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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, 1994
( ) 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 (708) 995-0400
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, 1995 (based upon an estimate that 74% 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 $47,424,624.
The number of shares of the registrant's common stock, $1.00 par value
per share, outstanding as of March 24, 1995 was 5,902,873.
DOCUMENTS INCORPORATED BY REFERENCE
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Portions of the registrant's definitive proxy statement for the annual
meeting of stockholders to be held May 25, 1995 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
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GENERAL
Pioneer Financial Services, Inc. (the Company) markets and underwrites life
insurance and health insurance in selected niche markets throughout the
United States. The Company concentrates on three core insurance businesses:
Life Insurance, Senior Health Insurance and Group Medical. The Company also
has a Medical Utilization Management unit which in part supports the Group
Medical Division.
The Life Insurance Division underwrites mid-sized term insurance, interest
sensitive and universal life insurance for the middle income and Senior
markets. In January 1995, the Company acquired Connecticut National Life
Insurance Company which will increase gross annual revenue by approximately
$35 million and total assets by over $350 million.
The Life Insurance Division is organized to sell its products through a
national network of brokerage general agents (BGAs). Manhattan National Life
has developed a network of 50 BGAs who in the aggregate contract with
approximately 10,000 brokers across the nation to sell the Company's product
line to fit their niche needs. With the addition of Connecticut National
Life, 50 BGAs and approximately 10,000 brokers are added to this national
distribution system. Since the distribution systems of Connecticut National
Life and Manhattan National Life are nearly mirror images, the blending of
companies enhances the product portfolios of each company.
The Senior Health Insurance Division concentrates on underwriting and
administering a full range of specialty health insurance for Americans age 65
and older. The products include traditional Medicare supplement, Medicare
Select, group Medicare supplement, long term care and home health care. A
nationwide brokerage network of 15,000 individual agents sells the Company's
Senior products. These agents also distribute the Company's life insurance
and annuity products, with this revenue being reflected in the Life Insurance
Division. The Senior Health Insurance Division accounted for 34% of the
Company's health insurance premiums in 1994.
The Group Medical Division markets, underwrites and administers small group
and individual major medical policies and markets managed care products
(health maintenance organizations--HMOs) for self-employed individuals and
small business owners. The Division also provides insurance and non-
insurance marketing services for unaffiliated insurance companies and
associations. The Company's marketing subsidiaries in this Division receive
commission overrides and other fee income from these client companies, which
increases revenues without adding to the insurance underwriting risk
liability. The Division markets through two sales units: a nationwide force
of approximately 1,800 trained career agents, an a network of over 50
professional telemarketing representatives who access approximately 9,500
independent insurance brokers nationwide through the Company's computer
database. The Company also has an established telemarketing subsidiary with
facilities in Phoenix, Arizona, and Arlington, Texas. The Division accounted
for 66% of the Company's health insurance premiums in 1994.
The Company's Medical Utilization Management unit provides healthcare
coordination to control medical expense costs for insurance companies,
government agencies, self-insured businesses, unions, HMOs and third party
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administrators. Services include precertification of care, provider networks
and case management. This unit's services provide significant claims cost
savings for the Company's Group Medical Division. In addition, the unit
markets its services to many unaffiliated companies and organizations. In
1994, approximately 68% of the unit's revenue was derived from services
provided to unaffiliated organizations.
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.
The executive offices of the Company are located at 1750 East Golf Road,
Schaumburg, Illinois 60173, and it 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 pre-tax income by Business Division is set forth
in Note 20 of the Notes to Consolidated Financial Statements.
PRODUCTS
LIFE INSURANCE DIVISION
Substantially all of the Company's life insurance policies 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 (term
and whole life), interest sensitive and universal life policies and annuities
for the periods shown:
Year Ended December 31,
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1994 1993 1992
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Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in thousands)
Traditional $32,238 44 $26,353 50 $20,300 45
Int Sensitive
& Univ Life 17,590 24 16,300 31 18,399 41
Annuties 22,807 32 10,004 19 6,212 14
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Total $72,635 100 $52,657 100 $44,911 100
For 1992, premium collected from the Company's life insurance products were
approximately 27% first year and 73% renewal, for 1993 approximately 24% were
first year and 76% renewal, and for 1994 premiums collected were
approximately 28% first year and 72% renewal.
The Company's gross life insurance in force was as follows at the dates
shown:
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December 31,
------------------------------
1994 1993 1992
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(Dollars in millions)
Traditional $10,803 $10,320 $ 8,757
Interest Sensitive
& Universal Life
Policies 1,779 1,503 1,582
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Total $12,582 $11,823 $10,339
TRADITIONAL LIFE. The largest portion of the Life Insurance Division's
business is in term life insurance, specializing in face amounts of $100,000
to $500,000, sold to middle and higher income families. Marketed under the
name "Super Saver Term," this series features low cost 5, 10 and 15 year term
life insurance products.
In 1994 the Company also began selling a significant amount of smaller unit
whole life insurance policies specifically designed to cover final expenses
for senior citizens.
For a number of years, the Company's subsidiary, Manhattan National Life, has
offered individually underwritten insurance on 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.
INTEREST SENSITIVE LIFE AND UNIVERSAL LIFE. The Company's interest sensitive
and universal life insurance products provide 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. 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, 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, if any, are deducted from the policyholder's
account value at the time of surrender. No surrender charges are deducted if
death benefits are paid or if the policy remains in force for a specified
period.
The Company's "Interest Sensitive Series" includes whole life policies
ideally suited for the impaired risk market. This product series provides
permanent protection with a fixed, guaranteed level premium and an interest
rate persistency bonus. The "Financial Lifestyle II" is a highly flexible
back-load universal life policy providing low-cost protection with tax-
deferred cash accumulation.
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
lifetime of the annuitant and spouse, with or without a guaranteed minimum
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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.
SENIOR HEALTH INSURANCE DIVISION
The Company's Senior Health products, all of which are individually
underwritten and issued, include Medicare supplement insurance, long term
care, home health care and various specialty health coverages.
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 37% of health premiums in 1992,
approximately 33% of health premiums in 1993 and approximately 27% of health
premiums in 1994. These policies provide payment for deductibles and the
excess over maximum limits of the federal Medicare program. Under these
policies, annual premiums may be 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 most states, the Company markets 8 of the 10 model policies--those
which the Company believes are most applicable to the Company's market. All
states have adopted the NAIC model or similar legislation which specifically
defines policy models.
The federal government began a test program, allowing 15 specified states to
participate in a "Medicare Select" program. Medicare Select policies combine
the cost advantages of a preferred provider organization with a Medicare
supplement policy to provide a reduced premium cost for policyholders.
Utilizing specified medical providers, certain costs are reduced and these
savings are passed on to the consumer through the insurance company. The
Company markets Medicare Select policies in a number of states and has plans
to expand into the other available states. In addition, if the federal
government allows the Medicare Select program to expand to other states, the
Company plans to also expand its marketing to those additional states.
LONG TERM CARE AND HOME HEALTH CARE. 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 required health services received in the home, and comprehensive
coverages which provide benefits for all levels of nursing home care, home
health care and adult day care.
SPECIALTY HEALTH. The Company offers various specialty health products which
typically are sold in conjunction with the Company's principal health
products. Policies include hospital indemnity, private duty nursing and
cancer plans.
GROUP MEDICAL DIVISION
The Group Medical Division's products include health insurance products
individually underwritten and issued. For 1992, 1993 and 1994, the Division
produced health insurance premium revenue of approximately $306,880,000,
$357,784,000 and $431,831,000, respectively. The Division also derives
marketing commission revenue and other fee income through marketing insurance
and other products of unaffiliated companies and associations.
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The insurance products marketed and underwritten by the Company's
subsidiaries include major hospital and specialty health insurance products.
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 are designed to cover in-hospital expenses for self-employed
individuals, small business owners, 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. The Company
provides 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 1994 the Company
introduced "ChoicePlus," a product which combines HMO-type wellness features
within a specific provider network along with in-network and out-of-network
indemnity benefits.
In December 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. In response to the Act, the Company
has modified and continues to modify its new products for sale in those
states adopting the Act or adopting other healthcare reforms.
The Marketing Unit of the Group Medical Division also derives revenue through
sales of products of unaffiliated insurance companies. These products
include medical insurance for medium-sized groups (50 or more), employer
self-funded plans, flexible premium universal life insurance, disability
income protection and annuities. The Company also markets HMO products in
areas where these products have a significant competitive advantage over
traditional indemnity insurance products. The HMO products are sold in
selected states through marketing relationships with regional HMOs. In
addition to commission revenue, sales of these HMOs provide the sales force
with opportunities to cross-sell the Company's other products.
Another unit of this Division markets membership benefit packages to various
national associations. These packages include discounts on dental services,
hotels/motels, airfares, prescription drugs, vision and hearing aid equipment
and other services.
PREMIUMS AND LOSS RATIOS
In both the Senior Health Insurance Division and the Group Medical Division,
the Company may adjust premium rates by class, policy form and state in which
the policy is issued subject to applicable regulation in order to maintain
anticipated loss ratios. Since premium rate adjustments can have the
tendency to increase policy lapses, conservation and customer service
activities are emphasized. As a result, the Company has successfully avoided
any significant increases in policy lapses in both the small business and
Senior citizen markets. Both health insurance divisions follow a proactive
approach involving strict scrutiny of all health premium rates on a monthly
basis. The matching of pricing structure with the 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
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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.
Year Ended December 31,
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1994 1993 1992 1991 1990
------ ------ ------ ------ ------
(Dollars in thousands)
Senior Health
Earned premiums . . . . . $225,604 $243,482 $264,697 $298,653 $249,409
Losses and loss adjustment
expenses . . . . . . . 137,853 154,561 176,149 200,446 173,307
Loss ratio . . . . . . . 61% 63% 67% 67% 69%
Group Medical
Earned premiums . . . . . $443,599 $375,275 $302,881 $294,431 $234,004
Losses and loss adjustment
expenses . . . . . . . 279,419 251,955 200,781 176,222 168,939
Loss ratio . . . . . . . 63% 67% 66% 60% 72%
Total Accident and Health
Earned premiums . . . . . $669,203 $618,757 $567,578 $593,084 $483,413
Losses and loss adjustment
expenses . . . . . . . $417,272 $406,516 376,930 376,668 342,246
Loss ratio . . . . . . . 62% 66% 66% 64% 71%
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 1994 was as follows:
Total Percent
_____ _______
(Dollars in thousands)
Texas $77,298 10.3
Florida 77,151 10.2
California 57,779 7.7
Illinois 57,087 7.6
North Carolina 31,640 4.2
Ohio 22,992 3.1
Pennsylvania 22,891 3.0
Other (1) 406,471 53.9
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Total $753,309 100.0
(1) Includes 42 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
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A major portion 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 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 6 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
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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.
December 31,
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1994 1993
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Amount % Amount %
------ --- ------ ---
(Dollars in thousands)
Fixed maturities to be held
to maturity:
U.S. Treasury $ 8,891 1% $ 9,124 1%
States and political
subdivisions 8,888 1 5,200 1
Foreign governments 2,992 1 - -
Corporate securities 147,419 20 119,276 18
Mortgage-backed securities 210,460 29 192,912 29
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Total fixed maturities
to be held to maturity 378,650 52 326,512 49
Fixed maturities available
for sale:
U.S. Treasury 21,852 3 26,894 4
States and political
subdivisions 25,819 3 21,571 3
Foreign governments 3,465 1 4,056 1
Corporate securities 89,401 12 73,981 11
Mortgage-backed securities 78,211 11 131,215 19
-------- ---- -------- ----
Total fixed maturities
available for sale 218,748 30 257,717 38
-------- ---- -------- ----
Equity securities........... 15,440 2 17,436 3
Real estate................. 16,959 2 - -
Mortgage and policy loans... 24,888 4 27,189 4
Short-term investments...... 69,152 10 45,352 6
-------- ---- -------- ----
Total Investments....... $723,837 100% $674,206 100%
======== ==== ======== ====
At December 31, 1994, the average expected term of the Company's fixed
maturity investments was approximately five years. The results of the
investment portfolio for the periods shown were as follows:
Year Ended December 31,
-----------------------------------
1994 1993 1992
-------- -------- --------
(Dollars in thousands)
Average month-end investments . $679,331 $592,546 $549,643
Net investment income . . . . . 42,786 40,242 43,555
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Average annualized yield on
investments (1) . . . . . . . 6.3% 6.8% 7.9%
Realized investment
losses (2) . . . . . . . . . . $ (383) $ (1,336) $ (47)
(1) Not computed on a taxable equivalent basis. Includes interest income
paid or accrued on fixed maturity securities and loans and dividends on
equity securities.
(2) See Note 4 of Notes to Consolidated Financial Statements for information
on unrealized appreciation (depreciation) 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, 1994, less than 1% of the
Company's total investment portfolio was below investment grade or unrated.
The Company intends to invest no more than 4% of its admitted assets in
securities below investment grade.
For a detailed discussion of the Company's investment portfolio, see Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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.
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 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
Many proposals have been introduced in Congress and various state
legislatures to reform the present healthcare system. Most of these
proposals are specifically directed at the small group healthcare market, a
significant portion of the Company's health business. At the state level, a
number of states have passed or are considering legislation that would limit
the differentials in rates that carriers could charge between new business
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and renewal business with respect to similar demographic groups. Legislation
also has been adopted or is being considered that would make health insurance
available to all small groups by requiring coverage of all employees and
their dependents, by limiting the applicability of pre-existing conditions
exclusions, by requiring carriers to offer a basic plan exempt from certain
mandated benefits as well as a standard plan and by establishing a mechanism
to spread the risk of high risk employees to all small group carriers.
At the federal level, it is not possible to predict which proposal, if any,
will be adopted by Congress or when such a proposal may be enacted. However,
we do expect there to be insurance market reforms in any package that would
be passed. The Company is monitoring developments concerning healthcare
reform and preparing its strategic responses to different possible reform
scenarios. In response to existing legislation and in anticipation of future
healthcare reform, the Company has broadened its senior health insurance,
life insurance and medical utilization management business and has continued
to diversify products and services in selected market areas that the Company
believes will be consistent with its targeted market focus and be less
affected by healthcare reform. It is likely that healthcare reform at the
federal and state levels will require the Company to make significant changes
to the way it conducts its health insurance business, but it is not possible
at this time to predict the nature or effects of healthcare reform or how
soon it will be adopted and implemented, if at all. If state small group
reform continues to add restrictions to insurance business and the federal
government assumes responsibility for regulation and payment of much of the
healthcare that is now handled by the private sector, this would
significantly reduce or eliminate the Company's group medical insurance
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 departments 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 department 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
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As of December 31, 1994, 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............... 51 Chairman, Chief Executive Officer,
Director
Charles R. Scheper............ 42 President - Life Division and Director
Thomas J. Brophy.............. 59 President - Health Division and Director
William B. Van Vleet.......... 70 Executive Vice President, General
Counsel, and Director
Anthony J. Pino............... 47 Executive Vice President
Philip J. Fiskow.............. 38 Senior Vice President and Chief
Investment Officer
Ernest T. Giambra, Jr..........47 Executive Vice President
David I. Vickers.............. 34 Vice President, Treasurer and Chief
Financial Officer
Michael A. Cavataio........... 50 Director
Richard R. Haldeman........... 51 Director
R. Richard Bastian, III....... 48 Director
Karl-Heinz Klaeser............ 62 Director
Michael K. Keefe.............. 50 Director
Robert F. Nauert.............. 70 Director
Carl A. Hulbert............... 72 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.
Charles R. Scheper was elected President of the Company in March 1995.
He was Vice President of the Company from 1991 to March 1995 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
<PAGE>
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.
Thomas J. Brophy was elected President of the Company in March 1995. He
was 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 senior executive positions with various I.C.H. Corporation
subsidiaries from March 1974 to his joining of the Company in November 1993.
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.
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.
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.
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
Williams & McCarthy, P.C., a law firm, from 1975 to May 1990.
<PAGE>
R. Richard Bastian, III has been a Director of the Company since
December 1994. Mr. Bastian is a management consultant, specializing in
strategic planning and organizational development. Mr. Bastian's career
includes over twenty-eight years in the financial services industry, most
recently as President and Chief Executive Officer of Heritage Bank & Trust of
Racine, Wisconsin. Prior to Heritage, he served as Chairman, President and
Chief Executive Officer of Bank One, Rockford and its predecessor, First
Community Bancorp, an $800 million multi-bank holding company. He has also
held management positions at banks in Tulsa and Philadelphia where his
banking career began in 1966.
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.
Carl A. Hulbert was elected Director of the Company in March 1995. Mr.
Hulbert is a management consultant, specializing in the insurance industry.
Mr. Hulbert is a past Insurance Commissioner of the state of Utah. He has
also been a Director for numerous insurance companies during his 49 year
business career.
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 Group Medical Division. 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.
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
NONE
<PAGE>
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, 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
March 31, 1994.............. 14 3/4 11 1/8
June 30, 1994............... 12 10
September 30, 1994.......... 10 1/2 8 3/4
December 31, 1994........... 10 8 3/4
As of December 31, 1994, there were approximately 550 holders of record
of the Company's Common Stock.
On March 18, 1994, the Company's Board of Directors announced a
quarterly common stock dividend of 3.75 cents per share with a total of 15
cents per share paid in 1994.
On March 18, 1995, the Company's Board of Directors announced a
quarterly common stock dividend of 4.5 cents per share with an expectation of
a total of 18 cents per share to be paid for 1995.
Item 6. Selected Consolidated Financial Data
---------------------------------------------
The following selected consolidated financial data for the five years
ended December 31, 1994; 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.
(In thousands except per share amounts)
Year Ended December 31,
--------------------------------------------
1994 1993 1992 1991 1990
------ ------ ------ ------ ------
Operating Data:
Accident and health premiums$659,180 $601,684 $559,894 $593,236 $508,957
Life and annuity premiums
and policy charges 44,929 39,282 35,219 33,321 30,693
Net investment income 42,786 40,242 43,555 47,974 48,416
Other income and realized
<PAGE>
investment gains/losses 27,260 17,920 17,305 34,207 22,951
------- ------- ------- ------- -------
Total revenues 774,155 699,128 655,973 708,738 611,017
Accident and health benefits 407,249 397,963 368,046 376,820 367,790
Life and annuity benefits 42,947 39,419 47,622 46,128 46,889
------- ------- ------- ------- -------
Total benefits 450,196 437,382 415,668 422,948 414,679
------- ------- ------- ------- -------
Total benefits and
expenses 748,133 680,364 681,409 695,418 625,178
------- ------- ------- ------- -------
Income (loss) before
income taxes 26,022 18,764 (25,436) 13,320 (14,161)
Net income (loss) 17,149 12,145 (16,959) 8,872 (9,346)
Preferred stock dividends 1,904 2,021 2,039 2,039 2,164
------- -------- ------- -------- --------
Income (loss) applicable to
common stockholders $15,245 $ 10,124 $(18,998) $ 6,833 $(11,510)
======= ======== ========= ======== =========
Net income (loss) per
common share
Primary $ 2.36 $ 1.51 $(2.85) $ 1.02 $(1.72)
Fully diluted 1.58 1.26 (2.85) 1.02 (1.72)
Dividends declared per
common share .15 - - - -
Average common and common
equivalent shares
outstanding
Primary 6,459 6,724 6,660 6,699 6,690
Fully diluted 12,734 10,731 8,195 8,234 8,226
(In thousands except per share amounts)
December 31,
-------------------------------------------
Balance Sheet Data 1994 1993 1992 1991 1990
------ ------ ------ ------ ------
Total investments $723,837 $674,206 $568,349 $528,725 $563,807
Deferred policy acquisition
costs 225,618 260,432 269,674 313,453 309,016
Total assets 1,075,700 1,108,271 978,689 969,190 990,560
Policy liabilities 868,608 903,105 805,696 776,571 739,845
Short-term notes payable 20,093 5,575 12,931 6,371 16,218
Long-term notes payable 2,520 1,125 25,170 21,600 27,000
Subordinated Debentures 57,427 57,477 - - -
Redeemable Preferred Stock 21,682 23,675 23,990 23,990 23,990
Stockholders' equity 68,328 68,872 62,732 75,470 64,738
Stockholders' equity
per common share $ 11.55 $ 10.86 $ 9.21 $ 11.39 $ 9.77
Item 7. Management's Discussion and Analysis of Financial Condition and
<PAGE>
Results of Operations
-------------------------------------------------------------------------
RESULTS OF OPERATIONS
1994 COMPARED TO 1993
DIVISION OVERVIEW
-----------------
The income (loss) before income taxes by Division for 1994 and 1993 is
as follows (in thousands):
1994 1993
---- ----
Group Medical $ 10,889 $ 6,528
Senior Health 13,420 12,255
Life Insurance 8,537 7,623
Medical Utilization Mgmt 2,026 (1,211)
Corporate (8,850) (6,431)
-------- --------
Total $ 26,022 $ 18,764
======== ========
GROUP MEDICAL
-------------
The increase in pre-tax income for 1994 was due primarily to inclusion
of the profits of Continental Life & Accident Company (CLAC), acquired in
August 1993, and continued cost reduction plans. CLAC produced pre-tax
profits of $2,787,000 in 1994 compared to a small loss in 1993.
The Division incurred a pre-tax charge of $1,700,000 in the third
quarter of 1994 which was the net effect of a $16,700,000 adjustment to the
deferred acquisition cost (DAC) asset and a reduction of group medical claim
reserve margins of $15,000,000. Through its periodic review of the DAC
asset, the Company recognized the impact of state healthcare reforms on the
future profitability of certain of its group medical products. These reforms
include mandated benefits, guaranteed issue requirements and limitations on
premium rate increases. The Company identified blocks of this business that
are not anticipated to achieve the future profit margins originally assumed.
The Company has also historically held margins in its group accident and
health claim reserves to provide for potential adverse deviation. The claim
reserve estimates are continually reviewed and adjusted as necessary. Based
on payments through the first nine months of 1994, the Company determined
that claim reserves contained significantly higher margins than originally
projected. As a result, claim reserve margins of $15,000,000 were released
in the third quarter of 1994. The Company continues to hold additional
margins which it considers to be reasonable in its group medical claim
reserves.
SENIOR HEALTH
-------------
The increase in pre-tax income was due to the reduction in loss ratios,
from 63.5% to 61.1%, primarily on a mature block of nursing home business and
realized investment gains compared to realized losses of $2,520,000 in 1993.
<PAGE>
The improvements were offset by a 6.8% reduction in collected premium revenue
during 1994.
LIFE INSURANCE
--------------
The increase in pre-tax income for the Life Insurance Division was due
to a substantial increase in new sales, improved spreads on interest
sensitive business, and a slight improvement in the unit cost per policy.
Despite the decline in the average annual investment yield in 1994, the
Division continued to aggressively manage the interest rate crediting
strategy. The unit cost per policy improved 5% to approximately $76 in 1994
as compared to $80 in 1993. The mortality was consistent with levels
experienced in 1993. Realized investment losses were $158,000 in 1994
compared to realized investment gains of $621,000 in 1993.
MEDICAL UTILIZATION MANAGEMENT
------------------------------
The improvement in pre-tax profitability of this Division in 1994
compared to losses experienced in 1993 was due to the elimination of an
unprofitable operating subsidiary in the fourth quarter of 1993 and a
significant increase in new sales to unaffiliated customers. The revenue
from unaffiliated customers increased 131% to $10,416,000 in 1994 of which
53% or $5,498,000 was related to the 1993 acquisition of Healthcare Review
Corporation. The consolidation of certain operations in July 1994 resulted
in reduced expense levels the second half of the year.
CORPORATE EXPENSE AND INTEREST
------------------------------
Interest expense increased in 1994 as compared to 1993 due to the
issuance of the convertible subordinated debentures in July 1993 and the
increase in other notes payable in 1994.
CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
----------------------------------------------------------
The Company reported net income of $17,149,000 for the twelve months
ended December 31, 1994, compared to $12,145,000 for the comparable period in
1993. The increase was due to profits from Continental Life & Accident
Company (CLAC), improved loss ratios in the Senior Health Division, expense
reductions and improved spreads in the Life Insurance Division, and increased
revenue and margins in the Medical Utilization Management Division.
Total revenues increased $75,027,000 or 11% for the twelve month period
in 1994 as compared to 1993. The increase in revenue is primarily due to the
increase in premiums and policy charges of $63,143,000.
Accident and health insurance premiums increased $57,496,000, or 10% in
1994 as compared to 1993. Premiums from major hospital plans increased
$81,472,000 in 1994 as compared to 1993 primarily due to the acquisition of
CLAC completed in August 1993. Total premiums attributable to the remaining
mix of Medicare supplement and long-term care products decreased $23,976,000
or 4%.
Net investment income increased $2,544,000 or 6% in 1994 compared to
1993. Annualized investment yields decreased from 6.8% in 1993 to 6.3% in
1994. The decrease in the investment yield was principally due to the
<PAGE>
shortening of the Company's average duration and the increased emphasis on
tax-exempt securities included in the Company's portfolio.
Other income and realized investment gains and losses increased
$9,340,000 or 52% in 1994 compared to 1993. The increase in other income was
due to the acquisitions of Healthcare Review Corporation (HRC) and CLAC in
August 1993. In addition, the Company realized increased sales to
unaffiliated customers in the Medical Utilization Management Division and by
its marketing subsidiaries. Realized investment losses were $383,000 in 1994
compared to $1,336,000 in 1993. The remaining other income generated by the
Company's other non-insurance subsidiaries remained relatively unchanged.
Total benefits increased $12,814,000 or 3% in 1994 as compared to 1993.
Life and annuity benefits increased $3,528,000 or 9% in 1994 as compared to
1993 due to higher mortality on a closed block of universal life and an
increase in in-force business. Accident and health benefits, which include
the change in unearned premiums, increased $9,286,000 or 2%. The increase
was due primarily to the increased amount of collected premiums. The
accident and health loss ratios decreased to 62% from 66% in 1994 as compared
to 1993. The improved loss ratios were due primarily to the previously
discussed reduction in the group medical claim reserve margins.
In 1994 and 1993, managed healthcare efforts resulted in estimated net
savings to the Company's Health Insurance Division of $67,000,000 and
$41,000,000, 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:
1994* 1993*
---- ----
PPOs (preferred provider organization) networks 40% 49%
Precertification 10 5
Large case management 22 32
Usual and customary, rebundling,
and prompt pay discounts 28 14
--- ---
100% 100%
=== ===
---------------------
* Percent of total estimated savings from managed healthcare efforts.
The Company expects to continue to emphasize medical utilization
management procedures to control claim costs. Although the Company cannot
accurately determine the amount of 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.
General expenses as a percent of premiums decreased in 1994 as compared
to 1993 due to the continued emphasis on cost reduction in the Health and
Life Insurance Divisions. However, insurance and general expenses (which
include commission compensation to agents) increased $29,979,000 or 18% in
1994 compared to 1993. The increase was primarily caused by the increase in
premium and policy charges and the acquisitions of HRC and CLAC.
<PAGE>
Interest expense increased in 1994 due to the issuance of the
convertible subordinated debentures in July 1993 and the increase in other
notes payable in 1994.
Amortization of deferred policy acquisition costs (DAC) increased
$23,198,000 or 30% in 1994 as compared to 1993. The increase was due
primarily to the adjustment in the DAC asset on group and individual medical
business issued in recent years. These blocks of business have achieved
lower margins than expected due primarily to mandated state healthcare
reforms. The Company is now assuming a lower level of profitability on these
blocks. The Company continues to monitor the profitability of its business.
Increased lapses or unprofitability on the business could result in an
increase in the amortization rate of DAC, which would adversely impact future
earnings.
The effective tax rate of the Company decreased to approximately 34% in
1994 from 35% in 1993. The decrease was due to the increased investment in
tax-exempt securities included in the Company's portfolio and net operating
loss carryforwards utilized from CLAC.
The Company acquired the building containing its corporate headquarters
in Schaumburg, Illinois, in January 1994 resulting in the increase in
investment real estate. Cash decreased due to increased investment in short-
term investments. Reinsurance receivables decreased due to the timing of
payments due from reinsurers. Deferred policy acquisition costs decreased as
a result of the third quarter write-down and the decrease in new business
issues in 1994. General expenses and other liabilities decreased due to the
timing of payments for federal income taxes and amounts due to reinsurers.
Notes payable increased due to the utilization of the line of credit by the
Company.
1993 COMPARED TO 1992
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 acquisition costs.
The remaining increase was due to improved loss ratios on the Medicare
supplement business, expense reductions in the Life Insurance Division and
increased revenue and margins in the Group Medical 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.
