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, 1995
[ ] 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 (847) 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 7, 1996 (based upon an estimate that 85% 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 $136,912,779.
The number of shares of the registrant's common stock, $1.00 par value
per share, outstanding as of March 7, 1996 was 10,112,062.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for the annual
meeting of stockholders to be held May 23, 1996 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 (Section 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. [ ]
ITEM 1. BUSINESS
Pioneer Financial Services, Inc. (the Company) underwrites and markets
health insurance, life insurance and annuities and provides medical
utilization management services throughout the United States. In the nine
years since it became public, the Company's total revenue has grown from
$75.2 million in 1986 to $800.1 million in 1995; total assets have increased
from $165.0 million at December 31, 1986 to over $1.5 billion at December 31,
1995; and stockholders' equity has increased from $33.5 million at December
31, 1986 to $144.6 million at December 31, 1995. The Company sells its
products and services through four marketing divisions: Senior Health and
Life Division, Group Medical Division, Life Insurance Division and Medical
Utilization Management Division.
OPERATIONS
Senior Health and Life Division. The Senior Health and Life Division
markets a wide range of specialty health insurance and life insurance and
annuities for individuals age 65 and older. Products which are underwritten
by this division include Medicare supplement, long-term care, home health
care and specialty health. In addition, this division markets cash burial
life policies and annuities which are underwritten by the Company's Life
Insurance Division. The Company's Medicare supplement policies provide
coverage for many of the expenses which the federal Medicare program does not
fully cover and its long-term care and home health care policies provide
coverage, within various prescribed benefit limits, for nursing home and in-
home care. During 1995, the number of senior health insurance policies
issued by the Company increased 21% over 1994, to over 48,000 policies.
Additionally, the number of senior life insurance policies issued by the
Company increased 137% in 1995 compared to 1994, to over 35,000 policies.
The Company is the fourth largest issuer of individual Medicare
supplement insurance in the nation, excluding Blue Cross and Blue Shield-
related entities, based on direct premiums earned. The Company sells
products designed for senior citizens through a distribution network which
has grown from approximately 15,000 agents at the end of 1994 to nearly
22,000 agents at the end of 1995. This growth was primarily the result of
the formation, in mid-1995, of Markman International, a 50/50 joint venture
with Markman Company, which, prior to the joint venture, had established
itself as a leading independent marketer of long-term care policies. Markman
International serves as the national marketing and distribution arm of the
Senior Health and Life Division. Future revenue growth in this division is
expected to be generated in part from the increased number of agents and
increased sales of Medicare supplement, long-term care and home health care
policies.
Group Medical Division. The Group Medical Division underwrites and
markets small group and individual hospital and medical policies, primarily
to self-employed individuals and small business owners. In 1995,
approximately 82% of this division's business was sold through a sales force
of approximately 1,700 career agents and the remaining 18% was sold through a
brokerage system of 6,000 independent agents. This division uses the
services provided by the Medical Utilization Management Division,
unaffiliated preferred provider organizations ("PPOs") and other managed care
operations to help control claims costs. In 1995, approximately 70% of
hospital stays covered by policies issued by the Group Medical Division used
PPO facilities, an increase from 32% in 1993 and 54% in 1994. The Group
Medical Division's use of managed care services, provided by both the Medical
Utilization Management Division and unaffiliated companies, resulted in
approximately $69.0 million in claims savings for the Company in 1995, with
most of these savings being passed on to customers in the form of more
competitive premium rates.
Life Insurance Division. The Life Insurance Division underwrites and
markets traditional life (term and whole life), universal life, and interest
sensitive life insurance and annuities targeted primarily to the middle
income market. The Life Insurance Division sells its products through a
nationwide network of brokerage general agents ("BGAs") and managing general
agents ("MGAs") who in turn contract with multiple brokers and general
agents. This division grew significantly when the Company acquired
Connecticut National Life Insurance Company ("CNL") in January 1995. This
division also underwrites, issues and administers the life insurance products
marketed by the Senior Health and Life Division.
Medical Utilization Management Division. The Medical Utilization
Management Division provides health care coordination services to assist in
the management of medical costs for insurance companies, government agencies,
self insured businesses, unions, health maintenance organizations ("HMOs")
and third-party administrators as well as for the Group Medical Division.
Such services include precertification of inpatient and outpatient medical
care, case management, and the development and management of provider
networks. During 1995, approximately 81% of this division's revenues were
derived from services provided to unaffiliated organizations.
Investment Portfolio. The Company has maintained and intends to
continue to maintain a diversified portfolio of medium-term investment-grade
fixed income securities. As of December 31, 1995, 83% of the Company's
invested assets were fixed income securities and the weighted average quality
of the fixed income portfolio was "AA."
STRATEGY
Senior Health and Life Division. The Company believes it has an
opportunity to expand its position as a leading provider of health and life
insurance products to the growing senior market. According to the U.S.
Census Bureau, the age 65 and over population group is estimated to grow by
more than 13% to 35 million by the year 2000 and to over 53 million by 2020.
Currently only 10% of persons age 65 and over own long-term care insurance,
while approximately 43% of such individuals are expected to require the use
of nursing care at least once in their lives. The number of long-term care
policies sold industry-wide has increased at a rate of approximately 27% per
year since 1987, to a total of approximately 3.4 million long-term care
policies sold through December 31, 1994. As such, the Company believes the
demand for long-term care and home health care insurance will increase at a
rate greater than the growth rate of the senior population. The Company
believes the growth of this senior health insurance market could be enhanced
if future government regulation continues to move toward more personal
financial responsibility, with less reliance on government payments, possibly
in the form of additional reductions in Medicare benefits and/or the
establishment of tax deductibility for long-term care insurance premiums.
The Company intends to expand its position in the growing senior
market by increasing the number of agents who sell its senior products, and
by increasing the number of products agents sell to each customer through
cross-selling. Through Markman International, the Company has increased its
agent force by nearly 45% since the end of 1994 and expects further increases
in 1996. In 1995, approximately 2.5% of the Senior Health and Life
Division's Medicare supplement policyholders owned one of the Company's long-
term care or home health care policies. Through increased training of its
agents as to the full range of products offered by the Company and the
development of pre-approved (already underwritten for issue) add-on products
that can easily be coupled with certain existing products, the Company
intends to increase its cross-selling efforts and thereby increase the number
of its products owned by each customer. Additionally, the Company believes
that the market for senior managed care products will grow as health care
expenditures continue to grow. Currently, approximately 10% of Medicare
beneficiaries in the nation participate in HMOs. There are many states with
very low penetration of managed care in the senior market, including states
with a high concentration of Medicare beneficiaries. The Company intends to
take advantage of this opportunity by utilizing its position in the senior
market and its managed care capability to market managed care products to
senior citizens.
Group Medical Division. The Group Medical Division intends to focus
its efforts on increasing administrative efficiency and claims-cost
containment on its existing block of business through, among other things,
increased use of the Medical Utilization Management Division's services,
continued development of medical provider networks and continued migration of
its fee-for-service indemnity health insurance customers to managed care
products. As the regulatory environment changes, the Company will evaluate
growth opportunities in this market.
Life Insurance Division. The Life Insurance Division's strategy is to
expand its distribution channels and products and to continue to lower its
administrative unit costs. The acquisition of CNL in 1995 has given the
Company the opportunity to initiate new distribution strategies, including
consumer-direct sales over the Internet. Also, at year-end 1995, the Company
entered into an agreement with a national marketing organization to market a
new term life insurance product with an income benefit rider. With 25,000
agents nationwide, this marketing organization gives the Company the
potential to increase significantly the sales of the Life Insurance Division.
Medical Utilization Management Division. The Medical Utilization
Management Division intends to grow through cross-selling additional managed
care services to existing clients. In addition, this division is currently
developing and intends to manage PPOs, exclusive provider organizations
("EPOs") and HMOs in selected market areas.
Acquisitions. The Company believes that current trends in the life
and health insurance industry will provide opportunities for continued
acquisitions and consolidations. The Company further believes that its
ability to integrate acquisitions into its existing operations and its
flexibility in developing and marketing new products should enable it to
capitalize on these opportunities.
The Company was organized in Delaware in 1982 as a successor to an
Illinois holding company formed in 1957. The executive offices of the
Company are located at 1750 East Golf Road, Schaumburg, Illinois 60173 and
its telephone number is (847) 995-0400.
PRODUCTS AND SERVICES
The Company markets and underwrites health insurance, life insurance and
annuities and provides medical utilization management services throughout the
United States. The Company sells products and provides its services through
four marketing divisions: Senior Health and Life Division, Group Medical
Division, Life Insurance Division and Medical Utilization Management
Division. The Company's distribution systems for its products have increased
from approximately 12,000 agents in 1986 to nearly 45,000 agents at the end
of 1995.
Senior Health and Life Division
The products marketed by the Senior Health and Life Division include
Medicare supplement, long-term care, home health care, various specialty
health coverages, life insurance and annuities. This division markets these
products to individuals age 65 and older and underwrites and issues all such
products except the life insurance and annuity products which are
underwritten and issued by the Life Insurance Division.
The following table sets forth the earned premiums, losses and loss
adjustment expenses incurred and loss ratios for the Company's senior health
products. Senior health premiums have been impacted by federally mandated
standardized Medicare supplement policies. This standardization began in
1992 and included fixed benefits and reductions in agent commissions,
especially in the case of replacement of an existing Medicare supplement
policy. During this same period, the Company altered its marketing emphasis,
reducing the number of products available for sale in selected states until
new products were developed and priced. The combination of these changes had
the effect of decreasing new sales revenue for these policies.
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993 1992 1991
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Earned premiums (1) $ 217,382 $ 225,604 $ 243,482 $ 264,697 $ 298,653
Benefits (1) 143,226 137,853 154,561 176,149 200,446
Loss ratio 66% 61% 63% 67% 67%
___________________
(1) In the Company's statement of consolidated operations, earned 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.
</TABLE>
In the Senior Health and Life Division, the Company may adjust health
insurance 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 increases can increase policy lapses,
conservation and customer service activities are emphasized. The Senior
Health and Life Division follows a proactive approach involving strict
scrutiny of all health premium rates on a monthly basis, including
comparisons of pricing structure to actual claims experience by product line
and state. This ongoing analysis provides the lead time necessary for the
orderly adjustment of premiums.
Medicare Supplement. Since the inception of the federal Medicare
program in 1966, the Company has offered policies designed to supplement
Medicare benefits and is now the fourth largest issuer of individual Medicare
supplement insurance in the nation, excluding Blue Cross and Blue Shield-
related entities, based on direct premiums earned. Medicare supplement
policies provide coverage for many of the medical expenses which the Medicare
program does not cover, such as deductible and coinsurance costs and
specified losses which exceed the Federal program's maximum benefits.
In 1991, the NAIC defined ten model Medicare supplement policies. In
states which have adopted the NAIC model, only those ten policies can be
sold. In most states, the Company markets eight of the ten model
policies those which the Company believes are most applicable to its target
market. All states have adopted either the NAIC model or similar legislation
which specifically defines policy models. Sales of the Company's Medicare
supplement products increased 20% in 1995 on an annualized premium basis.
The federal government began a test program in 1992, 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. Utilization of specified hospitals, which waive
certain deductibles covered by the Medicare supplement policy, allows the
Company to reduce the premium charged. In 1995, the federal government
expanded the Medicare Select program to all states. Although the market for
this product is just developing, the Company sells Medicare Select policies
in a number of states and has plans to expand sales nationally.
Long-Term Care and Home Health Care. The Senior Health and Life
Division 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, within prescribed
limits. 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. In 1995, the Company developed and introduced a new
series of "Independent Choice" long-term care and home health care plans
which provide greater flexibility of benefit use and include care
coordination features to help lower benefit costs. In 1995, new annualized
sales of the Company's long-term care and home health care products increased
by 288% from $3.4 million to $13.2 million. The Company's strategy is to
cross-sell these products to customers who have already purchased the
Company's Medicare supplement product.
The Company believes that the market for long-term care and home health
care could increase if the federal government were to enact proposed tax
legislation to provide tax deductibility for long-term care insurance
premiums. While these changes have been proposed, the Company cannot predict
if or when they will be enacted. See "--Health Care Reform".
Specialty Health and Other. The Senior Health and Life Division offers
various specialty health products which typically are sold in conjunction
with the Company's principal health products. These policies include
hospital indemnity, private duty nursing and cancer plans. Additionally, the
Company intends to develop and market managed care organizations for seniors
as the demand for such products expands. The Company believes that the
market for senior managed care products will grow as health care costs
continue to grow. Currently approximately 10% of Medicare beneficiaries in
the nation participate in HMOs. There are many states with very low
penetration of managed care in the senior market, including states with a
high concentration of Medicare beneficiaries. The Company intends to take
advantage of this opportunity by utilizing its strong position in the senior
market and its managed care capability to market managed care products to
senior citizens.
Life Insurance and Annuities. The Senior Health and Life Division
markets life insurance and annuities which are issued by the Life Insurance
Division to individuals age 65 and over. In 1994, the Company began selling
smaller face-amount whole life insurance policies specifically designed to
cover final expenses for senior citizens, including funeral expenses and
other expenses that otherwise would be paid by the insured's family. During
1995, sales of these products increased 120% on an annualized premium basis
to $16.8 million from $7.6 million. As part of its cross-selling strategy,
the Company automatically offers a pre-approved (already underwritten for
issue) cash burial life insurance policy with all Medicare supplement
policies issued to customers age 66-79. The Company also offers annuity
products specifically designed for seniors. These products provide an
attractive investment alternative to seniors, offering higher interest rates
than bank savings accounts and certificates of deposit and the ability to
receive monthly payouts during retirement years.
Marketing. The Senior Health and Life Division markets its products and
services primarily to individuals age 65 and older through a distribution
system which, in 1995, grew from approximately 15,000 agents to nearly 22,000
agents, primarily as a result of the formation in mid-1995 of Markman
International, a 50/50 joint venture with Markman Company, which, prior to
the joint venture, had established itself as a leading independent marketer
of long-term care policies. Markman International is the national marketing
and distribution arm of the Senior Health and Life Division. The Company
intends to increase further the number of agents used by the Senior Health
and Life Division in 1996 and to enhance the Company's cross-selling
capabilities through increased agent training and packaging of products. The
agents receive extensive product and marketing information from the Company.
