification . . . . . . . . . . . . . . . . . . 49
SECTION 9A.8 Agent in Individual Capacity . . . . . . . . . . . 50
SECTION 9A.9 Successor Agent . . . . . . . . . . . . . . . . . . 50
SECTION 10
GENERAL . . . . . . . . . . . . . . . . . 50
SECTION 10.1 Amendments and Waivers . . . . . . . . . . . . . . 50
SECTION 10.2 Notices . . . . . . . . . . . . . . . . . . . . . . 51
SECTION 10.3 Accounting Terms; Computations . . . . . . . . . . 52
SECTION 10.4 Costs, Expenses and Taxes . . . . . . . . . . . . . 52
SECTION 10.5 Indemnification . . . . . . . . . . . . . . . . . . 53
SECTION 10.6 Captions and References . . . . . . . . . . . . . . 53
SECTION 10.7 No Waiver; Cumulative Remedies. . . . . . . . . . . 53
SECTION 10.8 Governing Law; Jury Trial; Severability . . . . . . 54
SECTION 10.9 Counterparts . . . . . . . . . . . . . . . . . . . 55
SECTION 10.10 Successors and Assigns . . . . . . . . . . . . . . 55
SECTION 10.11 Prior Agreements . . . . . . . . . . . . . . . . . 55
SECTION 10.12 Assignments; Participations . . . . . . . . . . . . 55
SECTION 10.13 Confidentiality. . . . . . . . . . . . . . . . . . 56
SECTION 10.14 Notification of Addresses, Etc. . . . . . . . 57
iii
EXHIBITS
EXHIBIT A Form of Note
EXHIBIT B Form of Notice of Borrowing
EXHIBIT C Form of Notice of Conversion/Continuation
iv
CREDIT AGREEMENT
This Credit Agreement dated as of December 22, 1993 (this
"Agreement"), is among (i) PIONEER FINANCIAL SERVICES, INC., a Delaware
corporation (herein, together with its successors and assigns, called the
"Company"), (ii) AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO, as
administrative agent (in such capacity, the "Agent") and (iii) AMERICAN
NATIONAL BANK AND TRUST COMPANY OF CHICAGO, a national banking association
(herein, together with its successors and assigns, called the "ANB"),
FIRSTAR BANK MILWAUKEE, N.A., a national banking association (herein,
together with its successors and assigns, called "Firstar") and BANK ONE,
ROCKFORD, NA, a national banking association (herein, together with its
successors and assigns, called "Bank One") (ANB, Firstar and Bank One
collectively referred to as the "Banks" and individually as a "Bank").
W I T N E S S E T H:
WHEREAS, the Company has requested the Banks severally to make
available to the Company a revolving credit facility for the purposes as
set forth herein; and
WHEREAS, the Banks are willing to make available to the Company a
revolving facility in the aggregate amount of $20,000,000, under which each
Bank severally shall lend funds and ANB, in its capacity as Issuing Bank,
shall issue letters of credit from time to time to or for the benefit of
the Company subject to the terms and conditions set forth in this
Agreement;
NOW, THEREFORE, in consideration of the mutual agreements contained
herein, the parties hereto agree as follows:
SECTION 1
CERTAIN DEFINITIONS
SECTION 1.1 Terms Defined in this Agreement. When used herein the
following terms shall have the following respective meanings:
"Adjusted Capital and Surplus" means, with respect to each Insurance
Subsidiary as of any date, the sum of (i) Capital and Surplus for such
Insurance Subsidiary and (ii) the asset valuation reserve of such Insurance
Subsidiary as of such date determined in accordance with Statutory
Accounting Principles.
"Affiliate" means, with respect to any Person, any other Person
directly or indirectly controlling, controlled by, or under direct or
indirect common control with, such Person. A Person shall be deemed to
control another Person if such first Person possesses, directly or
indirectly, the power to direct or cause the direction of the management
and policies of such other Person, whether through ownership of voting
securities, by contract or otherwise.
1
"Agent's Payment Office" means the address for payments set forth on
the signature page hereto in relation to the Agent or such other address as
the Agent may from time to time specify in accordance with Section 10.2.
"Agent-Related Persons" means the Agent and any successor Agent
appointed under Section 9A.9, together with their respective Affiliates,
and the officers, directors, employees, agents and attorneys-in-fact of
such Persons and Affiliates.
"Aggregate Commitment" means the combined Commitments of the Banks in
the amount of twenty million dollars ($20,000,000), as such amount may be
reduced from time to time pursuant to this Agreement.
"Aggregate Stated Amount" shall mean, as of the date of determination,
the aggregate Stated Amounts of all LCs.
"Agreement" means this Credit Agreement as it may be amended,
supplemented or otherwise modified from time to time in accordance with the
terms hereof.
"ANB" - see Preamble.
"Applicable Margin" means (a) with respect to Base Rate Loans, -0-,
(b) with respect to CD Rate Loans, two percent (2.00%) per annum, and (c)
with respect to Eurodollar Rate Loans, two percent (2.00%) per annum.
"Authorized Control Level RBC" shall have the same meaning as the term
"Authorized Control Level RBC" as defined in the NAIC Risk-Based Capital
(RBC) for Life and/or Health Insurers Model Act, as such term may be
amended by the NAIC from time to time.
"Authorized Officer" means the Chairman, the President, any Executive
Vice President, the Treasurer or any Vice Presidents of the Company that
are designated as authorized officers pursuant to a resolution of the Board
of Directors of the Company (each Bank shall be entitled to rely on such
resolution until revoked or amended in writing by the Company).
"Available Cash Flow" means, for any accounting period, without
duplication of items that may be included in more than one of the following
computations, the sum of (i) the aggregate Distributable Profits from the
Insurance Subsidiaries for such period, and (ii) the combined net after tax
income of the Non-Insurance Operating Subsidiaries for such period, plus
depreciation, amortization and other non-cash expenses of the Non-Insurance
Operating Subsidiaries for such period, minus all capitalized expenditures
of the Non-Insurance Operating Subsidiaries for such period, all to be
determined in accordance with GAAP.
"Bank" or "Banks" - see Preamble.
"Bank Parties" - see Section 10.5.
"Base Rate" means at any time and from time to time the rate of
2
interest per annum which ANB most recently announced as its base rate at
Chicago, Illinois, which rate shall not necessarily be the lowest rate of
interest which ANB charges its customers.
"Base Rate Loan" means a Loan that bears interest based on the Base
Rate.
"Borrowing" means a borrowing hereunder consisting of the several
Loans made to the Company on the same day by each Bank pursuant to Section
2 hereof and having the same interest rate basis and Interest Period.
"Business Day" means any day of the year on which each Bank is open
for business in the city where such Bank's main office is located.
"Capital and Surplus" means, with respect to each Insurance
Subsidiary, such Insurance Subsidiary's capital and surplus as reported on
such Insurance Subsidiary's Statutory Statements most recently filed with
the department of insurance of such Insurance Subsidiary's state of
incorporation.
"CD Rate" means with respect to each Interest Period to be applicable
to a CD Rate Loan, the rate of interest per annum payable on a certificate
or certificates of deposit purchased by the Company from ANB concurrently
in connection with the extension of a CD Rate Loan.
"CD Rate Loan" means a Loan that bears interest based on the CD Rate.
"Clean-up Date" shall mean the first day of any Clean-up Period.
"Clean-up Period" shall mean, during such period of twelve consecutive
months determined on a rolling basis, any period of sixty consecutive days
in which no Loans are outstanding.
"Closing Date" means the date on which all conditions precedent set
forth in Section 8.1 are satisfied or waived by all the Banks.
"Commitment", with respect to each Bank, has the meaning specified in
Section 2.1.
"Commitment Percentage" means, as to any Bank, the percentage
equivalent at the time of determination of such Bank's Commitment divided
by the Aggregate Commitment.
"Company" - see Preamble.
"Conversion Date" means any date on which the Company converts a Base
Rate Loan to a Eurodollar Rate Loan or a CD Rate Loan; a CD Rate Loan to a
Eurodollar Rate Loan or a Base Rate Loan; or a Eurodollar Rate Loan to a CD
Rate Loan or a Base Rate Loan.
"Debt Service Requirements" means, for any accounting period, the
aggregate of the principal, interest and other dividends, payments or
3
distributions made or required to be made (i) to each Bank under this
Agreement, (ii) with respect to other Indebtedness and (iii) with respect
to the Preferred Stock.
"Distributable Profits" means, for any accounting period, (i) the
greater of (A) 10% of the aggregate Capital and Surplus of all Insurance
Subsidiaries, and (B) the aggregated net after-tax profits of all Insurance
Subsidiaries, determined in accordance with Statutory Accounting Principles
for such period minus (ii) the after-tax profits of each Principal
Insurance Subsidiary that must be retained by such Principal Insurance
Subsidiary to maintain the Total Adjusted Capital required by Section
7.10.y
"Dollar(s)" and the sign "$" means lawful money of the United States
of America.
"Environmental Laws" means any and all federal, state or local
environmental or health and safety-related laws, regulations, rules,
ordinances, orders or directives.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, and any successor statute of similar import, together with the
regulations thereunder and under the Internal Revenue Code of 1986, as
amended, in each case as in effect from time to time. References to
sections of ERISA shall be construed to also refer to any successor
sections.
"ERISA Affiliate" means any corporation, trade or business that is,
along with the Company, a member of a controlled group of corporations or a
controlled group of trades or businesses, as described in Sections 414(b)
and 414(c), respectively, of the Internal Revenue Code of 1986, as amended,
or Section 4001 of ERISA.
"Eurodollar Rate Loan" means a Loan that bears interest based on
LIBOR.
"Event of Default" means any of the events described in Section 9.1.
"FDIC" means the Federal Deposit Insurance Corporation, or any entity
succeeding to any of its principal functions.
"Federal Funds Rate" means, for any day, the rate set forth in the
weekly statistical release designated as H.15(519), or any successor
publication, published by the Federal Reserve Board (including any such
successor, "H.15(519)") for such date opposite the caption "Federal Funds
(Effective)". If on any relevant day such rate is not yet published in
H.15(519), the rate for such day will be the rate set forth in the daily
statistical release designated as the Composite 3:30 p.m. Quotations for
U.S. Government Securities, or any successor publication, published by the
Federal Reserve Bank of New York (including any such successor, the
"Composite 3:30 p.m. Quotation") for such day under the caption "Federal
Funds Effective Rate". If on any relevant day the appropriate rate is not
4
yet published in either H.15(519) or the Composite 3:30 p.m. Quotations,
the rate for such day will be the arithmetic mean as determined by the
Agent of the rates for the last transaction in overnight Federal funds
arranged prior to 9:00 a.m. (New York time) on that day by each of three
leading brokers of Federal funds transactions in New York City selected by
the Agent.
"Federal Reserve Board" means the Board of Governors of the Federal
Reserve System, or any entity succeeding to any of its principal functions.
GAAP means the generally accepted accounting principles in the United
States of America with such changes thereto as (i) shall be consistent with
the then-effective principles promulgated or adopted by the Financial
Accounting Standards Board and its predecessors and successors and
(ii) shall be concurred in by the independent certified public accountants
of recognized standing certifying any financial statements of the Company
and its Subsidiaries.
"Indebtedness" means, as of any date, all indebtedness, obligations or
other liabilities of the Company and its Subsidiaries as of such date (i)
for borrowed money, (ii) evidenced by bonds, debentures, notes or other
similar instruments for borrowed money, or (iii) pursuant to any guarantee
of any indebtedness, obligations or other liabilities of any other Person
of the type described in clauses (i) or (ii); provided, however, that (a)
the amounts set forth in clauses (i), (ii) and (iii) shall not be double
counted and (b) Indebtedness shall not include indebtedness, obligations or
other liabilities of the Company to any Subsidiary or indebtedness,
obligations or other liabilities of any Subsidiary to the Company or
another Subsidiary.
"Indemnified Liabilities" - see Section 10.5.
"Insurance Company Leverage Ratio" means, for each Principal Insurance
Subsidiary on an individual basis as of any date and for all Principal
Insurance Subsidiaries on a combined basis as of any date, the ratio of
Adjusted Capital and Surplus to Total Assets.
"Insurance Laws" means any and all federal or state laws, regulations,
rules, ordinances, orders or directives that pertain to the regulation of
insurance companies, as such.
"Insurance Subsidiaries" means, as of any date, all Subsidiaries of
the Company that are engaged in the insurance business and are subject to
regulation by the insurance commission or department of any state or other
jurisdiction. The Insurance Subsidiaries of the Company as of the date of
this Agreement are set forth in Schedule 6.17 attached hereto.
"Interest Payment Date" means, (a) with respect to any CD Rate Loan or
Eurodollar Rate Loan, the last day of each Interest Period applicable to
such Loan, provided, however, that if any Interest Period for a CD Rate
Loan or Eurodollar Rate Loan exceeds 90 days or three months, respectively,
the date which falls 90 days or three months (as the case may be) after the
5
beginning of such Interest Period and after each Interest Payment Date
thereafter shall also be an Interest Payment Date, and (b) with respect to
any Base Rate Loan, the last Business Day of each calendar quarter and each
date upon which such Loan is prepaid or converted to a Eurodollar Rate Loan
or a CD Rate Loan.
"Interest Period" means, (a) with respect to any Eurodollar Rate Loan,
the period commencing on the Business Day the Loan is disbursed or
continued or on the Conversion Date on which the Loan is converted to the
Eurodollar Rate Loan and ending on the date one, two, three or six months
thereafter, as selected by the Company in its Notice of Borrowing or Notice
of Conversion/Continuation; and (b) with respect to any CD Rate Loan, the
period commencing on the Business Day the CD Rate Loan is disbursed or
continued or on the Conversion Date on which a Loan is converted to the CD
Rate Loan and ending 30, 60, 90 or 180 days thereafter, as selected by the
Company in its Notice of Borrowing or Notice of Conversion/Continuation;
provided that:
(i) if any Interest Period pertaining to a
Eurodollar Rate Loan or CD Rate Loan would otherwise end on a
day which is not a Business Day, that Interest Period shall be
extended to the next succeeding Business Day unless, in the
case of a Eurodollar Rate Loan, the result of such extension
would be to carry such Interest Period into another calendar
month, in which event such Interest Period shall end on the
immediately preceding Business Day;
(ii) any Interest Period pertaining to a Eurodollar Rate
Loan that begins on the last Business Day of a calendar month
(or on a day for which there is no numerically corresponding
day in the calendar month at the end of such Interest Period)
shall end on the last Business Day of the calendar month at
the end of such Interest Period; and
(iii) no Interest Period for any Loan shall extend beyond
a Clean-up Date or the Termination Date.
"Investment Grade Obligations" means, as of any date for each
Insurance Subsidiary, investments having an NAIC investment rating of 1 or
2; or a Standard & Poor's rating within the range of ratings from AAA to
BBB-; or a Moody's rating within the range of ratings from Aaa to Baa3.
"Issuing Bank" means American National Bank and Trust Company of
Chicago in its capacity as issuing bank with respect to LCs issued under
and pursuant to the terms of this Agreement.
"LC" - see Section 2.2.
"LC Application" - see Section 2.5.
"Liabilities" means any and all of the Company's obligations to the
6
Banks, howsoever created, arising or evidenced, whether direct or indirect,
absolute or contingent, now or hereafter existing, or due or to become due,
which arise out of or in connection with this Agreement or the Related
Documents.
"LIBOR" means, with respect to each Interest Period to be applicable
to a Eurodollar Rate Loan, the rate of interest per annum determined by the
Agent obtained by dividing (a) the Telerate Screen Rate for such Interest
Period or (b) if the Telerate Screen Rate is unavailable at the time the
LIBOR rate is to be determined, a rate determined on the basis of the
offered rates for deposits in U.S. dollars for a period approximately equal
to such Interest Period which appear on the Reuters Screen LIBO Page, as of
11:00 a.m., London time, on the day that is two London banking days
preceding the beginning of such Interest Period by (c) a percentage equal
to 100% minus the stated maximum rate (expressed as a percentage) as
prescribed by the Federal Reserve Board of all reserve requirements
(including, without limitation, any marginal, emergency, supplemental,
special or other reserves) applicable on the first day of such Interest
Period to any member bank of the Federal Reserve System in respect of
Eurodollar funding or liabilities.
"Lien" means any mortgage, pledge, lien, security interest or other
charge or encumbrance, including the retained security title of a
conditional vendor or lessor.
"Loan" means an extension of credit by a Bank to the Company pursuant
to Section 2, and may be a Base Rate Loan, CD Rate Loan or a Eurodollar
Rate Loan.
"Majority Banks" means at any time Banks then having Commitments equal
to at least 51% of the Aggregate Commitment.
"Margin Stock" has the meaning given to such term in Regulation U.