<PAGE>
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 Group Medical Division and the Medical Utilization Management Division.
Realized investment losses increased $1,289,000 due to write-downs on certain
mortgage-backed derivative securities.
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 $41,000,000 and
$27,000,000, 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:
1993* 1992*
---- ----
PPOs (preferred provider organization) networks 49% 64%
Precertification 5 17
Large case management 32 11
Other 14 8
___ ___
100% 100%
=== ===
----------------
* Percent of total estimated savings from managed healthcare efforts.
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 $30,000,000 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.
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
<PAGE>
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 significant.
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.
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 and
profitability of the policies. The actual amortization of DAC reflects the
actual persistency and profitability of the business. For example, if actual
policy terminations are higher than expected or actual profits are lower than
originally assumed, DAC could 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 recent years had an adverse impact on
its major hospital accident and health claims experience. The Company
continues to implement 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 insurance
subsidiaries' primary sources of cash are premiums, investment income, and
investment sales and maturities. The primary uses of cash are operating
<PAGE>
costs, policy acquisition costs, payments to policyholders and investment
purchases.
In addition, liquidity requirements of the Company are created by the
dividend requirements of the $2.125 Preferred Stock, common stock dividends,
interest payments on the Convertible Subordinated Debentures and other debt
service requirements. The Company's liquidity requirements are met primarily
by dividends declared by its subsidiaries. Payments of dividends by the
insurance subsidiaries to the Company is subject to certain regulatory
restrictions. (See Note 11 of the consolidated financial statements).
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 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. The Company through a subsidiary has entered into
agreements with an unaffiliated corporation to provide financing for its
agent commission financing program through the sale of agent receivables.
Proceeds from such sales during 1994 and 1993 were $24,393,0l00 and
$25,376,000, respectively. The termination date of the current program is
December 31, 1997, subject to extension or termination as provided therein.
In July 1993 the Company issued $57,477,000 of 8% convertible
subordinated debentures due 2000. Net proceeds from the offering totaled
$54,000,000. 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.
In August 1993 a subsidiary of 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.
Short-term notes payable included $18,950,000 at December 31, 1994,
drawn under a line of credit arrangement. In March 1995, $15,000,000 of the
line of credit was replaced with a five year term loan. The remaining
balance under the line of credit is due in October 1995.
At December 31, 1994, a subsidiary of the Company had an unsecured loan
of $1,125,000. The portion of the loan due in 1995 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 prime and is
payable quarterly with the final payment due July 1998.
At December 31, 1994 a subsidiary of the Company had two unsecured loans
totaling $2,275,000. The portion of the loans due in 1995 of $580,000 is
included in short-term notes payable. The remainder of the notes are
included in long-term notes payable. The notes bear interest at prime and
are payable quarterly with the final payment due December 1999. The Company
has guaranteed payment of the notes.
<PAGE>
In March, June, September and December 1994, the Company's Board of
Directors announced a quarterly Common Stock dividend of $.0375 per share,
for a total of 15 cents per share to be paid for 1994.
The concept of risk-based capital has been adopted for regulatory
monitoring of the life and health insurance industry. Risk based capital
standards are 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 1994 annual statement are as follows:
Authorized
Adjusted Control
Company Capital Level RBC RBC Ratio
------ -------- ---------- ---------
(Dollars in thousands)
Pioneer Life Insurance
Company of Illinois $87,591 $25,595 342%
Manhattan National
Life Insurance Company 43,096 4,974 866%
National Group Life
Insurance Company 42,932 10,461 410%
Continental Life &
Accident Company 17,518 5,205 337%
Health and Life Insurance
Company of America 3,921 273 1,440%
Interest paid amounted to $4,950,000, $1,023,000 and $2,274,000 for
1994, 1993, and 1992, 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. Prior to
January 1, 1994, the Company's fixed maturity portfolio was segregated into
two components: fixed maturities held-to-maturity and fixed maturities
available-for-sale. Fixed maturities, where the intent was to hold to
maturity, were carried at amortized cost, adjusted for other-than-temporary
impairments. Fixed maturities that were available for sale were carried, on
an aggregate basis, at the lower of amortized cost or fair value.
In 1993, the Financial Accounting Standards Board (FASB) issued
Statement 115, "Accounting for Certain Investments in Debt and Equity
Securities." Statement 115 requires that fixed maturity securities are to be
classified as either held-to-maturity, available-for-sale, or trading. The
Company adopted Statement 115 as of January 1, 1994, with no effect on net
income and a $3,605,000 increase in stockholders' equity.
The Company believes that it has the ability and intent to hold to
maturity its fixed maturity investments that are classified as "held-to-
maturity." However, the Company also recognizes that there may be
circumstances where it may be appropriate to sell a security prior to
maturity in response to unforeseen changes in circumstances. Recognizing the
need for the ability to respond to changes in market conditions and in tax
<PAGE>
position, the Company has designated a portion of its investment portfolio as
available-for-sale. As required by Statement 115, the Company adjusted the
carrying value of it fixed maturity investments that are classified as
investments available-for-sale to fair value at January 1, 1994.
At January 1, 1994, the remainder of the Company's portfolio of fixed
maturity investments was classified as held-to-maturity. Although the
Company has the ability and intent to hold those securities to maturity,
there could occur infrequent and unusual conditions under which it would sell
certain of those securities. Those conditions would include unforeseen
changes in asset quality, significant changes in tax law affecting the
taxation of securities, a significant business acquisition or disposition,
and changes in regulatory capital requirements or permissible investments.
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.
INVESTMENT PORTFOLIO
At December 31, 1994, the Company had invested assets of $723,837,000,
compared to $674,206,000 at December 31, 1993. 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 83% and 87% of the Company's investment portfolio at December
31, 1994 and 1993, respectively. The remainder of the invested assets were
in short-term investments, equity securities, real estate, 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
holds investments in below-investment grade fixed maturity securities in an
amount less than 1% of its invested assets at December 31, 1994. This
reduction resulted from sales and writedowns of the carrying value of such
securities in prior periods, and the elimination of new purchases. The
Company has a policy not to invest more than 4% of its admitted 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
<PAGE>
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 increased 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 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 fair
value based principally on available market prices. The amount of the
reduction is reported as a realized loss on investments and the net fair
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.
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, 1994, the Company had
$293,481,000, or 49%, of its fixed maturities portfolio in mortgage-related
securities ($324,127,000 at December 31, 1993). 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.
The Company's mortgage-related securities portfolio is well diversified
as to collateral, maturity/duration and other characteristics. The majority
<PAGE>
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.
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.
The Company's mortgage-related securities portfolio at December 31,
1994, included $84,016,000 of CMOs and pass-through certificates issued by
non-government agencies ($37,049,000 at December 31, 1993). 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 creditworthiness 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 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 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, 1994, and December 31, 1993 (in
thousands):
December 31, 1994 December 31, 1993
----------------- -----------------
Carrying Fair Carrying Fair
Value Value Value Value
-------- ----- -------- -----
Inverse floaters and interest
only CMO tranches $ 14,961 $ 8,940 $ 18,954 $ 13,551
Accrual bonds:
U.S. government agency - - 6,968 7,386
Other CMOs:
U.S. government agency 151,697 137,138 187,871 190,141
Non-government agency 29,379 27,404 21,154 21,919
------- ------- -------- --------
Total other CMOs 181,076 164,542 209,025 212,060
U.S. government agency pass-through 42,807 39,414 73,285 74,004
Non-government agency pass-through 54,637 50,555 15,895 16,041
-------- ------- -------- --------
Total mortgage-backed securities $293,481 $263,451 $324,127 $323,042
======== ======== ======== ========
RECENTLY ISSUED ACCOUNTING STANDARDS
For a discussion of a new investments accounting standard, a new income
tax accounting standard and a new reinsurance accounting standard and the
<PAGE>
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.
<PAGE>
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 in
connection with the Company's 1995 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 in
connection with the Company's 1995 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 in
connection with the Company's 1995 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 in
connection with the Company's 1994 annual meeting of stockholders
entitled "Certain Transactions" is incorporated herein by this reference.
<PAGE>
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-35
Schedule II - Condensed Financial Information of
Registrant - Condensed Balance Sheets . . . . . . F-36
Schedule II - Condensed Financial Information of
Registrant - Condensed Statements of Operations . . . F-37
Schedule II - Condensed Financial Information of
Registrant - Condensed Statements of
Cash Flows. . . . . . . . . . . . . . . . . . . . . . F-38
Schedule II - Note to Condensed Financial Statements F-39
Schedule III - Supplementary Insurance Information. . F-40
Schedule IV - Reinsurance . . . . . . . . . . . . . . F-41
Schedule V - Valuation and Qualifying Accounts . . . F-42
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.
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 1994.
(c) Index to Exhibits
<PAGE>
-----------------
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)
<PAGE>
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 as Exhibit 10(f) to the Company's
Annual Report on Form 10-K (No. 1-10522) and
incorporated herein by reference)
*10 (g) Employment Agreement dated December
3, 1993 by and between the Company and
Peter W. Nauert (filed as Exhibit 10(g) to
the Company's Annual Report on Form 10-K
(No. 1-10522) and incorporated herein by reference)
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 as Exhibit 10(k) to the Company's Annual
Report on Form 10-K (No. 1-10522) and
incorporated herein by reference)
<PAGE>
*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 as Exhibit 10(m) to the
Company's Annual Report on Form 10-K (No. 1-10522) and
incorporated herein by reference)
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, N.A., as Banks (filed as Exhibit 10(n)
to the Company's Annual Report on Form 10-K (No. 1-10522)
and incorporated herein by reference)
10 (o) Stock Purchase Agreement dated November 21, 1994 among the
Company, United Life Holdings, Inc. and GRENEL Financial
Corporation (filed as Exhibit 2(a) to the Company Current
Report on Form 8-K, dated January 31, 1995 and incorporated
herein by reference)
10 (p) Second Amended and Restated Receivables Purchase Agreement
dated as of October 1, 1994 by and between Design
Benefit Plans, Inc. (formerly National Group
Marketing Corporation) and National Funding
Corporation (filed herewith)
10 (q) Consent and Agreement dated as of October 1, 1994 among Design
Benefit Plans, Inc., Pioneer Financial Services, Inc., American
National Bank and Trust Company of Chicago, and National Funding
Corporation (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 LLP
(filed herewith)
27 Financial Data Schedule
* Indicates management employment contracts or compensatory plans or
arrangements.
<PAGE>
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, 1994 and 1993,
and the related statements of consolidated operations, stockholders' equity,
and cash flows for each of the three years in the period ended December 31,
1994. 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, 1994 and 1993, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1994, in conformity with
generally accepted accounting principles. 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.
As discussed in Note 2 to the consolidated financial statements, in 1994, the
Company changed its method of accounting for investments in debt and equity
securities.
ERNST & YOUNG LLP
Chicago, Illinois
March 22, 1995
<PAGE>
Pioneer Financial Services, Inc. and Subsidiaries
Statements of Consolidated Operations
(In Thousands, Except Per Share Amounts)
YEAR ENDED DECEMBER 31
1994 1993 1992
---- ---- ----
REVENUES
Premiums and policy charges (Note 6):
Accident and health $ 659,180 $ 601,684 $ 559,894
Life and annuity 44,929 39,282 35,219
--------- --------- ---------
704,109 640,966 595,113
Net investment income (Note 4) 42,786 40,242 43,555
Other income and realized investment
gains and losses (Note 4) 27,260 17,920 17,305
--------- --------- ---------
774,155 699,128 655,973
BENEFITS AND EXPENSES
Benefits:
Accident and health 407,249 397,963 368,046
Life and annuity 42,947 39,419 47,622
--------- --------- ---------
450,196 437,382 415,668
Insurance and general expenses 192,810 162,831 162,837
Interest expense (Notes 9 and 12) 5,054 3,276 2,189
Amortization of deferred policy acquisition
costs (Note 10) 100,073 76,875 100,715
--------- --------- ---------
748,133 680,364 681,409
--------- --------- ---------
Income (loss) before income taxes 26,022 18,764 (25,436)
Income taxes (benefit) (Note 5):
Current 6,570 10,858 2,878
Deferred 2,303 (4,239) (11,355)
--------- --------- ---------
8,873 6,619 (8,477)
--------- --------- ---------
Net income (loss) 17,149 12,145 (16,959)
Preferred stock dividends (Note 13) 1,904 2,021 2,039
--------- --------- ---------
Income (loss) applicable to common
stockholders $ 15,245 $ 10,124 $ (18,998)
========= ========== =========
Net income (loss) per common share:
Primary $ 2.36 $ 1.51 $ (2.85)
Fully diluted 1.58 1.26 (2.85)
Dividends declared per common share .15 - -
Average common and common equivalent
shares outstanding:
Primary 6,459 6,724 6,660
Fully diluted 12,734 10,731 8,195
See notes to consolidated financial statements.
<PAGE>
Pioneer Financial Services, Inc. and Subsidiaries
Consolidated Balance Sheets
(In Thousands, Except Share and Per Share Amounts)
DECEMBER 31
1994 1993
--------------------
ASSETS
Investments (Note 4 and 19):
Securities available-for-sale:
Fixed maturities, at fair value $218,748
Fixed maturities, at cost - $257,717
Equity securities, at fair value 15,440 17,436
Fixed maturities held-to-maturity, principally
at amortized cost 378,650 326,512
Real estate - at cost, less accumulated depreciation 16,959 -
Mortgage loans at unpaid balance 1,806 3,201
Policy loans at unpaid balance 23,082 23,988
Short-term investments at cost, which approximates
fair value 69,152 45,352
---------- ----------
Total investments 723,837 674,206
Cash 8,612 23,379
Premiums and other receivables, less allowance
for doubtful accounts (Notes 7 and 18) 20,102 20,734
Reinsurance receivables and amounts
on deposit with reinsurers (Note 6) 41,426 74,366
Accrued investment income 8,873 8,482
Deferred policy acquisition costs (Note 10) 225,618 260,432
Land, building, and equipment at cost, less accumulated
depreciation (Note 18) 20,314 22,248
Deferred federal income taxes (Note 5) 7,262 3,922
Other 19,656 20,502
---------- ----------
$1,075,700 $1,108,271
========== ==========
<PAGE>
DECEMBER 31
1994 1993
--------------------
LIABILITIES, REDEEMABLE PREFERRED STOCK,
AND STOCKHOLDERS' EQUITY
Policy liabilities:
Future policy benefits:
Life $246,953 $244,249
Annuity 210,132 208,155
Accident and health 163,477 158,330
Unearned premiums 76,266 87,945
Policy and contract claims (Note 8) 155,373 189,389
Other 16,407 15,037
---------- -----------
868,608 903,105
General liabilities:
General expenses and other liabilities 37,042 48,442
Short-term notes payable (Notes 9, 21 and 22) 20,093 5,575
Long-term notes payable (Notes 9, 19, 21 and 22) 2,520 1,125
Convertible subordinated debentures (Notes 12 and 19) 57,427 57,477
---------- -----------
Total liabilities 985,690 1,015,724
Commitments and contingencies (Notes 5 to 11 and 16)
Redeemable Preferred Stock, no par value (Note 13):
$2.125 cumulative convertible exchangeable preferred
stock:
Authorized: 5,000,000 shares
Issued and outstanding: (1994 - 867,300 shares;
1993 - 947,000 shares) 21,682 23,675
Stockholders' equity (Notes 5 and 11 to 15):
Common Stock, $1 par value:
Authorized: 20,000,000 shares
Issued, including shares in treasury
(1994 - 6,996,157; 1993 - 6,900,000) 6,996 6,900
Additional paid-in capital 29,299 28,814
Unrealized appreciation (depreciation)
of available-for-sale securities (Notes 2 and 4) (7,193) 3,285
Retained earnings 48,960 34,645
Treasury stock at cost (1994 - 1,078,400 shares;
1993 - 556,800 shares) (9,734) (4,772)
---------- -----------
Total stockholders' equity 68,328 68,872
---------- -----------
$1,075,700 $1,108,271
========== ===========
See notes to consolidated financial statements.
<PAGE>
Pioneer Financial Services, Inc. and Subsidiaries
Statements of Consolidated Stockholders' Equity
(In Thousands, Except Share and Per Share Amounts)
<TABLE>
<CAPTION>
Unrealized Total
Additional Appreciation Stock-
Common Paid-In (Depreciation) Retained Treasury holders
Stock Capital of Securities Earnings Stock Equity
------ ---------- -------------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1992 $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) 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
Appreciation of equity
securitie s - - 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) 8 36 - - - 44
------ ------- -------- ------- -------- -------
Balance at December 31, 1993 6,900 28,814 3,285 34,645 (4,772) 68,872
1994 transactions:
Net income - - - 17,149 - 17,149
Cash dividends - Preferred
Stock ($2.125 per share) - - - (1,904) - (1,904)
Cash dividends - Common
Stock ($.15 per share) - - - (930) - (930)
Stock options exercised
(85,500 shares) 86 409 - - - 495
<PAGE>
Conversion of convertible
subordinated debentures
(4,255 shares) 4 46 - - - 50
Cummulative effect of change
in accounting principle (Note 2)- - 3,605 - - 3,605
Depreciation of available-
for-sale securities - - (14,083) - - (14,083)
Purchase of treasury stock
(521,600 shares) - - - - (4,962) (4,962)
Issuance of shares pursuant to
Agent Stock Purchase Plan
(6,332 shares) 6 30 - - - 36
------ ------- -------- ------- -------- --------
BALANCE AT DECEMBER 31, 1994 $6,996 $29,299 $(7,193) $48,960 $(9,734) $68,328
====== ======= ======== ======= ======== ========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
Pioneer Financial Services, Inc. and Subsidiaries
Statements of Consolidated Cash Flows
(In Thousands)
YEAR ENDED DECEMBER 31
1994 1993 1992
---- ---- ----
OPERATING ACTIVITIES
Net income (loss) $ 17,149 $ 12,145 $ (16,959)
Adjustments to reconcile net income or loss to
net cash provided by operating activities:
Decrease (increase) in premiums receivable 4,981 (3,912) 5,673
Increase (decrease) in policy liabilities (34,498) 31,132 12,734
Deferral of policy acquisition costs (65,258) (67,633) (56,936)
Amortization of deferred policy
acquisition costs (Note 10) 100,073 76,875 100,715
Deferred income tax expense (benefit) 2,303 (4,239) (11,355)
Change in other assets and liabilities 21,392 (13,423) (10,597)
Depreciation, amortization, and accretion (102) 9,795 10,303
Realized losses (Note 4) 383 1,336 47
--------- ---------- ---------
Net cash provided by operating activities 46,423 42,076 33,625
INVESTING ACTIVITIES
Securities available-for-sale:
Purchases - fixed maturities (110,416) (120,228) (29,001)
Sales - fixed maturities 99,865 51,780 13,367
Maturities - fixed maturities 44,116 18,836 17,106
Purchases - equity securities (4,609) (5,532) (4,085)
Sales - equity securities 2,558 14,845 13,651
Securities held-to-maturity:
Purchases (84,010) (256,579) (587,931)
Sales 9,427 126,072 424,404
Maturities 21,472 102,535 90,453
Purchase of investment real estate (17,442) - -
Net decrease (increase) in other investments (21,499) 26,038 22,080
Net purchases of property and equipment (2,957) (3,956) (4,434)
Purchase of subsidiaries including a cash overdraft
of $1,019 (Note 3) - (9,685) -
--------- ---------- ---------
Net cash used by investing activities (63,495) (55,871) (44,390)
FINANCING ACTIVITIES
Net proceeds from issuance of convertible
subordinated debentures (Note 12) - 54,055 -
Increase in notes payable 21,225 - 14,030
Repayment of notes payable (5,362) (31,401) (3,900)
Proceeds from sale of agent receivables (Note 7) 24,393 25,376 20,347
Transfer of collections on previously sold agent
receivables (Note 7) (28,743) (22,981) (22,437)
Dividends paid - preferred (1,904) (2,021) (2,039)
Dividends paid - common (930) - -
Stock options exercised 495 451 165
Purchase of treasury stock (4,963) (4,720) (52)
Retirement of preferred stock (1,993) (315) -
Other 87 44 717
--------- ---------- ---------
Net cash provided by financing activities 2,305 18,488 6,831
--------- ---------- ---------
<PAGE>
Increase (decrease) in cash (14,767) 4,693 (3,934)
Cash at beginning of year 23,379 18,686 22,620
--------- ---------- ---------
Cash at end of year $ 8,612 $ 23,379 $ 18,686
========= ========== =========
<PAGE>
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
Prior to January 1, 1994, PFS' fixed maturity portfolio was segregated into
two components: fixed maturities held-to-maturity and fixed maturities
available-for-sale. Fixed maturities, where the intent was to hold to
maturity, were carried at amortized cost, adjusted for other-than-temporary
impairments. Fixed maturities that were available for sale were carried, on
an aggregate basis, at the lower of amortized cost or fair value.
In 1993, the Financial Accounting Standards Board ("FASB") issued Statement
115, "Accounting for Certain Investments in Debt and Equity Securities."
Statement 115 requires that fixed maturity securities are to be classified as
either held-to-maturity, available-for-sale, or trading. PFS adopted
Statement 115 as of January 1, 1994, with no effect on net income and a
$3,605,000 increase in stockholders' equity (see Note 2).
PFS believes that it has the ability and intent to hold to maturity its fixed
maturity investments that are classified as "held-to-maturity." However, PFS
also recognizes that there may be circumstances where it may be appropriate
to sell a security prior to maturity in response to unforeseen changes in
circumstances. Recognizing the need for the ability to respond to changes in
market conditions and in tax position, PFS has designated a portion of its
investment portfolio as available-for-sale. As required by Statement 115,
PFS adjusted the carrying value of its fixed maturity investments that are
classified as investments available-for-sale to fair value at January 1,
1994.
At January 1, 1994, the remainder of PFS' portfolio of fixed maturity
investments was classified as held-to-maturity. Although PFS has the ability
and intent to hold those securities to maturity, there could occur infrequent
and unusual conditions under which it would sell certain of those securities.
Those conditions would include unforeseen changes in asset quality,
significant changes in tax law affecting the taxation of securities, a
significant business acquisition or disposition, and changes in regulatory
capital requirements or permissable investments.
Sales of two held-to-maturity securities in 1994 with an amortized cost of
$9,803,000 resulted after discussions with an insurance rating agency
regarding specific investments of PFS' insurance subsidiaries and evidence of
a significant deterioration in credit worthiness. Sales of these securities,
all of which were owned at January 1, 1994, resulted in a realized loss of
$376,000.
Subsequent to January 1, 1994, all securities purchased are designated for
inclusion in either the available-for-sale or held-to-maturity categories
based on PFS' intent and the nature of the securities purchased.
<PAGE>
Changes in fair values of available-for-sale securities, after adjustment of
deferred policy acquisition costs ("DAC"), if any, and deferred income taxes,
are reported as unrealized appreciation or depreciation directly in
stockholders' equity and, accordingly, have no effect on net income. DAC
offsets to the unrealized appreciation or depreciation represent valuation
adjustments or reinstatements of DAC that would have been required as a
change or credit to operations had such unrealized amounts been realized.
The amortized cost of fixed maturity investments classified as available-for-
sale and as held-to-maturity is adjusted for amortization of premiums and
accretion of discounts. That amortization or accretion is included in net
investment income.
For the mortgage-backed portion of the fixed maturity securities portfolio,
PFS recognizes income using a constant effective yield based on anticipated
prepayments and the estimated economic life of the securities. When actual
prepayments differ significantly from anticipated prepayments, the effective
yield is recalculated to reflect actual payments to date and anticipated
future payments. The net investment in the security is adjusted to the
amount that would have existed had the new effective yield been applied since
the acquisition of the security. That adjustment is included in net
investment income.
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, and declines in value
considered to be other-than-temporary, are recognized in operations on the
specific identification basis.
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.
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, 1994, 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 liabilities for future policy benefits on other life insurance 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
<PAGE>
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.
The unamortized cost of purchased insurance in force is included in DAC
($21,291,000 and $23,078,000 at December 31, 1994 and 1993, 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. PFS maintains an additional provision for adverse deviation in
its accident and health claim liability estimates.
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 DAC 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 had 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.
FEDERAL INCOME TAXES
<PAGE>
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, 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 FASB Statement No. 109 "Accounting for Income
Taxes." Under this method deferred tax assets and liabilities are determined
based on the differences between financial reporting and tax bases of assets
and liabilities and are measured using enacted tax rates. The cumulative
effect of adopting Statement No. 109 as of January 1, 1993, was not
significant and has not been separately disclosed.
DEPRECIATION
Building, equipment and investment real estate 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.
COST IN EXCESS OF NET ASSETS OF COMPANIES ACQUIRED
The cost in excess of net assets of companies acquired (goodwill) ($5,317,000
and $5,449,000 at December 31, 1994 and 1993, 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
1994, 1993 and 1992 PFS repurchased 521,600, 546,200 and 10,600 shares,
respectively, of their common stock. During 1994 and 1993, PFS repurchased
78,900 and 13,400 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.
RECLASSIFICATIONS
Certain amounts in the 1992 and 1993 financial statements have been
reclassified to conform to the 1994 presentation.
2. CHANGES IN ACCOUNTING PRINCIPLES
<PAGE>
FASB Statement 115, "Accounting for Certain Investments in Debt and Equity
Securities" was adopted by PFS as of January 1, 1994. In accordance with
Statement 115, PFS' prior year financial statements have not been restated to
reflect the change in accounting principle. Under Statement 115, securities
are classified as available-for-sale, held-to-maturity, or trading. PFS
classified a portion of its fixed maturity securities portfolio as available-
for-sale with the remainder classified as held-to-maturity. Securities
classified as available-for-sale are carried at fair value and unrealized
gains and losses on such securities are reported as a separate component of
stockholders' equity. Securities classified as held-to-maturity are carried
at cost, adjusted for amortization of premium or discount.
With the classification of a portion of the portfolio as available-for-sale,
the January 1, 1994, balance of stockholders' equity was increased by
$3,605,000 (net of adjustments to deferred income taxes) to reflect the net
unrealized gains on fixed maturity securities classified as available-for-
sale that were previously carried at amortized cost. The adoption of
Statement 115 had no effect on net income or PFS' accounting policy for
equity securities.
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.
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 at December 31, 1993. The adoption of Statement
No. 113 had no effect on net income.
The Financial Accounting Standards Board has issued Statements No. 114 and
118 which relate to accounting by creditors for impairment of a loan. The
Statements require that impaired loans are to be valued at the present value
of expected future cash flows, at the loan's observable market price, or at
the fair value of the collateral if the loan is collateral dependent. PFS
anticipates adopting these Statements in its 1995 financial statements as
required. Implementation of these Statements is not expected to have a
material effect on PFS' financial statements.
3. BUSINESS COMBINATIONS
On January 31, 1995, Pioneer acquired for a cost of $24,000,000 (purchase
price $23,700,000 and $300,000 of additional costs), the outstanding common
shares of Connecticut National Life Insurance Company.
The acquisition will be accounted for by the purchase method and,
accordingly, the purchase price is allocated to assets and liabilities
acquired based on estimates of their fair values. These allocations,
summarized below, may be adjusted upon final determination of such values:
(IN THOUSANDS)
--------------
<PAGE>
Assets Acquired
Cash $ 2,900
Investments 287,500
Value of insurance in force 1,500
Receivables and amounts on deposit with reinsurers 87,100
Other assets 6,700
Liabilities Assumed
Policy liabilities 353,700
Other liabilities 8,000
-------
Total purchase price $ 24,000
=======
The value of insurance inforce will be amortized over the estimated remaining
life of the insurance inforce.
The following unaudited pro-forma consolidated results of operations have
been prepared as if the acquisition had been made as of January 1, 1994:
YEAR ENDED
DECEMBER 31, 1994
(IN THOUSANDS)
-----------------
Revenues $809,500
Net income 18,700
Net income per share
Primary 2.60
Fully-diluted 1.70
The foregoing pro-forma information is not necessarily indicative of either
the results of operations that would have occurred had the acquisition been
effective on January 1, 1994, or of future results of operations of the
consolidated companies.
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' 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' 1993 net income.