They also have access, through the Company, to lists of prospective customers
turning age 65 in their respective geographic areas and to a direct-mail
lead-generation system. By providing its agents with training, sales
materials, lead-generation programs and a full range of health and life
insurance products designed for senior citizens, the Company intends to
increase both sales to new customers and cross-sales to existing
policyholders. The agents receive commissions on each sale based on the type
of product sold.
Group Medical Division
The Group Medical Division underwrites and markets small group and
individual hospital and medical products, including major hospital and
specialty health insurance policies, individually underwritten and issued.
For 1993, 1994 and 1995, this division produced health insurance premium
revenue of approximately $354.4 million, $435.9 million, and $404.9 million,
respectively. This division also derives marketing commission revenue and
other fee income through marketing insurance and other products of
unaffiliated companies and associations with whom the Company has a marketing
relationship. This division's products and services are targeted primarily
to self-employed individuals and small business owners. The insureds in this
division also become prospects for the Senior Health and Life Division --
when they reach age 65, the Company automatically provides for conversion to
a Medicare supplement policy.
Pre-tax income increased in this division in 1995, as the Company
continued to make improvements in its management of the division's block of
business through close monitoring of claims costs, increased use of medical
provider networks and case management and the implementation of premium rate
adjustments as necessary.
The following table sets forth the earned premiums, losses and loss
adjustment expenses incurred and loss ratios for the Group Medical Division's
products. 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.
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993 1992 1991
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Earned premiums (1) $ 414,160 $ 443,599 $ 375,275 $ 302,881 $ 294,431
Benefits (1) 261,336 279,419 251,955 200,781 176,222
Loss ratio 63% 63% 67% 66% 60%
___________________
(1) In the Company's statement of consolidated operations, earned 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.
</TABLE>
As in the Senior Health and Life Division, the Company may, in the Group
Medical Division, adjust health insurance 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 with the Senior Health and Life
Division, the Group Medical Division follows a proactive approach involving
strict scrutiny of health premium rates on a monthly basis. The matching of
pricing structure with actual claims experience varies by product line and
state. This ongoing analysis provides the lead time necessary for the
orderly adjustment of premiums.
The Group Medical Division intends to focus its efforts on increasing
administrative efficiency and claims-cost containment on its existing block
of business through, among other things, increased use of the Medical
Utilization Management Division's services, continued development of medical
provider networks and continued migration of its fee-for-service indemnity
health insurance customers to managed care products. As the regulatory
environment changes, the Company will evaluate growth opportunities in this
market.
Major Hospital. The Company offers major hospital insurance plans on an
individual basis and on a group trust (multiple employer 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 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
(the "SEA Act"). The SEA 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 SEA
Act, the Company has modified and continues to modify its new products for
sale in those states that have adopted or are adopting the SEA Act or other
health care reforms.
Other. The Group Medical Division also derives revenue through sales of
products of unaffiliated insurance companies and other associations with whom
the Company has a marketing relationship. 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 Group Medical Division 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. This division
also 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.
Marketing. The Group Medical Division markets its products and services
primarily to self-employed individuals and small business owners. In 1995,
approximately 84% of this division's products was sold through a sales force
of approximately 1700 career agents, and the remaining 16% was sold through a
brokerage system of 6,000 independent agents. These agents receive leads
through the Company's telemarketing subsidiary and compensation in the form
of commissions.
The Company's acquisition of Continental Marketing Corporation in
connection with the 1993 acquisition of CLAC added an efficient broker-to-
broker telemarketing distribution system to the Group Medical Division. This
system utilizes experienced sales representatives who contact brokers by
phone to promote the Company's products and provide the brokers with sales
and marketing assistance. The brokers are compensated for their sales
through commissions; the telemarketing representatives receive salaries from
the Company and bonuses based on meeting certain sales objectives.
Life Insurance Division
The Life Insurance Division's products include traditional life (term
and whole life), universal life and interest sensitive insurance and
annuities. Substantially all of the Company's life insurance policies are
individually underwritten and issued. This division's products and services
are targeted primarily to the middle income market. In addition, this
division underwrites, issues and administers the life insurance and annuity
products marketed by the Senior Health and Life Division. This division grew
significantly when the Company acquired CNL in January 1995.
The following table sets forth the breakdown of premiums collected
(including receipts not related to policy charges) among traditional life
policies, interest sensitive and universal life policies and annuities for
the years shown:
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993 1992 1991
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Traditional $ 44,276 $ 32,238 $ 26,353 $ 20,300 $ 17,968
Interest Sensitive and
Universal Life Policies 21,215 17,590 16,300 18,399 20,676
Annuities 19,639 22,807 10,004 6,212 13,479
Total $ 85,130 $ 72,635 $ 52,657 $ 44,911 $ 52,123
</TABLE>
For the fiscal year 1993, premiums collected from the Company's life
insurance products were approximately 24% first year and 76% renewal, the
fiscal year 1994 premiums were approximately 28% first year and 72% renewal,
and for 1995 premiums collected were approximately 32% first year and 68%
renewal.
The Company's gross life insurance in force was as follows at the dates
shown:
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993 1992 1991
(dollars in millions)
<S> <C> <C> <C> <C> <C>
Traditional $ 14,863 $ 10,803 $ 10,320 $ 8,757 $ 7,507
Interest Sensitive and
Universal Life Policies 2,880 1,779 1,503 1,582 1,634
Total $ 17,743 $ 12,582 $ 11,823 $ 10,339 $ 9,141
</TABLE>
Traditional Life. The largest portion of the Life Insurance Division's
business is in term life insurance. The Company specializes in face amounts
of $100,000 to $500,000, sold to middle income families. Marketed under the
name "Super Saver Term," this series features low cost 5-, 10- and 15-year
term life insurance products.
For a number of years, the Company 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.
Approximately 10% of the Company's in-force life insurance could be
categorized as "impaired risk."
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 are not 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 offers single and flexible premium deferred
annuities. 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 period;
periodic payments for a fixed period regardless of the survival of the
annuitant; or lump sum cash payment of the accumulated value. The Company's
annuities typically provide for the crediting of interest at rates set from
time to time by the Company.
Marketing. The Life Insurance Division markets its products primarily
to individuals in middle income levels through a nationwide network of
approximately 100 BGAs and MGAs who in turn contract with approximately
15,000 brokers and general agents. In addition, at the end of 1995, the
Company signed a marketing agreement with a national marketing company with
approximately 25,000 agents to distribute a new term insurance product with
an income benefit rider. The Company's BGAs, MGAs and agents receive
compensation through sales commissions.
Medical Utilization Management Division
The Medical Utilization Management Division provides a number of health
care coordination services to assist in the management of medical costs for
insurance companies, government agencies, self-insured businesses, unions,
HMOs and third party administrators, as well as the Company's Group Medical
Division. The services provided by this division include precertification of
inpatient and outpatient medical care, case management, high-risk maternity
review, long-term care case management and the development and management of
HMOs and PPOs. These services are designed to provide negotiated medical
provider rates along with close review of utilization in order to impact
positively total medical costs without adversely affecting the quality of
care.
The July 1995 purchase of ACMG, an Ohio-based healthcare management
company, increased revenues by $5.2 million in 1995 and provided the Company
with the capacity and expertise to develop and manage PPOs, HMOs and EPOs.
During 1996, the Company currently expects to have a limited number of HMOs
and EPOs operational in selected states where the Company has significant
concentrations of policyholders and the market for managed care is
undeveloped, although no assurance to that effect can be given. These HMOs
and EPOs will be marketed by the Company's Group Medical Division as part of
the Company's strategy to migrate its fee-for-service indemnity insurance
customers to managed care products. In addition, the Company will use a
similar strategy to develop PPOs and HMOs (Medicare Risk Contracts) for the
Senior Health and Life Division.
This division has also provided significant claims expense savings for
the Group Medical Division, realizing claims savings for the Company of over
$22.0 million in 1995 through programs such as utilization review and case
management. These savings were primarily passed on to customers in the form
of more competitive premium rates which the Company believes generally has
the effect of increasing customer retention.
Revenues for this division increased 64% to $17.1 million in 1995,
compared to $10.4 million in 1994, due to increased sales and the July 1995
acquisition of ACMG.
Marketing. This division markets its services to insurance companies,
self-insured employers, unions, third-party administrators, HMOs and PPOs.
Utilization management professionals conduct direct selling activities and
respond to requests for proposals from insurance companies, large employers
and consulting companies.
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 1995 was as follows:
<TABLE>
<CAPTION>
TOTAL PERCENT
(dollars in thousands)
<S> <C> <C>
Texas $ 71,127 9.4%
Florida 67,149 8.9
California 51,935 6.9
Illinois 51,615 6.8
North Carolina 33,617 4.5
New Jersey 24,802 3.3
Ohio 24,072 3.2
Georgia 23,911 3.2
Pennsylvania 23,782 3.1
Mississippi 23,670 3.1
Other (1) 359,427 47.6
Total $755,107 100.0%
(1) Includes 39 other states, the District of Columbia, and certain U.S.
territories and foreign countries, each of which accounts for less than
3% of collected premiums.
</TABLE>
UNDERWRITING
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 and 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 7 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 and contribute to profitability.
ACQUISITIONS
The Company believes that current trends in the life and health insurance
industry will provide opportunities for continued acquisitions and
consolidations. Larger companies are reducing administrative costs by
divesting divisions and blocks of life and health insurance business which do
not fit their overall strategies and are focusing on two or three core
product lines to improve efficiency and gain competitive advantage.
Additionally, smaller, less efficient companies with less capital at their
disposal are experiencing increasing difficulty in remaining competitive;
regulatory requirements add significant costs which may not be able to be
absorbed by smaller companies; capital requirements have increased due to the
imposition of risk-based capital ratios by regulatory agencies; state
healthcare reform programs are squeezing health insurance profit margins; the
costs of necessary information processing systems have increased; and smaller
companies cannot access capital markets to finance additional growth.
The following table summarizes the recent significant acquisitions made by
the Company:
ACQUISITIONS DATE OF TYPE OF BUSINESS
ACQUISITION
Continental Life & August 1993 Small group medical
Accident Company insurance; became part
("CLAC") of the Group Medical
Division.
Healthcare Review August 1993 Health care management
Corporation ("HRC") company; became part of
the Medical Utilization
Management Division.
Connecticut National January 1995 Interest sensitive and
Life Insurance universal life
Company ("CNL") insurance; became part
of the Life Insurance
Division.
Western Fidelity July 1995 Major medical products;
Insurance Company became part of the Group
(block of business) Medical Division.
ACMG, Inc. ("ACMG") July 1995 Health care management
company; became part of
the Medical Utilization
Management Division.
Universal Fidelity pending Medicare supplement
Life Insurance carrier; to become part
Company ("UFLIC") of the Senior Health and
Life Division.
In August 1993, the Company acquired, and added to the Group Medical
Division, CLAC, a small group medical insurer. In 1994 and 1995, the
administration of this subsidiary was consolidated with the Company's other
health insurance operations. In addition to CLAC, this acquisition included
the purchase of Continental Marketing Corporation which added an efficient
broker-to-broker telemarketing distribution system to the Group Medical
Division.
In August 1993, the Company also acquired, and added to the Medical
Utilization Management Division, HRC, a health care management company
headquartered in Louisville, Kentucky. HRC's largest client is the Kentucky
Medicaid program. In addition to adding to the revenue and client base of
the Medical Utilization Management Division, HRC's Louisville facility has
become the division's headquarters.
In January 1995, the Company acquired, and added to the Life Insurance
Division, CNL, a $350 million asset company, which had issued primarily
interest sensitive and universal life insurance products. This acquisition
increased the distribution system of the Life Insurance Division.
In July 1995, the Company acquired, and consolidated into the Group
Medical Division's administrative facility in Dallas, Western Fidelity
Insurance Company's $42 million block of major medical policies. The Company
was able to integrate substantially all of this business into its operations
within one month.
In July 1995, the Company also acquired, and added to the Medical
Utilization Management Division, ACMG, an Ohio-based health care management
company. This acquisition is expected to increase the annual revenue of the
Medical Utilization Management Division and to enhance the Company's capacity
to establish HMOs and EPOs. See "-- Products and Services."
In the first quarter of 1996, the Company expects to acquire Universal
Fidelity, a company which markets and underwrites primarily Medicare
supplement products to senior citizens in Oklahoma and Texas. Universal
Fidelity generated approximately $33 million in premium revenue in 1995 (on a
statutory basis). The approximately 30,000 Universal Fidelity Medicare
supplement policyholders also provide potential for increased profitability
through cross-selling of long-term care, home health care and other products.
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 Baa3 and/or BBB- or better. At December 31, 1995, less than
1.3% of the Company's total investment portfolio and less than 1.2% of its
statutory admitted assets were below investment grade or unrated. The
Company has a policy to invest no more than 4% of its statutory admitted
assets in fixed income securities below investment grade or unrated. At
December 31, 1995, the Company had invested assets of $1,042.6 million,
compared to $723.8 million at December 31, 1994. The Company manages all of
its investments internally with resource and evaluation assistance provided
by independent investment consultants.
The following table provides information on the Company's investments
as of the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
(DOLLARS IN THOUSANDS)
1995 1994
TYPE OF INVESTMENT: Amount Percent Amount Percent
<S> <C> <C> <C> <C>
Fixed maturities to be held to
maturity:
U.S. Treasury . . . . . . . . $26,897 3% $ 8,891 1%
States and political
subdivisions . . . . . . . . 4,669 1 8,888 1
Foreign governments . . . . . - - 2,992 1
Corporate securities . . . . 51,608 5 147,419 20
Mortgage-backed securities . 162,867 15 210,460 29
Total fixed maturities held 246,041 24 378,650 52
to maturity. .
Fixed maturities available for
sale:
U.S. Treasury . . . . . . . . 34,084 3 21,852 3
States and political 26,976 3 25,819 4
subdivisions . . . . . . . .
Foreign governments . . . . . 3,018 * 3,465 1
Corporate securities . . . . 313,501 30 89,401 12
Mortgage-backed securities . 245,087 23 78,211 11
Total fixed maturities 622,666 59 218,748 31
available for sale . . . . . .
Total fixed maturities . 868,707 83 597,398 83
Equity securities . . . . . . . 15,570 1 15,440 2
Real estate . . . . . . . . . . 18,250 2 16,959 2
Mortgage loans . . . . . . . . 9,253 1 1,806 *
Policy loans . . . . . . . . . 79,122 8 23,082 3
Short-term investments . . . . 51,690 5 69,152 10
Total Investments .$1,042,592 100% $723,837 100%
______________________
* less than one percent
</TABLE>
The following table provides information on the credit quality and
average lives of the Company's fixed maturity portfolio as of December 31,
1995.