"Material Subsidiary" means any Subsidiary of the Company, the
financial condition of which, when consolidated with the financial
condition of the Company, has a material effect on such financial condition
of the Company, and shall include, without limitation, each Principal
Insurance Subsidiary.
"Mortgage" means, as of any date, as to each Insurance Subsidiary, the
amount of such Insurance Subsidiary's mortgage loans on real estate
calculated in accordance with Statutory Accounting Principles.
"Multiemployer Plan" means a "multiemployer plan" as defined in ERISA.
"NAIC" means the National Association of Insurance Commissioners and
any successor thereto.
"Net Worth" means, with respect to the Company, as at the time any
determination thereof is made, the consolidated shareholders' equity
(including common stock, additional paid-in capital, retained earnings, and
7
net unrealized gains and losses).
"Non-Insurance Operating Subsidiaries" means, as of any date, all
Subsidiaries of the Company that are not Insurance Subsidiaries. The Non-
Insurance Operating Subsidiaries of the Company as of the date of this
Agreement are set forth in Schedule 6.17 attached hereto.
"Non-Investment Grade Obligations" means, as of any date, for each
Insurance Subsidiary, any fixed maturity debt instrument investment that is
not an Investment Grade Obligation.
"Note" or "Notes" - see Section 3 and Exhibit A.
"Notice of Borrowing" means a notice given by the Company to the Agent
pursuant to Section 2.3, in substantially the form of Exhibit B.
"Notice of Conversion/Continuation" means a notice given by the
Company to the Agent pursuant to Section 2.4, in substantially the form of
Exhibit C.
"PBGC" means the Pension Benefit Guaranty Corporation and any entity
succeeding to any or all of its functions under ERISA.
"Permitted Liens" - see Section 7.16.
"Person" means an individual or a corporation, partnership, trust,
incorporated or unincorporated association, joint venture, joint stock
company, government (or any agency or political subdivision thereof) or
other entity of any kind.
"Plan" means an "employee pension benefit plan", as such term is
defined in Section 3(2) of ERISA, an "employee welfare benefit plan," as
such term is defined in Section 3(1) of ERISA, or any bonus, deferred
compensation, stock purchase, stock option, severance, salary continuation,
vacation, sick leave, fringe benefit, incentive, insurance, welfare or
similar arrangement.
"Policy Liabilities" means the aggregate liabilities of a Principal
Insurance Subsidiary for future policy benefits with respect to life and
annuity policies issued by such Principal Insurance Subsidiary, determined
in accordance with GAAP.
"Preferred Stock" means the shares of the Company's Cumulative
Convertible Exchangeable Preferred Stock, having a stated value of $25 per
share.
"Principal Insurance Subsidiaries" means, as of any date, any
Insurance Subsidiary that is or becomes engaged in a material amount of
insurance business and has been designated in writing by all of the Banks
and the Company as a Principal Insurance Subsidiary. The following
Insurance Subsidiaries shall be deemed to be Principal Insurance
Subsidiaries as of the date of this Agreement and until designated
otherwise by all of the Banks and the Company : Pioneer Life Insurance
8
Company of Illinois, an Illinois corporation; National Group Life Insurance
Company, an Illinois corporation; and Manhattan National Life Insurance
Company, an Illinois corporation.
"Real Estate Concentration Ratio" means, as of any date, as to each
Insurance Subsidiary, the ratio of (a) the sum of (i) Real Estate
Investments plus (ii) Mortgages to (b) Capital and Surplus.
"Real Estate Investments" means, as of any date, as to each Insurance
Subsidiary, the sum of (a) the book value of properties acquired in
satisfaction of debt calculated in accordance with Statutory Accounting
Principles plus (b) the investment in investment real estate calculated in
accordance with Statutory Accounting Principles; provided, that the
properties occupied by the Company or any Subsidiary shall be excluded from
the calculation of Real Estate Investments for purposes of this Agreement.
"Regulation U" means Regulation U of the Board of Governors of the
Federal Reserve System and any successor rule or regulation of similar
import as in effect from time to time.
"Reimbursement Obligations" - see Section 2.6.
"Related Documents" means, collectively, this Agreement, each Note
issued by the Company to each Bank, and all other documents, instruments
and agreements executed by the Company and delivered to the Agent or the
Banks pursuant to or in connection with this Agreement or any of the
foregoing.
"Reportable Event" means a reportable event (as defined in Section
4043(b) of ERISA) for which notice has not been waived pursuant to
applicable regulations.
"Reuters Screen LIBO Page" means the display page designated "LIBO" on
the Reuters Monitor Money Rates Service (or such other page that may
replace that page on such service for the purpose of displaying comparable
rates).
"Stated Amount" shall mean, with respect to any LC and as of the date
of determination, the maximum amount for which a draw or demand for payment
may then be made thereunder, whether or not such maximum amount is defined
in such LC as the "Stated Amount" thereof.
"Statutory Accounting Principles" means the accounting principles used
in the preparation of Statutory Statements in accordance with the rules and
regulations prescribed by the insurance commission or department of each
Insurance Subsidiary's respective state of domicile in effect as of the
date of this Agreement. In the event that there is a material change in
such accounting principles subsequent to the date hereof, the covenants
contained herein and affected by such change shall be adjusted as necessary
to preserve the force and effect of such covenants by the Company (provided
that prior to any such adjustment the Company shall consult with the Agent
with respect to any such adjustment) subject to the reasonable objection of
9
the Majority Banks.
"Statutory Statements" means, with respect to an Insurance Subsidiary,
the annual or quarterly accounting statement for such Insurance Subsidiary
prepared in accordance with Statutory Accounting Principles, as filed with
the insurance commissioner or department of each jurisdiction in which such
Insurance Subsidiary is subject to regulation.
"Subsidiary" means a corporation, association or business entity of
which the Company and/or its other Subsidiaries own, directly or
indirectly, such number of outstanding shares as have more than 50% of the
ordinary voting power for the election of such entity's directors.
"Telerate Screen Rate" means, for any Interest Period to be applicable
to a Eurodollar Rate Loan, the rate for deposits in U.S. dollars for a
period approximately equal to such Interest Period which appears on Page
3750 of the Dow Jones Telerate Service (or such other page that may replace
that page on such service for the purpose of displaying comparable rates)
as of 11:00 a.m., London time, on the day that is two London banking days
preceding the beginning of such Interest Period.
"Termination Date" - means the earlier to occur of:
(a) April 30, 1996; and
(b) the date on which the Aggregate Commitment shall
terminate in accordance with the provisions of this
Agreement.
"Total Adjusted Capital" shall have the same meaning as the term
"Total Adjusted Capital" as defined in the NAIC Risk-Based Capital (RBC)
for Life and/or Health Insurers Model Act, as such term may be amended by
the NAIC from time to time.
"Total Assets" means, as of any date, as to each Insurance Subsidiary,
the total net admitted assets calculated as of such date in accordance with
Statutory Accounting Principles.
"Total Invested Assets" means, as of any date, as to each Insurance
Subsidiary, the amount of such Insurance Subsidiary's cash and invested
assets calculated in accordance with Statutory Accounting Principles.
"Unrestricted Subsidiary" - see Section 7A.1.
SECTION 2
BANK'S COMMITMENT; BORROWING PROCEDURES; LCs
SECTION 2.1 Bank's Commitment to Make Loans. (a) On the terms and
subject to the conditions set forth in this Agreement, each Bank severally
agrees to make revolving loans (each such loan called a "Loan" and
collectively called the "Loans") to the Company from time to time on any
10
Business Day during the period from the Closing Date to the Termination
Date, in an aggregate amount not to exceed at any time outstanding the
amount set forth opposite such Bank's name on the signature page hereof
under the heading "Commitment" (such amount as the same may be reduced
pursuant to Section 2.9 or as a result of one or more assignments pursuant
to Section 10.12, such Bank's "Commitment") minus the sum of (a) such
Bank's Commitment Percentage of the aggregate Stated Amount of all LCs
issued and outstanding and (b) such Bank's Commitment Percentage of the
aggregate amount of all Reimbursement Obligations; provided, however, that
after giving effect to any Borrowing of Loans, the aggregate principal
amount of all outstanding Loans plus the sum of (c) the Aggregate Stated
Amount of all LCs issued and outstanding and (d) the aggregate amount of
all Reimbursement Obligations, shall not exceed the Aggregate Commitment.
The Company and each Bank agree and acknowledge that each Bank's portion of
each Borrowing of Loans shall be based pro rata on such Bank's Commitment
Percentage determined at the time of such Borrowing.
(b) The Company agrees that, with respect to each Bank's
Commitment Percentage of each Loan that is a CD Rate Loan, the Company
shall purchase from such Bank a certificate or certificates of deposit in
an amount equal to such Bank's Commitment Percentage of each such Loan
having a term equal to the Interest Period applicable to such Loan.
SECTION 2.2 Issuing Bank's Commitment to Issue LCs. On the terms
and subject to the conditions set forth in this Agreement, the Issuing Bank
agrees, as the Company may from time to time request, to issue for the
account of the Company letters of credit (each such letter of credit called
an "LC" and collectively called the "LCs") from time to time on any
Business Day during the period from the Closing Date to the Termination
Date, in a Stated Amount not to exceed the Aggregate Commitment minus the
sum of (a) the aggregate principal amount of all Loans then outstanding and
not repaid, (b) the aggregate Stated Amount of all LCs previously issued
and then outstanding and (c) the aggregate amount of all Reimbursement
Obligations.
SECTION 2.3 Procedure for Borrowing.
(a) Each Borrowing of Loans shall be made upon the Company's
irrevocable written notice delivered to the Agent in accordance with
Section 10.2 in the form of a Notice of Borrowing (which notice must be
received by the Agent prior to 11:00 a.m. (Chicago time) (i) two Business
Days prior to the requested Borrowing date, in the case of Eurodollar Rate
Loans, (ii) one Business Day prior to the requested Borrowing Date, in the
case of CD Rate Loans, and (iii) on the requested Borrowing date, in the
case of Base Rate Loans) specifying:
(A) the amount of the Borrowing, which shall be in an
aggregate minimum principal amount of one hundred thousand
dollars ($100,000);
(B) the requested Borrowing date, which shall be a
Business Day;
11
(C) whether the Borrowing is to be comprised of
Eurodollar Rate Loans, CD Rate Loans or Base Rate Loans;
(D) in the case of Eurodollar Rate Loans and CD Rate
Loans, the duration of the Interest Period applicable to such
Loans included in such notice. If the Notice of Borrowing
shall fail to specify the duration of the Interest Period for
any Borrowing comprised of CD Rate Loans or Eurodollar Rate
Loans, such Interest Period shall be 30 days or one month,
respectively; and
(E) the account of the Company to which the proceeds of
such Borrowing shall be deposited.
(b) Upon receipt of the Notice of Borrowing, the Agent will
promptly notify each Bank thereof and of the amount of such Bank's
Commitment Percentage of the Borrowing.
(c) Each Bank will make the amount of its Commitment Percentage
of the Borrowing available to the Agent for the account of the Company at
the Agent's Payment Office by 2:00 p.m. (Chicago time) on the Borrowing
date requested by the Company in funds immediately available to the Agent.
Promptly after receipt of all such amounts by the Agent, the proceeds of
all such Loans will be disbursed by the Agent to such account of the
Company designated in writing by the Company in the Notice of Borrowing in
like funds as received by the Agent.
(d) Unless the Majority Banks shall otherwise agree, during the
existence of an Event of Default, the Company may not elect to have a Loan
be made as, or converted into or continued as, a Eurodollar Rate Loan or a
CD Rate Loan.
SECTION 2.4 Conversion and Continuation Elections.
(a) The Company may upon irrevocable written notice to the Agent
in accordance with Section 2.4(b):
(i) elect to convert on any Business Day,
any Base Rate Loans (or any part thereof in an amount not less
than $100,000) into Eurodollar Rate Loans or CD Rate Loans; or
(ii) elect to convert on the last day of any Interst
Period with respect thereto any Eurodollar Rate Loans (or any
part thereof in an amount not less than $100,000) into Base
Rate Loans or CD Rate Loans; or
(iii) elect to convert on the last day of any
Interest Period with respect thereto any CD Rate Loans (or any
part thereof in an amount not less than $100,000) into Base
Rate Loans or Eurodollar Rate Loans; or
(iv) elect on the last day of any Interest Period
12
with respect to any Eurodollar Rate Loans or CD Rate Loans (or
any part thereof in an amount not less than $100,000) to
continue such Eurodollar Rate Loans or CD Rate Loans (or such
part thereof) as such;
provided, that if the aggregate amount of CD Rate Loans or Eurodollar Rate
Loans shall have been reduced, by payment, prepayment, or conversion of
part thereof, to be less than $100,000, such CD Rate Loans or Eurodollar
Rate Loans shall automatically convert into Base Rate Loans, and on and
after such date until the amount of Loans shall exceed $100,000 the right
of the Company to continue such Loans as, and convert such Loans into,
Eurodollar Rate Loans or CD Rate Loans, as the case may be, shall
terminate.
(b) The Company shall deliver a Notice of Conversion/
Continuation in accordance with Section 10.2 to be received by the Agent
not later than 11:00 a.m. (Chicago time) at least (i) two Business Days in
advance of the Conversion Date or continuation date, if the Loans are to be
converted into or continued as Eurodollar Rate Loans, (ii) one Business Day
in advance of the Conversion Date or continuation date, if the Loans are to
be converted into or continued as CD Rate Loans, and (ii) on the Conversion
Date, if the Loans are to be converted into Base Rate Loans, specifying:
(A) the proposed Conversion Date or continuation
date;
(B) the aggregate amount of Loans to be converted
or continued;
(C) the nature of the proposed conversion or
continuation; and
(D) the duration of the requested Interest Period.
(c) If upon the expiration of any Interest Period applicable to
CD Rate Loans or Eurodollar Rate Loans, the Company has failed to select
timely a new Interest Period to be applicable to such CD Rate Loans or
Eurodollar Rate Loans, as the case may be, or if any Event of Default shall
then exist, the Company shall be deemed to have elected to convert such CD
Rate Loans or Eurodollar Rate Loans into Base Rate Loans effective as of
the expiration date of such current Interest Period.
(d) Upon receipt of a Notice of Conversion/Continuation, the
Agent will promptly notify each Bank thereof, or, if no timely notice is
provided by the Company, the Agent will promptly notify each Bank of the
details of any automatic conversion.
(e) Unless the Majority Banks shall otherwise agree, during the
existence of an Event of Default, the Company may not elect to have a Loan
converted into or continued as a Eurodollar Rate Loan or a CD Rate Loan.
SECTION 2.5 LC Documentation. (a) Each of the Company's requests
13
for an LC must be received by the Agent and the Issuing Bank at least two
Business Days prior to the requested issue date of such LC, and shall be
accompanied by a duly completed application therefor (the "LC Application")
and such other documents, in support thereof as the Issuing Bank may
reasonably require, and all of such applications and documents shall be in
form and substance reasonably satisfactory to the Issuing Bank. In
addition, the proposed form of each LC shall be in form and substance
reasonably satisfactory to the Issuing Bank, due regard being given to the
customs and conventions followed by the Issuing Bank in the issuance of
letters of credit generally and the advice of the Banks from time to time
given to the Issuing Bank as to necessary or desirable terms and provisions
in the form of any such proposed LC. Upon receipt of any request for an
LC, the Agent will promptly notify each Bank thereof and deliver to each
Bank a copy of the LC Application and each other document received by the
Agent in connection with such request for an LC. Each LC shall have an
expiry date that shall in no event be later than one year after the
Termination Date.
(b) Subject to the terms and conditions of this Agreement,
including, without limitation, Section 2.2, Section 2.5(a) and Section 8.2
hereof, the Issuing Bank shall issue the requested LC in accordance with
the Issuing Bank's usual and customary business practices on the date
requested for such issuance by the Company in the request made by the
Company pursuant to the terms of Section 2.5(a) hereof. Notwithstanding
the foregoing, if the Issuing Bank shall have received written notice from
the Agent or any Bank on or before the Business Day prior to the date of
the Issuing Bank's issuance of such proposed LC that one or more of the
conditions set forth in Section 8.2 is not then satisfied, then, until such
condition is satisfied and the Issuing Bank receives written notice
thereof, the Issuing Bank shall have no obligation to issue any LC. Each
Bank agrees that it shall not unreasonably give any such notice or
unreasonably fail to withdraw any such notice.
(c) The Issuing Bank shall promptly give the Agent notice upon
the issuance of an LC hereunder and a copy of the LC so issued by such
Issuing Bank, and the Agent shall promptly thereafter give notice of such
issuance and a copy of such LC to the Banks. An LC otherwise issued in
accordance with the terms of this Agreement shall be an LC notwithstanding
any failure by the Issuing Bank or the Agent to provide any such notice or
copies in a timely manner.