4. INVESTMENTS
Realized investment gains (losses), including provisions for other-than-
temporary impairments on investments held, and the change in unrealized
appreciation (depreciation) on fixed maturities, equity securities, and other
investments during the years shown are summarized as follows:
FIXED EQUITY
MATURITIES SECURITIES OTHER TOTAL
<PAGE>
---------- ---------- ----- -----
(IN THOUSANDS)
1994
REALIZED $ (94) $ 211 $ (500) $ (383)
UNREALIZED (44,685) (2,098) - (46,783)
---------- --------- ------- ---------
$ (44,779) $ (1,887) $ (500) $(47,166)
========== ========= ======= =========
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)
========== ========= ======= =========
The cost of available-for-sale equity securities was $12,484,000 at December
31, 1994, and $12,382,000 at December 31, 1993. At December 31, 1994, gross
unrealized appreciation on available-for-sale equity securities was
$3,514,000 and gross unrealized depreciation was $558,000. At December 31,
1993, gross unrealized appreciation on equity securities was $5,067,000 and
gross unrealized depreciation was $13,000.
A comparison of amortized cost to fair value of fixed maturity investments by
category is as follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ----- -----
(IN THOUSANDS)
At December 31, 1994:
HELD TO MATURITY
U.S. Treasury $ 8,891 $ 25 $ (840) $ 8,076
States and political subdivisions 8,888 - (810) 8,078
Foreign governments 2,992 - (197) 2,795
Corporate securities 147,419 90 (13,158) 134,351
Mortgage-backed securities 210,460 558 (25,778) 185,240
--------- -------- --------- ---------
$378,650 $ 673 $(40,783) $338,540
========= ======== ========= =========
AVAILABLE FOR SALE
U.S. Treasury $ 23,207 $ 2 $ (1,357) $ 21,852
States and political subdivisions 26,579 - (760) 25,819
Foreign governments 4,024 - (559) 3,465
Corporate securities 95,939 - (6,538) 89,401
Mortgage-backed securities 83,020 37 (4,846) 78,211
--------- -------- --------- ---------
$232,769 $ 39 $(14,060) $218,748
========= ======== ========= =========
At December 31, 1993:
HELD TO MATURITY
<PAGE>
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
State 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
========= ======== ========= =========
The amortized cost and fair value of fixed maturities at December 31, 1994,
by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without prepayment penalties.
AMORTIZED FAIR
COST VALUE
--------- -----
HELD TO MATURITY: (IN THOUSANDS)
Due in 1995 $ 510 $ 512
Due 1996-2000 51,247 47,784
Due 2001-2005 69,574 62,956
Due after 2005 46,859 42,048
Mortgage-backed securities 210,460 185,240
--------- --------
$378,650 $338,540
========= ========
AVAILABLE FOR SALE:
Due in 1995 $ 830 $ 831
Due 1996-2000 59,914 56,399
Due 2001-2005 62,665 57,900
Due after 2005 26,340 25,407
Mortgage-backed securities 83,020 78,211
--------- --------
$232,769 $218,748
========= ========
Proceeds from sales of investments (principally fixed maturities) during
1994, 1993 and 1992 were $111,850,000, $192,697,000 and $451,422,000,
respectively. Gross gains of $1,448,000, $10,834,000 and $8,073,000 and
gross losses of $1,542,000, $12,472,000 and $8,164,000 were realized on fixed
maturity sales in 1994, 1993 and 1992, respectively.
Major categories of net investment income are summarized as follows:
1994 1993 1992
---- ---- ----
(IN THOUSANDS)
Fixed maturities $40,172 $34,529 $39,384
Short-term investments 1,549 2,691 2,083
Other 4,189 4,069 3,733
-------- -------- --------
<PAGE>
Total investment income 45,910 41,289 45,200
Investment expenses (3,124) (1,047) (1,645)
-------- -------- --------
Net investment income $42,786 $40,242 $43,555
======== ======== ========
At December 31, 1994 and 1993 the net appreciation (depreciation) of
available-for-sale securities in stockholders' equity consisted of gross
appreciation (depreciation) of ($11,066,000) and $5,054,000, respectively,
net of deferred tax assets (liabilities) of $3,873,000 and ($1,769,000),
respectively.
At December 31, 1994, securities with a carrying value of $96,247,000 were on
deposit with various government authorities to meet regulatory requirements.
At December 31, 1994, the amortized cost of fixed maturity investments in any
one entity, other than the U.S. government or a U.S. government agency or
authority, which exceeded 10% of PFS' consolidated stockholders' equity were
as follows:
GE Capital Mortgage Services, Inc. $23,576,000
Prudential Home 11,131,000
Ford Capital 10,648,000
Nomura Asset Securities 10,102,000
State of Washington 9,651,000
GMAC 9,877,000
Associates Corporation 7,237,000
Citibank 6,900,000
Investment real estate (net of $483,000 of accumulated depreciation) at
December 31, 1994 consists principally of land and a building used, in part,
as PFS' corporate headquarters.
At December 31, 1994, PFS held unrated or less-than-investment-grade
securities with a carrying value of $6,269,000 and an aggregate fair value of
$5,479,000. Those holdings amounted to less than 1% of PFS' total
investments at December 31, 1994.
At December 31, 1994, fixed maturities with a carrying value of $16,400,000
had been non-income producing for the preceding 12-month period.
5. FEDERAL INCOME TAXES
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' deferred tax liabilities and assets are as follows:
DECEMBER 31
1994 1993
---- ----
(IN THOUSANDS)
DEFERRED TAX LIABILITIES
Deferred policy acquisition costs $72,306 $86,545
Net unrealized appreciation on
available-for-sale securities - 1,769
Other 1,537 1,367
<PAGE>
-------- --------
Total deferred tax liabilities 73,843 89,681
-------- --------
DEFERRED TAX ASSETS
Policy liabilities 69,101 77,493
Financial reinsurance 3,788 11,150
Net unrealized depreciation on
available-for-sale securities 3,873 -
Other 8,213 8,830
-------- --------
Total deferred tax assets 84,975 97,473
Valuation allowance for
deferred tax assets (3,870) (3,870)
-------- --------
Deferred tax assets net of
valuation allowance 81,105 93,603
-------- --------
Net deferred tax asset $ 7,262 $ 3,922
======== ========
The nature of PFS' deferred tax assets and liabilities are such that the
reversal pattern for these temporary differences should generally result in
realization of PFS' deferred tax assets. PFS establishes a valuation
allowance for any portion of the deferred tax asset that management believes
may not be realized. There was no change in the valuation allowance in 1994,
and in 1993 the valuation allowance increased by $1,221,000 principally due
to the acquisition of Continental Life & Accident Company (See Note 3).
The deferred tax benefit for 1992 includes the effects of the following items
(in thousands):
Deferred policy acquisition costs $(16,232)
Policy liabilities 2,966
Decrease in operating loss carryforward 143
General expenses 1,537
Financial statement capital gains
greater than tax capital gains 148
Other 83
---------
Deferred federal income tax benefit $(11,355)
=========
PFS' effective federal income tax rate varied from the statutory federal
income tax rate as follows:
LIABILITY METHOD DEFERRED METHOD
1994 1993 1992
AMOUNT % AMOUNT % AMOUNT %
------ --- ------ --- ------ ---
(DOLLARS IN THOUSANDS)
Statutory federal income tax rate
applied to income or loss
before income taxes $ 9,108 35.0% $ 6,567 35.0% $(8,648) 34.0%
Nondeductible goodwill
amortization 109 .4 319 1.7 192 (.8)
Tax exempt interest (307) (1.2) (99) (.5) - -
<PAGE>
Other (37) (.1) (168) (.9) (21) .1
-------- ----- -------- ----- -------- -----
Income taxes (benefit) and
effective rate $ 8,873 34.1% $ 6,619 35.3% $(8,477) 33.3%
======== ===== ======== ===== ======== =====
Taxes paid amounted to $9,731,000, $5,735,000, and $8,828,000 for 1994, 1993,
and 1992, respectively.
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, 1994 for PFS' life insurance subsidiaries was
$10,040,000. Should the policyholders' surplus accounts of PFS' 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, 1994, PFS' life insurance subsidiaries had combined tax-
basis shareholders' surplus accounts of $46,000,000. Distributions up to
that amount would result in no income tax liability.
6. REINSURANCE
PFS' 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' premiums were reduced for reinsurance premiums by $37,273,000,
$40,592,000, and $30,469,000 in 1994, 1993, and 1992, respectively. Under
various reinsurance arrangements, PFS' premiums were increased by
$16,928,000, $19,338,000, and $15,403,000 in 1994, 1993, and 1992,
respectively. PFS' policy benefits have been reduced for reinsurance
recoveries of $23,319,000 in 1994, $21,871,000 in 1993, and $22,171,000 in
1992. At December 31, 1994, approximately 40% of PFS' reinsurance
receivables and amounts on deposit with reinsurers were due from Employers
Reinsurance Corporation, 14% from North American Reassurance, and 12% from
The Universe Life Insurance Company. The amounts due from The Universe Life
Insurance Company were held in a financial institution trust account.
7. SALE OF AGENT RECEIVABLES
In 1994, 1993, and 1992 a subsidiary of PFS sold agent receivables to an
unaffiliated company for proceeds of $24,393,000, $25,376,000, and
$20,347,000, respectively. The outstanding balances of such agent
receivables sold that remained uncollected at December 31, 1994 and 1993 were
$7,937,000 and $9,815,000, respectively. PFS remains subject to a maximum
credit exposure under this agreement amounting to 10% of agent receivables at
December 31, 1994.
8. RECONCILIATION OF LIABILITY FOR POLICY AND CONTRACT CLAIMS
<PAGE>
The following table provides a reconciliation of the beginning and ending
policy and contract claim liability balances reported in PFS' balance sheets:
YEAR ENDED DECEMBER 31
1994 1993 1992
---- ---- ----
(IN THOUSANDS)
Policy and contract claim
liability beginning of year $189,389 $148,141 $151,577
Incurred claims 445,794 410,607 377,063
Deduct claims paid related to:
Current year 350,210 260,702 251,773
Prior years 129,600 108,657 128,726
--------- --------- ---------
Total claims paid 479,810 369,359 380,499
--------- --------- ---------
Policy and contract claim
liability end of year $155,373 $189,389 $148,141
========= ========= =========
PFS has historically held margins in its accident and health claim reserves
to provide for potential adverse deviation. The claim reserve estimates are
continually reviewed and adjusted as necessary. Based on payments through
the first nine months of 1994, PFS determined that claim reserves contained
significantly higher margins than originally projected. As a result, claim
reserve margins of $15,000,000 were released in the third quarter of 1994.
PFS continues to hold additional margins which it considers to be reasonable
in its medical claim reserves.
9. NOTES PAYABLE
Short-term notes payable included $18,950,000 at December 31, 1994, drawn
under a line of credit arrangement. The borrowings are due in 1995 and bear
interest at prime and payable quarterly (See Note 22). The remaining balance
under the line of credit is due in October 1995.
At December 31, 1994, a PFS subsidiary had an unsecured loan of $1,125,000.
The portion of the loan due in 1995 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 prime and is payable quarterly
with the final payment due July 1998.
At December 31, 1994, a PFS subsidiary has two unsecured loans totaling
$2,275,000. The portion of the loans due in 1995 of $580,000 are included in
short-term notes payable. The remainder of the notes are included in long-
term notes payable. The notes bear interest at prime and are payable
quarterly with the final payment due December 1999. PFS has guaranteed
payment of the notes.
At December 31, 1994, PFS had $263,000 of short-term debt liability for which
a PFS agency subsidiary's future renewal commissions were pledged as
collateral.
The weighted average interest rate on short-term notes payable at year end
<PAGE>
was 7.7%, 5.0% and 5.6% in 1994, 1993 and 1992, respectively.
Interest paid amounted to $4,950,000, $1,023,000, and $2,274,000 for 1994,
1993, and 1992, respectively.
10. 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 third quarter of 1994, 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 $16,700,000 in the third quarter of 1994. A
similar actuarial study performed in 1992 resulted in increased amortization
of deferred policy acquisition costs of $30,000,000 in the fourth quarter of
1992.
11. STATUTORY-BASIS FINANCIAL INFORMATION
The following tables compare combined net income and stockholders' equity for
PFS' 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 on a statutory basis rather than capitalized and
amortized over the term of the related polices in the GAAP financial
statements.
Policy Liabilities. Certain policy liabilities are calculated based on
statutorily required methods and assumptions on a statutory basis rather
than on estimated expected experience or, for annuity and interest-
sensitive life insurance, actual account balances for 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 on a
statutory basis rather than as liabilities in the GAAP financial
statements.
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.
<PAGE>
Unrealized Depreciation On Fixed Maturities Available-For-Sale. Fixed
maturity securities classified as available-for-sale are carried
principally at amortized cost on a statutory basis rather than at fair
value with unrealized gains and losses on such securities reported as a
separate component of stockholders' equity in the GAAP financial
statements.
1994 1993 1992
---- ---- ----
(IN THOUSANDS)
Combined net income on a statutory basis $ 6,986 $ 10,155 $ 3,629
Adjustments for:
Deferred policy acquisition costs (34,814) (12,842) (43,779)
Policy liabilities 26,544 (18,494) (19,957)
Financial reinsurance 17,544 34,017 33,118
Deferred federal income taxes (2,303) 4,239 11,355
Non-insurance companies, eliminations,
and other adjustments 3,192 (4,930) (1,325)
---------- --------- ----------
Consolidated net income (loss) in accordance
with GAAP $ 17,149 $ 12,145 $ (16,959)
========== ========= ==========
DECEMBER 31
1994 1993
------------------
(IN THOUSANDS)
Combined stockholders' equity on a statutory basis $ 124,284 $ 106,567
Adjustments for:
Deferred policy acquisition costs 225,618 260,432
Policy liabilities (180,422) (206,966)
Financial reinsurance (12,748) (30,292)
Deferred federal income taxes 7,262 3,922
Non-admitted assets 10,813 11,743
Surplus notes (4,436) (4,116)
Unrealized depreciation on available-for-sale
fixed maturities (14,021) -
Other (12,296) (12,229)
--------- ----------
Combined insurance subsidiaries stockholders'
equity on a GAAP basis 144,054 129,061
Non-insurance companies equity, eliminations
and other adjustments (75,726) (60,189)
--------- ----------
Consolidated stockholders' equity in
accordance with GAAP $ 68,328 $ 68,872
========= ==========
Dividends from PFS' insurance subsidiaries unassigned surplus 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
<PAGE>
in 1995 without regulatory approval is $7,419,000. At December 31, 1994,
PFS' retained earnings was $34,460,000 in excess of the combined statutory-
basis unassigned surplus of the insurance subsidiaries.
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.
12. 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 long-term notes payable. The debentures are
convertible into PFS' Common Stock at any time prior to maturity, unless
previously redeemed, at a conversion price of $11.75 per share.
The debentures are redeemable by PFS under certain conditions after July
1996.
At December 31, 1994, 4,887,404 shares of PFS' Common Stock were reserved for
conversion of the outstanding convertible subordinated debentures.
13. 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' 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, 1994, 1,387,680 shares of PFS'
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 $26.06 per
share in 1994, declining to $25 in 1999. The Preferred Stock is exchangeable
in whole at PFS' option on any dividend payment date for PFS' 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.
14. 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' 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' Common Stock under certain circumstances.
The rights, when exercisable, entitle the holder to purchase one-tenth of a
<PAGE>
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.
15. STOCK OPTIONS AND RIGHTS
PFS has a nonqualified stock option plan and certain stock incentive programs
principally for directors and key employees of PFS and its subsidiaries.
PFS' Board of Directors grants the options and specifies the conditions of
the options. The number of shares of common stock available for benefits
under the plan is equal to 15% of the average fully diluted shares
outstanding for the prior fiscal year. Options expire ten years after grant.
Information with respect to these options is as follows:
1994 1993
NUMBER NUMBER
OF EXERCISE OF EXERCISE
SHARES PRICE SHARES PRICE
------ -------- ------ --------
Options outstanding at
beginning of year 733,250 $5.50 - $12.00 594,250 $5.50 - $12.00
Granted 480,321 8.88 - 11.38 225,000 5.50
Exercised 85,500 5.50 - 11.00 72,000 5.50 - 12.00
Canceled/repurchased 82,500 5.50 - 12.00 14,000 5.50
--------- -------------- ------- --------------
Options outstanding at end
of year 1,045,571 $5.50 - $12.00 733,250 $5.50 - $12.00
========= =======
Options exercisable at end
of year 561,250 573,250
========= =======
Unoptioned shares available
for granting of options 1,535,201 22,900
========= =======
16. 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' management
and its legal counsel are of the opinion that the disposition of these
actions will not have a material adverse effect on PFS' financial position.
PFS leases various office facilities furniture and equipment and computer
equipment under noncancelable operating leases. Rent expense was $4,530,000,
$4,516,000, and $3,700,000 in 1994, 1993, and 1992, respectively. Minimum
future rental commitments in connection with noncancelable operating leases
are as follows:
1995 $ 3,203,000
1996 2,445,000
1997 939,000
1998 258,000
<PAGE>
1999 106,000
PFS has entered into employment agreements with certain officers.
The number of insurance companies that are under regulatory supervision has
increased, and that increase is expected to result in an increase in
assessments by state guaranty funds to cover losses to policyholders of
insolvent or rehabilitated companies. Those mandatory assessments may be
partially recovered through a reduction in future premium taxes in some
states. For all assessment notifications received, PFS has accrued for those
assessments net of estimated future premium tax reductions.
17. 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 ($9,240 in 1994). PFS makes employer contributions to
the plan in cash or in PFS Common Stock at the discretion of PFS' Board of
Directors. At December 31, 1994, the Plan's assets included PFS Common Stock
of $2,915,775, at fair value. PFS' contibutions charged to operations were
$1,365,000 in 1994, $1,073,000 in 1993, and $852,000 in 1992.
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
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 1994, 1993 and 1992,
6,332 shares, 8,057 shares and 163,566 shares, respectively, of PFS Common
Stock were issued under this plan.
18. ALLOWANCES AND ACCUMULATED DEPRECIATION
Allowances for doubtful accounts related to other receivables amounted to
$895,000 at December 31, 1994, and $1,271,000 at December 31, 1993.
Accumulated depreciation related to building and equipment amounted to
$19,325,000 at December 31, 1994, and $16,891,000 at December 31, 1993.
19. FAIR VALUE INFORMATION
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
<PAGE>
traded, fair values are estimated using values obtained from 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.
Mortgage loans and policy loans: The carrying amount of PFS' 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' liabilities under
investment-type insurance contracts are based on current cash surrender
values.
Fair values for PFS' 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' 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' long-term notes payable
approximates the carrying value.
Convertible subordinated debentures: The fair value of PFS' convertible
subordinated debentures is based on quoted market prices.
The fair values of certain financial instruments along with their
corresponding carrying values of December 31, 1994 and 1993 are as follows:
1994 1993
FAIR CARRYING FAIR CARRYING
VALUE VALUE VALUE VALUE
----- -------- ----- --------
(IN THOUSANDS)
Financial Assets
Fixed Maturities:
Available-or-sale $218,748 $218,748 $263,263 $257,717
Held-to-maturity 338,540 378,650 325,540 326,512
Equity securities 15,440 15,440 17,436 17,436
Mortgage loans 1,806 1,806 3,201 3,201
Policy loans 22,025 23,082 21,011 23,988
Financial Liabilities
Investment contracts 194,072 203,654 191,816 200,894
Long-term notes payable 2,520 2,520 1,125 1,125
Subordinated debentures 54,843 57,427 70,122 57,477
During the fourth quarter of 1994, PFS began using exchange-traded treasury
futures contracts as part of its overall interest rate risk management
strategy for a small portion of its life and annuity business. The initial
margin deposit paid for the futures represents their cost basis which is
adjusted to fair value in the financial statements. Realized and unrealized
gains and losses, which were immaterial in 1994, are recognized as an
adjustment to the carrying amount of the asset being hedged.
<PAGE>
20. SEGMENT INFORMATION
PFS has four business segments: Group Medical, Senior Health, Life
Insurance, and Medical Utilization Management. The segments are based on
PFS' main Divisions. 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:
1994 1993 1992
---- ---- ----
(IN THOUSANDS)
REVENUES
--------
Group Medical:
Unaffiliated $ 457,633 $ 379,742 $ 327,033
Inter-segment 35,373 30,439 26,500
Senior Health 235,031 247,100 258,608
Life Insurance 71,075 67,780 68,411
Medical Utilization Management:
Unaffiliated 10,416 4,506 1,921
Inter-segment 4,927 4,358 2,041
---------- ---------- ---------
814,455 733,925 684,514
Eliminations 40,300 34,797 28,541
---------- ---------- ---------
Total $ 774,155 $ 699,128 $ 655,973
========== ========== =========
INCOME (LOSS) BEFORE INCOME TAXES
---------------------------------
Group Medical $ 10,889 $ 6,528 $(25,235)
Senior Health 13,420 12,255 1,966
Life Insurance 8,537 7,623 340
Medical Utilization Management 2,026 (1,211) 335
Corporate expenses (8,850) (6,431) (2,843)
---------- ---------- ---------
Total $ 26,022 $ 18,764 $(25,437)
========== ========== =========
IDENTIFIABLE ASSETS AT YEAR-END
-------------------------------
Group Medical $ 245,763 $ 287,713 $ 206,194
Senior Health 291,703 301,700 292,449
Life Insurance 533,070 514,154 478,529
Medical Utilization Management 5,164 4,704 1,517
---------- ---------- ---------
Total $1,075,700 $1,108,271 $ 978,689
========== ========== =========
21. CREDIT ARRANGEMENTS
PFS has a line of credit arrangement for short-term borrowings with three
<PAGE>
banks amounting to $20,000,000 through April 1996, of which $18,950,000 was
used at December 31, 1994. The line of credit arrangement can be terminated,
in accordance with the agreement, at PFS' option.
22. SUBSEQUENT EVENT
As discussed in Note 3, on January 31, 1995, PFS acquired all of the
outstanding common shares of Connecticut National Life Insurance Company for
a cost of $24,000,000. To fund the acquisition, PFS utilized $15,000,000
from its available line of credit and internal cash sources. The line of
credit was replaced with a five year term loan totaling $15,000,000 in March
1995.
23. QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary of unaudited quarterly results of operations for 1994 and 1993 is
as follows (in thousands, except per share amounts):
1994
----
1ST 2ND 3RD 4TH
--- --- --- ---
Premiums and
policy charges $172,898 $176,803 $176,190 $178,219
Net investment
income and other 18,367 16,926 17,674 17,079
Net income 4,500 4,403 3,321 4,926
Net income per share:
Primary .60 .59 .44 .73
Fully diluted .40 .40 .32 .46
1993
----
1ST 2ND 3RD 4TH
--- --- --- ---
Premiums and
policy charges $155,343 $154,189 $154,132 $177,302
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
<PAGE>
SCHEDULE I
PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS
IN RELATED PARTIES
December 31, 1994
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 $ 8,891 $ 8,076 $ 8,891
States and political
subdivisions 8,888 8,078 8,888
Foreign governments 2,992 2,795 2,992
Corporate securities 147,419 134,351 147,419
Mortgage-backed securities 210,460 185,240 210,460
-------- -------- --------
TOTAL FIXED MATURITIES
TO BE HELD TO MATURITY 378,650 338,540 378,650
-------- -------- --------
Fixed maturities available
for sale:
U.S. Treasury 23,207 $ 21,852 21,852
States and political
subdivisions 26,579 25,819 25,819
Foreign governments 4,024 3,465 3,465
Corporate securities 95,939 89,401 89,401
Mortgage-backed securities 83,020 78,211 78,211
-------- -------- --------
TOTAL FIXED MATURITIES
AVAILABLE FOR SALE 232,769 218,748 218,748
-------- -------- --------
Equity securities:
Common stocks:
Banks, trusts, and
insurance companies 9,145 $ 12,526 12,526
Nonredeemable preferred
stocks 3,339 2,914 2,914
-------- -------- --------
TOTAL EQUITY SECURITIES 12,484 $ 15,440 15,440
-------- ======== --------
Real estate 16,959 16,959
Mortgage loans on real estate 1,806 1,806
Policy loans 23,082 23,082
Short-term investments 69,152 69,152
-------- --------
<PAGE>
TOTAL INVESTMENTS $734,902 $723,837
======== ========
<PAGE>
SCHEDULE II
PIONEER FINANCIAL SERVICES, INC. (Parent Company)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
(In thousands, except share and per share amounts)
December 31
1994 1993
------ ------
ASSETS
Investments in subsidiaries* $122,310 $107,620
Cash 157 1,711
Note receivable from United Group Holdings* 38,704 37,495
Other notes receivable from subsidiaries* 3,517 403
Due from affiliates* 132 1,014
Prepaid expenses 592 573
Deferred debenture offering expenses 3,214 3,799
Other assets 2,014 363
-------- ---------
$170,640 $152,978
======== =========
LIABILITIES, REDEEMABLE PREFERRED STOCK, AND STOCKHOLDERS' EQUITY
Liabilities:
General expenses and other liabilities $ 3,481 $ 2,444
Preferred stock dividends payable 772 510
Short-term notes payable 18,950 -
Convertible subordinated debentures 57,427 57,477
-------- --------
80,630 60,431
Redeemable Preferred Stock, no par value:
$2.125 cumulative convertible exchangeable
preferred stock
Authorized: 5,000,000 shares
Issued and outstanding: (1994-867,300 shares; 21,682 23,675
1993-947,000 shares)
Stockholders' equity:
Common Stock, $1 par value:
Authorized: 20,000,000 shares
Issued, including shares in treasury
(1994 - 6,996,157; 1993 - 6,900,000) 6,996 6,900
Additional paid-in capital 29,299 28,814
Unrealized appreciation (depreciation)
of equity securities (7,193) 3,285
Retained earnings 48,960 34,645
Less treasury stock at cost (1994 - 1,078,400)
1993 - 556,800) (9,734) (4,772)
-------- --------
Total stockholders' equity 68,328 68,872
-------- --------
$170,640 $152,978
======== ========
See note to condensed financial statements.
*Eliminated in consolidation.
<PAGE>
SCHEDULE II
PIONEER FINANCIAL SERVICES, INC. (Parent Company)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT--Continued
CONDENSED STATEMENTS OF OPERATIONS
(In thousands)
Year Ended December 31
1994 1993 1992
------ ------ ------
Revenues:
Interest income from subsidiaries* $ 2,972 $ 1,090 $ 1,835
Other investment income 109 62 15
Dividends from consolidated
subsidiaries* 10,225 10,345 10,482
-------- -------- --------
13,306 11,497 12,332
Expenses:
Operating and administrative
expenses 5,672 4,702 2,154
Interest expense 4,894 3,204 2,206
-------- -------- --------
10,566 7,906 4,360
-------- -------- --------
Income before equity in
undistributed net income or
loss of subsidiaries 2,740 3,591 7,972
Equity in undistributed net
income (loss) of subsidiaries* 14,409 8,554 (24,931)
-------- -------- --------
Net income (loss) 17,149 12,145 (16,959)
Preferred stock dividends 1,904 2,021 2,039
-------- -------- --------
Income (loss) applicable to
common stockholders $ 15,245 $ 10,124 $(18,998)
======== ======== ========
See note to condensed financial statements.
*Eliminated in consolidation.
<PAGE>
SCHEDULE II
PIONEER FINANCIAL SERVICES, INC. (Parent Company)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT--Continued
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31
1994 1993 1992
------ ------ ------
OPERATING ACTIVITIES
Net income (loss) $ 17,149 $ 12,145 $(16,959)
Adjustments to reconcile net
income or loss to net cash provided
by operating activities:
Change in other assets and
liabilities 1,095 1,678 (929)
Equity in undistributed net
(income) loss of subsidiaries* (14,409) (8,554) 24,931
-------- -------- --------
NET CASH PROVIDED
BY OPERATING ACTIVITIES 3,835 5,269 7,043
INVESTING ACTIVITIES
Additional investment in
consolidated subsidiaries* (10,758) (15,219) (13)
FINANCING ACTIVITIES
Decrease (increase) in notes receivable
from PLIC - 29,128 (11,597)
Increase in notes receivable from UGH (1,209) (37,495) -
Net proceeds from issuance of
convertible subordinated debentures - 54,055 -
Increase in notes payable 18,950 - 10,000
Repayment of notes payable (50) (31,600) (3,900)
Decrease (increase) in other notes
receivable from subsidiaries* (3,114) 3,591 (447)
Stock options exercised 495 451 165
Dividends paid-preferred (1,904) (2,021) (2,039)
Dividends paid-common (930) - -
Purchase of treasury stock (4,963) (4,720) (52)
Retirement of preferred stock (1,993) (315) -
Other 87 44 717
-------- -------- --------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES 5,369 11,118 (7,153)
-------- -------- --------
INCREASE (DECREASE) IN CASH (1,554) 1,168 (123)
CASH AT BEGINNING OF YEAR 1,711 543 666
-------- -------- --------
CASH AT END OF YEAR $ 157 $ 1,711 $ 543
<PAGE>
======== ======== ========
See note to condensed financial statements.