<TABLE>
<CAPTION>
FIXED MATURITY PORTFOLIO
(dollars in thousands)
Carrying
Value Percent
Credit Quality - S&P (or equivalent) rating:
<S> <C> <C>
AAA $ 411,128 48%
AA+, AA, AA- 67,408 8
A+, A, A- 262,837 30
BBB+, BBB, BBB- 113,815 13
Below investment grade 12,719 1
In default 800 *
Total $ 868,707 100%
Average Lives
One year or less $ 58,048 7%
Over one year through five years 301,657 35
Over five years through ten years 437,209 50
Over ten years 71,793 8
Total $ 868,707 100%
* Less than one percent.
</TABLE>
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. The investment objectives of
the Company are to maximize investment yield without sacrificing high
investment quality and matched liquidity.
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 often
unsecured and are often subordinated to other creditors of the issuer, and
because these issuers usually have high levels of indebtedness and are more
sensitive to adverse economic conditions, such as recession or increasing
interest rates, than are investment grade issuers. Also, the market for
below-investment grade securities is less liquid and not as actively traded
as the market for investment grade securities.
The 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, a determination is made as to 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. 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
effect on net income from declines in interest income and portfolio yield
from impaired securities in future periods will depend on many factors,
including, for life insurance business, the level of interest rates credited
to policyholder account balances. In as much as interest rates credited to
the Company's policyholders are typically only guaranteed for one year, the
Company does not expect any material adverse effect on net income in future
periods from declines in yields from impaired securities.
Mortgage-Related Securities. At December 31, 1995, the Company had
$408.0 million (or 47% of its fixed maturities portfolio) in mortgage-related
securities compared to $288.7 million at December 31, 1994 (or 48% of its
fixed maturities portfolio). The mortgage-related securities are invested
primarily in U.S. government agency and non-agency pass-through certificates
and various components of U.S. government agency and non-agency
collateralized mortgage obligations ("CMOs"). CMOs are bonds that are
collateralized by U.S. government agency or non-agency whole loan mortgages
and mortgage pass-through securities. 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 possibility 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 may 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
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. At
December 31, 1995, the Company's mortgage-related securities portfolio
included $136.9 million of CMOs and pass-through certificates issued by non-
government agencies (34.0% of total mortgage-backed securities) compared to
$83.9 million at December 31, 1994 (29.0% of total mortgage-backed
securities). The majority of these holdings are senior securities in the CMO
structures which are collateralized by first mortgage liens on single family
residences and which have investment grade ratings of Baa3 and/or BBB- or
higher. 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 Association and the Federal Home Loan Mortgage Corporation.
Therefore, 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.
At December 31, 1995, the Company held $10.3 million carrying value of
inverse floater and interest-only tranches of CMOs. These derivative
securities were acquired to protect the Company in the event of adverse
interest rate fluctuations. The yields and fair values of these securities
are generally more sensitive to changes in interest rates and prepayments
than other mortgage-related securities.
The following table summarizes the components of the Company's mortgage-
related securities portfolio at December 31, 1994, and December 31, 1995:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1995 AT DECEMBER 31, 1994
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Inverse floaters and interest-only
CMO tranches . . . . . . . . . . . . . . . . . $ 10,258 $ 10,258 $ 14,961 $ 8,940
Other CMOs:
U.S. government agency . . . . . . . . . . . . 207,637 211,507 148,366 137,138
Non-agency . . . . . . . . . . . . . . . . . . 73,784 73,793 29,299 27,404
Total other CMOs . . . . . . . . . . . . 281,421 285,300 177,665 164,542
U.S. government agency pass-through . . . . . . . 53,136 53,664 41,444 39,414
Non-agency pass-through . . . . . . . . . . . . . 63,139 63,139 54,601 50,555
Total mortgage-backed securities. . . . $ 407,954 $ 412,361 $ 288,671 $ 263,451
</TABLE>
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 2 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.
HEALTH CARE REFORM
Many proposals have been introduced in Congress and various state
legislatures to reform the present health care system. Most of these
proposals are specifically directed at the small group health care market, a
significant portion of the Company's health business. At present, most
health care reform, other than that related to the Medicare program, is
taking place at the state level. A number of states have passed or are
considering legislation that would limit the differentials in rates that
insurers could charge between new business and renewal business with respect
to similar demographic groups. State 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 insurers 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 insurers.
At the federal level, the current focus of healthcare reform is related
to the federal Medicare program and efforts to control expenditures. From
time to time there are significant federal legislative developments with
respect to long-term care and Medicare coverage. The Federal Omnibus Budget
Reconciliation Act of 1990 ("COBRA '90") required that Medicare supplement
policies provide for guaranteed renewability and waivers of pre-existing
condition coverage limitations under certain circumstances. In addition, the
NAIC has recently adopted model long-term care policy language providing
nonforfeiture benefits and has proposed a rate stabilization standard for
long-term care policies. Among the proposals currently pending in the U.S.
Congress are the implementation of certain minimum consumer protection
standards for inclusion in all long-term care policies, including guaranteed
renewability, protection against inflation and limitations on waiting periods
for pre-existing conditions. These proposals would also prohibit "high
pressure" sales tactics in connection with long-term care insurance and would
guarantee consumers access to information regarding insurers, including lapse
and replacement rates for policies and the percentage of claims denied.
Other pending legislation would permit premiums paid for long-term care
insurance to be treated as tax-deductible medical expenses, with the amount
of the deduction increasing with the age of the taxpayer. The Company cannot
predict with certainty the effect any such proposals, if adopted, or
legislative developments could have on its business and operations. It is
likely that health care reform at the federal and state levels will require
the Company to make significant changes to the way it conducts its health
insurance business. See "Risk Factors -- Insurance Regulation." The Company
has already initiated activity to prepare for expected legislation. For
example, the Company has begun to establish HMOs for Medicare managed care
programs which are expected to be included in federal Medicare reform
programs.
GOVERNMENT REGULATION
The Company and its insurance subsidiaries are subject to extensive
governmental regulation and supervision in each of the jurisdictions in which
it or its subsidiaries conduct business. Such regulation vests in
governmental agencies broad regulatory, supervisory and administrative power
with respect to the Company's business, including premium rate levels,
premium rate increases, policy forms, minimum loss ratios, dividend payments,
claims settlement, licensing of insurers and their agents, capital adequacy,
transfer of control, the amount and type of investments the Company may have,
reserve requirement, solvency standards, trade practices and periodic
examinations. Such regulations are primarily intended to protect
policyholders and not investors. 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.
The states in which the Company is licensed have the authority to change
the minimum mandated statutory loss ratios to which the Company is subject,
the manner in which these ratios are computed and the manner in which
compliance with these ratios is measured and enforced. Loss ratios are
commonly defined as incurred claims and increases in policy reserves divided
by earned premiums. Most states in which the Company writes insurance have
adopted the loss ratios recommended by the NAIC. The Company is unable to
predict the impact of (i) any changes in the mandatory statutory loss ratios
for individual or group policies to which the Company may become subject,
(ii) any changes in the minimum loss ratios for individual, group or Medicare
supplement policies, or (iii) any change in the manner in which these
minimums are computed or enforced in the future. The Company has not been
informed by any state that it does not meet mandated minimum ratios, and the
Company believes that it is in compliance with all such minimum ratios. In
the event the Company is not in compliance with minimum statutory loss ratios
mandated by regulatory authorities with respect to certain policies, the
Company may be required to reduce or refund premiums, which could have a
material adverse effect upon the Company.
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
As of December 31, 1995, the Company employed approximately 1,830
persons on a full-time basis. The Company considers its employee relations
to be good.
MANAGEMENT AND DIRECTORS
The executive officers and directors of the Company are as follows:
Peter W. Nauert . . . . . . 52 Chairman, Chief Executive Officer and
Director
Charles R. Scheper . . . . 43 President Life Insurance Operations
and Director
Thomas J. Brophy . . . . . 60 President Health Insurance Operations
and Director
Ernest T. Giambra, Jr. . . 48 Executive Vice President and Chief
Marketing Officer
William B. Van Vleet . . . 71 Director and General Counsel Emeritus
Anthony J. Pino . . . . . . 48 Executive Vice President
Philip J. Fiskow . . . . . 39 Senior Vice President and Chief
Investment Officer
David I. Vickers . . . . . 34 Vice President, Treasurer and Chief
Financial Officer
Mark S. Fischer. . . . . 39 Vice President
Michael A. Cavataio . . . . 52 Director and Vice Chairman
Richard R. Haldeman . . . . 53 Director
R. Richard Bastian, III . . 49 Director
Karl Heinz Klaeser . . . . 64 Director
Michael K. Keefe . . . . . 51 Director
Robert F. Nauert . . . . . 71 Director
Carl A. Hulbert . . . . . . 72 Director
All executive officers are elected annually and serve at the pleasure of
the Board of Directors. Certain of the executive officers have employment
agreements with the Company. The Company's Board of Directors is divided
into three classes, each of which serves for a three year term.
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 1991 to 1995, and became Chairman of the Company in
1988. 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--Life Insurance Operations 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 1992,
he has been President and Vice Chairman of the Board of Manhattan National
Life, a subsidiary of the Company. Prior to the Company's acquisition of
Manhattan National Life, Mr. Scheper was Manhattan National Life's Senior
Vice President and Chief Financial Officer, a position which he held from May
1987 until the acquisition. Prior to joining Manhattan National Life, Mr.
Scheper was with Union Central Life Insurance Company from 1979, having
served as Vice President and Controller since 1985.
Thomas J. Brophy was elected President--Health Insurance Operations 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 (now known as Southwestern Life
Corp.) subsidiaries from March 1974 to his joining the Company in November
1993.
Ernest T. Giambra, Jr. was elected Executive Vice President of the
Company in May 1994. Prior to joining the Company as Chief Marketing Officer
in June 1993, Mr. Giambra had been with Bankers Life Holding Corporation
since 1969 where he had served as Vice President of Sales since 1988.
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 and served until his retirement from that position in 1995. He now
serves as the Company's General Counsel Emeritus. Mr. Van Vleet had served
Pioneer Life Insurance Company, a subsidiary of the Company, from 1948 until
1995 as General Counsel and a director. Mr. Van Vleet also serves as a
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, a subsidiary
of the Company, from July 1991 to June 1992. Mr. Pino has served as
President of National Health Services, a subsidiary of the Company, 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 1993. He is also an
officer of other subsidiaries of the Company. Mr. Fiskow was with Asset
Allocation and Management Company 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.
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 LLP since
1983 where he was a Senior Manager in the Insurance Division.
Mark S. Fischer has been a Vice President of the Company since December
1994 and has been a Vice President of one of the Company's subsidiaries since
May 1993. Prior to joining the Company, he had been a consultant to the
Company and was with the public accounting firm of Ernst & Young LLP from May
1978 to October 1992 where he was a Senior Manager in the Insurance Division.
Michael A. Cavataio has been a director of the Company since 1986 and
Vice Chairman since December 1995. Mr. Cavataio is a real estate developer
in Northern Illinois and Southern Wisconsin. His business experience also
includes 25 years as an owner and manager of a regional clothing store chain.
He has also been a member of the board of directors of Today's Bank East
since 1987.
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.
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 28 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 is also 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
and, through another subsidiary, also owns a building in the Dallas, Texas
metropolitan area which currently serves as the main administrative office
for the Group Medical Division. The Company leases the offices of its other
regional service centers. The executive and administrative offices of
Manhattan National Life are located in Cincinnati, Ohio, in leased space.
The headquarters of the Company's Medical Utilization Management Division are
located in Louisville, Kentucky in leased space. The Company believes these
facilities will adequately serve its needs for the foreseeable future and
could accommodate expansion of the Company's business.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are named as defendants in various
legal actions, some claiming significant damages, arising primarily from
claims under insurance policies, disputes with agents, and other matters.
The Company's management and its legal counsel are of the opinion that the
disposition of these actions will not have a material adverse effect on the
Company's financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS
MATTERS
The Common Stock is traded on the NYSE and the Chicago Stock Exchange
under the symbol "PFS." The following table sets forth for the fiscal
periods indicated the high and low last reported sale prices per share of the
Common Stock, as reported by the NYSE and the dividends paid per share of the
Common Stock.
<TABLE>
<CAPTION>
High Low Dividend
1994
<S> <C> <C> <C>
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . $ 14 3/4 $ 11 1/8 $ .0375
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . 12 10 .0375
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . 10 1/2 8 3/4 .0375
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . 10 8 3/4 .0375
1995
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . 11 1/4 8 7/8 .045
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . 15 1/2 10 3/4 .045
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . 15 3/8 13 1/8 .045
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . 18 1/2 13 7/8 .045
</TABLE>
As of January 29, 1996, there were approximately 635 holders of record
of the Common Stock.
On February 28, 1996 the Company's Board of Directors announced a
quarterly common stock dividend of 5.5 cents per share with an expectation of
a total of 22 cents per share to be paid for 1996.
All cumulative dividends on the $2.125 Preferred Stock have been paid
by the Company when due. The ability of the Company to pay dividends will
depend primarily on the receipt of cash dividends and other cash payments
from its subsidiaries. The Company's insurance subsidiaries are subject to
state laws and regulations which limit their ability to pay dividends or make
other payments to the Company. Certain of the Company's credit agreements
also limit its ability to pay dividends. Furthermore, the Company's
Certificate of Incorporation prohibits the Company from paying dividends on
the Common Stock if the Company is not current in its dividend payments on
the Preferred Stock. See "Management's Discussion and Analysis of Results of
Operations and Financial Condition -- Liquidity and Capital Resources."
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for the five years
ended December 31, 1995, 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.