(d) The Company may request that an LC be extended beyond its
stated expiry date or otherwise renewed by giving the Issuing Bank and the
Agent written notice of any such extension or renewal not later than ten
Business Days prior to the date (the "LC Extension Date") that such LC
would have expired absent such extension or renewal. Each such notice (an
"LC Extension Request") shall specify the LC that is being extended or
renewed and the proposed new expiration date of such LC. The Agent shall
promptly advise each Bank of its receipt of, and provide to each Bank a
copy of, each LC Extension Request. The new expiration date proposed for
any LC may not be a date that is on or after one year after the Termination
Date. Following proper delivery of an LC Extension Request pursuant to
14
this Section, the Issuing Bank shall, subject to Section 8.2, extend the
expiration date of or renew any LC issued by the Issuing Bank.
Notwithstanding the foregoing, if the Issuing Bank shall have received
written notice from the Agent or any Bank on or before the Business Day
prior to the Issuing Bank's proposed extension of the expiration date of an
LC that one or more of the conditions set forth in Section 8.2 is not then
satisfied, then, until such condition is satisfied and the Issuing Bank
receives written notice thereof, the Issuing Bank shall have no obligation
to extend the expiration date of such LC.
(e) The Company may request that an LC be amended at any time by
giving the Issuing Bank and the Agent written notice thereof not later than
ten Business Days prior to the date proposed for such amendment. Each such
notice (an "LC Amendment Request") shall specify in reasonable detail the
changes that are then being requested to be made in the applicable LC and
the changes, if any, in the information specified in the original request
with respect to such LC delivered pursuant to Section 2.5(a). The Agent
shall promptly advise the Banks of its receipt of, and provide a copy to
each Bank of, each LC Amendment Request. If the Issuing Bank and the
Agent, after consultation with any Bank that provides comments on any such
LC Amendment Request, agree to such amendment, such amendment shall be
given effect; provided, that (i) any extension of the expiration date or
renewal of an LC shall be subject to the terms of Section 2.5(d), and (ii)
any amendment which increases the face amount of an LC shall be deemed an
issuance of a new LC with a face amount equal to the amount of such
increase, and shall be subject to the provisions of this Agreement,
including without limitation, Section 2.2, Section 2.5(a) and Section 8.2.
SECTION 2.6 Agreement to Repay LC Drawings. (a) The Company hereby
agrees to reimburse the Issuing Bank (collectively called the
"Reimbursement Obligations" and individually a "Reimbursement Obligation"),
for each payment or disbursement made by the Issuing Bank under any LC
honoring any demand for payment made by the beneficiary thereunder
immediately following the occurrence of any such payment or disbursement.
Any Reimbursement Obligation not repaid on the date of the applicable
payment or disbursement giving rise thereto shall bear interest on the
amount so paid or disbursed by the Issuing Bank from the date of payment or
disbursement made by the Issuing Bank to but not including the date the
Issuing Bank is reimbursed therefor, at a rate per annum equal to the Base
Rate from time to time in effect plus two percent (2.00%) per annum.
Interest shall be computed for the actual number of days elapsed on the
basis of a year consisting of 360 days.
(b) Any action taken or omitted to be taken by the Issuing Bank
under or in connection with any LC, if taken or omitted in the absence of
willful misconduct or gross negligence, shall not put the Issuing Bank
under any resulting liability to any Bank or, assuming that the Issuing
Bank has complied with the applicable procedures specified herein and a
Bank has not given a notice contemplated by Section 2.5(b) that continues
in full force and effect, relieve any Bank of its obligations hereunder to
the Issuing Bank.
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SECTION 2.6A Participations. (a) Upon the issuance by the Issuing
Bank of any LC in accordance with the procedures and the terms set forth
herein, each Bank shall be deemed to have irrevocably and unconditionally
purchased and received from the Issuing Bank, without recourse or warranty,
an undivided interest and participation to the extent of such Bank's
Commitment Percentage in such LC (including, without limitation, all
obligations of the Company with respect thereto other than amounts owing to
the Issuing Bank under Section 4.2(d)), provided, that the participation of
any Bank in any LC hereunder shall at no time exceed an amount equal to
such Bank's Commitment minus the sum of (i) the aggregate principal amount
of all Loans made by such Bank then outstanding and not repaid, (ii) such
Bank's Commitment Percentage of the aggregate Stated Amount of all LCs
previously issued and then outstanding and (iii) such Bank's Commitment
Percentage of the aggregate amount of all Reimbursement Obligations.
(b) (i) In the event that the Issuing Bank makes any payment or
disbursement under any LC and the Company shall not have repaid such amount
to the Issuing Bank pursuant to Section 2.6(a), the Issuing Bank shall
promptly notify the Agent, which shall promptly notify each Bank, of such
failure, and each Bank severally agrees to promptly and unconditionally pay
to the Agent for the account of the Issuing Bank the amount of such Bank's
Commitment Percentage of such payment or disbursement in same day funds and
the Agent shall promptly pay such amount, and any other amounts received by
the Agent for the Issuing Bank's account pursuant to this Section 2.6A(b),
to the Issuing Bank. If the Agent so notifies such Bank prior to 11:00
A.M. (Chicago time) on any Business Day, such Bank shall make available to
the Agent for the account of the Issuing Bank its Commitment Percentage of
the amount of such payment or disbursement on such Business Day in same day
funds (or on the next succeeding Business Day if notice is given after such
time). The failure of any Bank to make available to the Agent for the
account of the Issuing Bank its Commitment Percentage of any such payment
or disbursement shall not relieve any other Bank of its obligation
hereunder to make available to the Agent for the account of the Issuing
Bank its Commitment Percentage of any payment or disbursement on the date
such payment is to be made.
(ii) In the event that any Bank fails to fund its Commitment
Percentage of any payment or disbursement required to be made by the Banks
to the Agent for the benefit of the Issuing Bank in accordance with the
provisions of clause (i) above, until the earlier of such Bank's cure of
such failure and the termination of the Bank's Commitment, the proceeds of
all amounts thereafter paid or repaid to the Agent by the Company (or any
Person on behalf of the Company) and contemplated hereunder to be disbursed
to such Bank for application against amounts owing such Bank hereunder
shall be disbursed instead to the Issuing Bank by the Agent on behalf of
such Bank to cure, in full or in part, such failure by such Bank, and, upon
such disbursement payment to such Bank shall be deemed to have been made.
Notwithstanding anything in this Agreement to the contrary:
(A) if the Issuing Bank has theretofore applied any
portion of any cash collateral pledged to it to secure
Reimbursement Obligations relating to the applicable LC as
16
reimbursement for such Reimbursement Obligations, any amounts
disbursed to the Issuing Bank by the Agent in accordance with
this Section 2.6A(b)(ii) (net of any interest due the Issuing
Bank) shall be used by the Issuing Bank to restore such cash
collateral; and
(B) a Bank shall be deemed to have cured its failure to
fund its Commitment Percentage of any such required payment in
respect of an LC at such time as an amount equal to such
Bank's Commitment Percentage (determined as of the time of the
Agent's receipt of notice of the failure by the Company to
reimburse the Issuing Bank with respect to a payment or
disbursement under such LC) of such required payment plus any
interest accrued thereon is fully funded to the Issuing Bank,
whether made by such Bank itself, by operation of the terms of
this Section 2.6A(b)(ii) or by the Company directly to the
Issuing Bank.
Interest shall accrue on the amount that should have been paid by the
defaulting Bank, for each day from the date such amount shall have been due
until the date such amount is repaid to the Agent for the benefit of the
Issuing Bank, at the Federal Funds Rate as in effect for each such day.
The provisions of this Section 2.6A(b) shall not relieve the Company from
paying interest at the applicable interest rate under Section 2.6(a).
(c) Whenever the Issuing Bank receives a payment on account of a
Reimbursement Obligation, including any interest thereon, as to which the
Agent has received for the account of the Issuing Bank any payments from
the Banks pursuant to this Section 2.6A, it shall promptly pay to the Agent
and the Agent shall promptly pay to each Bank that has funded its
participating interest therein, in the kind of funds so received, an amount
equal to such Bank's Commitment Percentage thereof (according to the
amounts so funded). Each such payment shall be made by the Issuing Bank or
the Agent, as the case may be, on the Business day on which such Person
receives the funds paid to it pursuant to the preceding sentence, if
received prior to 11:00 a.m. (Chicago time) on such Business Day, and
otherwise on the next succeeding Business Day. If the Issuing Bank or the
Agent, as the case may be, shall fail to pay to any Bank the amount due
such Bank pursuant to this Section when due, the Issuing Bank or the Agent,
as the case may be, shall be obligated to pay to such Bank interest on the
amount that should have been paid hereunder for each day from the date such
amount shall have become due until the date such amount is paid, at the
Federal Funds Rate as in effect for each such day.
(d) The obligations of (i) a Bank to make payments to the Agent
for the account of the Issuing Bank with respect to a payment or
disbursement made under an LC issued pursuant to this Agreement and (ii)
the Company to reimburse the Issuing Bank for payments and disbursements
made by the Issuing Bank under any LC shall, in each case, be absolute and
unconditional under any and all circumstances and irrespective of any
setoff, counterclaim or defense to payment which the Company may have or
have had against the Issuing Bank or such beneficiary, including, without
17
limitation, any defense based on the failure of such demand for payment to
conform to the material terms of such LC or any nonapplication or
misapplication by such beneficiary of the proceeds of such demand for
payment or the legality, validity, regularity or enforceability of such LC
or any document or contract related to or required to be presented under
the terms of such LC; provided, however, that neither the Company nor the
Banks shall be obligated to reimburse the Issuing Bank for any wrongful
payment or disbursement made by such Issuing Bank under such LC as a result
of acts or omissions constituting negligence or willful misconduct on the
part of the Issuing Bank.
SECTION 2.7 Mandatory Payment of LC Liability. The Company agrees
that, upon (i) its receipt of a written notice from the Agent acting upon
the written request of the Majority Banks stating that an Event of Default
has occurred or (ii) its receipt of a written notice from the Agent that
the Termination Date has occurred, it will promptly pay to the Agent for
the account of the Issuing Bank an amount equal to the amount of the then
aggregate Stated Amount of all LCs issued and outstanding hereunder. The
Agent, the Issuing Bank and the Company hereby agree that the Company's
payment of such amount shall be by means of purchasing from the Issuing
Bank or its designee a certificate or certificates of deposit in an amount
equal to the amount of the then aggregate Stated Amount of all LCs issued
and outstanding hereunder. Any amounts so received by the Issuing Bank or
certificates of deposit issued by the Issuing Bank or its designee pursuant
to the provisions of the foregoing sentence shall be retained by the
Issuing Bank as collateral security for the Reimbursement Obligation of the
Company with respect to such LCs. Subject to Section 2.6A and so long as
no Event of Default has occurred and is continuing, upon the expiration of
any LC, the Issuing Bank will return to the Agent, and the Agent shall
return to the Company, all such funds with respect to such LC not used to
pay Reimbursement Obligations.
SECTION 2.8 LC Operations. The Issuing Bank shall, promptly
following its receipt thereof, (i) examine all documents purporting to
represent a demand for payment by the beneficiary under any LC to ascertain
that the same appear on their face to be in conformity with the terms and
conditions of such LC and (ii) notify the Agent and the Company in writing
of each such demand for payment. If, after examination, the Issuing Bank
shall have determined that a demand for payment under such LC does not
conform to the terms and conditions of such LC, then the Issuing Bank
shall, as soon as reasonably practicable, give notice to the beneficiary,
the Agent and the Company to the effect that negotiation was not in
accordance with the terms and conditions of such LC, stating the reasons
therefor and that the relevant document is being held at the disposal of
such beneficiary or is being returned to such beneficiary, as the Issuing
Bank may elect. The beneficiary may attempt to correct any such
nonconforming demand for payment under such LC if, and to the extent that,
such beneficiary is entitled (without regard to the provisions of this
sentence) and able to do so. If the Issuing Bank determines that a demand
for payment under such LC conforms to the terms and conditions of such LC,
then the Issuing Bank shall make payment to the beneficiary in accordance
with the terms of such LC. The Issuing Bank shall have the right to
18
require the beneficiary to surrender such LC to the Issuing Bank on the
stated expiration date of such LC.
SECTION 2.9 Voluntary Termination or Reduction of Commitments. The
Company may, upon not less than one Business Days' prior written notice to
the Agent, terminate the Aggregate Commitment or permanently reduce the
Aggregate Commitment by an aggregate minimum amount of $100,000; provided
that no such reduction or termination shall be permitted if, after giving
effect thereto and to any prepayments of the Loans made on the effective
date thereof, the sum of (i) the then outstanding principal amount of the
Loans, (ii) the Aggregate Stated Amount of all LCs issued and outstanding
and (iii) the aggregate amount of all Reimbursement Obligations, would
exceed the amount of the Aggregate Commitment then in effect. Any
reduction of the Aggregate Commitment shall be applied to each Bank's
Commitment in accordance with such Bank's Commitment Percentage. All
commitment fees with respect to the portion of the Commitments that are
being reduced that have accrued to, but not including, the effective date
of any reduction or termination of Commitments, shall be paid on the
effective date of such reduction or termination.
SECTION 2.10 Optional Prepayments. Subject to Section 4.5, the
Company may, at any time or from time to time, ratably prepay Loans in
whole or in part in any amount; provided that the Company's written notice
of such prepayment shall be delivered to the Agent in accordance with
Section 10.2 prior to 11:00 a.m. (Chicago time) (i) two Business Days prior
to the requested date of prepayment, in the case of Eurodollar Rate Loans;
(ii) one Business Day prior to the requested date of prepayment, in the
case of CD Rate Loans, and (iii) on the requested date of prepayment, in
the case of Base Rate Loans. Such notice of prepayment shall specify the
date of repayment, the aggregate amount of such prepayment, and whether
such prepayment is of Base Rate Loans, CD Rate Loans or Eurodollar Rate
Loans, or any combination thereof. Such notice shall not thereafter be
revocable by the Company. The Agent will promptly notify each Bank of such
notice and of such Bank's Commitment Percentage of such prepayment. If
such notice is given by the Company, the Company shall make such prepayment
and the payment amount specified in such notice shall be due and payable on
the date specified therein, together with accrued interest to each such
date on the amount prepaid and any amounts required pursuant to Section
4.5.
SECTION 2.11 Mandatory Prepayment. On each Clean-up Date, the
Company shall make a mandatory prepayment to the Agent for the benefit of
the Banks of the outstanding principal amount of all Loans outstanding on
such Clean-up Date together with accrued interest to such Clean-up Date on
such Loans and any amounts required pursuant to Section 4.5.
SECTION 2.12 Repayment. The Company shall repay to the Agent for
the benefit of the Banks in full on the Termination Date the aggregate
principal amount of the Loans outstanding on the Termination Date.
SECTION 3
19
NOTES EVIDENCING THE LOANS
SECTION 3.1 Notes. Each Bank's Loans shall be evidenced by a
promissory note (herein, as the same may be amended, modified or
supplemented from time to time, and together with any renewals thereof or
exchanges or substitutions therefor, individually called a "Note" and
collectively called the "Notes"), substantially in the form set forth in
Exhibit A, with appropriate insertions, dated the Closing Date, payable to
the order of such Bank in the principal amount equal to such Bank's
Commitment or the aggregate principal amount of the Loans outstanding to
such Bank, whichever is less. The date and amount of the Loans made by
each Bank and of each repayment of principal thereon received by such Bank
shall be recorded by such Bank in its records or, at its option, on the
schedule attached to its Note. The aggregate unpaid principal amount so
recorded shall be rebuttable presumptive evidence of the principal amount
owing and unpaid on such Note to such Bank. The failure so to record any
such amount or any error in so recording any such amount, however, shall
not limit or otherwise affect the Company's obligations hereunder or under
such Note to repay the principal amount of the Loans evidenced by such Note
together with all interest accruing thereon. Each Note shall provide for
the payment of interest as provided in Section 4.
SECTION 4
INTEREST, FEES AND COSTS
SECTION 4.1 Interest.
(a) Subject to Section 4.1(c), each Loan shall bear interest on
the outstanding principal amount thereof from the date when made until it
becomes due at a rate per annum equal to the CD Rate, LIBOR or the Base
Rate, as the case may be, plus the Applicable Margin.
(b) Interest on each Loan shall be paid in arrears on each
Interest Payment Date. Interest shall also be paid on the date of any
prepayment of Loans pursuant to Section 2.10 for the portion of the Loans
so prepaid and upon payment (including prepayment) in full thereof,
including, without limitation, on each Clean-up Date pursuant to Section
2.11 and, during the existence of any Event of Default, interest shall be
paid on demand.
(c) If any amount of principal of or interest on any Loan, or
any other amount payable hereunder or under any of the other Loan Documents
is not paid in full when due (whether at stated maturity, by acceleration,
demand or otherwise), the Company agrees to pay interest on such unpaid
principal or other amount, from the date such amount becomes due until the
date such amount is paid in full, payable on demand, at a fluctuating rate
per annum equal to the Base Rate plus two percent (2.00%) per annum.