*Eliminated in consolidation.
<PAGE>
SCHEDULE II
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, 1994 and 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.
<PAGE>
SCHEDULE III
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
------- ----------- --------------- -------- -------------
1994:
Group Medical $ 68,608 $121,098 $ 16,176 $ 4,343
Senior Health 95,191 191,800 60,090 4,461
Life Insurance 61,819 463,037 - 7,603
Medical Utilization
Management - - - -
-------- -------- -------- --------
$225,618 $775,935 $ 76,266 $ 16,407
======== ======== ======== ========
1993:
Group Medical $ 92,153 $126,684 $ 15,844 $ 3,862
Senior Health 111,708 215,232 72,101 4,204
Life Insurance 56,571 458,207 - 6,971
Medical Utilization
Management - - - -
-------- -------- -------- --------
$260,432 $800,123 $ 87,945 $ 15,037
======== ======== ======== ========
1992:
Group Medical $ 81,408 $ 85,257 $ 14,028 $ 1,361
Senior Health 133,749 203,709 76,852 1,471
Life Insurance 54,517 417,590 - 5,428
Medical Utilization
Management - - - -
-------- -------- -------- --------
$269,674 $706,556 $ 90,880 $ 8,260
======== ======== ======== ========
<PAGE>
SCHEDULE III (continued)
PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
(In thousands)
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*
------- ------ ------------- -------- ---------- ------ ---------
1994:
Group Medical $431,831 $ 9,184 $267,450 $ 62,281 $ 16,618 $117,013
Senior Health 227,349 6,516 139,799 29,807 1,166 52,005
Life Insurance 44,929 26,700 42,947 7,985 (554) 11,606
Medical Utilization
Management - 3 - - 10,413 8,390
Corporate Expenses - - - - - 8,850
-------- -------- -------- -------- --------- --------
$704,109 $ 42,403 $450,196 $100,073 $ 27,643 $197,864
======== ======== ======== ======== ========= ========
1993:
Group Medical $357,784 $ 8,033 $246,117 $ 36,189 $ 13,925 $ 90,908
Senior Health 243,900 2,393 151,846 30,132 800 52,860
Life Insurance 39,282 28,478 39,419 10,554 27 10,191
Medical Utilization
Management - 2 - - 4,504 5,717
Corporate Expenses - - - - - 6,431
-------- -------- -------- -------- --------- --------
$640,966 $ 38,906 $437,382 $ 76,875 $ 19,256 $166,107
======== ======== ======== ======== ========= ========
1992:
Group Medical $306,880 $ 6,806 $197,058 $ 55,701 $ 13,348 $ 99,510
Senior Health 253,014 3,476 170,988 35,928 2,117 49,724
Life Insurance 35,219 33,222 47,622 9,086 (30) 11,363
Medical Utilization
Management - 4 - - 1,917 1,586
Corporate Expenses - - - - - 2,843
<PAGE>
-------- -------- -------- -------- --------- --------
$595,113 $ 43,508 $415,668 $100,715 $ 17,352 $165,026
======== ======== ======== ======== ========= ========
*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.
<PAGE>
SCHEDULE IV
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, 1994:
Life insurance in force*$12,581,797 $ 3,801,387 $ - $8,780,410 -
=========== =========== ========== ========== ====
Premiums and Policy Charges:
Group Medical $ 435,166 $ 19,121 $ 15,786 $ 431,831 3.6%
Senior Health 227,349 - - 227,349 -
Life Insurance 61,939 18,152 1,142 44,929 2.5
Medical Utilization
Managment - - - -
----------- ----------- ---------- ----------
$ 724,454 $ 37,273 $ 16,928 $ 704,109
=========== =========== ========== ==========
Year Ended December 31, 1993:
Life insurance in force*$11,823,127 $ 3,859,945 $ - $7,963,182 -
=========== =========== ========== ========== ====
Premiums and Policy Charges:
Group Medical $ 362,888 $ 24,154 $ 19,050 $ 357,784 5.3%
Senior Health 243,899 - - 243,899 -
Life Insurance 55,433 16,438 288 39,283 .7
Medical Utilization
Management - - - -
----------- ----------- ---------- ----------
$ 662,220 $ 40,592 $ 19,338 $ 640,966
=========== =========== ========== ==========
Year Ended December 31, 1992:
Life insurance in force*$10,338,557 $ 3,929,621 $ - $6,408,936 -
=========== =========== ========== ========== ====
Premiums and Policy Charges:
Group Medical $ 305,833 $ 14,328 $ 15,375 $ 306,880 5.0%
Senior Health 253,014 - - 253,014 -
Life Insurance 51,332 16,141 28 35,219 .1
Medical Utilization
Management - - - -
----------- ----------- ---------- ----------
$ 610,179 $ 30,469 $ 15,403 $ 595,113
=========== =========== ========== ==========
<PAGE>
*At end of year
<PAGE>
SCHEDULE V
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
Description of Year Expense /Disposals of Year
----------- --------- ---------- ---------- --------
Year Ended December 31, 1994:
Allowance for doubtful accounts$ 1,271 $ 2,425 $ 2,801 $ 895
Accumulated depreciation on
building and equipment 16,891 5,532 3,098 19,325
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
<PAGE>
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/Chief
Executive Officer
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 22, 1995
/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/ R. Richard Bastian, III
__________________________________ ___________________________________
William B. Van Vleet, Executive R. Richard Bastian, III
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/ Charles R. Scheper /S/ Michael K. Keefe
__________________________________ ___________________________________
Charles R. Scheper Michael K. Keefe
President - Life Division Director
and Director
/S/ Thomas J. Brophy /S/ Carl A. Hulbert
__________________________________ ___________________________________
Thomas J. Brophy Carl A. Hulbert
President - Health Division Director
and Director
<PAGE>
EXHIBIT 10(p)
=============================================================================
$30,000,000
SECOND AMENDED AND RESTATED
RECEIVABLES PURCHASE AGREEMENT
DATED AS OF OCTOBER 1, 1994
BETWEEN
DESIGN BENEFIT PLANS, INC.,
AS SELLER
AND
NATIONAL FUNDING CORPORATION,
AS BUYER
=============================================================================
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.1 Certain Defined Terms . . . . . . . . . . . . . . . . . . . . .
1.2 Other Definitional Provisions . . . . . . . . . . . . . . . . .
ARTICLE II
Agreement to Purchase and Sell . . . . . . . . . . . . . . . . . . . . .
2.1 Agreement to Purchase and Sell . . . . . . . . . . . . . . . .
2.2 Purchase and Sale Procedure . . . . . . . . . . . . . . . . . .
2.3 Payment of Purchase Price; Purchase Fee . . . . . . . . . . . .
2.4 Reassignment . . . . . . . . . . . . . . . . . . . . . . . . .
2.5 Interest on Overdue Payments . . . . . . . . . . . . . . . . .
2.6 Fee and Interest Calculations . . . . . . . . . . . . . . . . .
2.7 Indemnification by Seller . . . . . . . . . . . . . . . . . . .
2.8 Distribution of Collections and Other Payments . . . . . . . .
2.9 Netting of Payments . . . . . . . . . . . . . . . . . . . . . .
2.10 Grant of Security Interest . . . . . . . . . . . . . . . . . .
ARTICLE III
Collections; Maintenance of Records . . . . . . . . . . . . . . . . . . .
3.1 Collections and Applications . . . . . . . . . . . . . . . . .
3.2 Collections by the Seller . . . . . . . . . . . . . . . . . . .
3.3 Maintenance of Records . . . . . . . . . . . . . . . . . . . .
3.4 Rebates, Adjustments and Reductions; Modifications; Additions;
Repurchase of DBP Lead Receivables . . . . . . . . . . . . . .
ARTICLE IV
Settlements; Termination . . . . . . . . . . . . . . . . . . . . . . . .
4.1 Settlement Statements . . . . . . . . . . . . . . . . . . . . .
4.2 Termination . . . . . . . . . . . . . . . . . . . . . . . . . .
ARTICLE V
Covenants, Representations and Warranties . . . . . . . . . . . . . . . .
5.1 Representations and Warranties of the Seller . . . . . . . . .
5.2 Covenants of the Seller. . . . . . . . . . . . . . . . . . . .
5.3 Effect of Breach by the Seller. . . . . . . . . . . . . . . . .
ARTICLE VI
Conditions to Effectiveness; Purchases . . . . . . . . . . . . . . . . .
6.1 Effective Date . . . . . . . . . . . . . . . . . . . . . . . .
6.2 Condition to each Purchase . . . . . . . . . . . . . . . . . .
ARTICLE VII
Events of Termination . . . . . . . . . . . . . . . . . . . . . . . . . .
7.1 Events of Termination . . . . . . . . . . . . . . . . . . . . .
ARTICLE VIII
<PAGE>
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8.1 Further Assurances . . . . . . . . . . . . . . . . . . . . .
8.2 Payments . . . . . . . . . . . . . . . . . . . . . . . . . . .
8.3 Costs and Expenses . . . . . . . . . . . . . . . . . . . . . .
8.4 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . .
8.5 No Waiver; Cumulative Remedies . . . . . . . . . . . . . . . .
8.6 Amendments . . . . . . . . . . . . . . . . . . . . . . . . . .
8.7 Severability . . . . . . . . . . . . . . . . . . . . . . . . .
8.8 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8.9 Successors and Assigns . . . . . . . . . . . . . . . . . . . .
8.10 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . .
8.11 Submission to Jurisdiction . . . . . . . . . . . . . . . . . .
8.12 Waiver of Jury Trial . . . . . . . . . . . . . . . . . . . . .
8.13 Entire Agreement; Amendment and Restatement . . . . . . . . . .
<PAGE>
Schedules
SCHEDULE I Chief Executive Office, Corporate Names and Subsidiaries of
the Seller
SCHEDULE II Accounts for Receiving Collections on the Receivables
SCHEDULE III Description of Chargeback Procedures
SCHEDULE IV Insurance Agency Agreements (Related to the Program)
Exhibits
Exhibit A Form of Assignment
Exhibit B Form of Agent Contract
Exhibit C-1 Form of Opinion of McDermott, Will & Emery, counsel to the
Seller
Exhibit C-2 Form of Opinion of Assistant General Counsel of the Seller
Exhibit C-3 Form of Opinion of Assistant General Counsel of Financial
Services
Exhibit D Form of Certificate
Exhibit E Intentionally Omitted
Exhibit F Form of Report of Milliman and Robertson
Exhibit G-1 Form of Acknowledgement of Assignment (for each Insurance
Company which is not an Eligible Fronting Company)
Exhibit G-2 Form of Acknowledgement of Assignment (for each Eligible
Fronting Company)
Exhibit H Form of Settlement Statement
<PAGE>
SECOND AMENDED AND RESTATED RECEIVABLES PURCHASE AGREEMENT
This Second Amended and Restated Receivables Purchase Agreement is dated
as of October 1, 1994, and is between DESIGN BENEFIT PLANS, INC., an Illinois
corporation (the "Seller"), and NATIONAL FUNDING CORPORATION, a Delaware
corporation (the "Buyer").
W I T N E S S E T H:
WHEREAS, the Seller in the ordinary course of its business generates
Receivables (as hereinafter defined); and
WHEREAS, the Seller desires to sell to the Buyer, and, subject to the
terms and conditions hereof, the Buyer is agreeable to purchasing, a
percentage Undivided Interest (as hereinafter defined) in all of the Seller's
right, title and interest in, to and under Eligible Receivables (as
hereinafter defined) and in the rights of the Seller in, to and under all
guarantees thereof and all collateral security therefor;
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants herein contained, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
1.1 CERTAIN DEFINED TERMS. As used in this Agreement the following
capitalized terms shall have the following meanings and, unless the context
indicates otherwise, shall include the plural as well as the singular:
"Acknowledgment of Assignment" shall mean, with respect to each
Insurance Company, the Acknowledgment of Assignment in the form of
Exhibit G-1 (for each Insurance Company which is not an Eligible Fronting
Company) or Exhibit G-2 (for each Eligible Fronting Company) executed and
delivered by such Insurance Company to L/C Bank.
"Addition" shall mean on a Closing Date, an increase in the Buyer's
Undivided Interest equal to the difference between (a) the Undivided Interest
of the Buyer as determined as of the Date of Sale immediately preceding such
Closing Date and assuming the remittance to the Buyer of all Principal
Collections attributable to its Undivided Interest which are held by the
Seller on such Closing Date on account of the Settlement Period preceding
such Closing Date and (b) the Undivided Interest of the Buyer in the
Portfolio of Eligible Receivables after giving effect to the purchase and
sale on such Closing Date.
"Affiliate" shall mean any Person which, directly or indirectly,
controls, is controlled by, or is under common control with, another Person.
For purposes of this definition, a Person shall be deemed to be "controlled
by" another Person if the other Person possesses, directly or indirectly,
power either to (i) vote 10% or more of the securities having ordinary voting
power for the election of directors of such Person or (ii) direct or cause
the direction of the management and policies of such Person whether by
contract or otherwise.
"Agent Contract" shall mean each financing agreement and note in the
form of Exhibit B (with such modifications as shall be approved by the Buyer
<PAGE>
and L/C Bank) by which an Agent Obligor is bound to make payments to the
Seller to repay funds lent by the Seller to such Agent Obligor and to pay
interest and/or other finance charges to Seller by such Agent Obligor, and
pursuant to which such Agent Obligor has assigned his, her or its Assigned
Commissions as collateral.
"Agent Obligor" shall mean any agent of the Seller who is obligated to
make payments to the Seller on an Agent Receivable.
"Agent Receivable" shall mean the obligation of a Person to repay the
principal amount of and interest and other finance charges on a loan made by
the Seller to such Person, in the ordinary course of its business, and which
loan is secured by amounts due or to become due to such Person as commissions
on insurance policies sold by such Person (or Persons within such Person's
supervisory control) as an agent of the Seller; provided, however, that
"Agent Receivable" shall not include any such obligation of any Person,
unless the Seller designates such Person as a Person whose obligations are to
be "Agent Receivables" in a written notice to the Buyer as provided herein.
"Agreement" shall mean this Second Amended and Restated Receivables
Purchase Agreement, as the same may from time to time be amended,
supplemented or otherwise modified as provided for herein.
"ANB" shall mean American National Bank and Trust Company of Chicago, a
national banking association.
"Application Account" shall mean the account of the Buyer held and
maintained at the offices of ANB located at 33 North LaSalle Street, Chicago,
Illinois 60690, and in the name of the Buyer and over which the Buyer shall
have sole dominion and control, entitled:
Name of Account Account No.
"National Funding Corporation, 4236114
Proceeds of Design Benefit Plans,
Inc. Receivables - Application
Account".
"Assigned Commissions" shall mean the aggregate first-year and renewal-
year commissions due or to become due to Agent Obligors with respect to
insurance policies issued by Insurance Companies and sold by such Agent
Obligors, which commissions have been assigned by such Agent Obligors to the
Seller as collateral to secure the payment of the Receivables owing by such
Agent Obligors.
"Assignment" shall mean each instrument of assignment, substantially in
the form of Exhibit A attached hereto, delivered pursuant to Section 2.2.
"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.
"Bankers Multiple Line" shall mean Bankers Multiple Line Insurance
Company, a New York insurance corporation.
"Bankers Security Life" shall mean Bankers Security Life Insurance
Society, a New York insurance corporation.
<PAGE>
"Business Day" shall mean any day of the week other than a Saturday,
Sunday or a day on which commercial banks located in Chicago, Illinois,
Milwaukee, Wisconsin or any city in which the principal office of the Trustee
or the Remarketing Agent is located are authorized or required by law to
close.
"Business Day Received" shall have the meaning assigned in subsection
3.1(d).
"Buyer" shall have the meaning assigned in the recitals hereto.
"Buyer Security Agreement" shall mean the Pledge and Security Agreement,
dated as of the date hereof, made by the Buyer to ANB, as the same may from
time to time be amended, supplemented or otherwise modified as provided
herein.
"Capital and Surplus" shall mean, with respect to an Insurance Company,
such Insurance Company's capital and surplus as reported on such Insurance
Company's annual or quarterly accounting statements prepared in accordance
with Statutory Accounting Principles most recently filed with the department
of insurance of such Insurance Company's state of incorporation.
"Closing Date" shall have the meaning assigned in subsection 2.2(a).
"Collateral Account" shall have the meaning assigned in the Buyer
Security Agreement.
"collections" shall mean the collective reference to all principal
collections and all finance charge collections.
"Collections" shall mean the collective reference to all Principal
Collections and all Finance Charge Collections.
"Complete Servicing Transfer" shall have the meaning assigned in
subsection 3.2(d).
"Consent and Agreement" shall mean the Consent and Agreement, dated as
of the date hereof, among the Seller, the Buyer, Financial Services and L/C
Bank, as the same may from time to time be amended, supplemented or otherwise
modified.
"Contract" shall mean any Agent Contract in the case of the Agent
Receivables or an Insurance Agency Agreement in the case of the DBP Lead
Receivables.
"Date of Sale" shall have the meaning assigned in subsection 2.2(b).
"DBP Lead Commissions" means the aggregate first-year and renewal
commissions payable by an Insurance Company to the Seller pursuant to the
Insurance Agency Agreement between such Insurance Company and the Seller with
respect to an Insurance Policy, other than Assigned Commissions.
"DBP Lead Obligor" shall mean, with respect to each DBP Lead Receivable,
the Insurance Company which is obligated to pay DBP Lead Commissions with
respect thereto.
"DBP Lead Receivable" shall mean, with respect to each Insurance Policy,
an amount equal to 75% of the aggregate first-year DBP Lead Commissions
payable by such Insurance Company to the Seller in respect of such Insurance
<PAGE>
Policy; provided, however, that "DBP Lead Receivable" shall not include any
such DBP Lead Commissions payable by an Insurance Company unless the Seller
designates such Insurance Company as an Insurance Company whose first year
DBP Lead Commissions are to be "DBP Lead Receivables" in a written notice to
the Buyer as provided herein.
"Default Rate" as of the last day of any Settlement Period shall mean
the product of (i) four times (ii) the ratio (expressed as a percentage),
with respect to any quarterly period (consisting of such Settlement Period
and the preceding two Settlement Periods), of the aggregate principal amount
of Defaulted Receivables arising (or written off) during such quarterly
period to the Gross Amount Due on the Portfolio of Eligible Receivables as of
the last day of such period.
"Defaulted Receivable" shall mean a Receivable as to which any amount
thereon remains unpaid for more than 60 days after the original due date
thereof.
"Dollars" and "$" shall mean lawful money of the United States of
America.
"Eligible Fronting Company" shall mean the collective reference to
Philadelphia Life Insurance Company, a Pennsylvania stock life insurance
corporation, Foundation Health, a California Health Plan, Arista Insurance
Company, a New York corporation, Mutual of Omaha Insurance Company, American
Life and Casualty Insurance Company and United World Life Insurance Company
upon their execution of an Acknowledgement of Assignment in the form of
Exhibit G-2 and each insurance company or other corporation legally
authorized to issue insurance contracts as shall be proposed by the Seller
and approved by the Buyer and which shall first execute an Acknowledgement of
Assignment in the form of Exhibit G-2.
"EFC Receivable" shall mean any Receivable with respect to which any of
the Assigned Commissions securing such Receivable, or any DBP Lead
Commissions giving rise to such Receivable, arise out of policies issued by
Eligible Fronting Companies.
"Eligible Receivable" shall mean a Receivable:
(i) which is owned by the Seller free and clear of all security
interests, liens, charges and encumbrances, except for liens granted in
the Assigned Commissions securing such Receivable or the DBP Lead
Commissions underlying such Receivable to Insurance Companies and agents
of the Seller in the ordinary course of business and consistent with
past practice, all of which liens are subordinate in right to the liens
granted to the Buyer hereunder pursuant to subordination agreements in
form and substance satisfactory to L/C Bank;
(ii) which has arisen in the ordinary course of the Seller's
business;
(iii) which represents, the genuine, legal, valid and binding
payment obligation in writing of the Obligor thereon, enforceable by the
Seller in accordance with its terms, and is freely assignable by the
Seller to the Buyer and, upon such assignment, will be enforceable by
the Buyer in accordance with its terms;
(iv) which complies with all legal requirements of the federal,
state and local jurisdictions where it originated;
<PAGE>
(v) which is payable in Dollars in the United States of America
by a Person who is an Obligor and who is not, at such time, the Obligor
on any Defaulted Receivable;
(vi) which is evidenced by a Contract (which, in the case of the
Agent Contracts, shall conform in all material respects to Exhibit B)
which shall have been delivered to the Buyer at or before the time of
the initial creation of an interest in such Receivable hereunder;
(vii) which is not payable by an Obligor which is located or
incorporated in any jurisdiction outside of the United States of
America;
(viii) which, in any case where the provisions of subsection 3.1(b)
shall have become operative, is payable by an Obligor which shall have
been directed to make all payments thereon in accordance with subsection
3.1(b) to an account over which the Buyer has sole right, title and
interest and dominion and control;
(ix) which in the case of an Agent Receivable is secured by a
valid assignment and grant of a security interest by the related Agent
Obligor to the Seller of and in all of such Obligor's rights to receive
any commissions, service fees, and bonuses payable to such Agent Obligor
by the Seller or any applicable Insurance Company, which security
interest in the case of an Agent Receivable shall, if required pursuant
to subsection 5.2(s) of this Agreement, be perfected by the filing of a
financing statement under applicable state law (and such financing
statement shall not have expired or been terminated);
(x) which in the case of an Agent Receivable bears interest at a
rate greater than the interest rate then prevailing on the Notes;
(xi) which is not, at the time of the initial creation of an
interest in such Receivable hereunder, subject to any defense, dispute,
offset or counterclaim, whether arising out of the transactions
represented by such Receivable or independently thereof and whether
arising out of any assertion by any Obligor that its obligations in
respect of such Receivable are, or may be, payable to a third party,
instead of the owner of such Receivable, or otherwise;
(xii) which is not an EFC Receivable, unless, in each case, such
Eligible Fronting Company shall have in full force and effect with the
Seller an Insurance Agency Agreement which shall not have been
terminated;
(xiii) which at the time of the initial creation of an interest in
such Receivable hereunder is not a Defaulted Receivable;
(xiv) which has not been designated by the Seller in writing as
ineligible for purchase by the Buyer under this Agreement; provided,
that the Seller shall not be permitted to designate as ineligible any
Receivable subsequent to the sale to the Buyer hereunder of such
Receivable (or any interest on such Receivable); and provided, further,
that notwithstanding any such designation by the Seller, the Buyer shall
continue to have a security interest in all such designated Receivables
pursuant to Section 2.10; and
(xv) which is not at the time of sale hereunder payable by an
Obligor (i) which is subject to any case, proceeding or other action (A)
<PAGE>
under any existing or future law of any jurisdiction, domestic or
foreign, relating to bankruptcy, insolvency, reorganization or relief of
debtors, seeking to have an order for relief entered with respect to it,
or seeking to adjudicate it a bankrupt or insolvent, or seeking
arrangement, adjustment or other relief with respect to it or its debts,
(B) seeking appointment of a receiver, trustee, custodian or other
similar official for it or for all or any substantial part of its
assets, or such Obligor shall make a general assignment for the benefit
of its creditors or (C) seeking issuance of a warrant of attachment,
execution, distraint or similar process against all or any substantial
part of its assets which results in the entry of an order for any such
relief which shall not have been vacated, discharged, or stayed or
bonded pending appeal within 90 days from the entry thereof, or (ii)
which shall generally not, or shall be unable to, or shall admit in
writing its inability to, pay its debts as they become due.
"Finance Charge Account" shall mean the account of the Buyer held and
maintained at the office of ANB located at 33 North LaSalle Street, Chicago,
Illinois 60690, and in the name of the Buyer and over which the Buyer shall
have sole dominion and control, entitled:
Name of Account Account
"National Funding Corporation, 4236076
Proceeds of Design Benefit Plans,
Inc. Receivables - Finance
Charge Account."
"finance charge collections" shall mean, with respect to the Agent
Receivables, all cash payments and collections made or received on account of
the finance charges owing on the Agent Receivables including, without
limitation, any payments or collections realized upon the sale of property of
any Obligor securing in whole or in part the payment by such Obligor of a
Receivable, any payments or collections realized under guarantees of payment
of such Receivable (including, without limitation under regional manager
agreements, if any) and proceeds of such Receivable.
"Finance Charge Collections" shall mean, with respect to the Seller's
Portfolio of Eligible Receivables, all cash payments and collections made or
received on account of the Finance Charges owing on the Eligible Receivables
in which the Buyer has purchased an Undivided Interest, including, without
limitation, any payments or collections realized upon the sale of property,
if any, of any Obligor securing in whole or in part the payment by such
Obligor of an Eligible Receivable, any payments or collections realized under
guarantees, if any, of payment of such Eligible Receivable and proceeds of
such Eligible Receivable.
"Finance Charges" shall mean, with respect to any Agent Receivable, the
interest and other finance charges charged by the Seller on such Receivable.
"Financial Services" shall mean Pioneer Financial Services, Inc., a
Delaware corporation.
"Financial Services Credit Agreement" shall mean the Credit Agreement
dated as of December 22, 1993, among Financial Services, ANB, Firstar Bank
Milwaukee, N.A. and Bank One, Rockford N.A., as such agreement may from time
to time be amended, supplemented or otherwise modified in accordance with the
terms thereof.
<PAGE>
"Financing Documents" shall mean the collective reference to this
Agreement, the Reimbursement Agreement, the Buyer Security Agreement, the
Consent and Agreement, the Acknowledgements of Assignment, the Tender Pledge
Agreement and the Note Agreements.
"GAAP" shall mean generally accepted accounting principles as in effect
from time to time in the United States.
"Gross Amount Due" shall mean (i) with respect to any Receivable, the
principal amount (net of any write-offs) due and to become due on such
Receivable, (ii) with respect to any DBP Lead Receivable, the initial amount
of such DBP Lead Receivable minus all Collections on such DBP Lead Receivable
(net of any writeoffs, but in no event less than zero) and (iii) with respect
to the Portfolio of Eligible Receivables, the aggregate of the amounts
specified in the preceding clauses (i) and (ii) with respect to the
Receivables comprising such Portfolio of Eligible Receivables.
"Holdback Account" shall mean the account of the Buyer held and
maintained at the office of ANB located at 33 North LaSalle Street, Chicago,
Illinois 60690, and in the name of the Buyer and over which the Buyer shall
have sole dominion and control (provided that amounts held therein shall be
applied strictly in accordance with the terms of this Agreement), entitled:
Name of Account Account No.
National Funding Corporation- 4236092
"Holdback Account."
"Indemnified Liability" shall have the meaning assigned in Section 8.3.
"Indenture" shall mean the Trust Indenture dated as of the date hereof
between the Buyer and PNC Bank, Ohio, National Association, as trustee, as
the same may from time to time be amended, supplemented or otherwise
modified.
"Insurance Agency Agreements" shall mean the collective reference to the
insurance agency agreements listed on Schedule IV attached hereto, as each is
in effect on the date hereof or as each such agreement may be amended,
supplemented or otherwise modified in accordance with the terms hereof and
such other insurance agency agreements between Seller and companies which
become Insurance Companies or Eligible Fronting Companies after the date
hereof.
"Insurance Companies" shall mean the collective reference to National
Group Life Insurance Company, an Illinois insurance corporation, Pioneer Life
Insurance Company of Illinois, an Illinois insurance corporation, Manhattan
National Life Insurance Company, an Illinois insurance corporation, each
Eligible Fronting Company (but only if any EFC Receivables relating to such
Eligible Fronting Company constitute Eligible Receivables hereunder), and
each other insurance company as shall be proposed by the Seller and approved
by the Buyer.
"Insurance Policies" shall mean the insurance policies issued by the
Insurance Companies and sold by Agent Obligors, under which any commissions
that are due or become due to Agent Obligors constitute Assigned Commissions.
"Investment Grade Obligations" shall mean investments having an NAIC
investment rating of 1 and 2; or a Standard & Poor's rating within the range
<PAGE>
of ratings from AAA to BBB-; or a Moody's rating within the range of ratings
from Aaa to Baa3.
"L/C Bank" shall mean ANB and its successors and assigns. Upon the
issuance and effectiveness of any letter of credit delivered in substitution
or replacement of a Letter of Credit, "L/C Bank" shall mean the issuer of
such replacement or substitute Letter of Credit and its successors and
assigns.
"Letter of Credit" shall mean the Letter of Credit as defined in the
Reimbursement Agreement.