<TABLE>
<CAPTION>
(In thousands except per share amounts)
Year Ended December 31,
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Operating Data:
Accident and health
premiums $ 625,951 $ 659,180 $ 601,684 $ 559,894 $ 593,236
Life and annuity premiums
and policy charges 61,092 44,929 39,282 35,219 33,321
Net investment income 70,975 42,786 40,242 43,555 47,974
Other income and realized
investment gains/losses 42,066 27,260 17,920 17,305 34,207
Total revenues 800,084 774,155 699,128 655,973 708,738
Accident and health benefits 398,971 407,249 397,963 368,046 376,820
Life and annuity benefits 76,846 42,947 39,419 47,622 46,128
Total benefits 475,817 450,196 437,382 415,668 422,948
Total benefits and
expenses 768,362 748,133 680,364 681,409 695,418
Income (loss) before
income taxes 31,722 26,022 18,764 (25,436) 13,320
Net income (loss) 20,968 17,149 12,145 (16,959) 8,872
Preferred stock dividends 1,805 1,904 2,021 2,039 2,039
Income (loss) applicable to
common stockholders $ 19,163 $ 15,245 $ 10,124 $(18,998) $ 6,833
Net income (loss) per
common share
Primary $ 2.44 $ 2.36 $ 1.51 $(2.85) $ 1.02
Fully Diluted 1.85 1.58 1.26 (2.85) 1.02
Dividends declared per
common share .18 .15 - - -
Average common and common
equivalent share
outstanding
Primary 7,839 6,459 6,724 6,660 6,699
Fully Diluted 12,608 12,734 10,731 8,195 8,234
</TABLE>
<TABLE>
<CAPTION>
(In thousands except per share amounts)
December 31,
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total investments $1,042,592 $723,837 $674,206 $568,349 $528,725
Deferred policy
acquisition costs 219,874 225,618 260,432 269,674 313,453
Total assets 1,558,921 1,075,700 1,108,271 978,689 969,190
Policy liabilities 1,214,465 868,608 903,105 805,696 776,571
Short-term notes
payable 13,534 20,093 5,575 12,931 6,371
Long-term notes
payable 21,504 2,520 1,125 25,170 21,600
Subordinated Debentures 9,695 57,427 57,477 - -
Redeemable Preferred
Stock 21,222 21,682 23,675 23,990 23,990
Stockholders' equity 144,574 68,328 68,872 62,732 75,470
Stockholders' equity per
common share $ 14.35 $ 11.55 $ 10.86 $ 9.21 $ 11.39
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Fiscal Year 1995 Compared to Fiscal Year 1994
Overview
The information set forth below is based on the Company's major product
lines.
<TABLE>
<CAPTION>
1995 1994
Revenues (IN THOUSANDS)
<S> <C> <C>
Group Medical (1) . . . . . . . . $430,885 $457,633
Senior Health and Life (2) . . . 236,556 235,031
Life Insurance . . . . . . . . . 115,545 71,075
Medical Utilization Management .
17,098 10,416
TOTAL . . . . . . . . . . . $800,084 $774,155
Pre-tax operating Income (loss)
(3)
Group Medical (1) . . . . . . . . $ 20,344 $ 12,065
Senior Health and Life(2) . . . . 11,604 12,469
Life Insurance . . . . . . . . . 7,669 8,695
Medical Utilization Management . 739 2,026
Total pre-tax operating income
before corporate expense
and interest . . . . . . . . . 40,356 32,255
Corporate expense and interest . (7,467) (8,851)
TOTAL . . . . . . . . . . . $32,889 $26,404
(1) Excludes revenues from life insurance products marketed by the Group
Medical Division but issued by the Life Insurance Division. For
purposes of the discussion set forth herein, the Company has included
the revenue and pre-tax income generated from the sale of a policy in
the results of operation of the division which issued the policy.
(2) Excludes revenues from life insurance products marketed by the Senior
Health and Life Division but issued by the Life Insurance Division. For
purposes of the discussion set forth herein, the Company has included
the revenue and pre-tax income generated from the sale of a policy in
the results of operation of the division which issued the policy.
(3) Represents the Company's income before taxes excluding the effects of
realized investment gains and losses. The 1995 amount also excludes
approximately $5.2 million in payments to converting bondholders and
other expenses relating to the conversion of the 8% Debentures.
</TABLE>
Group Medical Division
Revenue. Total revenue in the Group Medical Division decreased $26.7
million, or 6%, from $457.6 million to $430.9 million. The decrease was
primarily due to a reduction of premium revenue on the Company's major
medical products of $26.9 million, or 6%, from $431.8 million to $404.9
million. A major portion of the decrease in major medical premium revenue
was due to the Company's decision to market unaffiliated companies' HMO
products in states such as California, where competitive pressures and state
reforms made it difficult to underwrite the Company's indemnity products on a
profitable basis. In connection with the Company's decision to cease selling
new products in these states, the Company's career agency force submitted
$31.8 million of annualized HMO premiums to unaffiliated companies during
1995. While these premiums are not received by the Company, the Company
receives marketing commission overrides from the unaffiliated companies for
this production. The remaining decrease in major medical premium revenue was
due to lower average premiums on new issues due to the increased use of
managed care products.
Net investment income decreased $2.7 million, or 25%, from $10.4 million
to $7.7 million, due to a reduction in invested assets caused by the decrease
in major medical in-force business and the general decline in interest rates.
Total realized investment losses decreased $0.6 million or 48% from $1.2
million to $0.6 million.
Other income increased $1.9 million, or 12%, from $16.6 million to $18.5
million, due to marketing commission overrides received from the sale of HMO
products of unaffiliated companies.
Benefits. The following table sets forth the earned premium, benefits,
and loss ratios for products issued by the Group Medical Division:
(DOLLARS IN
THOUSANDS)
1995 1994
Earned premium (1) $414,160 $443,599
Benefits (1) . . 261,336 279,419
Loss ratio . . . 63.1% 63.0%
(1) In the Company's statement of consolidated operations, earned premiums
represent premiums written, adjusted for reinsurance; the changes in
unearned premiums are reflected in accident and health benefits.
The Company has historically held reserve margins in its accident and
health claims reserve to provide for potential adverse deviation. The
Company reduced reserve margins in the major medical claims reserves in 1994
by approximately $10.4 million. Excluding the reduction in claim reserve
margins, the 1994 major medical loss ratio was 65.3%. Improvement in the
loss ratio in 1995 was due to continued increases in PPO penetration and
higher claim costs in 1994.
Insurance and General Expenses. Insurance and general expenses
increased $2.6 million, or 2%, from $116.9 million to $119.5 million. The
expense ratio increased in 1995 due to system development costs,
consolidation of claim operations, and the 6% drop in premium.
The amortization of DAC decreased $24.3 million, or 39%, from $62.3
million to $38.0 million. The decrease was due to a $16.7 million write-off
of DAC in 1994, the lower 1995 new business levels, and the decline in first-
year commission rates.
Senior Health and Life Division
Revenue. Total revenue in the Senior Health and Life Division remained
relatively constant. Senior health premium decreased $6.3 million, or 3%,
from $227.3 million to $221.0 million. While the total new Medicare
supplement business and new long-term care business increased, these
increases were offset by a decrease in the total senior health premium due to
lapses from the current in-force block of business and the fact that a
greater percentage of the in-force block of business consisted of
standardized Medicare supplement products on which the average premium per
policy was lower due to benefit and agent compensation changes.
Net investment income increased $3.2 million, or 58%, from $5.6 million
to $8.8 million, primarily due to a 10-basis point improvement in yields and
increased invested assets. The total realized gains increased $4.2 million
from $0.9 million to $5.1 million.
Benefits. The following table sets forth the earned premium, benefits,
and loss ratios for senior health products:
(DOLLARS IN
THOUSANDS)
1995 1994
Earned premium (1) $217,302 $225,604
Benefits (1) . . 143,226 137,853
Loss ratio . . . 65.9% 61.1%
(1) In the Company's statement of consolidated operations, earned premiums
represent premiums written, adjusted for reinsurance; the changes in
unearned premiums are reflected in accident and health benefits.
The loss ratio on the Senior Health and Life Division's major products,
Medicare supplement policies, was higher during the first two quarters of
1995 due to increased utilization on the standardized Medicare supplement
products. The Medicare supplement loss ratio decreased to 61.5% in the
fourth quarter of 1995.
Insurance and General Expenses. The expense ratio remained relatively
unchanged. The decline in administrative expense levels was offset by an
increase in marketing expenses associated with new marketing initiatives.
See "Business -- Products and Services."
The amortization of DAC decreased $8.2 million, or 28%, from $29.8
million to $21.6 million. The decreased level of amortization was due to a
decline in the level of first-year costs deferred due to lower agent
compensation levels and improved persistency on the in-force Medicare
supplement business.
Life Insurance Division
Revenue. Total revenue in the Life Insurance Division increased $44.4
million, or 63%, from $71.1 million to $115.5 million. The increase was due
primarily to the acquisition of CNL in the first quarter of 1995 which added
$5.8 million in premium and $23.2 million in investment income. The
remaining increase was due to increased sales of the senior life insurance
product marketed in conjunction with Medicare supplement and long-term care
policies.
Net investment income increased $27.5 million, or 103%, from $26.9
million to $54.4 million. This increase was primarily due to the acquisition
of CNL.
Benefits. Total life and annuity policy benefits increased $33.9
million, or 79%, from $42.9 million to $76.8 million. Approximately $24.4
million of this increase was due to the acquisition of CNL and the remaining
amount was due to increased senior life insurance in-force. The senior life
mortality experience exceeded that which was developed in pricing and the
Company has initiated rate increases and modification to underwriting
procedures to improve profitability. The mortality experience on the
remaining block of business was less than projected.
Insurance and General Expenses. Insurance and general expenses
increased $10.4 million, or 90%, from $11.6 million to $22 million. The
increase in general expenses and commissions was primarily due to the
increase in the in-force block of business, legal fees associated with
reinsurance litigation which was settled in 1995, and the acquisition of CNL.
The unit cost of administration per policy in-force remained relatively
constant in 1995.
The amortization of DAC remained relatively unchanged, with the increase
in senior life amortization offsetting a decrease in the amortization on the
traditional term life block of business.
Medical Utilization Management Division
Total revenue increased $6.7 million, or 64%, from $10.4 million to
$17.1 million. The increase in revenues was primarily due to expanded sales
and the acquisition of ACMG, Inc. in the third quarter of 1995.
Pre-tax income decreased $1.3 million, or 65%, from $2.0 to $0.7
million. The decrease in profitability was due to expenses related to the
development of preferred provider organizations and health maintenance
organizations in selected states. The division expects continued pressure on
earnings during 1996 as it continues development of these managed care
programs. The Company has targeted its managed care development efforts in
geographic locations where it already has strong concentrations of
policyholders and sales agents.
Corporate Expenses
Corporate expenses decreased $1.4 million, or 16%, from $8.9 million to
$7.5 million (excluding the $5.2 million paid to holders of the Company's 8%
Debentures and other expenses in connection with the conversion of the 8%
Debentures, in the third quarter of 1995). Interest expense decreased $0.3
million, or 5%, from $4.9 million to $4.6 million, primarily due to the
utilization of a portion of the Company's Credit Facility beginning in the
fourth quarter of 1994 and continuing through the second quarter of 1995,
offset by a decrease in interest expense due to the conversion of the
Company's 8% Debentures. The general corporate overhead was down
approximately $1.1 million due to improved operating efficiencies.
Consolidated Financial Condition and Results of Operations
Fiscal Year 1995 Compared to Fiscal Year 1994
Net income. The Company's consolidated net income increased $3.9
million, or 22%, from $17.1 million to $21.0 million. This increase was due
primarily to improved profitability in the Group Medical Division as a result
of improved loss ratios and a lower level of DAC amortization.
Premiums and policy charges. Total premiums and policy charges
decreased $17.1 million, or 2%, from $704.1 million to $687.0 million. This
decrease was due to the decrease in accident and health premiums of $33.2
million, or 5%, which was due primarily to a decrease in premiums from major
medical products of $26.9 million, or 6%. The decrease in premiums was
primarily due to lower average premiums per policy sold, which resulted from
the Company initiating sales of new managed care products. Total health
insurance premiums attributable to Medicare supplement and long-term care
products remained relatively constant. Life insurance premiums increased
$16.2 million, or 36%, primarily due to the acquisition of CNL and new
business sales.
Net investment income. Net investment income increased $28.2 million,
or 66%, from $42.8 million to $71.0 million and annualized investment yields
increased from 6.3% to 7.0%. These increases were primarily due to the
acquisition of CNL.
Other revenue. Other income and realized investment gains and losses
increased $14.8 million, or 54%, from $27.3 million to $42.1 million. The
increase in other income was due to increased sales to unaffiliated clients
by the Medical Utilization Management Division and the acquisition of ACMG,
Inc. in July 1995. The remaining other income generated by the Company's
non-insurance subsidiaries remained relatively unchanged.
Benefits. Total benefits increased $25.6 million, or 6%, from $450.2
million to $475.8 million. Accident and health benefits, which include the
change in unearned premiums, decreased $8.2 million, or 2%, from $407.2
million to $399.0 million. Life and annuity benefits increased $33.9
million, or 79%. This increase was due to the acquisition of CNL and
increased senior life insurance in-force.
Insurance and general expenses. Insurance and general expenses (which
includes non-deferred commission compensation to agents) increased $25.6
million, or 13%, from $192.8 million to $218.4 million. Expenses for the
Medical Utilization Management Division increased due to the increase in
sales and the acquisition of ACMG. Expenses in the insurance divisions
increased due to the development of new marketing and sales incentive
programs, system development costs, and the acquisition of CNL. Corporate
expenses increased $4.0 million due to $5.2 million in payments made to
converting bondholders and other expenses relating to the August 1995
conversion of the Company's 8% Debentures.
Amortization of DAC. Amortization of DAC decreased $30.9 million, or
31%, from $100.1 million to $69.2 million. The decrease was primarily due to
an adjustment in 1994 to the DAC asset related to certain group and
individual medical business, a lower level of group major medical new
business and improved persistency on Medicare supplement business.
Income tax rate. The effective federal income tax rate was 34% due to
the increased investment in tax-exempt securities included in the Company's
portfolio.
Other. Investments, premiums and other receivables, amounts on deposit
and due from reinsurers, accrued investment income and other assets increased
principally due to the acquisition of CNL. The decrease in short-term notes
payable and the increase in long-term notes payable resulted from the
conversion of the Company's line of credit agreement at December 31, 1994 to
a term loan during the first quarter of 1995. General expenses and other
liabilities, and amounts due to reinsurers increased due primarily to the
acquisition of CNL. The remaining balance sheet amounts remained relatively
consistent with the amounts at December 31, 1994.
Fiscal Year 1994 Compared to Fiscal Year 1993
Net income. The Company's net income increased $5.0 million, or 41%,
from $12.1 million to $17.1 million. The increase was due to profits from
Continental Life & Accident Company ("CLAC"), improved health loss ratios in
the Senior Health and Life 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 $75.0
million, or 11%. The increase in revenue was primarily due to the increase
in premiums and policy charges of $63.1 million.
Premiums and policy charges. Accident and health insurance premiums
increased $57.5 million, or 10%. Premiums from major hospital plans
increased $81.5 million, 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 $24.0 million, or 10%.