SECTION 4.2 Fees.
(a) Closing Fee. On the Closing Date the Company shall pay to
20
the Agent for the account of each Bank a one-time closing fee equal to
0.30% of each Bank's Commitment.
(b) Unused Commitment Fees. The Company shall pay to the Agent
for the account of each Bank an unused commitment fee at the rate of 0.30%
per annum on the daily average amount of the difference between such Bank's
Commitment from time to time in effect minus the sum of (i) such Bank's
Commitment Percentage of the aggregate principal amount of all Loans then
outstanding and not repaid, (ii) such Bank's Commitment Percentage of the
aggregate Stated Amount of all LCs issued and outstanding and (iii) such
Bank's Commitment Percentage of the aggregate amount of all Reimbursement
Obligations. The Agent shall provide the Company with an invoice for the
amount of the unused commitment fee due to each Bank for each quarterly
period ending on the last day of each March, June, September and December,
commencing on December 31, 1993. Such unused commitment fee shall accrue
from the Closing Date to the Termination Date and shall be due and payable
quarterly in arrears no later than thirty (30) days after the Company
receives the invoice referred to above, with the final payment to be made
on the Termination Date; provided that, in connection with any reduction or
termination of Commitments pursuant to Section 2.9, the accrued, unused
commitment fee calculated for the period ending on such date shall also be
paid on the date of such reduction or termination, with the next succeeding
quarterly payment being calculated on the basis of the period from the
reduction or termination date to such quarterly payment date. The unused
commitment fees provided in this subsection shall accrue at all times after
the Closing Date, including during any Clean-up Period.
(c) Letter of Credit Fees. The Company shall pay to the Agent
for the account of each Bank a letter of credit fee at the rate of 1.00%
per annum of such Bank's Commitment Percentage of the aggregate Stated
Amount of all LCs issued and outstanding. Such letter of credit fee shall
accrue from the date of issuance of each LC to the date of termination of
such LC as set forth in such LC and shall be due and payable quarterly in
advance, with the first such payment due on the date of issuance of each
such LC.
(d) Letter of Credit Issuance Fees. The Company shall pay to
the Agent for the account of the Issuing Bank a letter of credit issuance
fee on the date of issuance of each LC at a rate to be determined according
to the standard fee schedules of the Issuing Bank with respect to letters
of credit.
SECTION 4.3 Computation of Fees and Interest.
(a) All computations of interest in respect of the Base Rate
and all computations of letter of credit fees pursuant to Section 4.2(c)
shall be made on the basis of a year of 365 or 366 days, as the case may
be, and actual days elapsed. All other computations of fees and interest
under this Agreement shall be made on the basis of a 360-day year and
actual days elapsed. Interest and fees shall accrue during each period
during which interest or such fees are computed from and including the
first day thereof to but excluding the last day thereof.
21
(b) The Agent will, with reasonable promptness, notify the
Company and the Banks of each determination of a Eurodollar Rate or CD
Rate; provided, however, that any failure to do so shall not relieve the
Company of any liability hereunder or provide the basis for any claim
against the Agent. Each determination of an interest rate by the Agent
pursuant hereto shall be conclusive and binding on the Company and the
Banks in the absence of manifest error.
SECTION 4.4 Increased Costs; Capital Adequacy.
(a) If (i) Regulation D of the Board of Governors of the Federal
Reserve System, or (ii) after the date hereof, the adoption of any
applicable law, rule or regulation, or any change therein, or any change in
the interpretation or administration thereof by any governmental authority,
central bank or comparable agency charged with the interpretation or
administration thereof, or compliance by a Bank with any request or
directive (whether or not having the force of law) of any such authority,
central bank or comparable agency issued after the date hereof,
(i) shall subject such Bank to any tax, duty or other
charge with respect to any Eurodollar Rate Loan or CD Rate
Loan made by such Bank, the Note issued to such Bank, such
Bank's obligation to make or maintain any such Loan, any LC
issued by the Issuing Bank or the Issuing Bank's obligation to
make or maintain any such LC, or shall change the basis of
taxation of payments to a Bank or the Issuing Bank, as the
case may be, of the principal of or interest on any such
Eurodollar Rate Loan or CD Rate Loan or such LC or any other
amounts due under this Agreement in respect of any such
Eurodollar Rate Loan or CD Rate Loan or such LC or such Bank's
or the Issuing Bank's, as the case may be, obligation to make
or maintain any such Eurodollar Rate Loan or CD Rate Loan or
such LC (except for changes in the rate of tax on the overall
net income of such Bank imposed by the jurisdiction in which
such Bank's principal executive office is located); or
(ii) shall impose, modify or deem applicable any reserve
(including, without limitation, any reserve imposed by the
Federal Reserve Board but excluding, in the case of Eurodollar
Rate Loans, any reserve prescribed by the Federal Reserve
Board included in the determination of LIBOR), special deposit
or similar requirement against assets of, deposits with or for
the account of, or credit extended by, such Bank;
and the result of any of the foregoing is to increase the cost to such Bank
of making or maintaining any Loan or to the Issuing Bank of issuing or
maintaining any LC, or to reduce the amount of any sum received or
receivable by such Bank or the Issuing Bank, as the case may be, under this
Agreement or under its Note with respect thereto, then within 30 days after
demand by such Bank, with a copy of such demand to the Agent (which demand
shall be accompanied by a statement setting forth in reasonable detail the
22
basis of such demand), the Company shall pay to the Agent for the account
of such Bank such additional amount or amounts as will compensate such Bank
for such increased costs or such reduction, provided, however, that any
such amount or amounts payable by the Company shall not exceed the
increased costs or amount of reduction of such Bank or the Issuing Bank, as
the case may be, in direct proportion to any such Loan or any such LC.
(b) If either (i) the introduction of or any change in or in the
interpretation of any law or regulation or (ii) compliance by a Bank with
any new guideline or request from any central bank or other governmental
authority affects or would affect the amount of capital required or
expected to be maintained by such Bank or any corporation controlling such
Bank and the amount of such capital is increased by or based upon the
existence of such Bank's commitment to make or maintain any Loan by such
Bank hereunder or in the case of the Issuing Bank, its commitment to issue
any LC hereunder, then, within 30 days after demand by such Bank, with a
copy to the Agent (which demand shall set forth in reasonable detail the
basis of such demand), the Company shall pay to the Agent for the account
of such Bank, from time to time as reasonably specified by such Bank,
additional amounts sufficient to compensate such Bank in the light of such
circumstances, to the extent that such Bank reasonably determines such
increase in capital to be allocable to the existence of such Bank's
commitment to make or maintain any Loan hereunder or in the case of the
Issuing Bank, its commitment to issue any LC hereunder, provided, however,
that any such amount or amounts payable by the Company shall not exceed the
increased amount of capital required to be maintained by such Bank and
allocable to any such Loan or any such LC, as the case may be, in direct
proportion to any such Loan or any such LC.
SECTION 4.5 Funding Losses. The Company agrees to reimburse each
Bank and to hold each Bank harmless from any loss or expense which such
Bank may sustain or incur as a consequence of:
(a) the failure of the Company to make when due any payment of
principal of any Eurodollar Rate Loan or CD Rate Loan (including payments
made after any acceleration thereof) not resulting from any Bank's failure
to act;
(b) the failure of the Company to borrow, continue or convert a
Loan after the Company has given (or is deemed to have given) a Notice of
Borrowing or a Notice of Conversion/ Continuation;
(c) the failure of the Company to make any prepayment after the
Company has given a notice in accordance with Section 2.10 or Section 2.11;
(d) the prepayment of a Eurodollar Rate Loan or a CD Rate Loan
on a day which is not the last day of the Interest Period with respect
thereto; or
(e) the conversion pursuant to Section 2.4 of any Eurodollar
Rate Loan or CD Rate Loan to a Loan of another type on a day that is not
the last day of the Interest Period with respect thereto;
23
including, in each case, (i) any such loss or expense arising from the
liquidation or reemployment of funds obtained by it to maintain its
Eurodollar Rate Loans or CD Rate Loans hereunder or from fees payable to
terminate the deposits from which such funds were obtained and (ii) with
respect to any certificate of deposit purchased by the Company from each
Bank in connection with a CD Rate Loan, any penalty assessed by such Bank
for the early withdrawal of the funds deposited under any such certificate
of deposit in accordance with such Bank's usual and customary practices.
SECTION 5
MAKING OF PAYMENTS
SECTION 5.1 Payments by the Company.
(a) All payments (including prepayments) to be made by the
Company on account of principal, interest, fees and other amounts required
hereunder shall, except as otherwise expressly provided herein, be made to
the Agent for the ratable account of the Banks at the Agent's Payment
Office without condition or reservation of right in immediately available
funds, no later than 12:00 noon (Chicago time) on the date specified
herein. Any payment which is received by the Agent later than 12:00 noon
(Chicago time) shall be deemed to have been received on the immediately
succeeding Business Day and any applicable interest or fee shall continue
to accrue. The Agent will promptly distribute to each Bank its Commitment
Percentage of such principal, interest, fees or other amounts, in like
funds as received, but in any event shall distribute such amounts no later
than the close of business on the date received by the Agent if received by
the Agent no later than 12:00 noon on such date. If the Agent shall fail
to pay to any Bank the amount due such Bank pursuant to this Section when
due, the Agent shall be obligated to pay to such Bank interest on the
amount that should have been paid hereunder for each day from the date such
amount shall have become due until the date such amount is paid, at the
Federal Funds Rate as in effect for each such day.
(b) Whenever any payment hereunder shall be stated to be due on
a day other than a Business Day, such payment shall be made on the next
succeeding Business Day, and such extension of time shall in such case be
included in the computation of interest or fees, as the case may be;
subject to the provisions set forth in the definition of "Interest Period"
herein.
(c) Unless the Agent shall have received written notice from the
Company prior to the date on which any payment is due to the Banks
hereunder that the Company will not make such payment in full as and when
required hereunder, the Agent may assume that the Company has made such
payment in full to the Agent on such date in immediately available funds
and the Agent may (but shall not be so required), in reliance upon such
assumption, cause to be distributed to each Bank on such due date an amount
equal to the amount then due such Bank. If and to the extent the Company
shall not have made such payment in full to the Agent, each Bank shall
repay to the Agent on demand such amount distributed to such Bank, together
24
with interest thereon for each day from the date such amount is distributed
to such Bank until the date such Bank repays such amount to the Agent, at
the Federal Funds Rate as in effect for each such day.
SECTION 5.2 Payments by the Banks to the Agent.
(a) Unless the Agent shall have received written notice from a
Bank, with respect to each Borrowing (other than a Borrowing of Base Rate
Loans), at least one Business Day prior to the date of any proposed
Borrowing (or, in the case of a Borrowing of Base Rate Loans, on the
applicable Borrowing date), that such Bank will not make available to the
Agent as and when required hereunder for the account of the Company the
amount of that Bank's Commitment Percentage of the Borrowing, the Agent may
assume that each Bank has made such amount available to the Agent in
immediately available funds on the Borrowing date and the Agent may (but
shall not be so required), in reliance upon such assumption, make available
to the Company on such date a corresponding amount. If and to the extent
any Bank shall not have made its full amount available to the Agent in
immediately available funds and the Agent in such circumstances has made
available to the Company such amount, that Bank shall on the next Business
Day following the date of such Borrowing make such amount available to the
Agent, together with interest at the Federal Funds Rate for and determined
as of each day during such period. A notice of the Agent submitted to any
Bank with respect to amounts owing under this Section 5.2(a) shall be
conclusive, absent manifest error. If such amount is so made available,
such payment to the Agent shall constitute such Bank's Loan on the date of
Borrowing for all purposes of this Agreement. If such amount is not made
available to the Agent on the next Business Day following the date of such
Borrowing, the Agent shall notify the Company of such failure to fund and,
upon demand by the Agent, the Company shall pay such amount to the Agent
for the Agent's account, together with interest thereon for each day
elapsed since the date of such Borrowing, at a rate per annum equal to the
interest rate applicable at the time to the Loans comprising such
Borrowing.
(b) The failure of any Bank to make any Loan on any date of
Borrowing shall not relieve any other Bank of any obligation hereunder to
make a Loan on the date of such Borrowing, but no Bank shall be responsible
for the failure of any other Bank to make the Loan to be made by such other
Bank on the date of any Borrowing.
SECTION 5.3 Setoff.
(a) The Company agrees that, if at any time (i) any amount owing
by it under this Agreement or any Related Document is then due and payable
to a Bank or (ii) any Event of Default shall have occurred and be
continuing, then such Bank, in its sole discretion, may apply to the
payment of the Liabilities any and all balances, credits, deposits,
accounts or moneys of the Company then or thereafter with such Bank.
(b) Without limitation of Section 5.3(a), the Company agrees
that, upon and during the continuance of any Event of Default, such Bank is
25
hereby authorized, at any time and from time to time, without notice to the
Company, (i) to set off against and to appropriate and apply to the payment
of the Liabilities (whether matured or unmatured) any and all amounts which
such Bank is obligated to pay over to the Company (whether matured or
unmatured, and, in the case of deposits, whether general or special, time
or demand and however evidenced) and (ii) pending any such action, to the
extent necessary, to hold such amounts as collateral to secure
such Liabilities.
(c) Notwithstanding any other provision of this Agreement, the
Notes or any other Related Document, the Banks shall not set off against,
or appropriate or apply to the payment of any Liabilities, any of the
deposits, accounts or other assets of any Insurance Subsidiary.
SECTION 5.4 Sharing of Payments. If, other than as expressly
provided elsewhere herein, any Bank shall obtain on account of the
Liabilities held by such Bank any payment (whether voluntary, involuntary,
through the exercise of any right of set-off, or otherwise) in excess of
its Commitment Percentage of payments on account of the Liabilities
obtained by all the Banks, such Bank shall promptly (a) notify the Agent of
such fact and (b) upon demand purchase from the other Banks a portion of
the Liabilities held by such other Banks as shall be necessary to cause
such purchasing Bank to share the excess payment ratably with each of them
based upon each Bank's Commitment Percentage; provided, however, that if
all or any portion of such excess payment is thereafter recovered from the
purchasing Bank, such purchase shall to that extent be rescinded and each
other Bank shall repay to the purchasing Bank the purchase price paid
therefor, together with an amount equal to such paying Bank's Commitment
Percentage of any interest or other amount paid or payable by the
purchasing Bank in respect of the total amount so recovered. The Company
agrees that any Bank so purchasing a portion of another Bank's Liabilities
pursuant to this Section 5.4 may, to the fullest extent permitted by law,
exercise all of its rights of payment (including the right of setoff) with
respect to such purchased Liabilities as fully as if such Bank were the
direct creditor of the Company in the amount of such purchased Liabilities.
The Agent will keep records (which shall be conclusive and binding in the
absence of manifest error) of amounts purchased pursuant to this Section
5.4 and will in each case notify the Banks following any purchases or
repayments.
SECTION 6
REPRESENTATIONS AND WARRANTIES
To induce each Bank to enter into this Agreement and to make Loans and
to induce the Issuing Bank to enter into this Agreement and issue LCs
hereunder, the Company represents and warrants to each Bank, the Issuing
Bank and the Agent that:
SECTION 6.1 Corporate Organization. The Company is a corporation
duly existing and in good standing under the laws of the State of Delaware
and is duly qualified and in good standing as a foreign corporation
26
authorized to do business in Illinois, which is the only other
jurisdiction in which the Company is required to be duly qualified and in
good standing as a foreign corporation. The Company's failure to be so
qualified in any other jurisdiction does not materially and adversely
affect the Company's business, operations or financial condition or its
ability to perform its obligations hereunder and under the Related
Documents to which it is a party.
SECTION 6.2 Authorization; No Conflict. The Company's execution,
delivery and performance of this Agreement and each of the Related
Documents to which it is a party and the consummation of the transactions
contemplated by this Agreement and each of the Related Documents are within
the Company's corporate powers, have been duly authorized by all necessary
corporate action, require no governmental, regulatory or other approval,
and (a) do not and will not contravene or conflict with any provision of
(i) any law the failure of the Company to comply with in the Company's
determination materially and adversely affects the Company's business,
operations or financial condition or its ability to perform its obligations
hereunder and under the Related Documents to which it is a party, (ii) any
judgment, decree or order applicable to the Company, or (iii) the Company's
articles of incorporation or by-laws, and (b) do not and will not
contravene or conflict with any provision of any agreement or instrument
binding upon the Company or upon any property of the Company that in the
Company's determination materially and adversely affects the Company's
business, operations or financial condition or its ability to perform its
obligations hereunder or under the Related Documents to which it is a
party.