"Liquidation Period" shall mean the period commencing on the earlier of
the (i) Purchase Termination Date and (ii) the date on which the conditions
precedent set forth in Section 6.2 (except for subsection 6.2(f)) are not
satisfied (unless such conditions are subsequently waived by the Buyer or
cured by the Seller with the express written consent of the Buyer) and ending
upon the termination of this Agreement pursuant to Section 4.2.
"Losses" shall mean, during the Liquidation Period, the outstanding
principal amount of each Sold Receivable (or portion thereof) which, in
accordance with GAAP, is written off of the books of the Seller as
uncollectible.
"M&R Report" shall mean the report prepared by Milliman and Robertson,
or other actuary reasonably acceptable to the Buyer (with the related
certificate of the Seller attached thereto), substantially in the form of
Exhibit F.
"Maximum Purchase Amount" shall mean $11,400,000, as such amount may be
(i) increased on any Settlement Date upon the written request of the Seller
pursuant to the related Settlement Statement, provided that any such increase
shall be in an amount equal to $100,000 or an integral multiple thereof and
provided, further, that the Seller shall have no right to request any such
increase if, after giving effect thereto, the Maximum Purchase Amount would
exceed the product of 0.90 times the Gross Amount Due upon the Portfolio of
Eligible Receivables (determined as of the last day of the preceding
Settlement Period) or (ii) reduced upon five Business Days' written notice
from the Seller to the Buyer, provided that any such reduction shall be in an
amount equal to $100,000 or an integral multiple thereof, and provided,
further, that if (A) at any time the Maximum Purchase Amount shall exceed the
outstanding principal amount of the Notes, such Maximum Purchase Amount shall
be automatically reduced to an amount not to exceed such outstanding
principal amount or (B) at any time the Maximum Purchase Amount shall exceed
the product of 0.90 and the Gross Amount Due upon the Portfolio of Eligible
Receivables (determined as of the last day of the preceding Settlement
Period), such Maximum Purchase Amount shall be automatically reduced to an
amount equal to the largest integral multiple of $100,000 which does not
exceed such product.
"Moody's" shall mean Moody's Investors Service, Inc.
"Mortgages" shall mean, as of any date, the amount of mortgage loans on
real estate calculated in accordance with Statutory Accounting Principles.
"NAIC" shall mean the National Association of Insurance Commissioners.
"Net Purchase Outstanding" shall mean, at any time, the positive
remainder, if any, of (a) the aggregate Purchase Price paid by the Buyer for
<PAGE>
its Undivided Interest minus (b) the sum of (i) aggregate Principal
Collections attributable to the Buyer's Undivided Interest remitted by the
Seller to the Buyer (whether or not used by the Buyer to purchase an Addition
to its Undivided Interest) on each Settlement Date pursuant to this Agreement
or otherwise and (ii) the aggregate principal collections remitted to the
Buyer pursuant to the proviso in Section 3.1(f).
"Non-Investment Grade Obligations" shall mean any fixed maturity debt
instrument investment that is not an Investment Grade Obligation.
"Note Agreements" shall mean the Indenture, the Notes, the Placement
Agreement and the Remarketing Agreement.
"Notes" shall mean the Floating Rate Option Notes, Series 1994-A, of the
Buyer, issued pursuant to the Indenture.
"Obligor" shall mean any Agent Obligor or DBP Lead Obligor.
"Person" shall mean an individual, partnership, corporation, business
trust, joint stock company, trust, unincorporated association, joint venture,
governmental authority or other entity of whatever nature.
"Placement Agent" shall mean Banc One Capital Corporation, as placement
agent for the Notes.
"Placement Agreement" shall mean the Placement Agreement dated
October 4, 1994 among the Seller, the Buyer and the Placement Agent.
"Policy Lapse Rate" shall mean the termination rate for each month
calculated by the Seller and, at the end of each fiscal quarter, by Milliman
& Robertson or other actuary acceptable to the Buyer, with respect to
Insurance Policies which are outstanding on the last day of the immediately
preceding month, provided that with respect to any calculation made for a
month other than a month immediately following the end of a quarterly fiscal
period, Insurance Policies underwritten after the end of the quarterly fiscal
period immediately preceding such month shall be excluded from such
calculation.
"Portfolio of Eligible Receivables" of the Seller shall mean, as of any
date of determination, all of the Seller's Eligible Receivables as of the
last day of the Settlement Period immediately preceding such date of
determination.
"Present Value of Assigned Commissions" shall mean, as of each monthly
date of determination, the amount determined in the M&R Report to be the
present value of all Assigned Commissions and DBP Lead Commissions scheduled
to be paid for the two-year period from such date computed by using as the
discount factor a percentage not less than the greater of (a) twelve percent
(12%) per annum and (b) the Prime Rate plus 3%, provided, however, that the
actuary preparing the M&R Report shall (i) exclude Assigned Commissions and
DBP Lead Commissions relating to Receivables which are not Eligible
Receivables, (ii) exclude Assigned Commissions and DBP Lead Commissions
relating to Defaulted Receivables, (iii) exclude Assigned Commissions,
relating to renewal commissions on Insurance Policies, that are assigned by
Agent Obligors to National Group Marketing Training Corporation, and (iv) net
against the Assigned Commissions and DBP Lead Commissions the amount of any
chargebacks.
<PAGE>
"Prime Rate" shall mean the rate as designated by L/C Bank from time to
time as its prime rate in the United States of America, such rate to change
as and when such designated rate changes. The prime rate is not intended to
be the lowest rate of interest charged by L/C Bank in connection with
extensions of credit to debtors.
"principal collections" shall mean, with respect to the Receivables, all
cash payments and collections made or received on account of the Receivables
exclusive of finance charges attributable thereto, but including, without
limitation, any payments or collections realized upon the sale of property of
any Obligor securing in whole or in part the payment by such Obligor of a
Receivable, any payments or collections realized under any guarantees of
payment of such Receivable and proceeds of such Receivable.
"Principal Collections" shall mean, with respect to the Seller's
Portfolio of Eligible Receivables, all cash payments and collections made or
received on account of the Eligible Receivables in which the Buyer has
purchased an Undivided Interest, exclusive of Finance Charges attributable
thereto, but including, without limitation, any payments or collections
realized upon the sale of property of any Obligor securing in whole or in
part the payment by such Obligor of an Eligible Receivable, any payments or
collections realized under any guarantees of payment of such Eligible
Receivable and proceeds of such Eligible Receivable.
"Prior Purchase Agreement" shall have the meaning assigned in Section
8.13.
"Purchase Fee" shall have the meaning assigned in subsection 2.3(c).
"Purchase Price" shall have the meaning assigned in subsection 2.3(a).
"Purchase Termination Date" shall mean the earlier of (i) December 31,
1997 or such later date as shall be agreed in accordance with subsection
4.2(b) and (ii) the date of termination of the commitment of the Buyer
hereunder pursuant to Section 7.1.
"Real Estate Concentration Ratio" means, as of any date, the ratio of
(a) the sum of (i) Real Estate Investments plus (ii) Mortgages to (b) Capital
and Surplus.
"Real Estate Investments" shall mean, as of any date, 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 Pioneer Financial
Services or any Subsidiary shall be excluded from the calculation of Real
Estate Investments for purposes of this Agreement.
"Receivable" shall mean each Agent Receivable and each DBP Lead
Receivable. An obligation arising from any one advance, loan or transaction
shall constitute a Receivable separate from a Receivable consisting of the
obligation arising from any other advance, loan or other transaction.
"Reimbursement Agreement" shall mean the Reimbursement Agreement, dated
as of the date hereof, between the Buyer and L/C Bank, as the same may from
time to time be amended, supplemented or otherwise modified.
"Remarketing Agent" shall mean Banc One Capital Corporation, as
remarketing agent for the Notes.
<PAGE>
"Remarketing Agreement" shall mean the Remarketing Agreement between the
Buyer and the Remarketing Agent, dated as of the date hereof.
"Reserve Account" shall mean the account of the Seller held and
maintained at the office of ANB located at 33 North LaSalle Street, Chicago,
Illinois 60690, entitled:
Name of Account Account
Design Benefit Plans, Inc. #4248082
Receivables - Agent Reserve Account
"S&P" shall mean Standard & Poor's Ratings Group.
"Seller" shall have the meaning assigned in the preamble hereto.
"Settlement Date" shall mean (i) October 27, 1994, and thereafter
(ii) the 20th calendar day of each succeeding month or, if such 20th day is
not a Business Day, the next succeeding Business Day.
"Settlement Period" shall mean, with respect to any Settlement Date, the
calendar month first preceding the calendar month in which such Settlement
Date occurs.
"Settlement Statement" shall mean the Settlement Statement,
substantially in the form of Exhibit H, to be delivered by the Seller to the
Buyer pursuant to Section 4.1.
"Sold Receivable" shall mean each Eligible Receivable in the Portfolio
of Eligible Receivables in which an Undivided Interest has been purchased by
the Buyer hereunder.
"Statutory Accounting Principles" shall mean statutory reporting
practices prescribed or permitted by the State of Illinois Department of
Insurance or by a regulatory body of another state, as applicable to an
Insurance Company, for the preparation of financial statements and other
reports by insurance companies of the same type as the Insurance Companies in
Illinois applied on a basis consistent with the most recent financial
statements of the Insurance Companies in Illinois delivered to the Buyer
prior to the date of this Agreement.
"Subsidiary" shall mean, in the case of any Person, any corporation or
other entity of which securities or other ownership interests having ordinary
voting power to elect a majority of the board of directors or other Persons
performing similar functions are at the time directly or indirectly owned by
such Person.
"Subsidiary Insurance Company" shall mean an Insurance Company which is
a Subsidiary of Financial Services.
"Taxes" shall mean any present or future sales, gross receipts, general
corporation, personal property, income, franchise, privilege, license, stamp
or other taxes, levies, imposts, duties, charges, fees, deductions or
withholdings, now or hereafter imposed, levied, collected, withheld or
assessed by any governmental authority, excluding, in the case of L/C Bank
net income and franchise taxes based upon net income imposed on L/C Bank by
the jurisdiction under the laws of which it is organized or in which is
located any office from or at which L/C Bank is making or maintaining its
loans or advances, or any political subdivision or taxing authority thereof
or therein.
<PAGE>
"Tender Pledge Agreement" shall mean the Tender Pledge and Security
Agreement, dated as of the date hereof, made by the Buyer to L/C Bank
pursuant to Section 2.9 of the Reimbursement Agreement.
"Termination Event" shall have the meaning assigned in Section 7.1.
"Time of Full Payout" shall mean the date on which the Net Purchase
Outstanding shall have been reduced to zero at the close of business on such
date.
"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 Invested Assets" shall mean, as of any date, as to each Insurance
Company (other than Eligible Fronting Companies), the amount of such
Insurance Company's cash and invested assets calculated in accordance with
Statutory Accounting Principles.
"Transfer Notice" shall have the meaning assigned in subsection 3.2(d).
"Trustee" shall mean PNC Bank, Ohio, National Association, as trustee
under the Indenture or any successor trustee appointed pursuant to the terms
contained therein.
"Undivided Interest" of the Buyer in the Seller's Portfolio of Eligible
Receivables shall mean an undivided participating ownership interest in the
Portfolio of Eligible Receivables equal, at any time, to the percentage
equivalent of a fraction the numerator of which is the Net Purchase
Outstanding of the Buyer in the Portfolio of Eligible Receivables at such
time and the denominator of which is the Gross Amount Due upon the Portfolio
of Eligible Receivables at such time; provided, however, that such percentage
equivalent, as computed as of the day immediately preceding the first day of
the Liquidation Period, shall remain constant at all times during the
Liquidation Period until it shall be reduced to zero at such time as the Net
Purchase Outstanding shall have been reduced to zero and all other amounts
owing to the Buyer hereunder shall have been paid in full.
1.2 OTHER DEFINITIONAL PROVISIONS.
(a) The words "hereof", "herein" and "hereunder" and words of similar
import when used in this Agreement shall refer to this Agreement as a whole
and not to any particular provision of this Agreement, and section,
subsection, schedule and exhibit references are to this Agreement unless
otherwise specified.
(b) As used herein and in any certificate or other document made or
delivered pursuant hereto, accounting terms relating to the Seller or its
Affiliates or its Subsidiaries, unless otherwise defined herein or therein,
shall have the respective meanings given to them under GAAP.
ARTICLE II
AGREEMENT TO PURCHASE AND SELL
<PAGE>
2.1 AGREEMENT TO PURCHASE AND SELL. Subject to the terms and
conditions of this Agreement, the Seller may at its option sell to the Buyer
without recourse (except as expressly provided for herein), and the Buyer
agrees (to the extent the Buyer has funds available to it) to purchase from
the Seller, from the effective date of this Agreement to but not including
the Purchase Termination Date, an Undivided Interest (and Additions thereto)
in all right, title and interest of the Seller in, to and under the Seller's
Portfolio of Eligible Receivables, including, without limitation, all monies
due and to become due thereunder and all guarantees thereof and collateral
security therefor and all proceeds thereof.
2.2 PURCHASE AND SALE PROCEDURE.
(a) Sales of Undivided Interests and Additions thereto hereunder
may take place on any Settlement Date occurring on or after the
effective date of this Agreement and prior to the Purchase Termination
Date (each date on which a sale of an Undivided Interest or an Addition
thereto occurs hereunder being herein referred to as the "Closing Date"
applicable to such sale), provided that the Seller shall have given the
Buyer at least three Business Days' prior written, telegraphic, telex,
facsimile or telephonic notice (effective upon receipt) of its intention
to sell an Undivided Interest or an Addition thereto hereunder on such
date. Also, not less than three Business Days prior to each Closing
Date hereunder, the Seller shall deliver to the Buyer the Settlement
Statement referred to in Section 4.1 hereof.
(b) Each sale hereunder of an Undivided Interest or an Addition
thereto shall be as of the close of business on the last Business Day of
the calendar month immediately preceding the related Closing Date (each
said "as of" date being herein called the "Date of Sale") and shall take
place at the office of the Buyer or such other place as may be agreed
upon. No later than 11:00 a.m. (Chicago time) on each Closing Date
hereunder the Seller shall deliver to the Buyer (i) a certificate in
substantially the form of Exhibit D, duly executed by an authorized
officer of the Seller, dated such Closing Date, certifying as to (w) the
Net Purchase Outstanding before giving effect to the purchase and sale
to be effected on such Closing Date and assuming the remittance to the
Buyer on such Closing Date of any Principal Collections attributable to
the Undivided Interest of the Buyer in the Portfolio of Eligible
Receivables and then held by the Seller on account of the Settlement
Period ending on such Closing Date, (x) the total Collections so held
and a breakdown of Finance Charge Collections and Principal Collections
and the portion of each attributable to the Buyer's Undivided Interest,
(y) the Purchase Price for any amount of the Undivided Interest or
Addition thereto being sold on such Closing Date and (z) that Section
2.2(c) will not be violated by the purchase of such Undivided Interest
or Addition, and (ii) an Assignment, dated the related Date of Sale,
assigning and transferring to the Buyer an Undivided Interest or
Addition thereto in all right, title and interest of the Seller in and
to the Seller's Portfolio of Eligible Receivables on such Date of Sale,
all monies to become due thereunder, and in and to any and all
guarantees thereof and collateral security therefor and all proceeds
thereof.
(c) The Buyer shall have no obligation to purchase an Undivided
Interest or Addition thereto on any Closing Date hereunder to the extent
that (i) the sum of (x) the Net Purchase Outstanding (as calculated and
set forth in the certificate delivered above) plus (y) the proposed
Purchase Price payable by the Buyer on such Closing Date would exceed
<PAGE>
the Maximum Purchase Amount or (ii) the Buyer does not have available
funds in the Collateral Account which may, consistent with Section
6.3(a) of the Buyer Security Agreement, be used to pay any portion of
the Purchase Price still owing after application of funds as provided in
clause first of the first sentence of Section 2.3(b) of this Agreement.
2.3 PAYMENT OF PURCHASE PRICE; PURCHASE FEE.
(a) The purchase price for the Undivided Interest or any Addition
thereto sold to the Buyer on any Closing Date pursuant to Section 2.2
shall, subject to the limitation in Section 2.2(c), be the amount
specified by the Seller (the "Purchase Price").
(b) The Purchase Price with respect to the Undivided Interest or
the Addition thereto being purchased from the Seller on a Closing Date
shall be paid: first, by applying all, but not less than all (except as
provided in the next succeeding sentence), of the Principal Collections
attributable to the Buyer's Undivided Interest received, by or on behalf
of the Seller during the Settlement Period immediately preceding such
Closing Date and to be delivered to the Buyer on such Closing Date under
subsection 3.1(a), and second, to the extent necessary, the Buyer shall
pay any remaining portion of the Purchase Price. In the event that the
Purchase Price with respect to the Undivided Interest or the Addition
thereto being purchased on a Closing Date is less than the Principal
Collections attributable to the Buyer's Undivided Interest received by
or on behalf of the Seller during the Settlement Period immediately
preceding such Closing Date, such Principal Collections shall be applied
first to the payment of such Purchase Price and second any remainder
thereof shall be distributed to the Buyer.
(c) As consideration for the Buyer's purchase of an Undivided
Interest or an Addition thereto and in lieu of purchasing such Undivided
Interest or an Addition thereto at any initial discount, the Seller
shall, on each Settlement Date (and as provided below, upon the request
of the Buyer), pay to the Buyer a purchase fee (the "Purchase Fee")
equal in the aggregate to the Buyer's fees, costs and expenses incurred
since the preceding Settlement Date (or in the case of the first
Settlement Date, since the effective date of this Agreement) in
connection with the transactions contemplated by this Agreement and the
Financing Documents and the issuance by the Buyer of the Notes,
including (i) all fees, expenses and costs payable by the Buyer or L/C
Bank under the Reimbursement Agreement, the Buyer Security Agreement,
and the Note Agreement, (ii) without duplication of any amounts payable
under clause (iii) below, interest accrued and to accrue on the Notes
(together with any amounts due in respect of "grossing-up" for
withholding or other Taxes), but not the principal amount of the Notes,
(iii) interest accrued and to accrue under the Reimbursement Agreement
and amounts in respect of interest paid by L/C Bank to the Trustee or
the holders of the Notes, which amounts are payable by the Buyer to L/C
Bank under the Reimbursement Agreement (together with any amounts due
under Section 2.8 of the Reimbursement Agreement in respect of
"grossing-up" for withholding or other Taxes), but not amounts
constituting principal owing under the Reimbursement Agreement or
amounts in respect of the principal amount of the Notes,
(iv) indemnities incurred or owing by the Buyer under or in connection
with the Reimbursement Agreement, the Buyer Security Agreement or the
Note Agreements and (v) the costs of preparing income and other tax
returns, the cost of maintaining a registered agent and a place of
business in the State of Delaware and federal, state and local income
<PAGE>
and other taxes (if any); provided, that, so long as no Termination
Event shall have occurred and be continuing, the Seller shall be
entitled to a credit against the Purchase Fee payable under this
subsection 2.3(c) on such Settlement Date (but not against any Purchase
Fee payable upon the request of the Buyer as provided below) equal to
the sum of (x) the amount of the Finance Charge Collections attributable
to the Buyer's Undivided Interest paid by the Seller to the Buyer on the
preceding Settlement Date plus (y) all interest and other amounts earned
on the deposited funds in the Collateral Account, the Application
Account and the Finance Charge Account from and including the preceding
Settlement Date (or, in the case of the first Settlement Date, the
effective date of this Agreement) to but not including such Settlement
Date (and, to the extent the sum of (x) and (y) exceed such Purchase Fee
payable on such Settlement Date, the Seller shall be entitled to a
rebate of such excess). Without in any way limiting the Seller's
obligations under this subsection 2.3(c) on any Settlement Date, if the
Buyer notifies the Seller at or prior to 5:00 p.m. (Chicago time) on any
Business Day that it wishes the Seller to pay on the immediately
succeeding Business Day any amount under this subsection 2.3(c) which is
or will be accrued as of such succeeding Business Day, then the Seller
shall pay to the Buyer such amount as provided in Section 8.2 at or
prior to 11:00 a.m. (Chicago time) on such immediately succeeding
Business Day; provided, that any amounts so paid by the Seller shall not
be considered owing on the next succeeding Settlement Date. Each
reference to each of the Financing Documents in this subsection 2.3(c)
shall be to such agreements as in effect on the date hereof or as the
same may be amended, supplemented or otherwise modified in accordance
with the terms thereof and with the consent of the Seller. All
calculations made by the Buyer pursuant to this subsection 2.3(c) shall
be conclusive, absent manifest error.
(d) As further consideration for the Buyer's purchase of an
Undivided Interest or an Addition thereto, the Seller agrees to pay to
the Buyer in advance (i) a nonrefundable annual fee of $10,000 on
October 31, 1994 and on each October 31 thereafter until the Time of
Full Payout and (ii) a nonrefundable semiannual fee of $5,324 on the
last Business Day of June and December commencing December 1994 until
Buyer's Preferred Stock is redeemed in full, at which time the Seller
agrees to pay to the Buyer a final nonrefundable fee in an amount equal
to the product of $5,324 multiplied by a fraction the numerator of which
is equal to the number of days between the last semiannual payment date
and such redemption date and the denominator of which is 180.
2.4 REASSIGNMENT.
(a) If the Net Purchase Outstanding shall at any time exceed the
Maximum Purchase Amount, the Buyer shall reassign to the Seller, free of
liens created by the Buyer but otherwise without recourse,
representation or warranty, such portion of the Undivided Interest as is
necessary so that, after giving effect to such reassignment, the Net
Purchase Outstanding would not exceed such Maximum Purchase Amount.
(b) Each such reassignment shall be made for a purchase price
(payable by the Seller upon request in immediately available funds)
equal to the amount of the Undivided Interest so reassigned multiplied
by the Gross Amount Due upon the Portfolio of Eligible Receivables as of
the last day of the Settlement Period immediately preceding the date of
such reassignment.
<PAGE>
2.5 INTEREST ON OVERDUE PAYMENTS. If any amount payable by the Seller
to the Buyer, whether on account of fees or expenses or on account of amounts
collected by the Seller or otherwise, is not paid on the relevant Settlement
Date or other relevant date, such amount shall bear interest for each day
from such Settlement Date or other relevant date, as the case may be, until
such amount is paid in full at a rate per annum equal to 3% above the Prime
Rate in effect on each such day.
2.6 FEE AND INTEREST CALCULATIONS. Calculations of per annum rates
under this Agreement shall be made on the basis of a 360-day year for actual
days elapsed.
2.7 INDEMNIFICATION BY SELLER. The Seller hereby agrees to pay, and to
indemnify and hold harmless the Buyer and the Buyer's officers, directors,
employees, agents and shareholders from (a) any Taxes which may at any time
be imposed in respect of this Agreement, the Financing Documents or the
subject matter hereof or thereof or as a result of the issuance by the Buyer
of the Notes or by the transactions contemplated hereby or thereby, and
(b) reasonable costs, expenses and counsel fees in defending against the
same, whether arising by reason of the acts to be performed by the Seller
hereunder or imposed against the Buyer, the Seller, the property involved or
otherwise.
2.8 DISTRIBUTION OF COLLECTIONS AND OTHER PAYMENTS. All amounts in
respect of Collections attributable to the Buyer's Undivided Interest shall
be remitted by the Seller without set-off or counterclaim, to the Buyer on
each Settlement Date and all amounts in respect of other payments owing by
the Seller pursuant to this Agreement shall be remitted to the Buyer as
promptly as practicable without set-off or counterclaim.
2.9 NETTING OF PAYMENTS. Anything contained in this Agreement to the
contrary notwithstanding, the Buyer may, in its complete discretion, net any
amounts the Buyer is required to make available to the Seller on any
Settlement Date pursuant to this Agreement against any amounts the Seller is
required to make available to the Buyer on such Settlement Date pursuant to
this Agreement.
2.10 GRANT OF SECURITY INTEREST. The parties hereto agree that this
Agreement is intended to constitute the sale of an Undivided Interest (and
any Additions thereto) in all right, title and interest of the Seller in, to
and under the Portfolio of Eligible Receivables. In addition, the parties
hereto agree that (a) this Agreement constitutes a grant by the Seller to the
Buyer of a perfected first priority security interest in all of the Seller's
right, title and interest in, to and under each Receivable (whether or not an
Eligible Receivable), all guarantees thereof, all collateral security
therefor (including, without limitation, all Contracts and Assigned
Commissions) and all of the DBP Lead Commissions, all monies due or to become
due thereon in each case and all amounts received with respect thereto in
each case and all "proceeds" (as defined in Section 9-306 of the Uniform
Commercial Code as in effect in the applicable jurisdiction) thereof in each
case, whether now existing or hereafter arising, (b) such security interest
is intended to secure, without limitation, all now and hereafter outstanding
obligations of the Seller to the Buyer and (c) this Agreement shall
constitute a security agreement under applicable law.
ARTICLE III
COLLECTIONS; MAINTENANCE OF RECORDS
<PAGE>
3.1 COLLECTIONS AND APPLICATIONS.
(a) The Seller hereby agrees that on or before the initial Date of
Sale on which an Undivided Interest shall be sold hereunder, the Seller
will have established a cash management system whereby the Seller can
identify from all cash received all Collections which are attributable
to the Portfolio of Eligible Receivables and the Buyer's Undivided
Interest therein (and the portion thereof constituting Principal
Collections and the portion thereof constituting Finance Charge
Collections) and all collections attributable to Receivables (and the
portion thereof constituting principal collections and the portion
thereof constituting finance charge collections). The Seller shall,
during each Settlement Period, identify those Collections which are on
account of the Buyer's Undivided Interest in the Portfolio of Eligible
Receivables and shall (i) with respect to such Collections constituting
Principal Collections, subject to the provisions of subsection 2.3(b),
not later than 12:00 noon (Chicago time) on the Settlement Date
immediately succeeding such Settlement Period, cause all such Principal
Collections to be deposited in the Application Account and (ii) with
respect to such Collections constituting Finance Charge Collections, not
later than 12:00 noon (Chicago time) on each such Settlement Date, cause
all such Finance Charge Collections to be deposited in the Finance
Charge Account; provided, however, that during the Liquidation Period,
the Seller shall deliver all principal collections and finance charge
collections which are attributable to the Receivables (including
collections which are not attributable to the Buyer's Undivided
Interest, which collections shall be applied in the manner specified in
subsections 3.1(f) and (g) below) to the Buyer on each Settlement Date
in the manner specified in clauses (i) and (ii) above; and provided,
further, however, that at any time after the occurrence and during the
continuance of a Termination Event and upon two Business Days' prior
written request of the Buyer, determined in the Buyer's sole discretion,
the Seller shall transfer or cause to be transferred on a daily basis in
immediately available funds (x) to the Application Account an amount not
less than the aggregate amount of all identified principal collections
(including all principal collections which are not attributable to the
Buyer's Undivided Interest, which collections shall be applied in the
manner specified in subsections 3.1(f) and (g) below) received prior to
the time of such transfer and not previously transferred and (y) to the
Finance Charge Account an amount not less than the aggregate amount of
all identified finance charge collections (including all finance charge
collections which are not attributable to the Buyer's Undivided
Interest, which collections shall be applied in the manner specified in
subsection 3.1(f) and (g) below) received prior to the time of such
transfer and not previously transferred.
(b) The Seller agrees that, upon (i) the occurrence and during the
continuance of any Termination Event or any event which, with the giving
of notice or the lapse of time or both, would constitute a Termination
Event, and (ii) the written request of the Buyer, the Seller shall
transfer to the Buyer all of the Seller's right, title and interest in,
to and under each and every bank account to which the Obligors (or
applicable Insurance Companies) shall previously have been directed to
remit payments (or Assigned Commissions or DBP Lead Commissions in the
case of Insurance Companies) on account of or with respect to
Receivables or which are used by the Seller to concentrate such
payments. Each such transfer shall be effected pursuant to such
agreements, documents and instruments as the Buyer shall, in its sole
discretion, require. The Seller shall, from time to time, execute and
<PAGE>
deliver such other documentation in form and substance satisfactory to
the Buyer as may be reasonably requested by the Buyer to obtain sole
dominion and control over each such bank account. Each such bank
account shall, after any transfer effected pursuant to this paragraph
(b), be maintained in accordance with the terms and conditions of such
documentation. Commencing upon any transfer of bank accounts described
in this paragraph (b), all collections then on deposit or thereafter
deposited in, and all credits in, such bank accounts shall be
transferred to the Application Account (in the case of principal
collections) and the Finance Charge Account (in the case of finance
charge collections). In the event the Seller has not established such a
system of bank accounts, it will promptly establish and maintain such a
system of bank accounts in form satisfactory to the Buyer.