Net investment income. Net investment income increased $2.5 million, or
6%. Annualized investment yields decreased from 6.8% to 6.3%. The decrease
in the investment yield was principally due to the shortening of the
Company's average duration and the increased emphasis on tax-exempt
securities included in the Company's portfolio.
Other revenue. Other income and realized investment gains and losses
increased $9.3 million, or 52%. The increase in other income was due to the
acquisitions of HRC and CLAC in August 1993. In addition, the Company
realized increased sales to unaffiliated customers by the Medical Utilization
Management Division and by its marketing subsidiaries. Realized investment
losses decreased $0.9 million, or 69%, from $1.3 million to $0.4 million.
The remaining other income generated by the Company's other non-insurance
subsidiaries remained relatively unchanged.
Benefits. Total benefits increased $12.8 million, or 3%. Life and
annuity benefits increased $3.5 million, or 9%, 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 $9.3 million, 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%. The improved loss ratios were due primarily to a
reduction in the group medical claim reserve margins.
In 1994 and 1993, managed health care efforts resulted in estimated net
pre-tax savings to the Company's Group Medical Division of $67.0 million and
$41.0 million, respectively. These savings were primarily used to lower the
amount of premium increases for policyholders, which the Company believes
generally has the effect of decreasing lapse rates of these policies. The
principal efforts and their approximate relative contributions to these
estimated savings were as follows:
1994 1993
PPO networks . . . . . . . . . . . . . . 40% 49%
Precertification . . . . . . . . . . . . 10 5
Large case management . . . . . . . . . . 22 32
Usual and customary, rebundling, and 28 14
prompt pay discounts . . . . . . . . . .
100% 100%
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.
Insurance and general expenses. General expenses as a percent of
premiums decreased due to the continued emphasis on cost reduction in the
Senior Health and Life Division, the Group Medical Division and the Life
Insurance Division. However, insurance and general expenses (which includes
non-deferred commission compensation to agents) increased $30.0 million, or
18%. The increase was primarily caused by the increase in premium and policy
charges and the acquisitions of HRC and CLAC.
Interest expense. Interest expense increased due to the issuance of the
8% Debentures in July 1993 and the increase in other notes payable in 1994.
Amortization of DAC. Amortization of DAC increased $23.2 million, or
30%. The increase was due primarily to a write-down in the DAC asset on
certain group and individual medical business issued in recent years. Future
losses were projected on these blocks of business due primarily to mandated
state healthcare reforms. 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.
Income tax rate. The effective tax rate of the Company decreased to
approximately 34% from 35%. The decrease was due to the increased investment
in tax-exempt securities included in the Company's portfolio.
Other. 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. DAC decreased as a result of
a write-down in the asset for certain medical business and the decrease in
new business issued 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.
DEFERRED POLICY ACQUISITION COSTS
Under generally accepted accounting principles, a DAC asset is
established to match properly the costs of writing new business against the
expected future revenues or gross profits from the policies. The 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 premium revenues of the
business to which the costs are related. The rate of amortization depends on
the expected pattern of future premium revenues for the block of policies.
The scheduled amortization for a block of policies is established when the
policies are issued. However, the actual amortization of DAC will reflect
the actual persistency and profitability of the business. For example, if
actual policy terminations are higher than expected or if future losses are
anticipated, DAC could be amortized more rapidly than originally scheduled or
written-off, which would reduce earnings in the applicable period.
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 has had an adverse impact
on its major hospital accident and health claims experience. The Company
continues to implement rate increases, as permitted by state regulations, in
response to this experience.
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated liquidity requirements are created and met
primarily by operations of its subsidiaries. The insurance subsidiaries'
primary sources of cash are premiums, investment income, and investment sales
and maturities. The insurance subsidiaries' primary uses of cash are
operating costs, policy acquisition costs, payments to policyholders and
investment purchases. In addition, liquidity requirements of the holding
company are created by the dividend requirements of the $2.125 Preferred
Stock, Common Stock dividends, interest payments on the 8% Debentures and
other debt service requirements. These liquidity requirements of the holding
company have historically been met through dividends from the non-insurance
subsidiaries which receive payments primarily from fees charged for
administrative and marketing services provided to the Company's insurance
subsidiaries and other unaffiliated companies. Dividends from the insurance
subsidiaries could be required in the future to meet such liquidity
requirements.
The ability of the insurance subsidiaries to pay dividends and make
other payments to the Company is subject to state insurance department
regulations which generally permit dividends and other payments to be paid
for any twelve month period in amounts equal to the greater of (i) net gain
from operations in the case of a life insurance company or net income in the
case of all other insurance companies for the preceding calendar year or (ii)
10% of surplus as of the preceding December 31st. Any dividends in excess of
these levels require the prior approval of the Director or Commissioner of
the applicable state insurance department. The amount of dividends that the
Company's insurance subsidiaries could pay in 1996 without prior approval is
approximately $3.7 million.
Notwithstanding the foregoing, if insurance regulators otherwise
determine that payment of a dividend or any other payment to an affiliate
would be detrimental to an insurance subsidiary's policyholders or creditors
because of the financial condition of the insurance subsidiary or otherwise,
the regulators may block dividends or other payments to affiliates that would
otherwise be permitted without prior approval.
The Company's 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 contributions from the holding company.
The Company has offered commission advances to certain of its agents and
marketing organizations which consist 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 a portion of its agent
commission advance program through the sale of agent receivables. Proceeds
from such sales for 1995 and 1994 were $20.9 million and $24.4 million,
respectively. The termination date of the current program is December 31,
1997, subject to extension or termination as provided therein. The Company
has retained approximately $13.8 million of agent advances at December 31,
1995.
In July 1993 the Company issued $57.5 million of its 8% Debentures. Net
proceeds from the offering totaled approximately $54.0 million. The 8%
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 1995, the Company accepted the conversion of $46.9 million
of the outstanding 8% Debentures. The effect of the conversion was an
increase in stockholders' equity of $45.3 million and a charge to income of
$3.5 million, net of taxes, for payments to converting bondholders and other
expenses relating to the conversion.
In August 1993, a non-insurance subsidiary of the Company borrowed $1.5
million from a commercial bank to finance the acquisition of HRC. Interest
on the unsecured note is payable quarterly at the lending bank's prime rate
of interest. The note requires principal repayments of $0.08 million per
quarter plus interest through July 31, 1998.
In December 1994, a non-insurance subsidiary of the Company borrowed
$0.4 million from a commercial bank to finance the purchase of certain
equipment. The note, which is secured by the equipment purchased, bears
interest at the lending bank's prime rate of interest and is payable
quarterly, with principal payments of $0.02 million, through December 1,
1999.
In January 1995, an insurance subsidiary of the Company issued a note in
the amount of $1.7 million as a portion of the acquisition price of CNL. The
principal balance of the note may be reduced by the amount of capital losses
incurred by the Company on mortgage loan and real estate holdings of CNL.
Interest is payable on the note at the average earnings rate of these
investments, currently eight percent.
Under the March 1995 Term Loan, the Company borrowed $15.0 million from
a group of banks to repay amounts borrowed under the Company's Credit
Facility in conjunction with the acquisition of CNL. Interest on the March
1995 Term Loan is payable quarterly, currently at five percent. The note,
which is unsecured, requires principal payments of $0.5 million plus interest
per quarter with a final payment on December 31, 1999.
In June 1995, a non-insurance subsidiary of the Company borrowed $1.2
million from a commercial bank in order to fund HMO development. Interest on
this secured facility is payable monthly at a fixed rate of 8.8%, with
principal due at maturity. This facility matures in June, 1996.
In June 1995 a non-insurance subsidiary of the Company entered into a
$1.0 million line of credit arrangement with a commercial bank in order to
finance the subsidiary's working capital needs. Interest on this secured
facility is payable monthly at the lending bank's prime rate of interest.
This facility matures in June 1996.
Under the August 1995 Term Loan, the Company borrowed $11.1 million from
a group of banks to repay amounts borrowed under the Company's Credit
Facility to, among other things, fund payments to converting bondholders and
other expenses relating to the conversion of the 8% Debentures. Interest on
the August 1995 Term Loan is at the prime rate of the lending bank. The
unsecured note requires principal repayments of $0.9 million plus interest
per quarter through August 31, 1998.
In September 1995, a non-insurance subsidiary of the Company borrowed
$3.3 million from a finance company to finance the purchase of certain
equipment. The note, which is secured by the equipment purchased, bears
interest at a fixed rate of 7.81% and has principal and interest payments of
$0.04 million payable monthly through August 2005.
The Company's Credit Facility provides a line of credit arrangement for
short-term borrowings with three banks amounting to $17.0 million through
April 1996, of which $3.5 million was used at December 31, 1995. In January
1996, the amount available under the Credit Facility was increased to $27.0
million. The line of credit arrangement can be terminated, in accordance
with the agreement, at the Company's option. The Company expects that the
Credit Facility will be extended at its maturity.
The Company's debt agreements include provisions requiring maintenance
of minimum working capital and risk based capital and limiting the Company's
ability to incur additional indebtedness. The Company's debt agreements also
restrict the amount of retained earnings which is available for dividends and
require the maintenance of certain minimum insurance company ratings at the
Company's subsidiaries.
In March, June, September and December 1995, the Company's Board of
Directors announced a quarterly Common Stock dividend of $.045 per share, for
a total of 18 centers per share in 1995.
In February, 1996 the Board of Directors announced a quarterly stock
dividend of $.055 per share to be paid in April, 1996.
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. See
"Business-Investments." Because the Company's insurance subsidiaries
experience strong positive cash flows, including monthly cash flows from
mortgage-backed securities, the Company does not expect its insurance
subsidiaries to be forced to sell the held to maturity investments prior to
their maturities and realize material losses or gains. 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
these securities. Those conditions would include a significant deterioration
of the issuer's creditworthiness, 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. See "Business-Investments."
The Company has entered into an agreement to purchase all of the
outstanding stock of Universal Fidelity for a total purchase price of
approximately $26.0 million. Closing on the acquisition is subject to the
approval of Universal Fidelity's shareholders and to regulatory approval.
The transaction is expected to close in the first quarter of 1996. Universal
Fidelity's business is primarily senior health insurance, including Medicare
supplement, long-term care and other supplemental insurance.
RECENTLY ISSUED ACCOUNTING STANDARDS
For a discussion of a new long-lived assets accounting standard, and a
new stock-based employee compensation accounting standard and the impact of
these standards 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.
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 1996 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 1996 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 1996 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 1996 annual meeting of stockholders entitled "Certain
Transactions" is incorporated herein by this reference.
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 Income. . . . . . . . . . . F-2
Consolidated Balance Sheets . . . . . . . . . . . . . F-3
Statements of Consolidated Stockholders' Equity. . . . F-5
Statements of Consolidated Cash Flows . . . . . . . . F-7
Notes to Consolidated Financial Statements . . . . . . F-8
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 Income. . . . . 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 1995.
(c) Index to Exhibits
Exhibit Sequentially
Number Description of
Document Numbered Page
3 (a) Certificate of Incorporation
of the Company (filed as Exhibit 3(a)
to the Company's Registration Statement
on Form S-1 [No. 33-7759] and incorporated
herein by reference)
3 (b) Amended Bylaws of the Company (filed as
Exhibit 3(b) to Amendment No. 1 to the
Company's Registration Statement
on Form S-1 [No. 33-30017] and incorporated
herein by reference)
4 (a) Certificate of Designations with respect
to the Company's $2.125 Cumulative
Convertible Exchangeable Preferred Stock
("Preferred Stock") (filed as Exhibit 4(a)
to Post-Effective Amendment No. 1 to the
Company's Registration Statement on Form S-1
[No. 33-30017] and incorporated herein by
reference)
4 (b) Proposed form of Indenture with respect
to the Company's 8 1/2% Convertible
Subordinated Debentures due 2014 into which
the Preferred Stock is exchangeable (filed
as Exhibit 4(b) to Post-Effective Amendment
No. 1 to the Company's Registration Statement
on Form S-1 [No. 33-30017] and incorporated
herein by reference)
4 (c) Rights Agreement dated as of December 12,
1990 between the Company and First Chicago
Trust Company of New York as Rights
Agent (including exhibits thereto)
(filed as Exhibit 1 to the Company's
registration statement on Form 8-A
dated December 14, 1990 and incorporated
herein by reference)
10 (a) Form of contract with independent agents
(filed as Exhibit 10(f) to the Company's
Registration Statement on Form S-1
[No. 33-7759] and incorporated herein by
reference)
*10 (b) Nonqualified Stock Option Plan (filed as
Exhibit 10(g) to the Company's Registration
Statement on Form S-1 [No. 33-7759] and
incorporated herein by reference)
*10 (c) Amendment to the Nonqualified Stock Option
Plan of the Company (filed as Exhibit 10(d)
to the Company's Registration Statement on
Form S-8 [No. 33-26455] and incorporated
herein by reference)
*10 (d) Amendment to the Nonqualified Stock Option
Plan of the Company (filed as Exhibit 10(c)
to the Company's Registration Statement on
Form S-1 [No. 33-17011] and incorporated
herein by reference)
*10 (e) Amendment to the Nonqualified Stock Option
Plan of the Company (filed as Exhibit 10(e)
to the Company's registration statement on
Form S-8 [No. 33-37305] and incorporated
herein by reference)
*10 (f) Employment Agreement dated as of September 1,
1995 by and between the Company and
Peter W. Nauert (filed herewith)
10 (g) 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 (h) 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 (i) Employment Agreement dated as of September 1,
1995 by and between the Company and
Thomas J. Brophy (filed herewith)
*10 (j) Amendment to Employment Agreement dated as of
September 1, 1995 by and between the Company
and Charles R. Scheper (filed herewith)
*10 (k) Employment Agreement dated as of January 1,
1996 by and between the Company and
Anthony J. Pino (filed herewith)
10 (l) 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's Current Report on Form 8-K,
dated January 31, 1995 and incorporated
herein by reference)
10 (m) Third Amended and Restated Receivables
Purchase Agreement dated as of November 1,
1995 by and between Design Benefit Plans,
Inc. (formerly National Group Marketing
Corporation) and National Funding
Corporation (filed herewith)
10 (n) 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
as exhibit 10(q) to the Company's Annual
Report on Form 10-K [No. 1-10522] and
incorporated herein by reference)
10 (o) Pioneer Financial Services, Inc.
Employee Stock Purchase Plan
(filed herewith)
10 (p) Pioneer Financial Services, Inc.