SECTION 6.3 Validity and Binding Nature. This Agreement and the
Related Documents to which the Company is a party are (or, when duly
executed and delivered, will be) the legal, valid and binding obligations
of the Company enforceable against the Company in accordance with their
respective terms.
SECTION 6.4 Financial Statements. The annual and quarterly
historical balance sheets and statements of operations that have been or
shall hereafter be furnished to the Agent, the Issuing Bank or any Bank by
or at the direction of the Company for the purposes of or in connection
with this Agreement do and will present fairly the financial condition of
the Persons involved as of the dates thereof and the results of their
operations for the period(s) covered thereby, all in accordance with GAAP,
consistently applied, unless otherwise noted therein.
SECTION 6.5 Litigation and Contingent Liabilities.
(a) No litigation (including, without limitation, derivative
actions), arbitration proceedings, governmental proceedings or
investigations or regulatory proceedings are pending or, to the best of its
knowledge, threatened against the Company or any Material Subsidiary which
in the Company's determination materially and adversely affects the
Company's or such Material Subsidiary's business, operations or financial
condition or the Company's ability to perform its obligations hereunder and
27
under the Related Documents to which it is a party. In addition, to the
best of the Company's knowledge, there are no inquiries, formal or
informal, which give rise to such actions, proceedings or investigations.
(b) The Company and, to the best of the Company's knowledge,
each Material Subsidiary has obtained all licenses, permits, franchises and
other governmental authorizations necessary to the ownership of its
properties or to the conduct of its businesses, including without
limitation all licenses, permits, franchises and other governmental
authorizations required under all applicable Environmental Laws, a failure
to obtain or violation of which in the Company's determination materially
and adversely affects the Company's or such Material Subsidiary's business,
operations or financial condition or the Company's ability to perform its
obligations hereunder and under the Related Documents to which it is a
party.
(c) The Company does not have any material contingent
liabilities required to be disclosed pursuant to GAAP that are not provided
for or disclosed in the financial statements referred to in Section 6.4
hereof.
SECTION 6.6 Employee Benefit Plans. To the best of the Company's
knowledge, each Plan complies in all material respects with all applicable
statutes and governmental rules and regulations (including, without
limitation, the requirements of Section 401(a) of the Internal Revenue Code
of 1986, as amended, to the extent that such Plan is intended to conform to
that section) and during the 12-consecutive-month period prior to the
Closing Date, (i) no Reportable Event has occurred and is continuing with
respect to any Plan subject to Title IV of ERISA, (ii) neither the Company
nor any ERISA Affiliate has withdrawn from any Plan subject to Title IV of
ERISA or instituted steps to do so, (iii) no steps have been instituted to
terminate any Plan subject to Title IV of ERISA, (iv) no contribution
failure has occurred with respect to any Plan sufficient to give rise
to a lien under Section 302(f) of ERISA, or (v) each Plan which is intended
to be qualified pursuant to Section 401(a) of the Internal Revenue Code of
1986, as amended, has received a favorable determination letter. To the
best of the Company's knowledge, no condition exists or event or
transaction has occurred in connection with any Plan which would result in
the incurrence by the Company or any ERISA Affiliate of any liability, fine
or penalty, which in the Company's determination materially and adversely
affects the Company's business, operations or financial condition, or the
ability of the Company to perform its obligations hereunder and under the
Related Documents to which it is a party. Neither the Company nor any
ERISA Affiliate presently maintains, contributes to or, to the best of the
Company's knowledge, has any liability (including current or potential
withdrawal liability) with respect to any Multiemployer Plan. To the best
of the Company's knowledge, neither the Company nor any ERISA Affiliate has
any liability with respect to any funded or unfunded postretirement benefit
for employees or former employees (including medical, health or life
insurance) other than liability for continuation coverage described in
Part 6 of Title I of ERISA.
28
SECTION 6.7 Investment Company Act. The Company is not an
"investment company" or a company "controlled" by an "investment company",
within the meaning of the Investment Company Act of 1940, as amended.
SECTION 6.8 Regulation U. The Company is not engaged principally,
or as one of its important activities, in the business of extending credit
for the purpose of purchasing or carrying Margin Stock.
SECTION 6.9 Accuracy of Information. To the best of the Company's
knowledge, all factual information heretofore or contemporaneously
furnished by the Company to the Agent, the Issuing Bank or any Bank for
purposes of or in connection with this Agreement or any transaction
contemplated hereby is, and all other factual information hereafter
furnished by the Company to the Agent, the Issuing Bank or any Bank will
be, true and accurate in every material respect on the date as of which
such information is dated or certified, and the Company has not knowingly
omitted and will not knowingly omit any material fact it deems necessary to
prevent such information from being false or misleading.
SECTION 6.10 Labor Controversies. There are no labor controversies
pending or threatened against the Company or any Material Subsidiary which
in the Company's determination materially and adversely affect the
Company's or such Material Subsidiary's business, operations or financial
condition or the Company's ability to perform its obligations hereunder and
under the Related Documents to which it is a party.
SECTION 6.11 Tax Status. Except as set forth in Schedule 6.11
hereto, the Company and, to the best of the Company's knowledge, each
Material Subsidiary, have made or filed all income and other tax returns,
reports and declarations required by any jurisdiction to which it is
subject, have paid all taxes, assessments and other charges shown or
determined to be due on such returns, reports and declarations (other than
those being diligently contested in good faith by appropriate proceedings),
and have set aside adequate reserves against liability for taxes,
assessments and charges applicable to periods subsequent to those covered
by such returns, reports and declarations, a failure of which to file, to
pay or to set aside in the Company's determination materially and adversely
affects the Company's or such Material Subsidiary's business, operations or
financial condition or the Company's ability to perform its obligations
hereunder and under the Related Documents to which it is a party.
SECTION 6.12 No Default. No event has occurred and no condition
exists which, upon the execution and delivery of, or consummation of any
transaction contemplated by, this Agreement or any Related Document, or
upon the funding of any Loan or the issuance of any LC, will constitute an
Event of Default. The Company and each Material Subsidiary have not
received notice of default with respect to any other material agreement,
security or contract, except those for which a default exists that is not
capable of being cured with the payment of money or as to which a good
faith dispute exists.
SECTION 6.13 Compliance with Applicable Laws. The Company and, to
29
the best of the Company's knowledge, each Material Subsidiary are in
compliance with the requirements of all applicable laws, rules,
regulations, and orders of all governmental authorities (Federal, state,
local or foreign, and including, without limitation, Environmental Laws and
Insurance Laws), a breach of which would in the Company's determination
materially and adversely affect the Company's or such Material Subsidiary's
business, operations or financial condition, or the ability of the Company
to perform its obligations hereunder and under the Related Documents to
which it is a party.
SECTION 6.14 Insurance. The Company is in its sole determination,
maintains adequate general liability, property and casualty insurance for
its benefit under policies issued by insurers of recognized responsibility.
SECTION 6.15 Solvency. After giving effect to the transactions
contemplated hereby and by the Related Documents, the Company is not
"insolvent", nor will the Company's incurrence of obligations to repay any
Loan or to reimburse the Issuing Bank with respect to the Issuing Bank's
honoring a draw under an LC render the Company "insolvent." For the
purposes of this Section 6.15, a corporation is "insolvent" if (i) the
"present fair salable value" (as defined below) of its assets is less than
the amount that will be required to pay its probable liability on its
existing debts and other liabilities (including contingent liabilities) as
they become absolute and matured; (ii) the property of the Company
constitutes unreasonably small capital for the Company to carry out its
business as now conducted and as proposed to be conducted including the
capital needs of the Company; (iii) the Company intends to, or believes
that it will, incur debts beyond its ability to pay such debts as they
mature (taking into account the timing and amounts of cash to be received
by the Company and amounts to be payable on or in respect of debt of the
Company), or the cash available to the Company after taking into account
all other anticipated uses of the cash of the Company is anticipated to be
insufficient to pay all such amounts on or in respect of debt of the
Company when such amounts are required to be paid; or (iv) the Company
believes that final judgments against the Company in actions for money
damages will be rendered at a time when, or in an amount such that, the
Company will be unable to satisfy any such judgments promptly in accordance
with their terms (taking into account the maximum reasonable amount of such
judgments in any such actions and the earliest reasonable time (as
determined in the Company's best judgment) at which such judgments might be
rendered), or the cash available to the Company after taking into account
all other anticipated uses of the cash of the Company (including the
payments on or in respect of debt referred to in clause (iii) of this
Section 6.15), is anticipated to be insufficient to pay all such judgments
promptly in accordance with their terms. For purposes of this Section
6.15, the following terms have the following meanings: (x) the term "debts"
includes any legal liability, whether matured or unmatured, liquidated,
absolute, fixed or contingent, (y) the term "present fair salable value" of
the Company's assets means the amount which may be realized, within a
reasonable time (as determined in the Company's best judgment), either
through collection or sale of such assets at their regular market value and
(z) the term "regular market value" means the amount which a capable and
30
diligent businessman (as determined in the Company's best judgment) could
obtain for the property in question within a reasonable time (as determined
in the Company's best judgment) from an interested buyer who is willing to
purchase under ordinary selling conditions (as determined in the Company's
best judgment).
SECTION 6.16 Use of Proceeds. The Company will use the proceeds of
any Loans for general corporate purposes, including but not limited to
financing future acquisitions and future working capital needs, including
transactions with Affiliates.
SECTION 6.17 Subsidiaries. The Company has no Subsidiaries except
as listed on Schedule 6.17 hereto.
SECTION 7
COVENANTS
Until the expiration or termination of each Bank's Commitment and
thereafter until all Liabilities of the Company are paid in full and all
LCs have expired or been terminated, the Company agrees that, unless at any
time the Majority Banks (except with respect to such sections that
expressly require the written consent of all of the Banks) shall otherwise
expressly consent in writing, it will:
SECTION 7.1 Reports, Certificates and Other Information. Furnish to
the Agent, the Issuing Bank and each of the Banks:
(a) Annual Report. On or before the ninetieth (90th) day after each
of the Company's fiscal years, a copy of an unqualified annual consolidated
audit report of the Company and its Subsidiaries, prepared in conformity
with GAAP, duly certified by independent certified public accountants of
recognized standing selected by the Company.
(b) Interim Reports. On or before the forty-fifth (45th) day after
the end of each of the first three quarters of each fiscal year of the
Company, a copy of the unaudited financial statements of the Company
prepared in a manner consistent with the financial statements referred to
in Section 7.1(a) hereof, signed by an Authorized Officer and consisting
of, at least, balance sheets as at the close of such quarter and statements
of earnings for such quarter and for the period from the beginning of such
fiscal year to the close of such quarter.
(c) Statutory Statements. Promptly upon the filing thereof, copies of
all Statutory Statements required to be filed by the Company and each
Principal Insurance Subsidiary with or to the insurance commission or
department of such Person's respective state of domicile.
(d) Reports to SEC. Promptly upon the filing or making thereof,
copies of each Form 10-K and Form 10-Q made by the Company with or to the
Securities and Exchange Commission.
31
(e) Certificates. Simultaneously with the furnishing of each annual
statement and each quarterly statement provided for in this Section 7.1, a
certificate of an Authorized Officer stating that (i) no Event of Default
has occurred and is continuing, or, if there is any such event, setting
forth the details thereof and the action that the Company is taking or
proposes to take with respect thereto and (ii) that the Company either has
funds or investments or has the ability to promptly obtain funds from its
Subsidiaries, including, without limitation, by means of inter-corporate
loans or advances from such Subsidiaries, dividends or other distributions
from such Subsidiaries or purchases by such Subsidiaries of stock, other
securities or assets of, or fees for services that are due and payable
from, other Subsidiaries of the Company, in an amount not less than the sum
of (A) the amount of all principal of and interest on all Loans
outstanding, (B) the Aggregate Stated Amount of all LCs issued and
outstanding and (C) the aggregate amount of all Reimbursement Obligations,
and that the ability of the Company to promptly obtain such funds will not
violate or result in the breach of any law, rule, regulation or order of
any governmental authority (federal, state, local or foreign and including,
without limitation, Insurance Laws).
(f) Notice of Default, Litigation and ERISA Matters. Promptly upon
learning of the occurrence of any of the following, written notice thereof
which describes the same and the steps being taken by the Company with
respect thereto: (i) the occurrence of an Event of Default, (ii) the
institution of, or any adverse determination in, any litigation,
arbitration proceeding or governmental proceeding in which any injunctive
relief is sought or in which money damages in excess of $5,000,000 are
sought, (iii) the occurrence of a material Reportable Event with respect to
any Plan subject to Title IV of ERISA, (iv) the institution of any material
steps by the Company, the PBGC or any other Person to terminate any Plan
subject to Title IV of ERISA, (v) the institution of any material steps by
the Company or any ERISA Affiliate to withdraw from any Plan subject to
Title IV of ERISA which would result in material liability to the Company,
(vi) the failure to make a material required contribution to any Plan if
such failure is sufficient to give rise to a lien under Section 302(f) of
ERISA, (vii) the taking of any material action with respect to a Plan which
could result in the requirement that the Company furnish a bond or other
security to the PBGC or such Plan, (viii) the occurrence of any event with
respect to any Plan which could result in the incurrence by the Company of
any liability, fine or penalty, which would in the Company's determination
materially and adversely affect the Company's business, operations or
financial condition or the ability of the Company to perform its
obligations hereunder and under the Related Documents to which it is a
party, or (ix) promptly after the incurrence thereof, notice of any
material increase in the contingent liability of the Company with respect
to any postretirement Plan benefits.
(g) Other Information. Such other material information concerning
the Company as the Agent, the Issuing Bank or any Bank may reasonably
request from time to time.
SECTION 7.2 Corporate Existence and Franchises. Except
32
as otherwise expressly permitted in this Agreement, maintain and cause each
Material Subsidiary to maintain in full force and effect its separate
existence and all rights, licenses, leases and franchises reasonably
necessary in the Company's sole discretion to the conduct of its and each
Material Subsidiary's business.
SECTION 7.3 Books, Records and Inspections. Maintain, and cause
each Material Subsidiary to maintain, books and records in accordance with
GAAP in all material respects, the Agent on behalf of the Banks to have
access to the Company's books and records, and permit the Agent on behalf
of the Banks, upon seven (7) days notice to the Company, to inspect the
Company's properties and operations during normal business hours and at
reasonable intervals, but no more frequently than semi-annually if no Event
of Default has occurred.
SECTION 7.4 Insurance. Maintain, and cause each Material
Subsidiary to maintain, such insurance as may be required by law.
SECTION 7.5 Taxes and Liabilities. Promptly pay, and cause each
Material Subsidiary to pay, when due all taxes, duties, assessments and
other liabilities (except such taxes, duties, assessments and other
liabilities as the Company or such Material Subsidiary is diligently
contesting in good faith and by appropriate proceedings; provided that the
Company or such Material Subsidiary has provided for and is maintaining
adequate reserves with respect thereto in accordance with GAAP), a failure
of which to pay in the Company's determination materially and adversely
affects the Company's or such Material Subsidiary's business, operations or
financial condition or the Company's ability to perform its obligations
hereunder and under the Related Documents to which it is a party.
SECTION 7.6 Cash Flow Coverage. Maintain a ratio of (x) Available
Cash Flow to (y) Debt Service Requirements equal to or greater than 1.10 to
1 at the end of each fiscal quarter of the Company and its Subsidiaries on
a consolidated basis, such ratio to be calculated for the period of the
four fiscal quarters ending on the most recent fiscal quarter end prior to
the date of computation.
SECTION 7.7 Net Worth. Nor permit the Net Worth of the Company to
be less than $60,000,000 at any time.
SECTION 7.8 Funds for Refinancing. Shall, at all times, either
have funds or investments or have the ability to promptly obtain funds from
its Subsidiaries, including, without limitation, by means of inter-
corporate loans or advances from such Subsidiaries, dividends or other
distributions from such Subsidiaries or purchases by such Subsidiaries of
stock, other securities or assets of, or fees for services that are due and
payable from, other Subsidiaries of the Company, in an amount at all times
not less than the sum of (a) the amount of all principal of and interest on
all Loans outstanding, (b) the Aggregate Stated Amount of all LCs issued
and outstanding and (c) the aggregate amount of all Reimbursement
Obligations, and the ability of the Company to promptly obtain such funds
shall not violate or result in the breach of any law, rule, regulation or
33
order of any governmental authority (federal, state, local or foreign and
including, without limitation, Insurance Laws).
SECTION 7.9 Indebtedness. Not incur or permit to exist any
Indebtedness that by its terms or otherwise is senior in right of payment
to the Liabilities, except (i) Indebtedness hereinafter incurred in
connection with the acquisition of assets or property, which Indebtedness
is secured by the assets or property so acquired, (ii) Indebtedness
originally incurred under this Agreement and converted into term loan
Indebtedness pursuant to such terms and subject to such documentation as is
satisfactory to the Agent and the Majority Banks in such Majority Banks'
reasonable discretion (provided, however, that no Bank shall, without its
consent, be compelled to convert any Indebtedness owed to it and originally
incurred under this Agreement into term loan Indebtedness) and (iii)
Indebtedness in connection with Permitted Liens pursuant to Section 7.16.