(c) The Buyer agrees that, in any case where the provisions of
subsection 3.1(b) shall become applicable, as soon as practicable but in
any event not later than the Business Day following the date of
establishment to its satisfaction by the Seller that any of the
collected funds received by the Buyer in any of the Buyer's bank
accounts referred to in subsection 3.1(b) do not constitute collections
on account of Agent Receivables or DBP Lead Commissions, the Buyer shall
remit to the Seller such moneys which do not constitute such collections
(provided that amounts which constitute collections but which are not
attributable to the Buyer's Undivided Interest shall be applied in the
manner specified in subsection 3.1(f) and (g) below). The Buyer agrees
that, upon the request of the Seller, it will furnish to the Seller such
information regarding moneys received on such bank accounts as may be
reasonably necessary to permit the Seller to identify such moneys which
do not constitute such collections.
(d) The Buyer shall treat all immediately available funds received
by it or deposited in the Application Account as "Principal Collections"
attributable to its Undivided Interest for purposes of this Agreement
and shall treat all immediately available funds received by it or
deposited in the Finance Charge Account as "Finance Charge Collections"
and all such funds shall be treated as having been received as of the
Business Day Received (as defined in the immediately succeeding
sentence). As used herein, the term "Business Day Received" shall mean
(i) if funds are deposited in such Application Account or Finance Charge
Account by 12:00 noon (Chicago time), such day of deposit and (ii) if
funds are deposited in such Application Account or Finance Charge
Account after 12:00 noon (Chicago time), the Business Day next following
such day of deposit.
(e) Neither the Seller nor any other Person claiming by, through
or under the Seller shall have any right, title or interest in, or any
control over the use of, or any right to withdraw moneys from, the
Application Account, the Finance Charge Account or the Holdback Account.
(f) During the Liquidation Period, all collections which are not
attributable to the Buyer's Undivided Interest which are deposited in
the Application Account and the Finance Charge Account shall be
segregated by the Buyer, shall be deposited in the Holdback Account and
shall be applied by the Buyer in accordance with the provisions of
subsections 3.1(g) and (h); provided, however, that during the
Liquidation Period, a percentage (equal to the percentage equivalent
representing the Buyer's Undivided Interest in all Sold Receivables) of
all collections attributable to the Receivables which are not
<PAGE>
attributable to the Buyer's Undivided Interest shall be paid to the
Buyer until such time as the Net Purchase Outstanding shall equal zero.
(g) On each Settlement Date occurring during the Liquidation
Period, the Buyer shall deduct from the Holdback Account (to the extent
of the funds therein) and pay to the Application Account an amount equal
to the sum of (i) all Losses occurring during the preceding Settlement
Period plus (ii) all Losses occurring during any prior Settlement Period
and not previously so reimbursed to the Buyer.
(h) At the end of the Liquidation Period, all funds on deposit in
the Holdback Account, to the extent not used to offset Losses as set
forth in subsection 3.1(g) above, shall be returned to the Seller.
3.2 COLLECTIONS BY THE SELLER.
(a) The Seller will, at the Seller's cost and expense and as agent
for the Buyer (but subject, at any time after the occurrence of a
Termination Event, to the right of the Buyer to direct and control),
endeavor to collect, consistent with its past practices (as to the
Receivables owned by it) as and when the same becomes due, the amount
owing on each Receivable. The Seller will not make any material changes
in its administrative servicing and collection systems without the prior
approval of the Buyer, such approval not to be unreasonably withheld.
In the event of default under any Sold Receivable, the Seller shall have
the power and authority, on behalf of the Buyer, to take such action in
respect of such Sold Receivable, as the Seller, in the absence of
contrary instructions from the Buyer, may deem advisable. In the
enforcement or collection of any Sold Receivable, the Seller shall be
entitled to sue thereon in its own name, if possible, or, if, but only
if, the Buyer consents in writing, as agent of the Buyer. In no event
shall the Seller make the Buyer a party to any litigation without the
Buyer's express prior written consent. The Buyer may, as set forth in
subsection 3.2(d), (i) by notice in writing terminate the authority of
the Seller to act as agent for and on behalf of the Buyer and/or
(ii) notify any Obligor of the assignment to the Buyer of an Undivided
Interest in any Sold Receivable hereunder and/or (iii) direct any
Obligor to make all payments in respect of Sold Receivables in the name
of the Buyer.
(b) The Seller hereby agrees to defend and indemnify the Buyer
against all costs, expenses, claims and liabilities in respect of any
action taken by the Seller relative to any Receivable, or arising out of
any failure of compliance of any Receivable hereunder with the
provisions of any law or regulation, whether Federal, state or local,
applicable thereto (including, without limitation, any usury law, the
Federal Truth in Lending Act or Regulation Z of the Board of Governors
of the Federal Reserve System). The Buyer shall have no obligation to,
and unless and until the occurrence of an event described in clauses (i)
and (ii) of the first sentence of subsection 3.1(b), the Buyer shall
not, take any action or commence any proceedings to realize upon any
Receivable (including, without limitation, any Defaulted Receivable) or
to enforce any of its rights or remedies with respect thereto.
(c) The Seller hereby irrevocably grants to the Buyer an
irrevocable power of attorney, with full power of substitution, coupled
with an interest, to take in the name of the Seller or in its own name
all steps necessary or advisable to endorse, negotiate or otherwise
realize on any writing or other right of any kind held or owned by the
<PAGE>
Seller or transmitted to or received by the Buyer as payment on account
or otherwise in respect of any Receivable. In addition, in order to
effect the purposes of this Agreement and the sale of Undivided
Interests and Additions thereto and to evidence the ownership interest
of the Buyer in the Sold Receivables and the security interest of the
Buyer in all other Receivables, the Seller hereby irrevocably grants to
the Buyer an irrevocable power of attorney, with full power of
substitution, coupled with an interest, to take in the name of the
Seller or in its own name all actions in respect of the preparation,
execution and filing of any and all notices and instruments necessary or
advisable under the Uniform Commercial Code.
(d) The Buyer may at any time, after the occurrence of a
Termination Event, by notice in writing to the Seller (a "Transfer
Notice") terminate the Seller's functions as to all of the
administrative, servicing and collection functions provided for in this
Article III (the termination of such functions being referred to as a
"Complete Servicing Transfer"). Upon the occurrence of a Complete
Servicing Transfer, (i) the Buyer or its designee shall administer the
administrative, servicing and collection functions, including, but not
limited to, the issuance of demands for payment under the Receivables,
in any manner it deems fit, provided that the Buyer will furnish or
cause to be furnished to the Seller such information as the Seller needs
to perform its obligations under Section 4.1, (ii) the Buyer shall, at
any time thereafter, be entitled to notify the Obligors on any
Receivables to make payment of amounts due thereunder in the name of and
directly to the Buyer and to notify the applicable Insurance Companies
to make payments of all Assigned Commissions or DBP Lead Commissions in
the name of and directly to the Buyer and (iii) the Seller shall, at its
own expense, (x) if so requested by the Buyer, endorse each instrument,
if any, evidencing any Receivable to the Buyer in such manner as the
Buyer shall direct and (y) perform any and all acts and execute any and
all documents as may be reasonably requested by the Buyer in order to
effect the purposes of this Agreement and the sale of Undivided
Interests and Additions thereto and to evidence the ownership interest
of the Buyer in the Sold Receivables and the security interest of the
Buyer in the other Receivables.
(e) The Seller shall execute and deliver such additional
documents, shall take such further action as the Buyer may reasonably
request to effect or evidence the transfer of an Undivided Interest in
the Portfolio of Eligible Receivables and a security interest in the
Receivables and shall execute and deliver to the Buyer such powers of
attorney (in addition to the power of attorney provided for in
subsection 3.2(c)) as may be necessary or appropriate to enable the
Buyer to endorse for payment any check, draft or other instrument
delivered in payment of any amount under or in respect of any
Receivable. If, at any time, when the provisions of subsection 3.1(b)
shall have become operative, the Seller receives any cash or checks,
drafts or other instruments for the payment of money on account or
otherwise in respect of Receivables, the Seller shall segregate such
cash and other items, hold such cash and other items in trust for the
benefit of the Buyer and cause such cash and other items (properly
endorsed, where required, so that such items may be collected by the
Buyer) to be transmitted or delivered to the Buyer within one Business
Day after the date any such cash or other item shall have been
identified and segregated by the Seller as being on account of a
Receivable.
<PAGE>
(f) All collections on account of the Receivables of each Obligor
shall be applied in the order of maturity thereof unless specifically
identified otherwise in writing by such Obligor.
(g) In the event of any Complete Servicing Transfer the Seller
shall be liable for all costs, fees, expenses and reimbursements payable
to the Buyer or its designee who shall have undertaken the
administration, servicing and collection functions provided for herein
in respect of the Receivables.
3.3 MAINTENANCE OF RECORDS. The Seller will or will cause one or more
of the Insurance Companies to hold in trust for the Buyer at the office of
the Seller books of account and other records as will enable the Buyer or its
designee to determine at any time the status of the Eligible Receivables and
the Receivables and all collections and payments in respect thereof. The
Seller will or will cause one or more of the Insurance Companies to permit
the Buyer, at any time and from time to time during the Seller's or such
Insurance Companies' regular business hours, to inspect, audit, check and
make abstracts from the Seller's or such Insurance Companies' books,
accounts, records, or other papers pertaining to such Receivables. From time
to time upon the written request of the Buyer, the Seller, at its own
expense, will deliver or will cause one or more Insurance Companies to
deliver to the Buyer (a) a schedule of the Receivables, identifying
separately the Sold Receivables sold by Seller and the Eligible Receivables,
indicating as to each such Receivable information as to the Obligor thereon,
the unpaid balance thereof, and such other information as the Buyer may
reasonably deem appropriate and (b) copies of any such records and invoices
pertaining thereto and evidence thereof as the Buyer may deem necessary to
enable it to enforce its rights thereunder. Following a Complete Servicing
Transfer, upon the written request of the Buyer, the Seller will deliver all
such records and invoices pertaining thereto and other evidence thereof to
the Buyer or any agent selected by the Buyer. Each computer record relating
to the Eligible Receivables or the Receivables will be marked to indicate the
interest of the Buyer therein. Upon request of the Buyer, the Seller will or
will cause one or more of the Insurance Companies to segregate from all other
receivables then owned or being serviced by the Seller or such Insurance
Companies all records, invoices and other documents relating to a Receivable
and will, or will cause such Insurance Companies to, hold in trust and safely
keep such records, invoices and other documents in such place or places as
shall be designated by the Buyer.
3.4 REBATES, ADJUSTMENTS AND REDUCTIONS; MODIFICATIONS; ADDITIONS;
REPURCHASE OF DBP LEAD RECEIVABLES.
(a) With respect to the Sold Receivables, the amount of any
rebate, discount, refund, adjustment, chargeback or similar item
(including, without limitation, as a result of the application of any
special or other discounts or any reconciliations) of any Sold
Receivable, the amount owing for any cancellations or the amount of any
other reduction of any payment under any Sold Receivable shall be
treated as a collection thereon by the Seller for purposes of this
Agreement and shall be paid to the Buyer on the next Settlement Date.
The Seller may be reimbursed for chargebacks relating to policies
written by an Agent Obligor out of amounts deposited in the Reserve
Account with respect to such Agent Obligor or, to the extent such
amounts are insufficient, out of Assigned Commissions payable to such
Agent Obligor; provided that the Seller may be reimbursed out of
Assigned Commissions of an Agent Obligor only to the extent that such
<PAGE>
Assigned Commissions exceed the aggregate amount payable with respect to
the outstanding Agent Receivables of such Agent Obligor.
(b) During the Liquidation Period with respect to the Receivables,
the amount of any rebate, discount, refund, adjustment, chargeback or
similar item (including, without limitation, as a result of the
application of any special or other discounts or any reconciliations) of
any Receivable, the amount owing for any cancellations or the amount of
any other reduction of any payment under any Receivable shall be treated
as a collection thereon by the Seller for purposes of this Agreement and
shall be paid to the Buyer on the next Settlement Date. The Seller may
be reimbursed for chargebacks relating to policies written by an Agent
Obligor out of amounts deposited in the Reserve Account with respect to
such Agent Obligor or, to the extent such amounts are insufficient, out
of Assigned Commissions payable to such Agent Obligor; provided that the
Seller may be reimbursed out of Assigned Commissions of an Agent Obligor
only to the extent that such Assigned Commissions exceed the aggregate
amount payable with respect to the outstanding Agent Receivables of such
Agent Obligor.
(c) Without limiting the generality of the foregoing provisions of
this Section 3.4, in the event that any Insurance Company fails to make
any DBP Lead Commission payment within 30 days after such payment is due
(whether because of the lapse or cancellation of the underlying
Insurance Policy or for any other reason) and such DBP Lead Commissions
were payable with respect to a DBP Lead Receivable in which an Undivided
Interest was sold hereunder (a "Defaulted Lead Receivable") then the
Seller shall repurchase from Buyer on the next Settlement Date, Buyer's
Undivided Interest in such Defaulted Lead Receivable for an amount equal
to the product of (i) the Undivided Interest times (ii) the Gross Amount
Due (without deduction for any write-offs) upon such Defaulted Lead
Receivable.
(d) Notwithstanding any other provision in this Agreement (or any
exhibit or schedule thereto) the Seller may at any time charge back to
an Agent's account any unearned advances, whether the result of a lapsed
policy or a policy not taken out, subject, however, to the limitations
on such chargebacks contained in this Agreement regarding matters other
than time.
ARTICLE IV
SETTLEMENTS; TERMINATION
4.1 SETTLEMENT STATEMENTS. Not later than three Business Days prior to
each Settlement Date until the Undivided Interest of the Buyer in the
Portfolio of Eligible Receivables has been reduced to zero, the Seller shall
submit to the Buyer a Settlement Statement, substantially in the form of
Exhibit H, setting forth the items listed on such Exhibit H and such other
information as the Buyer may reasonably consider appropriate for the purpose
of effecting an accounting and settlement hereunder. The Seller agrees to
notify the Buyer promptly after any collections manager or supervisor
thereof, any member of the legal department or any vice president or other
executive officer of the Seller obtains actual knowledge of any event with
respect to any Obligor or Insurance Company of the type described in
subsection 7.1(e).
4.2 TERMINATION.
<PAGE>
(a) This Agreement will terminate at such time on or after the
Purchase Termination Date, or on or after such earlier date as to which
the Seller shall have given the Buyer 30 days notice, when the Net
Purchase Outstanding has been reduced to zero and all other amounts
owing to the Buyer hereunder shall have been paid in full; provided,
however, that the indemnities of the Seller to the Buyer set forth in
this Agreement shall survive such termination. Upon the termination of
the commitment of the Buyer to purchase Eligible Receivables hereunder
in its entirety, whether pursuant to this Article IV, Article VII or
otherwise, and the collection, repurchase or other final resolution of
all Eligible Receivables, the Buyer, shall, at the expense of the
Seller, execute such Uniform Commercial Code termination statements and
such other documents as the Seller may reasonably request to evidence
the termination of the ownership interest or security interest of the
Buyer in Receivables. Prior to the collection, repurchase or other
final resolution of all Receivables, however, the termination of the
commitment of the Buyer to purchase Eligible Receivables hereunder shall
not affect the Seller's responsibilities pursuant to Article III hereof,
except in accordance with the provisions of such Article III.
(b) The Seller may request an extension of the Purchase
Termination Date then in effect for an additional one-year period by
submitting such request in writing to the Buyer at least 180 days prior
to the then effective Purchase Termination Date, so long as no
Termination Event shall have occurred and be continuing. If the Buyer
shall approve such extension in writing, the Purchase Termination Date
shall automatically and without further action be extended for such one-
year period. There shall be no limit on the number of such one-year
extensions which the Seller may request. However, in no event shall
Buyer have any obligation to approve such a request for extension nor
shall Buyer have any liability whatsoever for failing or refusing to
approve such a request for extension.
(c) When all amounts payable with respect to all Agent Receivables
of a particular Agent Obligor have been paid in full and neither the
Seller nor such Agent Obligor intend to create any additional
Receivables with respect to such Agent Obligor (herein referred to as an
"Earned Basis Agent"), the Seller may (at the request of such Earned
Basis Agent or on the Seller's own accord) deliver to the Buyer (with a
copy to L/C Bank) a request to terminate the UCC financing statement of
such Earned Basis Agent, if any, accompanied by a certificate executed
by a duly authorized officer of the Seller and certifying the date on
which all amounts payable with respect to all Agent Receivables of such
Earned Basis Agent were paid in full (the "Payment Date"). Upon the
later of (i) the Buyer's receipt of the certificate referred to in the
previous sentence and (ii) one calendar year plus one day following the
Payment Date, the Seller may execute a UCC termination statement with
respect to such Earned Basis Agent, and the Buyer and L/C Bank shall
promptly deliver to the Seller the original Contract relating to such
Earned Basis Agent and shall execute and deliver any necessary UCC
termination statements prepared by the Seller with respect to such
Earned Basis Agent (all at the Sellers' sole cost and expense).
ARTICLE V
COVENANTS, REPRESENTATIONS AND WARRANTIES
<PAGE>
5.1 REPRESENTATIONS AND WARRANTIES OF THE SELLER. The Seller hereby
represents and warrants to the Buyer that, on the effective date of this
Agreement and on each Closing Date:
(a) Closing Conditions. Each of the conditions set forth in
clauses (i) and (ii) of subsection 2.2(b) have been satisfied (after
giving effect to the proposed purchase and sale on such Closing Date).
(b) Eligible Receivables. Each Receivable in which an Undivided
Interest, or Addition thereto, is then being sold to the Buyer is an
Eligible Receivable.
(c) Gross Amount Due. The principal amount of the indebtedness
due and to become due on the Portfolio of Eligible Receivables in which
an Undivided Interest, or Addition thereto, is being sold to the Buyer
will be the amount set forth as the Gross Amount Due on account of the
Portfolio of Eligible Receivables in the Settlement Statement to be
furnished pursuant to Section 4.1.
(d) Buyer's Ownership Interest. Each Assignment, when executed
and delivered pursuant hereto, (i) will vest in the Buyer an undivided,
participating ownership interest in all of the right, title and interest
of the Seller in, to and under each Eligible Receivable described
therein and the unpaid indebtedness evidenced thereby and in and to any
and all guarantees thereof, all collateral security therefor, all monies
due or to become due thereon and all amounts received with respect
thereto and all "proceeds" (as defined in Section 9-306 of the Uniform
Commercial Code as in effect under applicable law) thereof, whether now
existing or hereafter arising, and (ii) will constitute a valid
assignment of such undivided, participating ownership interest in such
Eligible Receivables and such guarantees and collateral security
enforceable against all creditors of and purchasers from the Seller.
(e) Compliance with Laws. All the requirements of all laws and
regulations, whether Federal, state or local (including, without
limitation, usury laws, the Federal Truth in Lending Act and Regulation
Z of the Board of Governors of the Federal Reserve System), have been
duly complied with in all material respects with respect to the Seller,
its business, all Receivables and all related Contracts.
(f) Organization; Good Standing; Authority. The Seller is duly
organized, validly existing and in good standing under the laws of the
state of its incorporation and has the corporate power and authority and
the legal right to enter into and perform, and has taken all necessary
corporate action to authorize the execution, delivery and performance
of, this Agreement, the Consent and Agreement, each Assignment and any
other Financing Documents to which it is a party to be delivered by it,
all of which will constitute legal, valid and binding obligations of the
Seller, enforceable in accordance with their respective terms except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium and other similar laws relating to or
affecting creditors' rights generally and by general equitable
principles.
(g) No Violations of Laws; Litigation; Material Adverse Effect.
(i) None of this Agreement, the Consent and Agreement nor the
Assignments to be delivered by the Seller nor the performance by the
Seller of its obligations hereunder or thereunder will violate any
provision of law or of any agreement, indenture, note or other
<PAGE>
instrument binding upon the Seller (including, without limitation, the
Contract out of which such Receivable arose or any arrangement between
the Seller and any Insurance Company) or any judgment, order or decree
of any court or its articles of incorporation or by-laws or give cause
for acceleration of any indebtedness of the Seller; (ii) no litigation,
investigation or proceeding of or before any court, governmental body,
commission, agency or arbitrator is pending or, to the knowledge of the
Seller, threatened by or against the Seller or against any of its
properties or revenues with respect to this Agreement, the Consent and
Agreement or the Assignments or any of the transactions contemplated
hereby or thereby; and (iii) no material impairment exists in the
ability of the Seller to perform its obligations hereunder, under the
Consent and Agreement or under the Assignments or in connection with any
of the transactions contemplated hereby or thereby.
(h) Approvals and Consents. No consent or authorization of,
filing with, or other act by or in respect of any court, governmental
body, commission, agency, arbitrator or any other Person (including any
shareholder, creditor or other Affiliate of the Seller) is required in
connection with the execution, delivery, performance, validity or
enforceability of this Agreement, the Consent and Agreement or the
Assignments.
(i) Qualification and Enforceability. The Seller and each
Insurance Company is duly qualified and in good standing in each
jurisdiction in which failure to qualify would render any Receivable
unenforceable by the Seller or the Buyer.
(j) U.C.C. Filings. (i) The chief executive office of the Seller
is listed on Schedule I, which office is the place where the Seller is
"located" for the purposes of Section 9-103 of the Uniform Commercial
Code of the State of Illinois, and the offices of the Seller where the
Seller keeps its records concerning the Receivables are also listed on
said Schedule; (ii) Schedule I also sets forth all corporate names,
tradenames and fictitious names utilized by Seller; and (iii) all
filings and other acts necessary or advisable (including but not limited
to all filings and other acts necessary or advisable under the Uniform
Commercial Code of each relevant jurisdiction) have been made or
performed in order to grant the Buyer an ownership interest in respect
of all Sold Receivables and a security interest in all Receivables, free
and clear of any security interest, lien, claim, charge or encumbrance
of any other Person except for liens granted in the Assigned Commissions
securing the Agent Receivables and in the DBP Lead Commissions to
Insurance Companies and agents of the Seller in the ordinary course of
business and consistent with past practice, which liens in each case are
subordinate in right to the liens granted to Buyer hereunder.
(k) Financial Statements. The balance sheets of Seller, as at
December 31, 1993 and June 30, 1994 and the related statements of income
and retained earnings and changes in cash flow for the fiscal year and
six months ended on such dates, respectively, previously delivered to
the Buyer pursuant to subsection 6.1(e), are complete and correct and
present fairly the financial condition of Seller, as at such dates, and
the results of its operations and changes in financial position for the
periods then ended. Seller did not have, as of the dates of such
financial statements, any material (i) obligation, (ii) contingent
liability or liability for taxes or (iii) long-term lease which is not
reflected in such financial statements. There has not been as of the
date of this Agreement and there will not be as of the date of any
<PAGE>
purchase of Receivables hereunder any material adverse change in the
business, operations, property or other financial condition of Seller or
any of its Subsidiaries from the business, operations, property or other
financial condition of Seller or any such Subsidiary as of June 30,
1994.
(l) Termination Events. No Termination Event or event which, with
the giving of notice or lapse of time or both, would constitute a
Termination Event has occurred and is continuing.
(m) Chargebacks. The description, attached hereto as Schedule
III, of the procedures used with respect to chargebacks on the Insurance
Policies is a true, correct and complete summary of such procedures.
(n) Transfers of the Receivables. The Seller has not sold,
pledged, assigned or transferred, or granted any security interest in
any of the Receivables (except for liens granted in the Assigned
Commissions and the DBP Lead Commissions securing such Receivables to
Insurance Companies and agents of the Seller in the ordinary course of
business, which liens are subordinate in right to the liens granted to
Buyer hereunder) or any guarantee or proceeds thereof or collateral
security therefor.
5.2 COVENANTS OF THE SELLER. The Seller hereby covenants to the Buyer
that:
(a) Transfers of the Receivables. The Seller will not sell,
pledge, assign or transfer, or grant any security interest in, any of
the Receivables (except for liens granted in the Assigned Commissions
and DBP Lead Receivables securing such Receivables to Insurance
Companies and agents of the Seller in the ordinary course of business,
which liens are subordinate in right to the liens granted to Buyer
hereunder), any of the DBP Lead Commissions or any guarantee or proceeds
thereof or collateral security therefor, or any interest therein, to any
other Person.
(b) Compliance with Laws. All the requirements of all laws and
regulations, whether Federal, state or local (including, without
limitation, usury laws, the Federal Truth in Lending Act and Regulation
Z of the Board of Governors of the Federal Reserve System), will be duly
complied with in all material respects with respect to the Seller, its
business, all Receivables and all related Contracts.
(c) Compliance with Past Business Practices. The Seller will
continue to comply in all material respects with its past business
practices in generating, servicing and maintaining the Receivables.
(d) Fulfillment of Obligations. The Seller will duly fulfill all
material obligations on its part to be fulfilled under or in connection
with each Receivable (including, without limitation, all of its
obligations in the Insurance Agency Agreements) and will do nothing to
impair the rights of the Buyer to such Receivables.
(e) Accounting for the Transaction. The Seller will not (except
with respect to the DBP Lead Receivables) prepare any financial
statements which shall account for the transactions contemplated hereby
in a manner which is, nor will it in any other respect account for the
transactions contemplated hereby in a manner which is, inconsistent with
<PAGE>
the Buyer's undivided participating ownership interest in the Sold
Receivables.
(f) Advance Rate. The Seller will not increase its advance rate
with respect to Agent Receivables (presently at 75% of the annualized
first-year commissions at the point of sale) and will not make any
advances against renewal commissions without the consent of the Buyer.
(g) Conduct of Business; Good Standing. The Seller will continue
to engage in business of the same general type as now conducted by it
and preserve, renew and maintain its corporate existence, rights,
franchises and privileges in the jurisdiction of its incorporation, and
qualify and remain qualified in good standing as a foreign corporation
in each jurisdiction where it does business and take all reasonable
action to maintain all other rights, privileges and franchises necessary
or desirable in the normal conduct of its business except where the
failure to preserve and maintain such existence, rights, franchises,
privileges and qualification would not materially adversely affect the
interests of the Buyer hereunder or in the Receivables or the ability of
the Seller to perform its obligations hereunder.
(h) Communications with Buyer. The Seller will at any time and
from time to time during regular business hours upon prior notice,
permit the Buyer, or its agents or representatives, (i) to examine and
make copies of documents (including, without limitation, computer tapes
and disks) in the possession or under the control of the Seller relating
to Receivables, and (ii) to visit the offices and properties of the
Seller for the purpose of examining such materials described in clause
(i) above, and to discuss matters relating to Receivables or the
Seller's performance hereunder with any of the officers or employees of
the Seller having knowledge of such matters.
(i) Principal Executive Office. The Seller will not change the
location of its principal executive office or of any of the offices
where it keeps its records with respect to the Receivables without prior
notice being given to the Buyer and all necessary or advisable filings
under the Uniform Commercial Code being made.