Directors Compensation Deferral
Plan (filed herewith)
10 (q) Credit Agreement dated as of
March 22, 1995 by and among the
Company and American National Bank
and Trust Company of Chicago, Firstar
Bank Milwaukee, N.A. and Bank One,
Rockford N.A. (filed as Exhibit 10(a)
to the Company's Form 10-Q for the
quarterly period ended March 31, 1995
and incorporated herein by reference)
10 (r) Amended and Restated Credit Agreement
dated as of March 22, 1995, by and among
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. (filed as Exhibit 10(b)
to the Company's Form 10-Q for the quarterly
period ended March 31, 1995 and incorporated
herein by reference)
10 (s) Employment Agreement between the Company and
Ernest T. Giambra (filed as Exhibit 10(r) to
Amendment No. 4 to the Company's Registration
Statement on Form S-2 (File No. 33-62760) and
incorporated herein by reference)
10 (t) Pioneer Financial Services, Inc. Executive
Deferred Compensation Program (filed herewith)
11 Statement of Computation of per share net income
(filed herewith)
21 List of subsidiaries (filed herewith)
23 Consent of Ernst & Young LLP
(filed herewith)
27 Exhibit of financial data
* Indicates management employment contracts or compensatory plans or
arrangements.
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, 1995 and 1994,
and the related statements of consolidated income, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1995.
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, 1995 and 1994, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1995, 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 3 to the consolidated financial statements, in 1994, the
Company changed its method of accounting for investments in debt and equity
securities.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Chicago, Illinois
March 8, 1996
<TABLE>
<CAPTION>
Pioneer Financial Services, Inc. and Subsidiaries
Statements of Consolidated Income
(In Thousands, Except Per Share Amounts)
YEAR ENDED DECEMBER 31
1995 1994 1993
<S> <C> <C> <C>
REVENUES
Premiums and policy charges (Note 7):
Accident and health $ 625,951 $ 659,180 $ 601,684
Life and annuity 61,092 44,929 39,282
687,043 704,109 640,966
Net investment income (Note 5)70,975 42,786 40,242
Other income and realized investment
gains and losses (Note 5) 42,066 27,260 17,920
800,084 774,155 699,128
BENEFITS AND EXPENSES
Benefits:
Accident and health 398,971 407,249 397,963
Life and annuity 76,846 42,947 39,419
475,817 450,196 437,382
Insurance and general
expenses 218,388 192,810 162,831
Interest expense (Notes 10
and 13) 4,958 5,054 3,276
Amortization of deferred
policy acquisition
costs (Note 11) 69,199 100,073 76,875
768,362 748,133 680,364
Income before income taxes 31,722 26,022 18,764
Income taxes (benefit) (Note 6):
Current 7,407 6,570 10,858
Deferred 3,347 2,303 (4,239)
10,754 8,873 6,619
Net income 20,968 17,149 12,145
Preferred stock dividends
(Note 14) 1,805 1,904 2,021
Income applicable to common
stockholders $ 19,163 $ 15,245 $ 10,124
Net income per common share:
Primary $ 2.44 $ 2.36 $ 1.51
Fully diluted 1.85 1.58 1.26
Dividends declared per
common share .18 .15 -
Average common and common equivalent
shares outstanding:
Primary 7,839 6,459 6,724
Fully diluted 12,608 12,734 10,731
See notes to consolidated financial statements.
</TABLE>
Pioneer Financial Services, Inc. and Subsidiaries
Consolidated Balance Sheets
(In Thousands, Except Share and Per Share Amounts)
<TABLE>
<CAPTION>
DECEMBER 31
1995 1994
<S> <C> <C>
ASSETS
Investments (Notes 5 and 20):
Securities available-for-sale:
Fixed maturities, at fair value $622,666 $218,748
Equity securities, at fair value 15,570 15,440
Fixed maturities held-to-maturity
at amortized cost 246,041 378,650
Real estate - at cost, less accumulated
depreciation 18,250 16,959
Mortgage loans at unpaid balance 9,253 1,806
Policy loans at unpaid balance 79,122 23,082
Short-term investments at cost,
which approximates fair value 51,690 69,152
Total investments 1,042,592 723,837
Cash 20,274 8,612
Premiums and other receivables, less allowance
for doubtful accounts (Notes 8 and 19) 23,429 20,102
Reinsurance receivables and amounts
on deposit with reinsurers (Note 7) 184,719 41,426
Accrued investment income 13,307 8,873
Deferred policy acquisition costs
(Note 11) 219,874 225,618
Land, building, and equipment
at cost, less
accumulated depreciation (Note 19) 26,433 20,314
Deferred federal income taxes (Note 6) - 7,262
Other 28,293 19,656
$1,558,921 $1,075,700
LIABILITIES, REDEEMABLE PREFERRED STOCK,
AND STOCKHOLDERS' EQUITY
Policy liabilities:
Future policy benefits:
Life $591,093 $246,953
Annuity 216,431 210,132
Accident and health 153,603 163,477
Unearned premiums 71,150 76,266
Policy and contract claims (Note 9) 166,111 155,373
Other 16,077 16,407
1,214,465 868,608
General liabilities:
General expenses and other liabilities 48,580 31,793
Amounts due to reinsurers (Note 7) 82,954 5,249
Deferred federal income tax (Note 6) 2,393 -
Short-term notes payable (Notes 10,
22 and 23) 13,534 20,093
Long-term notes payable (Notes 10,
20, 22 and 23) 21,504 2,520
Convertible subordinated debentures
(Notes 13 and 20) 9,695 57,427
Total liabilities 1,393,125 985,690
Commitments and contingencies (Notes 6 to 12 and 17)
Redeemable Preferred Stock, no par value (Note 14):
$2.125 cumulative convertible exchangeable preferred
stock:
Authorized: 5,000,000 shares
Issued and outstanding:
(1995 - 848,900 shares;
1994 - 867,300 shares) 21,222 21,682
Stockholders' equity (Notes 6 and 12 to 16):
Common Stock, $1 par value:
Authorized: 20,000,000 shares
Issued, including shares in treasury
(1995 -11,207,591; 1994 - 6,996,157) 11,208 6,996
Additional paid-in capital 72,198 29,299
Unrealized appreciation (depreciation)
of available-for-sale securities
(Notes 3 and 5) 4,518 (7,193)
Retained earnings 66,870 48,960
Treasury stock at cost (1995 -
1,132,300 shares;
1994 - 1,078,400 shares) (10,220) (9,734)
Total stockholders' equity 144,574 68,328
$1,558,921 $1,075,700
See notes to consolidated financial statements.
</TABLE>
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, 1993 $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
securities - - 241 - - 241
Purchase of treasury stock
(546,200 shares) - - - - (4,720) (4,720)
Issuance of shares pursuant
to Agent Stock Purchase
Plan (8,057 shares) 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
Conversion of convertible
subordinated debentures
(4,255 shares) 4 46 - - - 50
Cummulative effect of change
in accounting principle (Note 3) - - 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>
Pioneer Financial Services, Inc. and Subsidiaries
Statements of Consolidated Stockholders' Equity (Continued)
(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 December 31, 1994 6,996 29,299 (7,193) 48,960 (9,734) 68,328
1995 transactions:
Net income - - - 20,968 - 20,968
Cash dividends - Preferred
Stock ($2.125 per share) - - - (1,805) - (1,805)
Cash dividends - Common
Stock ($.18 per share) - - - (1,253) - (1,253)
Stock options exercised
(147,000 shares) 147 1,373 - - - 1,520
Conversion of convertible
subordinated debentures
(4,062,418 shares) 4,063 41,517 - - - 45,580
Appreciation of available-
for-sale securities - - 11,711 - - 11,711
Purchase of treasury stock
(53,900 shares) - - - - (486) (486)
Issuance of shares pursuant to
Agent Stock Purchase Plan
(2,016 shares) 2 9 - - - 11
Balance at December 31, 1995 $11,208 $72,198 $4,518 $66,870 $(10,220) $144,574
See notes to consolidated financial statements.
</TABLE>
Pioneer Financial Services, Inc. and Subsidiaries
Statements of Consolidated Cash Flows
(In Thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1995 1994 1993
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 20,968 $ 17,149 $ 12,145
Adjustments to reconcile net income to
net cash provided by operating activities:
Decrease (increase) in premiums receivable (2,321) 4,981 (3,912)
Increase (decrease) in policy liabilities (30,922) (34,498) 31,132
Deferral of policy acquisition costs (65,036) (65,258) (67,633)
Amortization of deferred policy
acquisition costs (Note 11) 69,199 100,073 76,875
Deferred income tax expense (benefit) 3,347 2,303 (4,239)
Change in other assets and liabilities 17,154 21,392 (13,423)
Depreciation, amortization, and accretion 7,541 (102) 9,795
Realized losses (gains) (Note 5) (3,993) 383 1,336
Net cash provided by operating activities 15,937 46,423 42,076
INVESTING ACTIVITIES
Securities available-for-sale:
Purchases - fixed maturities (247,746) (110,416) (120,228)
Sales - fixed maturities 189,882 99,865 51,780
Maturities - fixed maturities 19,099 44,116 18,836
Purchases - equity securities (14,854) (4,609) (5,532)
Sales - equity securities 18,585 2,558 14,845
Securities held-to-maturity:
Purchases (13,369) (84,010) (256,579)
Sales 4,710 9,427 126,072
Maturities 28,865 21,472 102,538
Purchase of investment real estate (1,903) (17,442) -
Net decrease (increase) in other investments 15,593 (21,499) 26,038
Net purchases of property and equipment (6,650) (2,957) (3,956)
Purchase of subsidiaries (Note 4) (8,314) - (9,685)
Net cash used by investing activities (16,102) (63,495) (55,871)
FINANCING ACTIVITIES
Net proceeds from issuance of convertible
subordinated debentures (Note 13) - - 54,055
Increase in notes payable 14,219 21,225 -
Repayment of notes payable (1,794) (5,362) (31,401)
Proceeds from sale of agent receivables
(Note 8) 20,851 24,393 25,376
Transfer of collections on previously sold agent
receivables (Note 8) (18,978) (28,743) (22,981)
Dividends paid - preferred (1,805) (1,904) (2,021)
Dividends paid - common (1,253) (930) -
Stock options exercised 1,520 495 451
Purchase of treasury stock (486) (4,963) (4,720)
Retirement of preferred stock (460) (1,993) (315)
Other 13 87 44
Net cash provided by financing activities 11,827 2,305 18,488
Increase (decrease) in cash 11,662 (14,767) 4,693
Cash at beginning of year 8,612 23,379 18,686
Cash at end of year $ 20,274 $ 8,612 $ 23,379
See notes to consolidated financial statements.
</TABLE>
Pioneer Financial Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. NATURE OF OPERATIONS
Pioneer Financial Services, Inc. (PFS) through its subsidiaries markets and
underwrites life insurance and annuities, health insurance, and provides
medical utilization management services in selected niche markets throughout
the United States. PFS bases its operations on four core businesses: Life
Insurance, Senior Health, Group Medical, and Medical Utilization Management.
Life insurance products include traditional life (term and whole life),
universal life, and interest sensitive life insurance and annuities sold
primarily to the middle income market. Senior health products include
Medicare supplement, long-term care, home health care and specialty health
for individuals age sixty-five and older. Group medical business consists of
small group and individual hospital and medical policies marketed primarily
to self-employed individuals and small business owners. Medical utilization
management services provided to underwriters, self insured businesses,
provider organizations, and others include pre-certification of in-patient
and out-patient medical care, case management, and development and management
of provider networks. Approximately 40% of PFS' premiums are written in six
states.
2. 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 PFS and its
subsidiaries.
USE OF ESTIMATES
The preparation of the financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual results could
differ from those estimates, and such differences may be material to the
financial statements.
INVESTMENTS
Investments in fixed maturities include bonds and mortgage-backed securities
with contractual maturities greater than one year. Fixed maturities
classified as "available for sale" are carried at fair value and fixed
maturities classified as "held to maturity" are carried at amortized cost.
Although PFS has the ability and intent to hold held-to-maturity 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.
Changes in fair values of available-for-sale securities, after adjustments
including 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 charge or credit to operations had such unrealized amounts been
realized.
The amortized cost of fixed maturity investments 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.
On December 1, 1995, as a result of recently issued guidance from the
Financial Accounting Standards Board ("FASB"), PFS transferred held-to-
maturity fixed maturities with an amortized cost of $222,482,000 to
available-for-sale, and also transferred $110,152,000 of available-for-sale
fixed maturities to held-to-maturity. These transfers resulted in a
$8,290,000 decrease to unrealized appreciation of securities.
For 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.
Short term investments have maturities of three months or less and are
carried at cost which approximates fair value.
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, 1995, interest credited during
the contract accumulation period ranged from 2.5% to 11.25%. 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 2.5% to 9.25% depending on the year of issue. The
provisions for future policy benefits and the deferral and amortization of
policy acquisition costs are intended to result in benefits and expenses
being associated with premiums proportionately over the policy periods.
UNEARNED PREMIUMS
Unearned premiums are calculated using the monthly pro-rata basis.
DEFERRED POLICY ACQUISITION COSTS
Costs that vary with, and are primarily related to, the production of new
business are deferred. Such costs are primarily related to accident and
health business and principally include the excess of new business
commissions over renewal commissions and underwriting and sales expenses.
For annuities and interest-sensitive life insurance policies, deferred costs
are amortized generally in proportion to expected gross profits arising from
the difference between investment and mortality experience and amounts
credited or charged to policies. That amortization is adjusted
retrospectively when estimates of current or future gross profits (including
the impact of realized investment gains and losses) to be realized from a
group of products are revised. For other life and accident and health
policies, costs are amortized over the premium-paying period of the policies,
using the same mortality or morbidity, interest, and withdrawal assumptions
that are used in calculating the liabilities for future policy benefits.
The unamortized cost of purchased insurance in force is included in DAC
($26,681,000 and $21,291,000 at December 31, 1995 and 1994, 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.
FEDERAL INCOME TAXES
Federal income tax provisions are based on income or loss reported for
financial statement purposes and tax laws and rates in effect for the years
presented. Deferred income taxes have been provided for the effects of
temporary differences between financial reporting and tax bases of assets and
liabilities and are measured using enacted tax rates. A valuation allowance
for deferred tax assets is provided where it is more likely than not that a
portion of the asset will not be realized.
DEPRECIATION
Building, equipment and investment real estate are recorded at cost and are
depreciated using principally the straight-line method.