SECTION 7.10 Risk-Based Capital. Shall cause each Principal
Insurance Subsidiary on an individual basis to maintain at all times Total
Adjusted Capital equal to or greater than 260% of Authorized Control Level
RBC.
SECTION 7.11 Real Estate Concentration. Shall cause each Principal
Insurance Subsidiary on an individual basis to maintain at all times a Real
Estate Concentration Ratio of less than 50%.
SECTION 7.12 Investment Quality. Shall cause each Principal
Insurance Subsidiary on an individual basis to maintain at all times a
ratio of (x) Non-Investment Grade Obligations to (y) Total Invested Assets
to be less that 15%.
SECTION 7.13 Intentionally Omitted.
SECTION 7.14 Insurance Company Leverage Ratio. Shall cause (a) all
Principal Insurance Subsidiaries on a combined basis to maintain at all
times an aggregate Insurance Company Leverage Ratio of greater than 8.33%,
and (b) each Principal Insurance Subsidiary on an individual basis to
maintain at all times an Insurance Coverage Leverage Ratio of greater than
7.50%.
SECTION 7.15 Intentionally Omitted.
SECTION 7.16 Negative Pledge. Shall not permit any Principal
Insurance Subsidiary to (a) create or permit to exist any Lien with respect
to any assets or properties now owned or hereafter acquired by such
Principal Insurance Subsidiary or (b) enter into or consent to any oral or
written agreement or arrangement that prohibits or in any manner restricts
any such Principal Insurance Subsidiary from creating, incurring, assuming
or suffering to exist any Lien upon or with respect to any of such
Principal Insurance Subsidiary's assets or properties or to assign or
otherwise convey any right to receive income, except the following Liens
("Permitted Liens"): (i) purchase money security interests hereinafter
incurred in connection with the acquisition of assets or property; (ii)
34
Liens incurred in connection with the conversion of Indebtedness originally
incurred under this Agreement into term loan Indebtedness pursuant to such
terms and subject to such documentation as is satisfactory to the Agent and
the Majority Banks in such Majority Banks' reasonable discretion (provided,
however, that no Bank shall, without its consent, be compelled to convert
any Indebtedness owed to it and originally incurred under this Agreement
into term loan Indebtedness); (iii) Liens for taxes, assessments or
governmental charges or levies on property of the Company if the same shall
not at the time be delinquent or thereafter can be paid without penalty, or
are being contested in good faith and by appropriate proceedings and as to
which the Company shall have set aside on its books such reserves as are
required by GAAP with respect to any such taxes, assessments or other
governmental charges; (iv) Liens imposed by law, such as carriers',
warehousemen's and mechanics' liens and other similar liens, which arise in
the ordinary course of business with respect to obligations not yet due or
being contested in good faith by appropriate proceedings and as to which
the Company shall have set aside on its books such reserves as are required
by GAAP with respect to any such Liens; (v) Liens arising out of pledges or
deposits under insurance laws, worker's compensation laws, unemployment
insurance, old age pensions, or other Social Security or retirement
benefits, or similar legislation; (vi) Liens consisting of mortgages, deeds
of trust, liens or security interests on any interest of the Company as
sublessor under any sublease of property which solely secure obligations of
the Company as the lessee of such property and extensions or renewals
thereof; and (vii) Liens consisting of mortgages, deeds of trust or similar
encumbrances that may be incurred by the Company or an Insurance Subsidiary
of the Company in connection with the Company's or such Insurance
Subsidiary's purchase or refinancing of the building and property located
at 1750 Golf Road, Schaumburg, Illinois; provided, however, that promptly
after the creation of any Lien of the type referred to in this subsection
(vii), the Company shall provide to the Agent written notice of the
creation of such Lien, describing the amount of the obligation secured
thereby and the properties and assets subject to such Lien.
SECTION 7.17 Change in Nature of Business. Not, and not permit the
Company and its Material Subsidiaries as a whole to, make any material
change in the nature of its business carried on as of the date first stated
above, provided, however, the Company or any Material Subsidiary may make
changes in the nature of its business provided that any such change made is
related in any way to the medical or insurance businesses.
SECTION 7.18 Depository Relationship. The Company shall maintain
its primary depository and remittance relationship with the Banks.
Pursuant to such primary depository and remittance relationship, the
Company shall maintain with each Bank average available demand deposits
equal to the amount needed to cover non-credit services provided by such
Bank to the Company and its Subsidiaries, such amount to be determined
according to the published fee schedules of such Bank. The Company agrees
that if the amount of available demand deposits maintained by the Company
with such Bank are insufficient to equal the amount needed to cover non-
credit services provided by such Bank, then such Bank may charge the
Company a deficiency fee sufficient to cover such non-credit services, such
35
deficiency fee to be determined according to the published fee schedules of
such Bank or the fees being charged to the Company at that time, whichever
are less.
SECTION 7.19 Employee Benefit Plans. Not permit, and not permit any
ERISA Affiliate to permit, any condition to exist in connection with any
Plan which might constitute grounds for the PBGC to institute proceedings
to have such Plan terminated or a trustee appointed to administer such
Plan; and not engage in, or permit to exist or occur, or permit any ERISA
Affiliate to engage in, or permit to exist or occur, any other condition,
event or transaction with respect to any Plan which would result in the
incurrence by the Company or any ERISA Affiliate of any liability, fine or
penalty, which in either case would in the Company's determination
materially and adversely affect the Company's business, operations or
financial condition, or the ability of the Company to perform its
obligations hereunder and under the Related Documents to which it is a
party.
SECTION 7.20 Use of Proceeds. Not, and not permit any Subsidiary
to, use or permit the direct or indirect use of any proceeds of or with
respect to any Loan for the purpose, whether immediate, incidental or
ultimate, of "purchasing or carrying" (within the meaning of Regulation U)
Margin Stock.
SECTION 7.21 Other Agreements. Not, and not permit any Material
Subsidiary to, enter into any agreement containing any provision which
would be violated or breached by the performance of the Company's
obligations hereunder, under any Related Document or under any instrument
or document delivered or to be delivered by the Company hereunder or
thereunder or in connection herewith or therewith or which would violate or
breach any provision hereof or thereof or of any such instrument or
document.
SECTION 7.22 Compliance with Applicable Laws. Comply, and cause
each Material Subsidiary to comply, with the requirements of all applicable
laws, rules, regulations, and orders of all governmental authorities
(Federal, state, local or foreign, and including, without limitation,
Environmental Laws and Insurance Laws), a breach of which would in the
Company's determination materially and adversely affect the Company's or
such Material Subsidiary's business, operations or financial condition, or
which would impair the Company's ability to perform its obligations
hereunder and under the Related Documents to which it is a party.
SECTION 7A
UNRESTRICTED SUBSIDIARIES
SECTION 7A.1 Unrestricted Subsidiaries. The Company may, from time
to time, by written notice to the Agent, a copy of which the Agent shall
promptly deliver to each Bank, designate a Subsidiary as an Unrestricted
Subsidiary (referred to herein as an "Unrestricted Subsidiary") provided
that each of the following conditions is satisfied:
36
(a) the proposed Unrestricted Subsidiary shall not be a Material
Subsidiary existing on the Closing Date;
(b) the aggregate Indebtedness of all Unrestricted Subsidiaries,
including the Indebtedness of the proposed Unrestricted Subsidiary, shall
not exceed $40,000,000;
(c) If Loans made to the Company under this Agreement were used
by the Company directly or indirectly to acquire the proposed Unrestricted
Subsidiary, such Loans shall have been repaid by the Company pursuant to
the terms hereof;
(d) the proposed Unrestricted Subsidiary shall have no financial
obligations, liabilities or dealings of any kind with the Company or any
Material Subsidiary of the Company, except for (i) ordinary overhead
allocations, (ii) marketing agreements, administration agreements and other
agreements which the Company customarily enters into with its Subsidiaries
so long as the terms of such agreements are no more favorable to the
Company than the terms of agreements the Company enters into with its other
Subsidiaries, and (iii) other customary inter-corporate dealings so long as
the terms of such dealings are no more favorable to the Company than the
terms of dealings the Company enters into with its other Subsidiaries; and
(e) the proposed Unrestricted Subsidiary shall not have, permit
to exist or incur any undertaking, indebtedness, obligation or other
liability pursuant to which recourse may be made to the Company or any
Material Subsidiary of the Company, and neither the Company nor any
Material Subsidiary of the Company shall be or become a guarantor or surety
of, or otherwise be or become responsible in any manner (whether by support
agreement or agreement to purchase any obligations, stock, assets, goods or
services, or to supply or advance any funds, assets, goods or services, or
otherwise) with respect to any undertaking, indebtedness, obligation or
other liability of such proposed Unrestricted Subsidiary; provided,
however, that the proposed Unrestricted Subsidiary shall be permitted to
engage in the types of transactions prohibited by this Section 7A.1(e), and
the Company shall be permitted to provide guarantees and sureties, if the
Company's obligations under such transactions, guaranties and sureties (i)
are expressly subordinated to the Company's obligations under this
Agreement and (ii) shall not exceed $2,000,000 in the aggregate for any one
Unrestricted Subsidiary.
SECTION 7A.2 Additional Unrestricted Subsidiaries. In addition
to the Unrestricted Subsidiaries designated pursuant to Section 7A.1 above,
the Company and the Majority Banks can agree to designate any Subsidiary as
an Unrestricted Subsidiary. Any Indebtedness of an Unrestricted Subsidiary
designated as such pursuant to this Section 7A.2 shall be excluded from the
calculation of the aggregate Indebtedness permitted pursuant to Section
7A.1.
SECTION 7A.3 Effectiveness of Designation. The designation by the
Company of a Subsidiary as an Unrestricted Subsidiary shall become
effective five (5) Business Days after the Company delivers a written
37
notice of such designation to the Agent, which notice shall certify that
all of the conditions set forth in Section 7A.1 have been satisfied with
respect to such Unrestricted Subsidiary. The Agent shall promptly deliver
to each Bank a copy of such notice.
SECTION 7A.4 Effect of Designation. Other than for purposes of the
financial statements referenced in Section 7.1 hereof, the assets,
liabilities, Indebtedness, income, losses, cash flow, net worth, liens and
other relevant amounts and factors concerning any Unrestricted Subsidiary
shall be excluded from the computations referenced in Sections 7.6 and 7.9
of this Agreement and, to the extent applicable, the computations
referenced in Sections 7.10 through 7.16, inclusive, of this Agreement, and
the Unrestricted Subsidiaries shall not be subject to any of the other
limitations or restrictions contained herein.
SECTION 8
CONDITIONS TO MAKING LOANS AND ISSUING LCS
Each Bank's obligation to make any Loan and the Issuing Bank's
obligation to issue any LC is subject to the satisfaction of each of the
following conditions precedent:
SECTION 8.1 Initial Loans. Each Bank's obligation to make its
initial Loan and the Issuing Bank's obligation to issue its initial LC is,
in addition to the conditions precedent specified in Section 8.2, subject
to the satisfaction of each of the following conditions precedent:
(a) Fees and Expenses. The Company shall have paid all fees owed to
the Agent, the Issuing Bank and each of the Banks and reimbursed the Agent,
the Issuing Bank and each of the Banks for all expenses due and payable
hereunder on or before the Closing Date including, but not limited to,
ANB's counsel fees provided for in Section 10.4 to the extent such counsel
shall have requested payment of such fees.
(b) Documents. The Agent shall have received in sufficient copies
for the Issuing Bank and each of the Banks all of the following, each duly
executed and delivered and dated the Closing Date, in form and substance
satisfactory to the Agent, the Issuing Bank and each Bank:
(i) Agreement. This Agreement, executed by the Company,
the Agent and each Bank.
(ii) Note. Promissory Notes, substantially in the form
of Exhibit A hereto, with appropriate insertions, issued to
each Bank and executed by the Company.
(iii) Resolutions. Certified copies of resolutions of
the Company's Board of Directors authorizing the execution,
delivery and performance of this Agreement and the Related
Documents to which the Company is a party and any other
documents provided for herein or therein to be executed by the
Company.
38
(iv) Consents. Certified copies of all documents
evidencing any necessary corporate action, consents and
governmental approvals, if any, with respect to this
Agreement, the Related Documents, and any other documents
provided for herein or therein to be executed by the Company.
(v) Incumbency and Signatures. A certificate of the
Secretary or an Assistant Secretary of the Company certifying
the names of the officer or officers of the Company authorized
to sign this Agreement and the Related Documents to which the
Company is a party and any other documents provided for herein
or therein to be executed by the Company, together with a
sample of the true signature of each such officer. Each Bank
may conclusively rely on each such certificate until formally
advised by a like certificate of any changes therein.
(vi) Opinion of Counsel. Opinion of counsel to the
Company in form and substance reasonably satisfactory to the
Agent.
(vii) Constitutive Documents. Certified copies of the
Company's articles of incorporation and by-laws.
(viii) Good Standing Certificates. Certificates of good
standing for the Company in Delaware and Illinois and a
certificate of the insurance commissioner or similar official
of the jurisdiction of incorporation of each Principal
Insurance Subsidiary as to the good standing of such Principal
Insurance Subsidiary.
(ix) Other. Such other documents as the Agent, the
Issuing Bank or any Bank may reasonably request.
SECTION 8.2 All Loans and LCs. Each Bank's obligation to make its
initial Loan and each subsequent Loan, including the obligation of such
Bank to convert or continue any Loan pursuant to Section 2.4 hereof, and
the Issuing Bank's obligation to issue the initial LC and each subsequent
LC, or any extension or amendment thereof, is subject to the following
conditions precedent that:
(a) No Default, etc. (i) No Event of Default shall have
occurred and be continuing or will result from the making of such Loan or
the issuance of such LC, and (ii) the Company's representations and
warranties contained in Section 6 shall be true and correct as of the date
of such requested Loan or LC with the same effect as though made on the
date thereof (except to the extent such representations and warranties
expressly refer to an earlier date, in which case they shall be true and
correct as of such earlier date).
(b) Notice. The Agent shall have received a Notice of Borrowing
pursuant to and in accordance with the provisions of Section 2.3 hereof or
a Notice of Conversion/Continuation pursuant to and in accordance with the
39
provisions of Section 2.4 hereof, as the case may be.
SECTION 9
EVENTS OF DEFAULT AND THEIR EFFECT
SECTION 9.1 Events of Default. Each of the following shall
constitute an Event of Default under this Agreement following the
expiration of any applicable notice or cure period:
(a) Nonpayment of the Loan. Default in the payment when due of
the principal of or interest on any Loan, or the payment when due of any
fees or any other amounts payable by the Company hereunder and continuance
of such default for five (5) Business Days after the applicable due date.
(b) Nonpayment of Other Indebtedness. Default in the payment
when due (subject to any applicable grace period), whether by acceleration
or otherwise, of any other Indebtedness of, or guaranteed by, the Company
or any Material Subsidiary if the aggregate amount of any such other
Indebtedness that is accelerated or due and payable, or that may be
accelerated or otherwise become due and payable, by reason of such default
is $5,000,000 or more, or default in the performance or observance of any
obligation or condition with respect to any such other Indebtedness if the
effect of such default is to accelerate the maturity of any such
Indebtedness or cause any of such Indebtedness of $5,000,000 or more to be
prepaid, purchased or redeemed or to permit the holder or holders thereof,
or any trustee or agent for such holders, to cause such Indebtedness of
$5,000,000 or more to become due and payable prior to its expressed
maturity or to cause such Indebtedness of $5,000,000 or more to be prepaid,
purchased or redeemed.
(c) Bankruptcy or Insolvency. The Company becomes insolvent or
generally fails to pay, or admits in writing its general inability to pay,
debts as they become due; or the Company applies for, consents to, or
acquiesces in the appointment of, a trustee, receiver or other custodian
for the Company, or any property thereof, or makes a general assignment for
the benefit of creditors; or, in the absence of such application, consent
or acquiescence, a trustee, receiver or other custodian is appointed for
the Company or for a substantial part of the property thereof and is not
discharged within 60 days; or any bankruptcy, reorganization, debt
arrangement, or other case or proceeding under any bankruptcy or insolvency
law, or any dissolution or liquidation proceeding, is commenced in respect
of the Company, and if such case or proceeding is not commenced by the
Company, it is consented to or acquiesced in by the Company or remains for
60 days undismissed; or the Company takes any corporate action to
authorize, or in furtherance of, any of the foregoing or the insurance
commission or department of any Principal Insurance Subsidiary's state of
domicile takes any action against such Principal Insurance Subsidiary or
the Company in connection with any of the foregoing.