(j) Information to be Provided by Seller. The Seller will furnish
to the Buyer:
(i) Annual Financial Information. As soon as available, but
in any event no later than 90 days after the end of each fiscal
year of Financial Services, copies of (a) the audited consolidated
balance sheet of Financial Services, as at the end of such fiscal
year and the related audited statements of income, retained
earnings and changes in cash flows for such fiscal year, setting
forth in comparative form the corresponding figures for the
previous fiscal year, such audited statement to be certified
without qualifications or exception by independent certified public
accounts of national standing acceptable to the Buyer, and (b) the
annual unaudited consolidating balance sheets and related annual
unaudited consolidating statements of operations for National
Benefit Plans, Inc. and the Seller which support and form the basis
for the corresponding annual audited financial statements of
Financial Services;
(ii) Quarterly Financial Information. As soon as available,
but in any event no later than 45 days after the end of each fiscal
<PAGE>
quarter of Seller, copies of the consolidated and consolidating
balance sheet of Seller as at the end of such quarter and the
related consolidated statements of income and retained earnings of
Seller for such quarter and for the portion of the fiscal year then
ended, setting forth in comparative form the corresponding figures
for the corresponding periods in the previous fiscal year,
certified by the appropriate financial officer of the Seller
(subject to normal year-end audit adjustments), all such financial
statements delivered pursuant to this subsection 5.2(j) to be
complete and correct in all material respects and to be prepared in
reasonable detail and in accordance with GAAP applied consistently
throughout the periods reflected therein (except as approved by the
accountants and as disclosed therein);
(iii) M&R Report. On the effective date of this
Agreement, on December 31, 1994 and on each June 30 and December 31
thereafter occurring during the term of this Agreement, the M&R
Report which shall be prepared in a manner and using a methodology
consistent with that in preparation of the M&R Report dated June
30, 1994 delivered to the Seller on the effective date of this
Agreement;
(iv) Material Adverse Changes; Termination Events. Prompt
notice of (1) a material adverse change in the business,
operations, property or financial or other condition of the Seller
and (2) the occurrence of any Termination Event or event which,
with the giving of notice or lapse of time or both, would
constitute a Termination Event;
(v) Certification of Covenants. The Seller will furnish to
the Buyer (A) within 45 days after the end of each quarterly fiscal
period a statement (certified by the appropriate financial officer
of the Seller) setting forth whether the covenants referred to in
subsection 7.1(t) hereof were satisfied, and with respect to the
financial covenants referred to therein, the Seller shall also
furnish all information reasonably requested by the Buyer to allow
the Buyer to determine independently whether such financial
covenants were satisfied; (B) concurrently with the delivery by the
Seller of the statement referred to in (A) above, a certificate of
the President, Chief Executive Officer, Chief Financial Officer,
any Vice President or General Counsel of the Seller stating that,
to the best of such officer's knowledge after diligent inquiry, the
Seller has observed and performed all of its covenants and other
agreements, and satisfied every condition, contained in this
Agreement, the Consent and Agreement and each Financing Document to
which the Seller is a party to be observed, performed or satisfied
by it, and that such officer has obtained no knowledge of any
Termination Event or if any such Termination Event exists,
specifying the nature thereof, the period of existence thereof and
the action the Seller proposes to take with respect thereto; and
(C) concurrently with the information to be provided by the Seller
pursuant to subsection 5.2(j)(i), a certificate of the independent
public accountants of the Seller certifying that nothing has come
to their attention which would constitute a Termination Event or
any event which with notice or lapse of time or both would
constitute such a Termination Event has occurred or if such a
Termination Event or event has occurred or been discovered,
specifying the nature and extent thereof; and
<PAGE>
(vi) Designated Agents and Insurance Companies. The Seller
will furnish to Buyer on the initial Closing Date and, not less
often than monthly thereafter commencing January, 1995, a list
designating (a) those Persons whose obligations are to be Agent
Receivables, and (b) those Insurance Companies whose first year DBP
Lead Commissions are to be DBP Lead Receivables, who, in each case,
had not theretofore been so designated by the Seller to Buyer.
(k) (RESERVED)
(l) Receipt of Collection. The Seller shall use only the accounts
listed on Schedule II for receiving Collections on the Receivables.
(m) Delivery of Contracts. On each Closing Date the Seller will
deliver the originally executed copy of each Agent Contract (or any
other contract, note, financing agreement or other document, in lieu of
an Agent Contract, evidencing an Agent Receivable or interest therein)
with respect to an Agent Receivable executed since the immediately
preceding Closing Date.
(n) Amendments and Modifications. The Seller shall not amend or
modify any Insurance Agency Agreement or Contract without the prior
consent of the Buyer, which shall not be unreasonably withheld, and the
Seller shall promptly notify the Buyer upon its receipt from any
Insurance Company of a notice of termination pursuant to the Insurance
Agency Agreement between the Seller and such Insurance Company;
provided, however, that the Seller shall be permitted to amend or modify
any such Insurance Agency Agreement or Contract without the consent of
the Buyer so long as such amendment or modification does not materially
adversely affect the Buyer's interest in or the collectibility of the
Receivables.
(o) Termination of Insurance Agency Agreements. The Seller shall
not terminate an Insurance Agency Agreement to which National Group Life
Insurance Company or Pioneer Life Insurance Company of Illinois is a
party, except in accordance with the terms of such agreements as in
effect on the date hereof.
(p) Indebtedness. The Seller shall not incur any indebtedness to
any Insurance Company except for (i) indebtedness constituting
chargebacks and other similar items incurred in the ordinary course of
business and consistent with past practice; (ii) those insurance agency
agreements identified on Schedule IV hereto, complete and accurate
copies of which have been supplied to the Buyer and L/C Bank; and (iii)
intercompany loans provided that such loans are not secured by or
related to the Receivables.
(q) Changes to the Program Documents. The Seller shall not make
any material adverse change to the documents relating to the Receivables
or DBP Lead Commissions identified in and delivered along with the
certificate of the Chief Financial Officer of the Seller without the
express written consent of the Buyer and L/C Bank.
(r) (RESERVED)
(s) L/C Bank U.C.C. Filings. The Seller shall file UCC financing
statements with respect to each Person who is an Agent Obligor on the
date hereof showing such Agent Obligor as Debtor with respect to the
Agent Receivables of such Agent Obligor and, prior to entering into any
<PAGE>
Agent Contract with a Person who shall become an Agent Obligor of the
Seller after April 30, 1995, shall file UCC financing statements showing
each such Person as Debtor with respect to advances or loans to each
such Person by the Seller. All such financing statements to be filed
pursuant to this subsection 5.2(s) shall name the Seller as secured
party and the Buyer and L/C Bank as assignees and such financing
statements shall be acceptable to the Buyer and L/C Bank. In lieu of
filing any UCC financing statements, the Seller may maintain with L/C
Bank an L/C Bank certificate of deposit in the aggregate amount of
$200,000, which certificate of deposit shall be pledged to L/C Bank on
terms and conditions reasonably satisfactory to it.
(t) The Seller shall cause each Insurance Company (other than
Eligible Fronting Companies) on an individual basis (A) to maintain at
all times Total Adjusted Capital equal to or greater than 260% of
Authorized Control Level RBC, (B) to maintain at all times a Real Estate
Concentration Ratio of less than 50%, and (C) to maintain at all times
a ratio of (x) Non-Investment Grade Obligations to (y) Total Invested
Assets of less than 15%.
5.3 EFFECT OF BREACH BY THE SELLER. If any of the representations,
warranties or covenants contained in Sections 5.1 and 5.2 in respect of any
Sold Receivable shall be or have been materially incorrect or shall have been
materially breached at any applicable Closing Date, and such incorrectness or
breach shall not be corrected prior to the next Settlement Date which occurs
after such incorrectness or breach became known to the Seller or the Buyer,
then on such Settlement Date the Seller shall, at the option of the Buyer as
requested in writing, pay the Buyer an amount equal to the unpaid balance of
such Sold Receivable. Any amount paid by the Seller under this provision
shall be treated as a Principal Collection on account of the Buyer's
Undivided Interest for purposes of this Agreement. Upon receipt of such
payment and all other amounts then due under this Agreement in respect of any
so affected Sold Receivable, the Buyer shall reassign its interest in such
affected Sold Receivable to the Seller, subject to no liens created by Buyer,
without recourse, representation or warranty.
The obligations of the Seller to the Buyer under this Agreement shall
not be affected by reason of any invalidity, illegality or irregularity of
any Receivable or any sale of a Receivable.
ARTICLE VI
CONDITIONS TO EFFECTIVENESS; PURCHASES
6.1 EFFECTIVE DATE. This Agreement shall become effective on the date
(the "effective date of this Agreement") on which:
(a) The Seller shall have delivered to the Buyer copies of
resolutions of the Board of Directors of the Seller (and Financial
Services) authorizing the sales provided for herein and the execution,
delivery and performance of this Agreement, the Consent and Agreement,
the Assignment, and the other documents contemplated hereby certified by
the Secretary or an Assistant Secretary of the Seller on the effective
date of this Agreement, together with a certificate of such Secretary or
Assistant Secretary as to the incumbency of each officer of the Seller
(or Financial Services, as the case may be) authorized to execute this
Agreement, the Consent and Agreement, the Assignments and the other
documents contemplated hereby and thereby, and the Seller shall have
<PAGE>
delivered to the Buyer true and correct copies of the Insurance Agency
Agreements (together with the amendments thereto regarding notice for
termination) certified as to authenticity by a duly authorized officer
of the Seller;
(b) There shall have been delivered to the Buyer the favorable
written opinion of (i) McDermott, Will and Emery, counsel to the Seller,
and (ii) A. Clark Waid III, Assistant General Counsel of the Seller and
Financial Services, in each case addressed to the Buyer and L/C Bank and
dated the effective date of this Agreement, such opinions to be
substantially in the form of Exhibits C-1, C-2 and C-3, respectively;
(c) There shall have been delivered to the Buyer a certificate
executed by a duly authorized officer of the Seller, dated the effective
date of this Agreement, to the effect that appropriate financing
statements (naming the Buyer as the Secured Party and L/C Bank as
Assignee) relating to the Receivables of the Seller have been filed in
each appropriate filing office in each appropriate jurisdiction in which
the Seller maintains an office (which certificate shall also have
annexed thereto a schedule setting forth each office in which such
financing statements have been filed and the acknowledgement copies of
such financing statements, showing the recording data), and such
certificate shall also state that such offices are the only offices in
which filing is required in order to perfect the interest of the Buyer
in such Receivables against all creditors of and purchasers from the
Seller;
(d) The Buyer shall have received search reports satisfactory to
it dated a date reasonably near to the effective date of this Agreement,
listing all effective financing statements which name the Seller as
debtor and which are filed in the jurisdictions in which filings were
made pursuant to paragraph (c) above, together with copies of such other
financing statements none of which shall cover any Receivables, unless
UCC-3 termination statements with respect to such financing statements
shall be filed in the appropriate offices on or before the effective
date of this Agreement, (photostatic copies of which shall have been
delivered to the Buyer);
(e) There shall have been delivered to the Buyer financial
statements of the Seller as of June 30, 1994 for the fiscal period ended
on such date, certified by the appropriate financial officer of the
Seller, which financial statements shall be satisfactory in form and
substance to the Buyer;
(f) There shall have been delivered to the Buyer (i) a counterpart
of the Consent and Agreement, duly executed on behalf of the Seller and
Financial Services and (ii) an Acknowledgment of Assignment of each
Insurance Company, duly executed on behalf of such Insurance Company;
(g) The Reimbursement Agreement shall have been duly executed and
delivered on behalf of the parties thereto, and all of the conditions
set forth in Section 3 thereof shall have been satisfied or waived in
accordance with the terms thereof;
(h) Each of the other Financing Documents shall have been duly
executed and delivered on behalf of the parties thereto, and the Notes
shall have been issued pursuant to the Indenture yielding net proceeds
to the Buyer in an aggregate amount not less than the Maximum Purchase
Amount;
<PAGE>
(i) There shall be filed on the effective date of this Agreement
UCC-3 termination statements from ANB, as collateral agent under that
certain Pledge and Security Agreement dated as of October 1, 1992 made
by the Buyer, terminating its interest in the Receivables (photostatic
copies of which shall be delivered to the Buyer); and
(j) There shall have been delivered to the Buyer a copy of the
Articles of Incorporation of the Seller, certified by the Secretary of
State of Illinois.
6.2 CONDITION TO EACH PURCHASE. The obligation of the Buyer to make
each purchase of an Undivided Interest or Addition thereto hereunder from the
Seller (including its initial purchase) on any Closing Date hereunder is
subject to the conditions that:
(a) No Termination Event, or event which, with the lapse of time
or the giving of notice or both, would constitute a Termination Event,
shall have occurred and then be continuing, and no such Termination
Event or event shall occur as a result of the proposed purchase on such
Closing Date;
(b) The representations and warranties of the Seller set forth in
Article V shall be true and correct in all material respects on and as
of such Closing Date hereunder;
(c) The Buyer shall be satisfied that the requirements of
subsection 3.1(a) shall have been fulfilled with respect to such
Receivables, and that the documentation pursuant to which the applicable
bank accounts are required by subsection 3.1(b) to be maintained remains
in full force and effect;
(d) The Gross Amount Due upon all EFC Receivables constituting
Eligible Receivables (i) shall constitute no more than $4,500,000, (ii)
of Philadelphia Life Insurance Company ("PLIC") shall constitute no more
than $2,250,000, and (iii) of any one Eligible Fronting Company (other
than PLIC) shall constitute no more than $1,000,000;
(e) Each Eligible Fronting Company (other than Arista Insurance
Company) with EFC Receivables constituting Eligible Receivables in
excess of $250,000 shall have a Best rating of A- or higher;
(f) The Seller's Insurance Agency Agreements with National Group
Life Insurance Company, Pioneer Life Insurance Company of Illinois and
Manhattan National Life Insurance Company shall be in full force and
effect and no notice of termination with respect to either of such
agreements shall have been given by any party; and
(g) All legal matters incident to the execution and delivery of
this Agreement and to the purchases by the Buyer of such Receivables
shall be reasonably satisfactory to counsel for the Buyer and counsel
for L/C Bank.
Each sale of an Undivided Interest or Addition thereto on any Closing Date by
the Seller shall constitute a representation and warranty by the Seller that
the conditions to the purchase thereof on such Closing Date have been
satisfied.
ARTICLE VII
<PAGE>
EVENTS OF TERMINATION
7.1 EVENTS OF TERMINATION. If any of the following events (herein
called "Termination Events") shall have occurred and be continuing:
(a) The Seller shall fail, on any Settlement Date, to make any
payment reflected in the related Settlement Statement as being required
to be made by the Seller hereunder, or required to be made by the Seller
pursuant to subsection 3.4(c), on such Settlement Date;
(b) The Seller shall fail to pay any other amount required to be
paid by the Seller hereunder within three Business Days after the date
on which such amount shall have become due and payable;
(c) The Seller shall fail to observe or perform in any material
respect any covenant applicable to it contained (i) in subsection
5.2(f), 5.2(i), 5.2(j)(iv), 5.2(k), 5.2(l), 5.2(m), 5.2(n), 5.2(o),
5.2(p), 5.2(q) , 5.2(s) or 5.2(t) and such failure shall continue for
five days from the date thereof or (ii) in any other provision of this
Agreement and such failure shall continue for five days from the date
the Seller receives notice thereof or an executive officer of Seller
otherwise obtains actual knowledge thereof;
(d) Any representation, warranty, certification or statement made
by the Seller in this Agreement or in the Consent and Agreement or in
any certificate, financial statement or other document delivered
pursuant to this Agreement or the Consent and Agreement shall prove to
have been incorrect in any material respect when made; provided that no
such breach with respect to any Sold Receivable or Sold Receivables
shall constitute a Termination Event under this subsection 7.1(d) unless
(i) the Buyer has requested, pursuant to subsection 5.3 that the Seller
repurchase such Sold Receivable or Sold Receivables and (ii) the Seller
has failed to pay pursuant to subsection 5.3 to the Buyer an amount
equal to the unpaid balance of such Sold Receivable or Sold Receivables;
(e) (i) The Seller, Financial Services or any Insurance Company
(other than an Eligible Fronting Company with respect to which (i) not
more than $250,000 of Receivables in the Portfolio of Eligible
Receivables are Receivables of such Eligible Fronting Company, and (ii)
the Seller has repurchased all of the Sold Receivables of such Eligible
Fronting Company within three (3) Business Days after receipt of a
written request therefor from the Buyer) shall commence any case,
proceeding or other action (A) under any existing or future law of any
jurisdiction, domestic or foreign, relating to bankruptcy, insolvency,
reorganization or relief of debtors, seeking to have an order for relief
entered with respect to it, or seeking to adjudicate it a bankrupt or
insolvent, or seeking reorganization, arrangement, adjustment, winding-
up, liquidation, dissolution, composition or other relief with respect
to it or its debts, or (B) seeking appointment of a receiver, trustee,
custodian or other similar official for it or for all or any substantial
part of its assets, or the Seller, Financial Services or any such
Insurance Company shall make a general assignment for the benefit of its
creditors; or (ii) there shall be commenced against the Seller,
Financial Services or any such Insurance Company any case, proceeding or
other action of a nature referred to in clause (i) above which
(A) results in the entry of an order for relief or any such adjudication
or appointment or (B) remains undismissed, undischarged or unbonded for
a period of 90 days; or (iii) there shall be commenced against the
Seller, Financial Services or any Insurance Company any case, proceeding
<PAGE>
or other action seeking issuance of a warrant of attachment, execution,
distraint or similar process against all or any substantial part of its
assets which results in the entry of an order for any such relief which
shall not have been vacated, discharged, or stayed or bonded pending
appeal within 90 such days from the entry thereof; or (iv) the Seller,
Financial Services or any such Insurance Company shall take any action
in furtherance of, or indicating its consent to, approval of, or
acquiescence in, any of the acts set forth in clause (i), (ii), or (iii)
above; or (v) the Seller, Financial Services or any such Insurance
Company shall generally not, or shall be unable to, or shall admit in
writing its inability to, pay its debts as they become due;
(f) (RESERVED)
(g) The Seller, Financial Services or any Insurance Company
(except any Insurance Company which is an Eligible Fronting Company)
shall fail to make any payment of principal, when required (after giving
effect to any grace periods) in respect of indebtedness for borrowed
money with a value in excess of $5,000,000, or there shall have occurred
and be continuing an event of default under any other agreement,
contract or instrument relating to indebtedness of the Seller, Financial
Services or any such Insurance Company with a value in excess of
$5,000,000 which permits the holder of such indebtedness to accelerate
such indebtedness;
(h) One or more judicial orders or decrees (not paid by or fully
covered by insurance) for the payment of money in excess, in the
aggregate, of more than $5,000,000 or its equivalent shall be rendered
against the Seller, Financial Services or any Insurance Company (except
any Insurance Company which is an Eligible Fronting Company), and such
judgment or order, or execution thereon, shall not have been paid,
vacated, discharged, stayed or bonded, if necessary, pending appeal or
other appropriate proceeding or motion within 90 days from the entry
thereof;
(i) On any Settlement Date, the Default Rate shall exceed 5.0% for
the period consisting of the fiscal quarter of the Seller preceding such
date;
(j) Financial Services shall cease to own, directly or indirectly,
at least 51% (or such higher percentage as may be necessary to maintain
voting control) of the shares of the outstanding capital stock of the
Seller;
(k) The Consent and Agreement shall cease, for any reason, to be
in full force and effect, or any party thereto shall so assert in
writing;
(l) An Event of Default (as defined in the Reimbursement Agree-
ment) shall occur and be continuing;
(m) On any Settlement Date (after giving effect to any purchases
and sales on such date and after giving effect to any reassignment
required pursuant to subsection 2.4 on such date), the Undivided
Interest of the Buyer (as of the last day of the related Settlement
Period) in the Seller's Portfolio of Eligible Receivables (expressed as
a percentage) shall exceed 90%;
(n) the Best rating (to the extent it has one) for any Insurance
Company (except any Insurance Company which is an Eligible Fronting
<PAGE>
Company or Pioneer Life Insurance Company of Illinois) shall fall below
B+ or the Best rating for Pioneer Life Insurance Company of Illinois
shall fall below B-;
(o) the Policy Lapse Rates for any quarterly fiscal period shall
exceed 7.5% for major medical or long term disability, 5.0% for Medicare
supplement or 3.0% for life annuity business;
(p) the Present Value of Assigned Commissions, as set forth in any
M&R Report, shall be less than 300% of the Net Purchase Outstanding at
such time, provided that, notwithstanding any other provision in this
Agreement (or any exhibit or schedule hereto) the parties hereto confirm
that when computing compliance with this Section 7.1(p), the Seller
shall include DBP Lead Commissions when calculating the Present Value of
Assigned Commissions;
(q) (RESERVED)
(r) any Insurance Company (other than an Eligible Fronting
Company) (i) with a Best's rating on the date hereof shall fail to have
a Best's rating after such date or (ii) which obtains a Best's rating on
a date after the date hereof shall fail to have a Best's rating after
such date;
(s) any covenant contained in the Financial Services Credit
Agreement is breached (and the parties hereto agree such a breach shall
constitute a Termination Event hereunder regardless of whether such
breach constitutes an "Event of Default" under the Financial Services
Credit Agreement) or any note delivered in connection with such
agreement shall be declared due and payable in either event as the
result of the occurrence of an "Event of Default" under such agreement;
(t) Financial Services shall fail to observe or perform in any
material respect any covenant applicable to it in the Consent and
Agreement and such failure shall continue for five days from the date
thereof;
(u) Financial Services shall fail (i) for any two consecutive
quarterly fiscal periods or (ii) for any fiscal year to earn profits on
a consolidated basis as calculated in accordance with GAAP; provided,
however that this condition shall not be breached as a result of a
writeoff of deferred policy acquisition costs ("DPAC"), in excess of
normal recurring DPAC amortization determined in accordance with past
practice, based on a recoverability analysis of policies of insurance
conducted by M&R, written evidence of which analysis shall be provided
to the Buyer at its request; or
(v) any Subsidiary Insurance Company shall fail for any quarterly
fiscal period to earn profits as calculated in accordance with Statutory
Accounting Practices required or permitted by the applicable insurance
regulatory authority; provided, however, that this condition shall not
be breached unless at such time such Subsidiary Insurance Company shall
have failed to earn profits for the prior twelve month period (including
such quarterly fiscal period).
then, (A) if such event is a Termination Event described in paragraph (e)
above affecting or in any way relating to the Seller, automatically the
commitment of the Buyer to purchase Eligible Receivables hereunder shall
thereupon terminate without notice of any kind, which is hereby waived by the
<PAGE>
Seller and (B) if such event is any other Termination Event, the Buyer may,
by notice to the Seller terminate the Buyer's commitment to purchase
Undivided Interests and Additions hereunder; provided, however, if the Buyer
is prevented from giving such notice by any applicable law or court order,
such termination of the Buyer's commitment hereunder shall be automatic as
provided in clause (A) above.
ARTICLE VIII
MISCELLANEOUS
8.1 FURTHER ASSURANCES. The Seller agrees, from time to time, to do
and perform any and all acts and to execute any and all further instruments
required or reasonably requested by the Buyer more fully to effect the
purposes of this Agreement and the sales of the Eligible Receivables
hereunder, including, without limitation, the execution of any financing
statements or continuation statements relating to Receivables for filing
under the provisions of the Uniform Commercial Code of any applicable
jurisdiction.
8.2 PAYMENTS. Each payment to be made by either the Buyer or the
Seller hereunder shall be made on the required payment date in lawful money
of the United States and in immediately available funds and, in the case of
payments by the Seller, at the office of ANB located at 33 North LaSalle
Street, Chicago, Illinois 60690.
8.3 COSTS AND EXPENSES. The Seller agrees to pay all reasonable out-
of-pocket costs and expenses of the Buyer (including any expenses incurred in
connection with computer monitoring and related services and fees and
disbursements of the Buyer's counsel) in connection with (a) the preparation,
execution, delivery and administration of this Agreement, the Consent and
Agreement, any Financing Document and any other agreements contemplated
hereby or thereby, (b) the sale of Undivided Interests hereunder, (c) the
perfection as against all third parties whatsoever of the Buyer's right,
title and interest in, to and under the Receivables, (d) the enforcement by
the Buyer of the obligations and liabilities of the Seller under this
Agreement, the Consent and Agreement or any Financing Document and (e) the
maintenance by the Buyer of, and the obligations of the Buyer in connection
with, any bank accounts referred to in subsection 3.1(b) and the Seller
agrees to pay all out-of-pocket costs and expenses of the Buyer (including,
without limitation, the fees and disbursements of the Buyer's counsel) in
connection with the enforcement by the Buyer of its rights against the Seller
under this Agreement, the Consent and Agreement and any Financing Document.
In addition, the Seller agrees to indemnify the Buyer and the Buyer's
officers, directors, employees, agents and shareholders (collectively, the
"Indemnified Parties") from and against any and all other liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses or disbursements of any kind or nature whatsoever (i) which may at
any time be imposed on, incurred by or asserted against the Indemnified
Parties in any way relating to or arising out of this Agreement or the
transactions contemplated hereby or by the Financing Documents or by the
issuance of the Notes by the Buyer or any action taken or omitted by the
Indemnified Parties under or in connection with any of the foregoing (all
such other liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses and disbursements being herein called
"Indemnified Liabilities") and (ii) which would not have been imposed on,
incurred by or asserted against the Indemnified Parties but for its having
entered into this Agreement, provided, however, that the Seller shall in no
<PAGE>
event be liable to the Indemnified Parties for any Indemnified Liabilities
resulting from the gross negligence or willful misconduct of the Indemnified
Parties or Indemnified Liabilities relating to or resulting from an employee
benefit plan of the Indemnified Parties covered by the Employee Retirement
Income Security Act of 1974, as amended, provided, further, that nothing in
this Section 8.3 shall be deemed to constitute a guarantee of collection of
the Receivables. The agreements in the two preceding sentences shall survive
the termination of this Agreement.
8.4 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE DOMESTIC LAWS OF THE STATE OF ILLINOIS, WITHOUT GIVING
EFFECT TO ANY CHOICE OF LAW OR CONFLICT OF LAW PROVISION OR RULE (WHETHER OF
THE STATE OF ILLINOIS OR ANY OTHER JURISDICTION) THAT WOULD CAUSE THE
APPLICATION OF THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF ILLINOIS.
8.5 NO WAIVER; CUMULATIVE REMEDIES. No failure to exercise and no
delay in exercising, on the part of the Buyer, 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. The rights, remedies, powers and
privileges herein provided are cumulative and not exhaustive of any rights,
remedies, powers and privileges provided by law.
8.6 AMENDMENTS. This Agreement may not be modified, amended, waived,
supplemented or, except as provided in Sections 4.2 or 7.1, terminated except
pursuant to a written instrument executed by the Seller and the Buyer.
8.7 SEVERABILITY. If any provision hereof is void or unenforceable in
any jurisdiction, such voiding or unenforceability shall not affect the
validity or enforceability of (i) such provision in any other jurisdiction or
(ii) any other provision hereof in such or any other jurisdiction.
8.8 NOTICES. All notices and other communications provided for
hereunder shall be in writing and, if to the Buyer, mailed, delivered, faxed
or transmitted to it at National Funding Corporation, Box 8841, Second Floor,
900 Market Street, Wilmington, Delaware 19801 (with a copy to Banc One
Capital Corporation, 10 West Broad Street, Suite 400, Columbus, Ohio 43215,
Attention: Samuel J. Butler, and to American National Bank and Trust Company
of Chicago, 33 North LaSalle Street, Chicago, Illinois 60690, Attention:
Arthur W. Murray and to each "Participant" (as such term is defined in the
Reimbursement Agreement) at the addresses provided for in Schedule I to the
Reimbursement Agreement); or if to the Seller, mailed, delivered, faxed or
transmitted to it at Design Benefit Plans, Inc., 1750 East Golf Road, Suite
450, Schaumburg, Illinois 60173, Attention: General Counsel; or as to such
party at such other address or fax number as shall be designated by such
party in a written notice to the other parties hereto. Unless otherwise
expressly provided herein, each such notice shall be deemed to have been
given or made when delivered by hand, or three days after depositing in the
mail, first class postage prepaid, or, in the case of telecopy notice, upon
confirmation by the sender of receipt, or in the case of overnight courier
delivery, one day following deposit with reputable overnight courier for next
business morning delivery, or in the case of telegraphic notice, when
delivered to the telegraph company, or, in the case of telex notice, when
sent answerback received. Any communication with respect to a change of
address shall be deemed to be given or made when received by the party to
whom such communication was sent.
<PAGE>
8.9 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
inure to the benefit of the Seller and the Buyer and their respective
successors and assigns, except that the Seller may not assign or transfer any
of its rights or obligations under this Agreement without the prior written
consent of the Buyer and the Buyer may not assign or transfer any of its
rights or obligations under this Agreement except as contemplated by the
Buyer Security Agreement.
8.10 COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by different parties hereto in separate counterparts, each
of which when so executed shall be deemed to be an original, and all of which
taken together shall constitute one and the same agreement.
8.11 SUBMISSION TO JURISDICTION. The Buyer and the Seller hereby
irrevocably consent and agree that any legal action, suit or proceeding
arising out of or in any way connected with this Agreement may be instituted
or brought by the Buyer or the Seller in the courts of the State of Illinois
or Cook County, Illinois, or in the United States Courts for the Northern
District of Illinois, as the Buyer or the Seller may elect, and by execution
and delivery of this Agreement, the Buyer and the Seller hereby irrevocably
accept and submit to, for themselves and in respect of their property,
generally and unconditionally, the non-exclusive jurisdiction of any such
court, and to all proceedings in such courts. The Buyer and the Seller
irrevocably consent to service of any summons and/or legal process by
registered or certified United States air mail, postage prepaid, to the Buyer
or the Seller at the addresses set forth below, such method of service to
constitute, in every respect, sufficient and effective service of process in
any legal action or proceeding. Nothing in this Agreement shall affect the
right to service of process in any other manner permitted by law or limit the
right of the Buyer or the Seller to bring actions, suits or proceedings in
the court of any other jurisdiction. The Buyer and the Seller further agree
that final judgment against either one of them in any such legal action, suit
or proceeding shall be conclusive and may be enforced in any other
jurisdiction, within or outside the United States of America, by suit on the
judgment, a certified or exemplified copy of which shall be conclusive
evidence of the fact and the amount of the liability.