NET INCOME PER COMMON SHARE
Primary net income per share of Common Stock is determined by dividing net
income 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 per
share would be antidilutive, they are excluded from the average shares
outstanding. Fully diluted net income per share is computed as if the
Preferred Stock and Convertible Subordinated Debentures had been converted to
Common Stock.
COST IN EXCESS OF NET ASSETS OF COMPANIES ACQUIRED
The cost in excess of net assets of companies acquired (goodwill) ($5,017,000
and $5,317,000 at December 31, 1995 and 1994, respectively) is included
in other assets and is being amortized principally on a straight-line basis
over periods from five to forty years. Goodwill is periodically evaluated
for impairment based principally on projected undiscounted net cash flows of
the acquired companies.
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
1995, 1994 and 1993 PFS repurchased 53,900, 521,600 and 546,200 shares,
respectively, of their common stock. During 1995, 1994 and 1993, PFS
repurchased 18,400, 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.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, the FASB issued Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of",
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted
cash flows estimated to be generated by those assets are less than the
assets' carrying amount. Statement 121 also addresses the accounting for
long-lived assets that are expected to be disposed of. PFS will adopt
Statement 121 in the first quarter of 1996 and, based on current
circumstances, does not believe the effect of adoption of the new standard
will be material.
In October 1995, the FASB issued Statement No. 123, "Accounting for Stock-
Based Compensation," which the Company must adopt in 1996. This statement
establishes accounting and reporting standards for stock-based employee
compensation plans. The statement defines a fair value method of accounting
which would result in
an income statement charge, or to continue using the current accounting
method for such compensation plans. If PFS elects to continue using the
current treatment, the pro-forma results of the new provisions must be
disclosed in the financial statements. PFS is in the process of reviewing
this statement.
RECLASSIFICATIONS
Certain amounts in the 1993 and 1994 financial statements have been
reclassified to conform to the 1995 presentation.
3. CHANGES IN ACCOUNTING PRINCIPLES
In 1995 PFS adopted FASB Statements 114 and 118 which relate to accounting by
creditors for impairment of mortgage loans. Implementation of these
statements did not have an effect on PFS' financial statements.
FASB Statement 115, "Accounting for Certain Investments in Debt and Equity
Securities" was adopted by PFS as of January 1, 1994. 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.
4. BUSINESS COMBINATIONS
On January 31, 1995, Pioneer acquired for cash 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 (CNL).
The acquisition was accounted for by the purchase method and, accordingly,
the purchase price was allocated to assets and liabilities acquired based on
estimates of their fair values.
(IN THOUSANDS)
Assets Acquired
Cash $ 16,371
Investments 274,263
Value of insurance in force 1,570
Receivables and amounts on deposit
with reinsurers 87,213
Other assets 6,904
Liabilities Assumed
Policy liabilities (354,307)
Other liabilities (8,014)
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, EXCEPT PER
SHARE AMOUNTS)
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 July 1995, PFS purchased ACMG, Inc., a managed care company, principally
for cash of $1,584,000. The total assets acquired at the purchase date were
approximately $2,600,000.
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 statement of income 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.
5. 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:
<TABLE>
<CAPTION>
FIXED EQUITY
MATURITIES SECURITIES OTHER TOTAL
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1995
REALIZED $ (301) $ 4,605 $ (311) $ 3,993
UNREALIZED 86,406 (719) - 85,687
$86,105 $ 3,886 $ (311) $ 89,680
1994
Realized $ (94) $ 211 $ (500) $ (383)
Unrealized (58,705) (2,098) - (60,803)
$ (58,799) $ (1,887) $ (500) $(61,186)
1993
Realized $ (1,638) $ 293 $ 9 $ (1,336)
Unrealized 3,864 442 - 4,306
$ 2,226 $ 735 $ 9 $ 2,970
</TABLE>
The cost of equity securities was $13,332,571 at December 31, 1995, and
$12,484,000 at December 31, 1994. At December 31, 1995, gross unrealized
appreciation on equity securities was $2,781,000 and gross unrealized
depreciation was $544,000. At December 31, 1994, gross unrealized
appreciation on equity securities was $3,514,000 and gross unrealized
depreciation was $558,000.
In 1995, sales of two held-to-maturity securities with an amortized cost of
$5,490,000 resulted due to a significant deterioration in creditworthiness.
Sales of these securities resulted in a realized loss of $780,000. 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.
A comparison of amortized cost to fair value of fixed maturity investments by
category is as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(IN THOUSANDS)
<S> <C> <C> <C> <C>
At December 31, 1995:
HELD TO MATURITY
U.S. Treasury $26,897 $ 319 $ (44) $ 27,172
States and political subdivisions 4,669 227 - 4,896
Corporate securities 51,608 1,797 (19) 53,386
Mortgage-backed securities 162,867 4,599 (192) 167,274
$246,041 $6,942 $ (255) $252,728
AVAILABLE FOR SALE
U.S. Treasury $ 31,781 $ 2,303 $ - $ 34,084
States and political subdivisions 26,260 716 - 26,976
Foreign governments 3,072 - (54) 3,018
Corporate securities 294,950 19,523 (972) 313,501
Mortgage-backed securities 241,015 7,824 (3,752) 245,087
$597,078 $30,366 $ (4,778) $622,666
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
State 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
</TABLE>
The carrying amount of PFS' available for sale fixed maturity investments can
increase or decrease significantly in the near term as a result of changes in
market interest rates.
Unrealized appreciation on available-for-sale securities at December 31, 1995
of $4,518,000 included gross appreciation of $27,150,000 less unrealized
appreciation of $17,397,000 on investments in escrow trust accounts pursuant
to agreements with certain reinsurers (See Note 7) and net of deferred taxes
and DAC adjustments of $5,235,000. At December 31, 1994, unrealized
depreciation of available-for-sale securities consisted of gross depreciation
of $11,066,000 net of deferred tax assets of $3,873,000.
The amortized cost and fair value of fixed maturities at December 31, 1995,
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 1996 $ 6,691 $ 6,784
Due 1997-2001 73,794 75,903
Due 2002-2006 2,225 2,217
Due after 2006 464 550
Mortgage-backed securities 162,867 167,274
$246,041 $252,728
AVAILABLE FOR SALE:
Due in 1996 $ 7,639 $ 7,732
Due 1997-2001 114,199 119,818
Due 2002-2006 152,423 159,179
Due after 2006 81,802 90,850
Mortgage-backed securities 241,015 245,087
$597,078 $622,666
Proceeds from sales of investments (principally fixed maturities) during
1995, 1994, and 1993 were $213,177,000, $111,850,000 and $192,697,000,
respectively. Gross gains of $1,537,000, $1,448,000 and $10,834,000 and
gross losses of $1,838,000, $1,542,000 and $12,472,000 were realized on fixed
maturity sales in 1995, 1994, and 1993, respectively. Gross gains of
$4,762,000, $217,000 and $315,000 and gross losses of $157,000, $6,000 and
$22,000 were realized on sales of equity securities in 1995, 1994, and 1993,
respectively.
Major categories of net investment income are summarized as follows:
1995 1994 1993
(IN THOUSANDS)
Fixed maturities $61,076 $40,172 $34,529
Short-term investments 3,623 1,549 2,691
Other 9,550 4,189 4,069
Total investment income 74,249 45,910 41,289
Investment expenses (3,274) (3,124) (1,047)
Net investment income $70,975 $42,786 $40,242
At December 31, 1995, securities with a carrying value of $104,294,000 were
on deposit with various government authorities to meet regulatory
requirements and securities with a carrying value of $201,898,000 are held in
escrow trust accounts pursuant to reinsurance agreements. (See Note 7.)
At December 31, 1995, 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. $29,072,000
Prudential Home 14,763,000
Investment real estate (net of accumulated depreciation of $1,095,000 in 1995
and $483,000 in 1994) consists principally of land and a building used, in
part, as PFS' corporate headquarters.
At December 31, 1995, PFS held unrated or less-than-investment-grade
securities with a carrying value of $13,519,000. Those holdings amounted to
less than 1.3% of PFS' total investments at December 31, 1995.
At December 31, 1995, fixed maturities with a carrying value of $10,472,000
had been non-income producing for the preceding 12-month period.
6. FEDERAL INCOME TAXES
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:
<TABLE>
<CAPTION>
DECEMBER 31
1995 1994
(IN THOUSANDS)
<S> <C> <C>
DEFERRED TAX LIABILITIES
Deferred policy acquisition costs $66,458 $72,306
Net unrealized appreciation on
available-for-sale securities 2,625 -
Other 9,075 1,537
Total deferred tax liabilities 78,158 73,843
DEFERRED TAX ASSETS
Policy liabilities 70,550 69,101
Financial reinsurance - 3,788
Loss carryforwards 9,940 2,000
Net unrealized depreciation on
available-for-sale securities - 3,873
Other 11,775 6,213
Total deferred tax assets 92,265 84,975
Valuation allowance for
deferred tax assets (16,500) (3,870)
Deferred tax assets net of
valuation allowance 75,765 81,105
Net deferred tax (liability) asset $ (2,393) $ 7,262
</TABLE>
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. In 1995 the valuation allowance increased $12,630,000
principally due to the acquisition of Connecticut National Life Insurance
Company (See Note 4). There was no change in the valuation allowance in 1994
and in 1993 the valuation allowance increased $1,221,000.
PFS' effective federal income tax rate varied from the statutory federal
income tax rate as follows:
<TABLE>
<CAPTION>
1995 1994 1993
AMOUNT % AMOUNT % AMOUNT %
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Statutory federal income tax rate
applied to income
before income taxes $11,103 35.0% $ 9,108 35.0% $ 6,567 35.0%
Nontaxable investment income (473) (1.5) (384) (1.5) (112) (.6)
Nondeductible goodwill
amortization 60 .2 109 .4 319 1.7
Other 64 .2 40 .2 (155) (.8)
Income taxes and
effective rate $10,754 33.9% $ 8,873 34.1% $ 6,619 35.3%
</TABLE>
Taxes paid amounted to $8,257,000, $9,731,000, and $5,735,000 for 1995, 1994,
and 1993, 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, 1995 for PFS' life insurance subsidiaries was
$10,000,000. 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, 1995, PFS' life insurance subsidiaries had combined tax-
basis shareholders' surplus accounts of $63,700,000. Distributions up to
that amount would result in no income tax liability.
Certain of PFS' life insurance subsidiaries have tax basis operations loss
carryforwards of $28,400,000 expiring in years 2003 through 2008.
7. 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 $66,193,000,
$37,273,000, and $40,592,000 in 1995, 1994, and 1993, respectively. Under
various reinsurance arrangements, PFS' premiums were increased by
$13,474,000, $16,928,000, and $19,338,000 in 1995, 1994, and 1993,
respectively. PFS' policy benefits have been reduced for reinsurance
recoveries of $33,739,000 in 1995, $23,319,000 in 1994, and $21,871,000 in
1993. At December 31, 1995, approximately 29% of PFS' reinsurance
receivables and amounts on deposit with reinsurers were due from Lincoln
National Life Insurance Company, 23% from Employers Reinsurance Corporation,
and 15% from Reassurance Company of Hannover.
Prior to the acquisition by PFS in January 1995, CNL had entered into certain
reinsurance arrangements. PFS retains the assets and related policy
liabilities associated with the reinsured business. In accordance with the
reinsurance contracts, PFS does not participate in the realized gains and
losses on the assets held in escrow under these agreements. Accordingly, PFS
has established an amount due to reinsurers at December 31, 1995 and a
corresponding reduction in unrealized appreciation on available-for-sale
securities for investments held in escrow trust accounts pursuant to these
agreements.
8. SALE OF AGENT RECEIVABLES
In 1995, 1994, and 1993 a subsidiary of PFS sold agent receivables to an
unaffiliated company for proceeds of $20,851,000, $24,393,000, and
$25,376,000, respectively. The outstanding balances of such agent
receivables sold that remained uncollected at December 31, 1995 and 1994 were
$11,360,000 and $7,937,000, respectively. PFS remains subject to a maximum
credit exposure under this agreement amounting to 10% of agent receivables at
December 31, 1995.
9. RECONCILIATION OF LIABILITY FOR POLICY AND CONTRACT CLAIMS
The following table provides a reconciliation of the beginning and ending
policy and contract claim liability balances reported in PFS' balance sheets:
<TABLE>
<CAPTION>
1995 1994 1993
(IN THOUSANDS)
<S> <C> <C> <C>
Policy and contract claim
liability at beginning of year $155,373 $189,389 $148,141
Incurred claims related to:
Current year 469,881 482,449 431,357
Prior years (26,282) (36,655) (20,750)
Total claims incurred 443,599 445,794 410,607
Deduct claims paid related to:
Current year 322,210 350,210 260,702
Prior years 110,651 129,600 108,657
Total claims paid 432,861 479,810 369,359
Policy and contract claim
liability at end of year $166,111 $155,373 $189,389
</TABLE>
Claim reserves are estimates of amounts needed to pay reported and unreported
claims based on facts and circumstances known at the time the reserves are
established. Reserves are based on historical claims information, industry
statistics and other factors. The establishment of appropriate reserves is
an inherently uncertain process, and there can be no assurance that the
ultimate liability will not exceed recorded claim reserves. PFS holds
margins in its accident and health claim reserves to provide for potential
adverse deviation. Claim reserves estimates are continually reviewed and
adjusted as necessary.
10. NOTES PAYABLE
Short-term notes payable included $3,500,000 at December 31, 1995, drawn
under a line of credit arrangement. The borrowings are due in 1996 and bear
interest at prime and payable quarterly (See Note 22). The remaining balance
under the line of credit is due in April 1996 .
At December 31, 1995 PFS had a loan of $13,393,000 which replaced the line of
credit utilized at December 31, 1994. The portion of the loan due in 1996 of
$2,143,000 was included in short-term notes payable and the remainder was
included in long-term notes payable. Interest on the note is payable
quarterly currently at 5%. The note requires principal repayments of
$535,000 per quarter with a final payment on December 31, 1999. The Company
holds certificates of deposit at the bank in an amount equal to the
outstanding principal balance.
At December 31, 1995, PFS had an unsecured loan of $10,175,000. The portion
of the loan due in 1996 of $3,700,000 was included in short-term notes
payable and the balance was included in long-term notes payable. The note
bears interest currently at prime and is payable quarterly with the final
payment due August 1998.
At December 31, 1995, a PFS subsidiary had an unsecured loan of $825,000.
The portion of the loan due in 1996 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 at prime and is payable quarterly with the
final payment due July 1998.