(d) Specified Noncompliance with this Agreement. Failure by the
Company to comply with or to perform under Section 7.2 (only with respect
40
to the maintenance of the existence of the Company), Sections 7.6 through
7.16, inclusive, and Section 7.21 hereunder and continuance of such failure
for five (5) Business Days after (i) written notice thereof to the Company
from the Agent or (ii) any Authorized Officer of the Company knew or should
have known of such failure to comply or perform; provided, however, that,
with respect to the failure by the Company to comply with or to perform
under Sections 7.10 through 7.14, inclusive, the continuance of such
failure shall be extended from five (5) Business Days to thirty (30) days
if the Agent receives written notice from the Company prior to the
expiration of such five (5) Business Day period that such failure is
curable within such thirty (30) day period.
(e) Other Noncompliance with this Agreement. Failure by
the Company to comply with or to perform any provision of this Agreement
(and not constituting an Event of Default under any of the other provisions
of this Section 9) and continuance of such failure for sixty (60) days
after (i) written notice thereof to the Company from the Agent or (ii) any
Authorized Officer of the Company knew of such failure to comply or
perform.
(f) Representations and Warranties. Any representation
or warranty made by the Company herein or in any Related Document is
breached in any material respect or is known by the Company to have been
false or misleading in any material respect when given, or any schedule,
certificate, financial statement, report, notice, or other writing
furnished by the Company to the Agent, the Issuing Bank or any Bank is
known by the Company to have been false or misleading in any material
respect on the date as of which the facts therein set forth are stated or
certified.
(g) Employee Benefit Plans. (i) Institution by the PBGC,
the Company or any ERISA Affiliate of steps to terminate a Plan subject to
Title IV of ERISA if as a result of such termination, the Company or any
ERISA Affiliate would be required to make a material contribution to such
Plan, or would incur a material liability or obligation to such Plan;
(ii) occurrence of a contribution failure with respect to any Plan
sufficient to give rise to a lien under Section 302(f) of ERISA, or (iii)
incurrence of any material liability (including current or potential
withdrawal liability) by the Company or any ERISA Affiliate with respect to
any Multiemployer Plan.
(h) Judgments. There shall be entered against the Company one
or more final unappealable judgments or decrees in excess of $5,000,000 in
the aggregate at any one time outstanding for the Company, excluding those
judgments or decrees (i) that shall have been stayed, vacated or bonded,
(ii) that shall have been outstanding less than 30 days from the entry
thereof, (iii) for and to the extent to which the Company is insured and
with respect to which the insurer specifically has determined that it shall
assume responsibility in writing or (iv) for and to the extent to which the
Company is otherwise indemnified if the terms of such indemnification are
satisfactory to the Majority Banks.
41
SECTION 9.2 Effect of Event of Default. If any Event of Default
described in Section 9.1(c) shall occur, the Commitments (if they have not
theretofore terminated) shall immediately terminate and all Loans, the
Notes and all other Liabilities shall become immediately due and payable,
all without presentment, demand or notice of any kind, all of which, except
as expressly set forth herein, are hereby expressly waived by the Company;
and, in the case of any other Event of Default, the Agent shall, at the
request of, or may, with the consent of, the Majority Banks, by written
notice to the Company, declare the Commitments (if they have not
theretofore terminated) to be terminated and all Loans, the Notes and all
other Liabilities to be due and payable, whereupon such Loans, the Notes
and all other Liabilities shall become immediately due and payable, all
without presentment, demand or notice of any kind, all of which, except as
expressly set forth herein, are hereby expressly waived by the Company.
SECTION 9A
THE AGENT
SECTION 9A.1 Appointment and Authorization. Each Bank hereby
appoints, designates and authorizes the Agent to take such action on its
behalf under the provisions of this Agreement and each other Related
Document and to exercise such powers and perform such duties as are
expressly delegated to it by the terms of this Agreement or any other
Related Document, together with such powers as are reasonably incidental
thereto. Notwithstanding any provision to the contrary contained elsewhere
in this Agreement or in any other Related Document, the Agent shall not
have any duties or responsibilities, except those expressly set forth
herein, nor shall the Agent have or be deemed to have any fiduciary
relationship with any Bank, and no implied covenants, functions,
responsibilities, duties, obligations or liabilities shall be read into
this Agreement or any other Related Document or otherwise exist against the
Agent.
SECTION 9A.2 Delegation of Duties. The Agent may execute any of its
duties under this Agreement or any other Related Document by or through
agents, employees or attorneys-in-fact and shall be entitled to advice of
counsel concerning all matters pertaining to such duties. The Agent shall
not be responsible for the negligence or misconduct of any agent or
attorney-in-fact that it selects with reasonable care.
SECTION 9A.3 Liability of Agent. None of the Agent-Related Persons
shall (i) be liable to any Bank for any action taken or omitted to be taken
by any of them under or in connection with this Agreement or any other
Related Document (except for its own gross negligence or willful
misconduct) or (ii) be responsible in any manner to any of the Banks for
any recital, statement, representation or warranty made by the Company or
any officer thereof contained in this Agreement or in any other Related
Document, or in any certificate, report, statement or other document
referred to or provided for in, or received by the Agent under or in
connection with, this Agreement or any other Related Document, or the
validity, effectiveness, genuineness, enforceability or sufficiency of this
42
Agreement or any other Related Document, or for any failure of the Company
to perform its obligations hereunder or under any Related Document. No
Agent-Related Person shall be under any obligation to any Bank to ascertain
or to inquire as to the observance or performance of any of the agreements
contained in, or conditions of, this Agreement or any other Related
Document, or to inspect the properties, books or records of the Company or
any of the Company's Subsidiaries or Affiliates.
SECTION 9A.4 Reliance by Agent.
(a) The Agent shall be entitled to rely, and shall be fully
protected in relying, upon any writing, resolution, notice, consent,
certificate, affidavit, letter, telegram, facsimile, telex or telephone
message, statement or other document or conversation believed by it to be
genuine and correct and to have been signed, sent or made by the proper
Person or Persons, and upon advice and statements of legal counsel,
independent accountants and other experts selected by the Agent. The Agent
shall be fully justified in failing or refusing to take any action under
this Agreement or any other Related Document unless it shall first receive
such advice or concurrence of the Majority Banks as it deems appropriate
and, if it so requests, it shall first be indemnified to its satisfaction
by the Banks (to the extent not indemnified by the Company) against any and
all liability and expense that may be incurred by it by reason of taking or
continuing to take any such action. The Agent shall in all cases be fully
protected in acting, or in refraining from acting, under this Agreement or
any other Related Document in accordance with a request or consent of the
Majority Banks (or, when expressly required hereby, all the Banks) and such
request and any action taken or failure to act pursuant thereto shall be
binding upon all of the Banks.
(b) For purposes of determining compliance with the conditions
specified in Section 8.1, each Bank that has executed this Agreement shall
be deemed to have consented to, approved or accepted or to be satisfied
with each document or other matter either sent by the Agent to such Bank
for consent, approval, acceptance or satisfaction, or required thereunder
to be consented to or approved by or acceptable or satisfactory to such
Bank.
SECTION 9A.5 Notice of Default. The Agent shall not be deemed to
have knowledge or notice of the occurrence of any Event of Default, except
with respect to defaults in the payment of principal, interest and fees
required to be paid to the Agent for the account of the Banks, unless the
Agent shall have received written notice from a Bank or the Company
referring to this Agreement, describing such Event of Default and stating
that such notice is a "notice of default". In the event that the Agent
receives such a notice, the Agent shall promptly give notice thereof to the
Banks. The Agent shall take such action with respect to such Event of
Default as shall be requested by the Majority Banks in accordance with
Section 9; provided, however, that unless and until the Agent shall have
received any such request, the Agent may (but shall not be obligated to)
take such action, or refrain from taking such action, with respect to such
Event of Default as it shall deem advisable or in the best interest of the
43
Banks.
SECTION 9A.6 Credit Decision. Each Bank expressly acknowledges that
none of the Agent-Related Persons has made any representation or warranty
to it and that no act by the Agent hereinafter taken, including any review
of the affairs of the Company and its Subsidiaries shall be deemed to
constitute any representation or warranty by the Agent to any Bank. Each
Bank represents to the Agent that it has, independently and without
reliance upon the Agent and based on such documents and information as it
has deemed appropriate, made its own appraisal of and investigation into
the business, prospects, operations, property, financial and other
condition and creditworthiness of the Company and its Subsidiaries, and all
applicable bank regulatory laws relating to the transactions contemplated
thereby, and made its own decision to enter into this Agreement and extend
credit to the Company hereunder. Each Bank also represents that it will,
independently and without reliance upon the Agent and based on such
documents and information as it shall deem appropriate at the time,
continue to make its own credit analysis, appraisals and decisions in
taking or not taking action under this Agreement and the other Related
Documents, and to make such investigations as it deems necessary to inform
itself as to the business, prospects, operations, property, financial and
other condition and creditworthiness of the Company and its Subsidiaries.
Except for notices, reports and other documents expressly herein required
to be furnished to the Banks by the Agent, the Agent shall not have any
duty or responsibility to provide any Bank with any credit or other
information concerning the business, prospects, operations, property,
financial and other condition or creditworthiness of the Company and its
Subsidiaries that may come into the possession of any of the Agent-Related
Persons.
SECTION 9A.7 Indemnification. Whether or not the transactions
contemplated hereby shall be consummated, the Banks shall indemnify upon
demand the Agent-Related Persons (to the extent not reimbursed by or on
behalf of the Company and without limiting the obligation of the Company to
do so), ratably from and against any and all liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses and
disbursements of any kind whatsoever that may at any time (including at any
time following the repayment of the Loans and reimbursement of the LCs and
the termination or resignation of the related Agent) be imposed on,
incurred by or asserted against any such Person in any way relating to or
arising out of this Agreement or any document contemplated by or referred
to herein or the transactions contemplated hereby or any action taken or
omitted by any such Person under or in connection with any of the
foregoing; provided, however, that no Bank shall be liable for the payment
to any Agent-Related Person of any portion of such liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses or disbursements resulting from any Agent-Related Person's gross
negligence or willful misconduct. Without limitation of the foregoing,
each Bank shall reimburse the Agent upon demand for its ratable share of
any costs or out-of-pocket expenses (including attorney costs) incurred by
the Agent in connection with the administration, modification, amendment or
enforcement (whether through negotiations, legal proceedings or otherwise)
44
of, or legal advice in respect of rights or responsibilities under, this
Agreement, any other Related Document, or any document contemplated by or
referred to herein to the extent that the Agent is not reimbursed for such
expenses by or on behalf of the Company. The obligation of the Banks in
this Section shall survive the payment of all Obligations hereunder.
SECTION 9A.8 Agent in Individual Capacity. ANB and its Affiliates
may make loans to, issue letters of credit for the account of, accept
deposits from, acquire equity interests in and generally engage in any kind
of banking, trust, financial advisory or other business with the Company
and its Subsidiaries and Affiliates as though ANB were not the Agent
hereunder and without notice to or consent of the Banks. With respect to
its Loans, ANB shall have the same rights and powers under this Agreement
as any other Bank and may exercise the same as though it were not the
Agent, and the terms "Bank" and "Banks" shall include ANB in its individual
capacity.
SECTION 9A.9 Successor Agent. The Agent may resign as Agent upon 30
days' notice to each of the Banks and the Company. If the Agent shall
resign as Agent under this Agreement, the Majority Banks shall appoint from
among the Banks a successor agent for the Banks which successor agent shall
be approved by the Company, which consent shall not be unreasonably
withheld. If no successor agent is appointed prior to the effective date
of the resignation of the Agent, the Agent may appoint, after consulting
with the Banks and the Company, a successor agent from among the Banks.
Upon the acceptance of its appointment as successor agent hereunder, such
successor agent shall succeed to all the rights, powers and duties of the
retiring Agent and the term "Agent" shall mean such successor agent and the
Agent's appointment, powers and duties as Agent shall be terminated. After
any retiring Agent's resignation hereunder as Agent, the provisions of this
Section 9A and Sections 10.4 and 10.5 shall inure to its benefit as to any
actions taken or omitted to be taken by it while it was Agent under this
Agreement. Notwithstanding the foregoing, the Agent's resignation shall
not be effective until a successor agent is appointed and such successor
agent accepts such appointment as successor agent hereunder.
SECTION 10
GENERAL
SECTION 10.1 Amendments and Waivers. No amendment or waiver of any
provision of this Agreement or any other Related Document, and no consent
with respect to any departure by the Company therefrom, shall be effective
unless the same shall be in writing and signed by the Majority Banks,
acknowledged by the Agent, and, in the case of amendments, signed by the
Company, and then any such waiver shall be effective only in the specific
instance and for the specific purpose for which given; provided, however,
that no such waiver, amendment, or consent shall, unless in writing and
signed by all the Banks, acknowledged by the Agent, and, in the case of an
amendment, signed by the Company, do any of the following:
(a) increase or extend the Commitment of any Bank (or reinstate
45
any Commitment terminated pursuant to Section 2.9) or subject any Bank to
any additional obligations;
(b) postpone or delay any date fixed for any payment of
principal, interest, fees or other amounts due to the Banks (or any of
them) hereunder or under any other Related Document;
(c) reduce the principal of, or the rate of interest specified
herein on any Loan, or of any fees or other amounts payable hereunder or
under any other Related Document;
(d) change the percentage of the Commitments which shall be
required for the Banks or any of them to take action hereunder; or
(e) amend this Section 10.1 or any provision providing for
consent or other action by all Banks; and, provided further, that no
amendment, waiver or consent shall, unless in writing and signed by the
Agent in addition to the Majority Banks or all the Banks, as the case may
be, affect the rights or duties of the Agent under this Agreement or any
other Related Document.
SECTION 10.2 Notices. All notices hereunder shall be in writing.
Notices given by mail shall be deemed to have been given (i) five Business
Days after the date sent if sent by registered or certified mail, postage
prepaid, (ii) the next Business Day if sent by overnight delivery service,
(iii) the day sent if sent by telecopy or telex if sent prior to 5:00 p.m.
local time on a Business Day, otherwise the following day, or (iv) the day
delivered if sent by personal messenger, and:
(a) if to the Company, addressed to the Company at its address
shown below its signature hereto;
(b) if to the Agent, addressed to the Agent at the address shown
below its signature hereto; or
(c) if to a Bank, addressed to such Bank at the address shown
below its signature hereto;
or in the case of any party, such other address as such party, by
written notice received by the other parties to this Agreement, may have
designated as its address for notices.
SECTION 10.3 Accounting Terms; Computations. All accounting terms
used herein and not expressly defined in this Agreement shall have the
respective meanings given to them in accordance with GAAP as in effect on
the Closing Date. Where the character or amount of any asset or liability
or item of income or expense is required to be determined, or any
consolidation or other accounting computation is required to be made, for
purposes of this Agreement such determination or calculation shall, to the
extent applicable and except as otherwise specified in this Agreement or
agreed to in writing by the Majority Banks, be made in accordance with GAAP
as then in effect.
46
SECTION 10.4 Costs, Expenses and Taxes.
(a) The Company agrees to pay within thirty (30) days after
demand by ANB (including in its capacity as Agent) all of ANB's (including
in its capacity as Agent) reasonable out-of-pocket costs and expenses
(including the reasonable fees and out-of-pocket expenses of ANB's counsel)
in connection with the preparation, execution and delivery of this
Agreement, the Related Documents and all other instruments or documents
provided for herein or delivered or to be delivered hereunder or in
connection herewith (including, without limitation, all amendments,
supplements and waivers executed and delivered pursuant hereto or in
connection herewith).
(b) The reasonable costs and expenses which the Agent (on behalf
of itself, the Issuing Bank and all other Banks) incurs in any manner or
way with respect to the following shall be part of the Liabilities, payable
by the Company within thirty (30) days after demand if at any time after
the date of this Agreement the Agent (on behalf of itself, the Issuing Bank
and all other Banks): (i) reasonably employs counsel for advice or other
representation (A) to represent the Agent (on behalf of itself, the Issuing
Bank and all other Banks) in any litigation, contest, dispute, suit
or proceeding or to commence, defend or intervene or to take
any other action in or with respect to any litigation, contest, dispute,
suit or proceeding (whether instituted by the Agent, the Issuing Bank, such
Bank, any other Bank, the Company or any other Person) in any way or
respect relating to this Agreement or the Related Documents, (B) to enforce
any of the Agent's, the Issuing Bank's or any such Bank's rights with
respect to the Company under this Agreement and the Related Documents; and/
or (ii) reasonably seeks to enforce or enforces any of the Agent's, the
Issuing Bank's or any such Bank's rights and remedies with respect to
the Company under this Agreement and the Related Documents; provided,
however, that notwithstanding the foregoing, if the interests of the
Issuing Bank or any Bank conflict with the interests of such other Bank as
determined by the Issuing Bank or such Bank, as the case may be, then the
reasonable costs and expenses incurred by the Issuing Bank or such Bank, as
the case may be, in respect of the foregoing shall be payable by the
Company within thirty (30) days after demand by the Issuing Bank or such
Bank, as the case may be.