8.12 WAIVER OF JURY TRIAL. The Seller and the Buyer each waive all
right to trial by jury in any action or proceeding arising out of or relating
to any of the transactions contemplated by this Agreement.
8.13 ENTIRE AGREEMENT; AMENDMENT AND RESTATEMENT. This Agreement, and
the Related Agreements and the agreements, documents and instruments executed
in connection herewith and therewith, constitute the entire agreement between
the Seller and the Buyer with respect to the subject matter herein. This
Agreement amends, supersedes, and restates in its entirety the Amended and
Restated Receivables Purchase Agreement, dated as of October 1, 1992, by and
between the Seller and the Buyer, as amended (the "Prior Purchase
Agreement"); provided that (i) the Buyer shall retain all of its right, title
and interest in and to the Undivided Interest (as defined in the Prior
Purchase Agreement) outstanding on the date hereof and (ii) all of the
Seller's liabilities and obligations under the Prior Purchase Agreement shall
remain outstanding and be enforceable under the terms of this Agreement and
the Related Agreements until satisfied in full.
* * * * *
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized, all as of
the day and year first above written.
<PAGE>
DESIGN BENEFIT PLANS, INC.,
as Seller
By:________________________________________
Title: Executive Vice President
NATIONAL FUNDING CORPORATION, as Buyer
By:________________________________________
Title: Vice President
<PAGE>
EXHIBIT 10(q)
CONSENT AND AGREEMENT
CONSENT AND AGREEMENT, dated as of October 1, 1994 among DESIGN BENEFIT
PLANS, INC., an Illinois corporation (the "Seller"), PIONEER FINANCIAL
SERVICES, INC., a Delaware corporation ("Financial Services"), AMERICAN
NATIONAL BANK AND TRUST COMPANY OF CHICAGO, as the letter of credit issuer
("L/C Bank"), and NATIONAL FUNDING CORPORATION, a Delaware corporation (the
"Buyer").
W I T N E S S E T H:
WHEREAS, the Buyer proposes to issue its Floating Rate Option Notes, Series
1994-A, having an approximate maturity of 20 years from their date of
issuance (the "Notes") and to use the proceeds of the issuance of the Notes
(i) to satisfy the Buyer's obligations arising under the Reimbursement
Agreement, dated as of October 1, 1992, in connection with the redemption of
the Buyer's outstanding Floating Rate Option Notes, Series 1992-A, and (ii)
to purchase additional ownership interests in Eligible Receivables (as
defined in the Purchase Agreement) of the Seller from time to time pursuant
to a Second Amended and Restated Receivables Purchase Agreement, dated as of
the date hereof, between the Buyer and the Seller (as the same may from time
to time be amended, supplemented or otherwise modified, the "Purchase
Agreement"):
WHEREAS, the Buyer has requested L/C Bank to issue its irrevocable direct
pay letter of credit (the "Letter of Credit") to support the payment of
principal and interest on the Notes;
WHEREAS, the Buyer has entered into a Reimbursement Agreement, dated as of
the date hereof (as the same may from time to time be amended, supplemented
or otherwise modified, the "Reimbursement Agreement"), with L/C Bank,
pursuant to which the Buyer has agreed to pay certain amounts to L/C Bank in
consideration for the issuance of the Letter of Credit, all as more fully set
forth in the Reimbursement Agreement;
WHEREAS, the Buyer has entered into the Pledge and Security Agreement,
dated as of the date hereof, with L/C Bank (as the same may from time to time
be amended, supplemented or otherwise modified, the "Buyer Security
Agreement"), pursuant to which the Buyer proposes to grant to L/C Bank a
security interest in all of the Buyer's right, title and interest in, to and
under, the Purchase Agreement and the Receivables (as defined in the Purchase
Agreement) and the other collateral described therein (collectively, the
"Buyer Collateral"); and
WHEREAS, the Seller is an indirect subsidiary of Financial Services;
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt of which is hereby acknowledged, the
parties hereto hereby agree as follows:
I. AGREEMENTS OF THE SELLER.
1. The Seller hereby acknowledges receipt of an executed copy of, and
hereby accepts and consents to all of the terms of, the Reimbursement
Agreement and the Buyer Security Agreement and the assignment to L/C Bank of
the Buyer Collateral.
<PAGE>
2. The Seller hereby agrees that all representations, warranties,
indemnities and agreements made by the Seller in the Purchase Agreement shall
inure to the benefit of L/C Bank to the same extent as if L/C Bank had been a
party thereto, and that L/C Bank shall have, and shall be entitled to
exercise, in its own name, all rights of the "Buyer" under the Purchase
Agreement in the same manner as if L/C Bank had originally been named "Buyer"
therein.
3. The Seller hereby accepts and consents to the assignment by the Buyer
of all its right, title and interest in, to and under each of the Application
Account and the Finance Charge Account to L/C Bank, and hereby accepts and
consents to the system of collections and applications of collections on
account of the Receivables (as defined in the Purchase Agreement) set forth
in the Buyer Security Agreement and agrees to give to L/C Bank all
certificates, notices (including written notice of any Termination Event),
writings, requests and reports (financial or otherwise) required to be given
to the Buyer under the Purchase Agreement.
4. The Seller hereby agrees that, upon the receipt of notice from L/C
Bank that an Event of Default has occurred and is continuing under the
Reimbursement Agreement, it shall make and/or remit all payments required
under the Purchase Agreement to the Collateral Account or as L/C Bank may
otherwise direct in writing.
5. L/C Bank shall not be liable for any obligations or duties of the
Buyer under the Purchase Agreement, nor shall the Reimbursement Agreement or
the Buyer Security Agreement give rise to any duties or obligations
whatsoever owing to the Seller on the part of L/C Bank.
6. The Seller hereby agrees with L/C Bank that its obligations to make
and/or remit all payments under the Purchase Agreement are absolute and
unconditional and are independent of the performance by the Buyer of any of
its obligations under the Purchase Agreement or the realization by the Seller
of the benefits sought by the transactions contemplated by the Financing
Documents and that it will make all payments (unless the making of any such
payment would violate applicable law) under the Purchase Agreement to the
Application Account and the Finance Charge Account (or to the Collateral
Account following receipt of the notice referred to in paragraph 4 hereof)
regardless of (a) the validity of the organization of the Buyer, the
termination of the existence of the Buyer or the illegality, invalidity or
unenforceability of any of the Financing Documents, (b) any defense, claim,
set-off, recoupment, abatement or other right, existing or future, which the
Seller may have against the Buyer, L/C Bank or any other Person, (c) whether
a lien on or security interest in the Buyer Collateral shall have been
perfected or shall continue to be perfected or whether the Buyer Collateral
shall otherwise be impaired in any manner, (d) any amendment, extension,
supplement, acceleration, surrender, release, waiver, termination or other
modification of the terms or provisions of, or any of its rights, powers or
remedies under, any of the Financing Documents, (e) the impossibility of
performance by the Buyer or any inaccuracy of any representation, warranty or
statement made by or on behalf of the Buyer or any other Person, (f) the
bankruptcy, insolvency, reorganization, liquidation, dissolution, winding-up,
arrangement, composition, readjustment of debt or similar event with respect
to the Buyer, or (g) any other circumstance, whether similar or dissimilar,
which in any manner would constitute a legal, equitable or other excuse for
nonperformance by the Seller. Except as L/C Bank may hereafter otherwise
expressly consent in writing, the payment of all obligations (howsoever
created, arising or evidenced, whether direct or indirect, absolute or
contingent, or now or hereafter existing, or due or to become due; provided,
<PAGE>
however, that for purposes of this paragraph 6 such obligations shall exclude
amounts paid by the Buyer to the Seller as Purchase Price under the Purchase
Agreement in accordance with the terms thereof) of the Buyer to the Seller
(hereinafter collectively called the "Junior Buyer Obligations"), shall be
postponed and subordinated to the payment in full of all obligations
(howsoever created, arising or evidenced, whether direct or indirect,
absolute or contingent, or now or hereafter existing, or due or to become
due), of the Buyer to L/C Bank, whether arising under the Reimbursement
Agreement, the Buyer Security Agreement or otherwise (hereinafter
collectively called the "Senior Buyer Obligations"), including, without
limitation, any and all interest accruing on any of the Senior Buyer
Obligations after the commencement of any bankruptcy or insolvency proceeding
relating to the Buyer, notwithstanding any provision or rule of law which
might restrict the rights of L/C Bank as against the Buyer or anyone else, to
collect such interest, and no payments whatsoever in respect of any Junior
Buyer Obligations shall be made or be retained by the Seller, until the
payment in full of the Senior Buyer Obligations; provided, however, that, so
long as no Termination Event shall have occurred and be continuing under the
Purchase Agreement, the Buyer shall be permitted to pay to the Seller amounts
owing to the Seller under the Purchase Agreement in accordance with the terms
thereof. It is understood and agreed that, notwithstanding the foregoing
agreement by the Seller with L/C Bank to waive all defenses to payment or
remittance of amounts owing by the Seller to the Buyer under the Purchase
Agreement, such waiver shall not, as between the Seller and the Buyer, be
deemed to excuse the obligations the Buyer may have to the Seller under the
Purchase Agreement.
7. The Seller hereby agrees for the benefit of L/C Bank that it will not
institute against, or join any other Person in instituting against, the Buyer
any bankruptcy, reorganization, arrangement, insolvency or liquidation
proceedings, or other proceedings under any Federal or state bankruptcy or
similar law.
II. AGREEMENTS OF FINANCIAL SERVICES.
1. Financial Services hereby acknowledges receipt of an executed copy of,
and consents to all of the terms of, the Purchase Agreement, the
Reimbursement Agreement and the Buyer Security Agreement, the sale of the
Undivided Interest in the Seller's Portfolio of Eligible Receivables (as
defined in the Purchase Agreement) and the assignment by the Buyer of the
Buyer Collateral and all its rights under the Purchase Agreement and the Sold
Receivables pursuant to the Buyer Security Agreement.
2. (a) Financial Services hereby unconditionally and irrevocably
undertakes and agrees with and for the benefit of the Buyer and L/C Bank to
cause the due and punctual performance and observance by the Seller of all of
the terms, covenants, conditions, agreements and undertakings on the part of
the Seller to be performed or observed under the Purchase Agreement or any
document delivered in connection with the Purchase Agreement in accordance
with the terms thereof, including, without limitation, any agreement of the
Seller to pay any money under the Purchase Agreement or any such other
document (all such terms, covenants, conditions, agreements and undertakings
on the part of the Seller to be performed or observed under the Purchase
Agreement being collectively called the "Seller Obligations"). In the event
that the Seller shall fail in any manner whatsoever to perform or observe any
of the Seller Obligations when the same shall be required to be performed or
observed under the Purchase Agreement or any such other document delivered in
connection therewith, then Financial Services will itself duly and punctually
<PAGE>
perform or observe, or cause to be duly and punctually performed or observed,
such Seller Obligation, and it shall not be a condition to the accrual of the
obligation of Financial Services hereunder to perform or observe any Seller
Obligation (or to cause the same to be performed or observed) that the Buyer
or L/C Bank shall have first made any request of or demand upon or given any
notice to Financial Services or to the Seller or have instituted any action
or proceeding against Financial Services or the Seller in respect thereof.
(b) The Buyer or L/C Bank may proceed to enforce the obligations of
Financial Services under this paragraph 2 without first pursuing or
exhausting any right or remedy which the Buyer or L/C Bank may have against
the Seller or any other Person.
(c) Financial Services will perform its obligations under this
Agreement regardless of any law, rule, regulation or order now or hereafter
in effect in any jurisdiction affecting any of the terms of the Purchase
Agreement or any document delivered in connection with the Purchase
Agreement or the rights of the Buyer or L/C Bank with respect thereto. The
obligations of Financial Services under this Agreement shall be absolute
and unconditional irrespective of, among other things:
(i) any lack of validity or enforceability of the Purchase
Agreement or any document or any other agreement or instrument
relating thereto:
(ii) any change in the time, manner or place of performance
of, or in any other term of, all or any of the Seller
Obligations, or any other amendment or waiver of or any consent
to departure from the Purchase Agreement or any document or any
other agreement or instrument relating thereto;
(iii) any exchange, release or failure to transfer title
to the Receivables, or any release or amendment or waiver of or
consent to departure from any other guaranty, for all or any of the
Seller Obligations;
(iv) any failure to obtain any authorization or approval
from or other action by, or to notify or file with, any
governmental authority or regulatory body required in connection
with the performance of such obligations by Financial Services;
(v) any impossibility or impracticality of performance,
illegality, force majeure, any act of any government, or any other
circumstance which might constitute a defense available to, or a
discharge of, the Seller or Financial Services, or any other
circumstance, event or happening whatsoever, whether foreseen or
unforeseen and whether similar or dissimilar to anything referred
to above in this paragraph (v); or
(vi) any disposition of the stock of the Seller.
(d) Financial Services hereby waives promptness, diligence, notice of
acceptance and any other notice with respect to any of the Seller
Obligations and this Agreement, the Purchase Agreement and any other
document related thereto and any requirement that the Buyer or L/C Bank
exhaust any right or take any action against the Seller or any other
Person.
<PAGE>
(e) Notwithstanding anything to the contrary in this Agreement,
Financial Services hereby:
(i) expressly and irrevocably waives, to the fullest extent
possible, on behalf of itself and its successors and assigns
(including any surety) and any other Person, any and all rights
at law or in equity to subrogation, to reimbursement, to
exoneration, to contribution, to indemnification, to set off or
to any other rights that could accrue to a surety against a
principal, to a guarantor against a maker or obligor, to an
accommodation party against the party accommodated, to a holder
or transferee against a maker, or to the holder of a claim
against any Person and which Financial Services may have or
hereafter acquire against Seller or any Person in connection with
or as a result of Financial Services' execution, delivery and/or
performance of this Agreement or any other document related
hereto to which Financial Services is a party or otherwise;
(ii) expressly and irrevocably waives any "claim" (as such
term is defined in the United States Bankruptcy Code) of any kind
against Seller, and further agrees that it shall not have or
assert any such rights against any Person (including any surety),
either directly or as an attempted set off to any action
commenced against Financial Services by the L/C Bank or any other
Person;
(iii) acknowledges and agrees (1) that this waiver is
intended to benefit the L/C Bank and shall not limit or otherwise
affect Financial Services' liability hereunder or the
enforceability of this Agreement, and (2) that the L/C Bank and
its successors and assigns are intended third party beneficiaries
of the waivers and agreements set forth in this subparagraph (e)
and its rights under this subparagraph (e) shall survive payment
in full of its obligations hereunder.
3. Financial Services agrees with L/C Bank that, so long as the Buyer
Obligations remain outstanding, it shall furnish to L/C Bank:
(a) as soon as available and in any event within 105 days after the
end of each fiscal year of each of its Subsidiary insurance companies
(each, an "Insurance Subsidiary") (commencing with the first such fiscal
year ending on or after the date hereof) an executed copy of the Annual
Statement of such Insurance Subsidiary (in each case prepared in accordance
with statutory accounting practices required or permitted by the applicable
insurance regulatory authority) for such year and as filed with the
Insurance Department of the applicable State, together with the opinion
thereon of a senior financial officer of such Insurance Subsidiary stating
that said Annual Statement presents the financial condition of such
Insurance Subsidiary for such fiscal year in accordance with statutory
accounting practices required or permitted by the applicable insurance
regulatory authority and as soon as available and in any event within 270
days of the end of each fiscal year of each Insurance Subsidiary
(commencing with the first such fiscal year ending on the date hereof) a
statement of Ernst & Young (or other independent certified public
accountants of recognized national standing) confirming the certification
made in the opinion delivered pursuant to this subparagraph (a); and
(b) as soon as available and in any event within 50 days after the
end of each quarterly fiscal period of each fiscal year of each Insurance
<PAGE>
Subsidiary (commencing with the first such quarterly fiscal period ending
on or after the date hereof), quarterly financial statements of such
Insurance Subsidiary (prepared in accordance with Statutory Accounting
Principles) for such fiscal period, together with the opinion thereon of a
senior financial officer of such Insurance Subsidiary stating that such
financial statements fairly present the financial condition of such
Insurance Subsidiary for such fiscal quarter in accordance with Statutory
Accounting Principles.
III. MISCELLANEOUS.
1. Unless otherwise defined herein, all capitalized terms used herein
that are defined in the Reimbursement Agreement or the Purchase Agreement
shall have the respective meanings assigned to such terms in such Agreements.
2. This Consent and Agreement shall be binding upon the Seller and
Financial Services and shall inure to the benefit of the Buyer and L/C Bank
and be enforceable by the Buyer, and L/C Bank and their respective successors
and assigns. The obligations and liabilities of the Seller and Financial
Services hereunder shall survive the termination of the Financing Documents
and shall remain in full force and effect until the Obligations (as defined
in the Buyer Security Agreement) are satisfied and paid in full. No failure,
delay, forbearance or indulgence on the part of the Buyer or L/C Bank in
exercising any right, power to privilege hereunder or under any Financing
Document shall operate as a waiver thereof, nor as an acquiescence in any
breach, nor shall any single or partial exercise of any right, power or
remedy hereunder or under any Financing Document preclude any other or
further exercise thereof or the exercise of any other right, power or
privilege. All rights, powers and remedies of the Buyer and L/C Bank
hereunder and under the Financing Documents are cumulative and may be
enforced concurrently and from time to time and are not exclusive of any
other rights, powers or remedies provided by law or otherwise. Any provision
of this Consent and Agreement which is prohibited or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in
any other jurisdiction.
3. This Agreement shall be governed by and construed in accordance with
the domestic laws of the State of Illinois, without giving effect to any
choice of law or conflict of law provision or rule (whether of the State of
Illinois or any other jurisdiction) that would cause the application of the
laws of any jurisdiction other than the State of Illinois.
4. The provisions of this Agreement which are for the benefit of the
Buyer are also intended to be for the benefit of L/C Bank, and L/C Bank
shall be deemed to be a third party beneficiary with respect to such
provisions, entitled to enforce such provisions directly and in its own name.
5. This Consent and Agreement has been duly authorized by all necessary
corporate action on the part of the Seller and Financial Services, does not
require any stockholder approval and does not conflict with or result in a
breach of the terms, conditions or provisions of, or constitute a default
under, or result in the violation of, any Requirement of Law or Contractual
Obligation, to which the Seller or Financial Services in subject or by which
their respective properties may be bound. This Consent and Agreement has
been duly executed and delivered by the Seller and Financial Services and
<PAGE>
constitutes the valid and binding obligation of each such party enforceable
against it in accordance with its terms.
6. The Buyer, the Seller, Financial Services and L/C Bank may, from time
to time enter into written amendments, supplements or modifications hereto
for the purpose of adding any provisions to this Consent and Agreement or
changing in any manner the rights of the parties hereunder, and L/C Bank may
execute and deliver to the Seller and Financial Services written instruments
waiving, on such terms and conditions as may be specified in such
instruments, any of the requirements of this Consent and Agreement. Any such
waiver and any such amendment, supplement or modification shall apply equally
to each of the parties hereto and shall be binding upon the Seller, Financial
Services, the Buyer and L/C Bank. In the case of any waiver, the Seller, L/C
Bank and the Buyer shall be restored to their former position and rights
hereunder.
7. This Consent and Agreement may be executed by one or more of the
parties to this Consent and Agreement on any number of separate counterparts
and all of said counterparts taken together shall be deemed to constitute one
and the same instrument. A set of the copies of this Consent and Agreement
signed by all the parties shall be lodged with the Seller and L/C Bank.
8. The Seller and Financial Services agree that they will permit
representatives of L/C Bank, at its own expense, to visit and inspect their
respective properties and examine and make abstracts or copies from any of
the books and records relating to the transactions contemplated by the
Purchase Agreement at any reasonable time and as often as may reasonably
desired.
9. L/C Bank and the Buyer hereby agree that a request by the Seller
pursuant to subsection 4.2(b) of the Purchase Agreement to extend the
Purchase Termination Date then in effect for an additional one-year period
shall, if a copy of such request is provided to L/C Bank, also be deemed to
constitute a request by the Buyer under subsection 2.14 of the Reimbursement
Agreement to extend the Expiry Date for an additional one-year period.
10. The Seller and Financial Services confirm and agree that they do not
have any legal, equitable or beneficial interest in the Application Account,
the Finance Charge Account or the Collateral Account.
11. In furtherance of the agreements contained herein, the Seller and
Financial Services agree to take such further actions and execute such
further documents, instruments and agreements as may be necessary to effect
the purpose of this Consent and Agreement.
12. The Seller and Financial Services (and their respective successors and
assigns) each (a) agrees that any claim brought by any party or successor
thereto arising out of this Agreement or any related documents shall be
subject to the non-exclusive jurisdiction of the courts of the State of
Illinois or the United States District Court located in the City of Chicago,
and Appellate Courts therefrom (and each of the parties hereto irrevocably
submits, for itself and its property, to such jurisdiction) and
(b) irrevocably waives any objection it may have at any time to the laying of
venue of any suit, action or proceeding arising out of or relating to this
Agreement or any related document brought in any such court, irrevocably
waives any claim that any such suit, action or proceeding brought in any such
court has been brought in an inconvenient forum and further irrevocably
waives the right to object, with respect to such claim, suit, action or
proceeding brought in any such court, that such court does not have
<PAGE>
jurisdiction over it. For the purpose of proceedings in the Courts of the
State of Illinois and the United States Courts for the Northern District of
Illinois, the Seller and Financial Services hereby irrevocably designate CT
Corporation Systems as their respective agents, and in the event that such
agent or any successor shall cease to represent them, they shall promptly and
irrevocably designate a successor and notify L/C Bank thereof, to accept on
their behalf service of any and all process or other documents which may be
served in any action or proceeding in any of such court and further agree
that (1) service upon such agent shall constitute valid and effect service or
any judgment rendered in any action or proceeding based thereon and (2) that
service of any and all such process or other documents on the Seller or
Financial Services, as the case may be, may also be effected by registered
mail to its address set forth below its signature hereon.
13. Each of the Seller, Financial Services, the Buyer and L/C Bank (and
their respective successors and assigns) waive all right to trial by jury in
any action or proceeding arising out of this Agreement, any related documents
or relating to any of the transactions contemplated by this Agreement.
14. This Agreement shall continue to be effective or be reinstated, as the
case may be, if at any time any payment by the Seller under the Purchase
Agreement or any document delivered in connection with the Purchase Agreement
is rescinded or must otherwise be returned by the Buyer or L/C Bank upon the
insolvency, bankruptcy or reorganization of the Seller or otherwise, all as
though such payment had not been made. The obligations of Financial Services
under this Agreement shall not be subject to reduction, termination or other
impairment by reason of any set-off, recoupment, counterclaim or defense or
for any other reason. The obligations of Financial Services under this
Agreement shall not be discharged except by performance as herein provided.
* * * * *
IN WITNESS WHEREOF, the parties hereto have caused this Consent and
Agreement to be duly executed by their duly authorized officers as of the
date first above written.
DESIGN BENEFIT PLANS, INC.
By: __________________________________________
Title: Executive Vice President
Address: 1750 East Golf Road
Suite 450
Schaumburg, Illinois 60173
PIONEER FINANCIAL SERVICES, INC.
By: _________________________________________
Title: Vice President
Address: 1750 East Golf Road
Suite 450
Schaumburg, Illinois 60173
NATIONAL FUNDING CORPORATION
<PAGE>
By: _________________________________________
Title: Vice President
Address: Box 8841, Second Floor
900 Market Street
Wilmington, Delaware 19801
AMERICAN NATIONAL BANK AND
TRUST COMPANY OF CHICAGO
By: _________________________________________
Title: Vice President
Address: 33 North LaSalle Street
Chicago, Illinois 60690
<PAGE>
EXHIBIT 11
PIONEER FINANCIAL SERVICES, INC.
STATEMENT OF COMPUTATION OF PER SHARE
NET INCOME OR LOSS
For the Year Ended December 31
1994 1993 1992
---------- ---------- ----------
Net Income (loss) $ 17,149,000 $ 12,145,000 $(16,959,000)
Less Dividends on
Preferred Stock (1,904,000) (2,021,000) (2,039,000)
------------- ------------- -------------
Primary Basis-Net Income (loss) $ 15,245,000 $ 10,124,000 $(18,998,000)
============= ============ ============
Fully Diluted Basis-
Net Income (loss)** $ 20,145,000 $ 13,507,000 $(16,959,000)
============= ============ ============
Average shares outstanding 6,221,216 6,546,719 6,659,657
Common Stock equivalents
from dilutive stock
options, based on the
treasury stock method
using average market
price 237,847 176,883 -
------------- ------------- -------------
TOTAL-PRIMARY BASIS 6,459,063 6,723,602 6,659,657
Additional shares assuming
conversion of Preferred
Stock 1,387,680 1,515,200 1,535,360
Additional shares assuming
conversion of Subordinated
Debentures 4,887,404 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 12,734,147 10,731,194 8,195,017
============= ============= =============
Net income (loss) per share-
Primary $ 2.36 $ 1.51 $(2.85)
======== ======== ========
Net income (loss) per share-
Fully Diluted $ 1.58 $ 1.26 $(2.85)*
======== ======== ========
<PAGE>
* In 1992 fully diluted net loss per share is equivalent to primary net loss
per share due to the fully diluted computation being anti-dilutive for the
period.
** Fully diluted net income per share was calculated after adding tax
effected interest on Subordinated Debentures of $2,997,000 and $1,362,000 for
the years ended December 31, 1994 and 1993, respectively.
<PAGE>
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. Design Securities Corporation formerly Delaware
First Pioneer Equity Corporation
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. National Health Services, Inc. Wisconsin
19. Manhattan National Life Insurance Company North Dakota
20. United Group Holdings of Delaware, Inc. Delaware
21. Advantage Financial Systems, Inc. Delaware
<PAGE>
22. NHS Coordinated Care of Texas, Inc. formerly
American Managed Care of Texas, Inc. Texas
23. NHS Coordinated Care, Inc. Nevada
24. Continental Life & Accident Company Iowa
25. Continental Marketing Corporation Idaho
26. Healthcare Review Corporation Kentucky
<PAGE>
EXHIBIT 23
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration statement
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 22, 1995, with respect to the consolidated
financial statements of Pioneer Financial Services, Inc. and subsidiaries
included in the Annual Report (Form 10-K) for the year ended December 31,
1994.
ERNST & YOUNG LLP
Chicago, Illinois
March 22, 1995
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains annual summary financial information extracted from
Pioneer Financial Services, Inc. 1994 Annual Form 10-K and is qualified in its
entirety by reference to such form 10-K filing.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<DEBT-HELD-FOR-SALE> 218,748
<DEBT-CARRYING-VALUE> 378,650
<DEBT-MARKET-VALUE> 338,540
<EQUITIES> 15,440
<MORTGAGE> 1,806
<REAL-ESTATE> 16,959
<TOTAL-INVEST> 723,837
<CASH> 8,612
<RECOVER-REINSURE> 4,658
<DEFERRED-ACQUISITION> 225,618
<TOTAL-ASSETS> 1,075,700
<POLICY-LOSSES> 620,562
<UNEARNED-PREMIUMS> 76,266
<POLICY-OTHER> 155,373
<POLICY-HOLDER-FUNDS> 16,407
<NOTES-PAYABLE> 80,040<F1>
<COMMON> 6,996<F2>
0
21,682<F3>
<OTHER-SE> 61,332<F4>
<TOTAL-LIABILITY-AND-EQUITY> 1,075,700
704,109
<INVESTMENT-INCOME> 42,786
<INVESTMENT-GAINS> (383)
<OTHER-INCOME> 27,643
<BENEFITS> 450,196
<UNDERWRITING-AMORTIZATION> 100,073
<UNDERWRITING-OTHER> 197,864
<INCOME-PRETAX> 26,022
<INCOME-TAX> 8,873
<INCOME-CONTINUING> 17,149
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,149
<EPS-PRIMARY> 2.36
<EPS-DILUTED> 1.58
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>Includes short-term and long-term borrowings and convertible subordinated
documents.
<F2>Common stock at par value.
<F3>Redeemable preferred stock at par value
<F4>Includes additional paid in capital and retained earnings less unrealized
depreciation of securities and treasury stock.
</FN>
</TABLE>