(c) All of the Company's obligations provided for in this
Section 10.4 shall be Liabilities of the Company hereunder.
SECTION 10.5 Indemnification. In consideration of the Agent's, the
Issuing Bank's and each Bank's execution and delivery of this Agreement and
each Bank's agreement to extend its Commitment and to make and maintain
Loans and the Issuing Bank's commitment to issue LCs, the Company hereby
agrees to indemnify, exonerate and hold the Agent, the Issuing Bank and
each Bank and each of its officers, directors, employees and agents (herein
collectively called the "Bank Parties" and individually called a "Bank
Party") free and harmless from and against any and all actions, causes
of action, suits, losses, costs (including, without limitation, all
documentary or other stamp taxes or duties), liabilities and damages, and
47
expenses in connection therewith (irrespective of whether such Bank Party
is a party to the action for which indemnification hereunder is sought)
(the "Indemnified Liabilities"), including, without limitation, reasonable
attorneys' fees and disbursements, incurred by such Bank Parties or any of
them as a result of, or arising out of, or relating to (except for such
Indemnified Liabilities arising on account of such Bank Party's gross
negligence or willful misconduct):
(a) any transaction financed or to be financed in whole or in
part, directly or indirectly, with the proceeds of any Loan or LC;
(b) the execution, delivery, performance, administration
or enforcement of this Agreement and the Related Documents in accordance
with their respective terms by any of such Bank Parties;
(c) any misrepresentation or breach of any representation or
warranty or covenant herein by the Company.
If and to the extent that the foregoing agreements described in this
Section 10.5 may be unenforceable for any reason, the Company hereby agrees
to make the maximum contribution to the payment and satisfaction of each of
the Indemnified Liabilities which is permissible under applicable law.
SECTION 10.6 Captions and References. The recitals to this
Agreement (except for definitions) and the section captions used in this
Agreement are for convenience only, and shall not affect the construction
of this Agreement.
SECTION 10.7 No Waiver; Cumulative Remedies. No failure to exercise
and no delay in exercising, on the part of the Agent, the Issuing Bank or
any Bank, any right, remedy, power or privilege hereunder, shall operate as
a waiver thereof; nor shall any single or partial exercise of any right,
remedy, power or privilege hereunder preclude any other or further exercise
thereof or the exercise of any other right, remedy, power or privilege.
SECTION 10.8 Governing Law; Jury Trial; Severability. This
Agreement and each Note shall be a contract made under and governed by the
laws of the State of Illinois, without regard to conflict of laws
principles. Wherever possible, each provision of this Agreement shall be
interpreted in such manner as to be effective and valid under applicable
law, but if any provision of this Agreement shall be prohibited by or
invalid under such law, such provision shall be ineffective only to the
extent of such prohibition or invalidity, without invalidating the
remainder of such provision or the remaining provisions of this Agreement.
All obligations of the Company and rights of the Agent, the Issuing Bank
and any Bank, which obligations and rights are described herein or in the
Note issued to such Bank, shall be in addition to and not in limitation of
those provided by applicable law.
THE COMPANY HEREBY IRREVOCABLY WAIVES ANY RIGHT TO TRIAL BY JURY IN
ANY ACTION OR PROCEEDING (i) TO ENFORCE OR DEFEND ANY RIGHTS UNDER OR IN
CONNECTION WITH THIS AGREEMENT, THE RELATED DOCUMENTS, ANY LOAN, ANY LC OR
48
ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN
THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR THEREWITH, OR
(ii) ARISING FROM ANY DISPUTE OR CONTROVERSY IN CONNECTION WITH OR RELATED
TO THIS AGREEMENT, THE RELATED DOCUMENTS, ANY LOAN, ANY LC, OR ANY SUCH
AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT, AND AGREES THAT ANY SUCH
ACTION OR COUNTERCLAIM SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY.
____________________
Agreed and Acknowledged by the Company
THE COMPANY IRREVOCABLY AGREES THAT, SUBJECT TO THE AGENT'S, THE
ISSUING BANK'S AND EACH BANK'S SOLE AND ABSOLUTE ELECTION, ANY ACTION OR
PROCEEDING IN ANY WAY, MANNER OR RESPECT ARISING OUT OF THIS AGREEMENT, THE
RELATED DOCUMENTS, ANY LOAN, ANY LC OR ANY AMENDMENT, INSTRUMENT, DOCUMENT
OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN
CONNECTION HEREWITH OR THEREWITH, OR ARISING FROM ANY DISPUTE
OR CONTROVERSY ARISING IN CONNECTION WITH OR RELATED TO THIS AGREEMENT, THE
RELATED DOCUMENTS, ANY LOAN, ANY LC OR ANY SUCH AMENDMENT, INSTRUMENT,
DOCUMENT OR AGREEMENT SHALL BE LITIGATED IN THE COURTS HAVING SITUS WITHIN
THE CITY OF CHICAGO, THE STATE OF ILLINOIS, AND THE COMPANY HEREBY CONSENTS
AND SUBMITS TO THE JURISDICTION OF ANY LOCAL, STATE OR FEDERAL COURT
LOCATED WITHIN SUCH CITY AND STATE. THE COMPANY HEREBY WAIVES ANY RIGHT IT
MAY HAVE TO TRANSFER OR CHANGE THE VENUE OF ANY LITIGATION BROUGHT AGAINST
THE COMPANY BY THE AGENT, THE ISSUING BANK OR ANY BANK IN ACCORDANCE WITH
THIS SECTION 10.8.
SECTION 10.9 Counterparts. This Agreement and any amendment or
supplement hereto or any waiver or consent granted in connection herewith
may be executed in any number of counterparts and by the different parties
on separate counterparts and each such counterpart shall be deemed to be an
original, but all such counterparts shall together constitute but one and
the same Agreement.
SECTION 10.10 Successors and Assigns. Subject to Section 10.12, this
Agreement shall be binding upon the Company, each Bank and their respective
successors and assigns, and shall inure to the benefit of the Company, each
Bank and each Bank's successors and assigns. The Company shall have no
right to assign its rights or delegate its duties under this Agreement.
SECTION 10.11 Prior Agreements. The terms and conditions set forth
in this Agreement shall supersede all prior negotiations, agreements,
discussions, correspondence, memoranda and understandings (whether written
or oral) of the Company and the Agent, the Issuing Bank and any Bank
concerning or relating to the subject matter of this Agreement (including,
without limitation, the terms set forth in the proposal letter dated
October 20, 1993 issued by the Banks to Mr. Peter W. Nauert).
SECTION 10.12 Assignments; Participations. (a) Each Bank shall have
the right to assign, with the written consent of the Company, which shall
not be unreasonably withheld, to any Affiliate of such Bank and to one or
more banks or other financial institutions, all or a portion of its rights
49
and obligations under this Agreement (including, without limitation, all or
a portion of its Commitment, the Loans, the LCs and the Note issued to such
Bank) and the Related Documents. For purposes of this Section, it shall
not be unreasonable for the Company to withhold its consent to a proposed
assignee if, as a result of such proposed assignment, any one Bank's
Commitment Percentage would be in excess of fifty percent (50%) or there
would be more than six (6) banks or financial institutions party to this
Agreement. Upon any such assignment, (x) the assignee shall become a party
hereto and, to the extent of such assignment, have all rights and
obligations of such Bank hereunder and under the Related Documents and
(y) such Bank shall, to the extent of such assignment, relinquish its
rights and be released from its obligations hereunder and under the Related
Documents. The Company hereby agrees to execute and deliver
such documents, and to take such other actions, as such Bank may reasonably
request to accomplish the foregoing. Upon such assignment, this Agreement
shall be deemed to be amended to the extent, but only to the extent,
necessary to reflect the addition of the assignee and the resulting
adjustment of the Commitments arising therefrom. The Commitment allocated
to each assignee shall reduce such Commitment of the assigning Bank pro
tanto.
(b) In addition to the assignments permitted in clause (a)
of this Section 10.12, each Bank and any assignee pursuant to clause (a)
above shall have the right with the written consent of the Company to grant
participations to one or more banks or other financial institutions in or
to its Commitment, any Loan, any LC, the Related Documents, and the Note
held by such Bank or such assignee, provided that (i) each Bank's
obligations under this Agreement shall remain unchanged and (ii) the
Company and the Agent shall continue to deal solely and exclusively with
such Bank. No holder of a participation in all or any part of a
Commitment, the Loans, the LCs, the Related Documents, or any Note shall
have any rights under this Agreement; provided, however, that, to the
extent permitted by applicable law, each holder of a participation shall
have the same rights as each Bank under Section 5.3.
(c) The Company hereby consents to the disclosure of any
information obtained in connection herewith (i) by each Bank, to any bank
or other financial institution which is an assignee or potential assignee
with respect to which the Company has given its written consent pursuant to
clause (a) above, and (ii) by each Bank and any assignee pursuant to
clause (a) above, to any bank or other financial institution which is a
participant or potential participant with respect to which the Company has
given its written consent pursuant to clause (b) above, it being understood
that each Bank and each assignee shall advise any such bank or other
financial institution of its obligation to keep confidential any nonpublic
information disclosed to it pursuant to this Section 10.12.
SECTION 10.13 Confidentiality. Each Bank agrees to take normal and
reasonable precautions and exercise due care to maintain the
confidentiality of all information provided to it by the Company, or by the
Agent on the Company's behalf, in connection with this Agreement or any
other Related Document, and neither it nor any of its Affiliates shall use
50
any such information for any purpose or in any manner other than pursuant
to the terms contemplated by this Agreement, except to the extent such
information (i) was or becomes generally available to the public other than
as a result of a disclosure by such Bank, or (ii) was or becomes available
on a non-confidential basis from a source other than the Company, provided
that such source is not bound by a confidentiality agreement with the
Company known to such Bank; provided, further, however, that any Bank may
disclose such information (A) at the request or pursuant to any requirement
of any governmental or regulatory authority to which such Bank is subject
or in connection with an examination of such Bank by any such authority;
(B) pursuant to subpoena or other court process, provided that, if it is
lawful to do so, such Bank shall give prompt notice to the Company of
service thereof so that the Company may seek a protective order or other
appropriate remedy or waive compliance with the provisions of this Section
10.13; (C) when required to do so in accordance with the provisions of any
applicable requirement of law; (D) to the extent reasonably required in
connection with any litigation or proceeding to which the Agent, any Bank
or their respective Affiliates may be party, (E) to the extent reasonably
required in connection with the exercise of any remedy hereunder or under
any other Related Document, and (F) to such Bank's independent auditors and
other professional advisors.
SECTION 10.14 Notification of Addresses, Etc. Each Bank shall notify
the Agent in writing of any changes in the address to which notices to such
Bank should be directed, of payment instructions in respect of all payments
to be made to it hereunder and of such other administrative information as
the Agent shall reasonably request.
51
IN WITNESS WHEREOF, the Company, the Agent, and each Bank have caused
this Agreement to be executed and delivered as of the day and year first
above written.
THE COMPANY:
PIONEER FINANCIAL SERVICES, INC.
By: /s/ Val Rajic
Title: Vice President
1750 Golf Road
Schaumburg, Illinois 60101
Attention: David Vickers
Val Rajic
Telephone: (708) 995-0400
Telecopy: (708) 413-7195
THE AGENT:
AMERICAN NATIONAL BANK AND TRUST
COMPANY OF CHICAGO
By /s/ Arthur Murray
Vice President
33 North LaSalle Street
Chicago, Illinois 60690
Attention: Arthur W. Murray
Telephone: (312) 661-7298
Telecopy: (312) 661-6929
THE BANKS:
COMMITMENT: AMERICAN NATIONAL BANK AND TRUST
$9,000,000 COMPANY OF CHICAGO
By /s/ Arthur Murray
Vice President
33 North LaSalle Street
Chicago, Illinois 60690
Attention: Arthur W. Murray
Telephone: (312) 661-7298
Telecopy: (312) 661-6929
52
$6,000,000 FIRSTAR BANK MILWAUKEE, N.A.
By /s/ Stephen Check
Title: Vice President
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
Attention: Stephen E. Check
Telephone: ________________________
Telecopy: _________________________
$5,000,000 BANK ONE, ROCKFORD, NA
By /s/ Robert Opperman
Title: Vice President
East State at Mulford Road
Rockford, Illinois 61110-4900
Attention: Robert Opperman
Telephone: ________________________
Telecopy: _________________________
53
EXHIBIT 11
PIONEER FINANCIAL SERVICES, INC.
STATEMENT OF COMPUTATION OF PER SHARE
NET INCOME OR LOSS
For the Year Ended December 31
1993 1992 1991
Net Income (loss) $ 12,145,000 $(16,959,000) $ 8,872,000
Less Dividends on
Preferred Stock (2,021,000) (2,039,000) (2,039,000)
Primary Basis-Net Income (loss) $ 10,124,000 $(18,998,000) $ 6,833,000
Fully Diluted Basis-
Net Income (loss)** $ 13,507,000 $(16,959,000) $ 8,872,000
Average shares outstanding 6,546,719 6,659,657 6,626,447
Common Stock equivalents
from dilutive stock
options, based on the
treasury stock method
using average market
price 176,883 - 72,092
TOTAL-PRIMARY BASIS 6,723,602 6,659,657 6,698,539
Additional shares assuming
conversion of Preferred
Stock 1,515,200 1,535,360 1,535,360
Additional shares assuming
conversion of Subordinated
Debentures 2,282,774 - -
Additional Common Stock
equivalents from dilutive
stock options, based on the
treasury stock method
using closing market price 209,618 - -
TOTAL-FULLY DILUTED 10,731,194 8,195,017 8,233,899
Net income (loss) per share-
Primary $ 1.51 $(2.85) $ 1.02
Net income (loss) per share-
Fully Diluted $ 1.26 $(2.85)* $ 1.02 *
* In 1991 and 1992 fully diluted net income (loss) per share is equivalent
to primary net income (loss) per share due to the fully diluted computation
being anti-dilutive for these periods.
** In 1993 fully diluted net income per share was calculated after adding
tax effected interest on Subordinated Debentures of $1,362,000.
Exhibit 21
PIONEER FINANCIAL SERVICES, INC.
Subsidiary Jurisdiction
1. Pioneer Life Insurance Company of Illinois Illinois
2. Health and Life Insurance Company of America Illinois
3. National Group Life Insurance Company Illinois
4. First Pioneer Equity Corporation Delaware
5. Pioneer Fire & Casualty Insurance Company Pennsylvania
6. Administrators Service Corporation Illinois
7. Association Management Corporation Illinois
8. Network Air Medical Systems, Inc. Illinois
9. National Benefit Plans, Inc.
formerly National Group Holding
Corporation Delaware
10. Design Benefit Plans, Inc.
formerly National Group Marketing Corporation Illinois
11. Partners Health Group, Inc. formerly
Union Capital Corporation Delaware
12. National Marketing Specialists Delaware
13. National Business Concepts, formerly
Design Benefit Plans, Inc. formerly
National Marketing Corporation Illinois
14. Target Ad Group, Inc. formerly National
Benefit Finance, formerly Select Marketing
Corporation Illinois
15. Response Air Ambulance Network, Inc. Illinois
16. National Training Corporation formerly
NGM Training Corporation formerly
Educational Communications, Inc. Texas
17. Direct Financial Services, Inc. Illinois
18. Association Specialty Corporation Illinois
19. National Health Services, Inc. Wisconsin
20. Manhattan National Life Insurance Company North Dakota
21. United Group Holdings of Delaware, Inc. Delaware
22. Advantage Financial Systems, Inc. Delaware
23. NHS Coordinated Care of Texas, Inc. formerly
American Managed Care of Texas, Inc. Texas
24. NHS Coordinated Care, Inc. Nevada
25. Continental Life & Accident Company Iowa
26. Continental Marketing Corporation Idaho
27. Healthcare Review Corporation Kentucky
EXHIBIT 23
CONSENT OF ERNST & YOUNG, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
pertaining to the Nonqualified Stock Option Plan of Pioneer Financial
Services, Inc. (Form S-8 No. 33-37305), the Pioneer Financial Services,
Inc. Employee Savings and Stock Ownership Plan (Form S-8 No. 33-45894) and
the National Benefit Plans, Inc. 1992 Agent Stock Purchase Plan (Form S-8
No. 33-53686) of our report dated March 2, 1994, with respect to the
consolidated financial statements and schedules of Pioneer Financial
Services, Inc. and subsidiaries included in the Annual Report (Form 10-K)
for the year ended December 31, 1993.
ERNST & YOUNG
Chicago, Illinois
March 28, 1994