At December 31, 1995, a PFS subsidiary had two loans totaling $3,565,000.
The portion of the loans due in 1996 of $311,000 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, 1995, PFS had $720,000 of short-term debt liability for which
a PFS agency subsidiary's future renewal commissions were pledged as
collateral.
At December 31, 1995 a PFS subsidiary had a short term note payable in the
amount of $1,660,000 as a portion of the acquisition price of CNL. The
principal balance of the note may be reduced by the former parent of CNL for
capital losses incurred on mortgage loan and real estate holdings. Interest
is payable at the average earnings rate of the investments, currently 8%.
At December 31, 1995 a PFS subsidiary had a loan of $1,200,000. The loan
bears interest at 8.8% and is due in July 1996.
The weighted average interest rate on short-term notes payable at year end
was 8.4%, 7.7% and 5.0% in 1995, 1994 and 1993, respectively.
Interest paid amounted to $6,629,000, $4,950,000, and $1,023,000 for 1995,
1994, and 1993, respectively.
11. 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.
The amortization of deferred policy acquisition costs is generally based on
the expected pattern of future revenues or gross profits and on the expected
persistency of the policies. PFS monitors the profitability and persistency
of its policies on a monthly basis. In reviewing the recoverability of
deferred policy acquisition costs related to medical insurance products, PFS
has made assumptions relative to future rate increases, medical claim trends,
lapse rates, expenses and investment income. Increased lapses or revised
estimates of profitability anticipating future losses could result in an
increase in the amortization rate or a write-off of deferred policy
acquisition costs, which would adversely impact results of operations and
financial condition.
Pursuant to a 1994 actuarial study, PFS revised certain of these assumptions
to reflect present and anticipated future experience. This study resulted in
increased amortization of deferred policy acquisition costs in 1994 of
$16,700,000.
12. 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 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.
Unrealized Appreciation/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.
<TABLE>
<CAPTION>
1995 1994 1993
(IN THOUSANDS)
<S> <C> <C> <C>
Combined net income on a statutory basis $ 9,576 $ 6,986 $ 10,155
Adjustments for:
Deferred policy acquisition costs (12,579) (34,814) (12,842)
Policy liabilities 18,413 26,544 (18,494)
Financial reinsurance 12,748 17,544 34,017
Deferred federal income taxes (3,347) (2,303) 4,239
Non-insurance companies, eliminations,
and other adjustments (3,843) 3,192 (4,930)
Consolidated net income in accordance
with GAAP $ 20,968 $ 17,149 $ 12,145
DECEMBER 31
1995 1994
(IN THOUSANDS)
Combined stockholders' equity on a statutory basis $ 115,423 $ 124,284
Adjustments for:
Deferred policy acquisition costs 219,874 225,618
Policy liabilities (156,141) (180,422)
Financial reinsurance - (12,748)
Deferred federal income taxes (2,393) 7,262
Non-admitted assets 15,354 10,813
Surplus notes (4,756) (4,436)
Unrealized appreciation (depreciation) on
available-for-sale fixed maturities 25,588 (14,021)
Other (18,710) (12,296)
Combined insurance subsidiaries stockholders'
equity on a GAAP basis 194,239 144,054
Non-insurance companies equity, eliminations
and other adjustments (49,665) (75,726)
Consolidated stockholders' equity in
accordance with GAAP $144,574 $ 68,328
</TABLE>
Dividends from PFS' insurance subsidiaries unassigned surplus are limited
principally 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 in 1996 without regulatory approval is $3,711,000. At
December 31, 1995, PFS' retained earnings was $61,231,000 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.
13. 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.
In August 1995, the Company accepted the conversion of $46,900,000 of the
outstanding 8% convertible subordinated debentures. The effect of the
conversion was an increase in stockholders' equity of $45,300,000 and a
charge to income of $3,500,000, net of taxes. Had the conversion occurred at
the beginning of the year, primary earnings per share would have decreased to
$2.02.
The debentures are redeemable by PFS under certain conditions after July
1996.
At December 31, 1995, 825,106 shares of PFS' Common Stock were reserved for
conversion of the outstanding convertible subordinated debentures.
14. 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, 1995, 1,358,240 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 $25.85 per
share in 1995, 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.
15. 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
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.
16. 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:
<TABLE>
<CAPTION>
1995 1994
NUMBER NUMBER
OF EXERCISE OF EXERCISE
SHARES PRICE SHARES PRICE
<S> <C> <C> <C> <C>
Options outstanding at
beginning of year 1,045,571 $5.50 - $12.00 733,250 $5.50 -$12.00
Granted 1,019,364 9.00 - 22.25 480,321 8.88 - 11.38
Exercised (147,000) 5.50 - 12.00 (85,500) 5.50 - 11.00
Canceled/repurchased (25,000) 10.75 (82,500) 5.50 - 12.00
Options outstanding
at end of year 1,892,935 $5.50 - $22.25 1,045,571 $5.50-$12.00
Options exercisable
at end of year 692,566 561,250
Unoptioned shares
available for
granting of options 1,996,662 1,535,201
</TABLE>
17. 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 $7,140,000,
$4,530,000, and $4,516,000 in 1995, 1994, and 1993, respectively. Minimum
future rental commitments in connection with noncancelable operating leases
are as follows:
1996 $ 3,944,000
1997 5,039,000
1998 1,508,000
1999 970,000
2000 527,000
PFS has entered into employment agreements with certain officers.
PFS' insurance subsidiaries are subject to extensive governmental regulation
and supervision at both federal and state levels. Such regulation includes
premium rate levels, premium rate increases, policy forms, minimum loss
ratios, dividend payments, claims settlement, licensing of insurers and their
agents, capital adequacy transfer of control, and amount and type of
investments. Additionally, there are numerous health care reform proposals
and regulatory initiatives under consideration which if enacted could have
significant impact on PFS' revenues and results of operations.
The number of insurance companies that are under regulatory supervision has
increased, which 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.
18. BENEFIT PLANS
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 1995). 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, 1995, the Plan's assets included PFS Common Stock
of $7,561,912, at fair value. PFS' contributions charged to operations were
$1,564,804 in 1995, $1,365,000 in 1994, and $1,073,000 in 1993.
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 1995, 1994 and 1993,
2,016 shares, 6,332 shares and 8,057 shares, respectively, of PFS Common
Stock were issued under this plan.
19. ALLOWANCES AND ACCUMULATED DEPRECIATION
Allowances for doubtful accounts related to other receivables amounted to
$1,548,000 at December 31, 1995, and $895,000 at December 31, 1994.
Accumulated depreciation related to building and equipment amounted to
$23,370,000 at December 31, 1995, and $19,325,000 at December 31, 1994.
20. 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
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, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
FAIR CARRYING FAIR CARRYING
VALUE VALUE VALUE VALUE
(IN THOUSANDS)
Financial Assets
<S> <C> <C> <C>
Fixed Maturities:
Available-or-sale $622,666 $622,666 $218,748 $218,748
Held-to-maturity 252,728 246,041 338,540 378,650
Equity securities 15,570 15,570 15,440 15,440
Mortgage loans 9,253 9,253 1,806 1,806
Policy loans 78,230 79,122 22,025 23,082
Financial Liabilities
Investment contracts 205,160 214,573 194,072 203,654
Long-term notes payable 21,504 21,504 2,520 2,520
Subordinated debentures 14,833 9,695 54,843 57,427
</TABLE>
During 1994, PFS began using exchange-traded treasury futures contracts as
part of its overall interest rate risk management strategy for a 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 1995 and 1994, are recognized as an adjustment to the carrying
amount of the asset being hedged. PFS had no futures contracts outstanding
at December 31, 1995.
21. 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:
<TABLE>
<CAPTION>
1995 1994 1993
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUES
Group Medical:
Unaffiliated $ 430,885 $ 457,633 $ 379,742
Inter-segment 21,541 35,373 30,439
Senior Health 236,556 235,031 247,100
Life Insurance 115,545 71,075 67,780
Medical Utilization Management:
Unaffiliated 17,098 10,416 4,506
Inter-segment 4,007 4,927 4,358
825,632 814,455 733,925
Eliminations 25,548 40,300 34,797
Total $ 800,084 $ 774,155 $ 699,128
INCOME (LOSS) BEFORE INCOME TAXES
Group Medical $ 19,729 $ 10,889 $ 6,528
Senior Health 16,753 13,420 12,255
Life Insurance 7,128 8,537 7,623
Medical Utilization Management 739 2,026 (1,211)
Corporate expenses (12,627) (8,850) (6,431)
Total $ 31,722 $ 26,022 $ 18,764
IDENTIFIABLE ASSETS AT YEAR-END
Group Medical $ 245,439 $ 245,763 $ 287,713
Senior Health 337,789 291,703 301,700
Life Insurance 966,095 533,070 514,154
Medical Utilization Management 9,598 5,164 4,704
Total $1,558,921 $1,075,700 $1,108,271
</TABLE>
22. CREDIT ARRANGEMENTS
PFS has a line of credit arrangement for short-term borrowings with three
banks amounting to $17,000,000 through April 1996, of which $3,500,000 was
used at December 31, 1995. The line of credit arrangement can be terminated,
in accordance with the agreement, at PFS' option.
23. SUBSEQUENT EVENTS
PFS signed a letter of intent to purchase Universal Fidelity Life Insurance
Company (Universal) for approximately $26,000,000 in March 1996. For 1995
Universal has statutory-basis premium revenue of approximately $33,000,000,
assets of $40,000,000, and statutory basis capital and surplus of
approximately $18,000,000.
On February 21, 1996 PFS filed a Registration Statement with the Securities
and Exchange Commission for the issuance of $65,000,000 of convertible
subordinated notes due 2003 plus up to $9,750,000 which may be used for over-
allotments. PFS intends to use the net proceeds from the offering to call
its outstanding redeemable preferred stock and repay outstanding bank debt.
Any remaining proceeds will be contributed to the capital and surplus of the
insurance subsidiaries.
24. QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary of unaudited quarterly results of operations for 1995 and 1994 is
as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1995
1ST 2ND 3RD 4TH
<S> <C> <C> <C> <C>
Premiums and
policy
charges $169,575 $162,706 $174,678 $180,084
Net investment
income and
other 24,444 27,546 27,065 33,986
Net income 4,955 5,360 3,316 7,337
Net income
per share:
Primary .73 .78 .32 .60
Fully diluted .47 .48 .30 .59
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
</TABLE>
SCHEDULE I
PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS
IN RELATED PARTIES
December 31, 1995
<TABLE>
<CAPTION>
Amount
Shown in the
Consolidated
Amortized Fair Balance
Type of Investment Cost Value Sheet
(in thousands)
<S> <C> <C> <C>
Fixed maturities to be held
to maturity:
U.S. Treasury $ 26,897 $ 27,172 $ 26,897
States and political
subdivisions 4,669 4,896 4,669
Corporate securities 51,608 53,386 51,608
Mortgage-backed securities 162,867 167,274 162,867
TOTAL FIXED MATURITIES
TO BE HELD TO MATURITY 246,041 252,728 246,041
Fixed maturities available
for sale:
U.S. Treasury 31 781 $ 34,084 34,084
States and political
subdivisions 26,260 26,976 26,976
Foreign governments 3,072 3,018 3,018
Corporate securities 294,950 313,501 313,501
Mortgage-backed securities 241,015 245,087 245,087
TOTAL FIXED MATURITIES
AVAILABLE FOR SALE 597,078 622,666 622,666
Equity securities:
Common stocks:
Banks, trusts, and
insurance companies 9,959 12,551 12,551
Nonredeemable preferred
stocks 3,374 3,019 3,019
TOTAL EQUITY SECURITIES 13,333 $ 15,570 15,570
Real estate 18,250 18,250
Mortgage loans on real estate 9,253 9,253
Policy loans 79,122 79,122
Short-term investments 51,690 51,690
TOTAL INVESTMENTS $1,014,767 $1,042,592
</TABLE>
SCHEDULE II
PIONEER FINANCIAL SERVICES, INC. (Parent Company)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
December 31
1995 1994
<S> <C> <C>
ASSETS
Investments in subsidiaries* $158,212 $122,310
Cash 58 157
Note receivable from United Group Holdings (UGH)* 40,941 38,704
Other notes receivable from subsidiaries* 4,000 3,517
Due from affiliates* 674 132
Prepaid expenses 871 592
Deferred debenture offering expenses 442 3,214
Other assets 4,202 2,014
$209,400 $170,640
LIABILITIES, REDEEMABLE PREFERRED STOCK, AND STOCKHOLDERS' EQUITY
Liabilities:
General expenses and other liabilities $ 5,827 $ 3,481
Dividends payable 1,014 772
Short-term notes payable 9,343 18,950
Long-term notes payable 17,725 -
Convertible subordinated debentures 9,695 57,427
43,604 80,630
Redeemable Preferred Stock, no par value:
$2.125 cumulative convertible exchangeable
preferred stock
Authorized: 5,000,000 shares
Issued and outstanding: (1995-848,900 shares; 21,222 21,682
1994-867,300 shares)
Stockholders' equity:
Common Stock, $1 par value:
Authorized: 20,000,000 shares
Issued, including shares in treasury
(1995 - 11,207,591; 1994 - 6,996,157) 11,208 6,996
Additional paid-in capital 72,198 29,299
Unrealized appreciation (depreciation)
of available for sale securities 4,518 (7,193)
Retained earnings 66,870 48,960
Less treasury stock at cost (1995 - 1,132,300)
1994 - 1,078,400) (10,220) (9,734)
Total stockholders' equity 144,574 68,328
$209,400 $170,640
See note to condensed financial statements.
*Eliminated in consolidation.
</TABLE>
SCHEDULE II
PIONEER FINANCIAL SERVICES, INC. (Parent Company)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT--Continued
CONDENSED STATEMENTS OF INCOME
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31
1995 1994 1993
<S> <C> <C> <C>
Revenues:
Interest income from subsidiaries* $ 2,948 $ 2,972 $ 1,090
Other investment income 29 109 62
Dividends from consolidated
subsidiaries* 4,540 10,225 10,345
7,517 13,306 11,497
Expenses:
Operating and administrative
expenses 8,020 5,672 4,702
Interest expense 4,645 4,894 3,204
12,665 10,566 7,906
Income (loss) before equity in
undistributed net income
of subsidiaries (5,148) 2,740 3,591
Equity in undistributed net
income of subsidiaries* 26,116 14,409 8,554
Net income 20,968 17,149 12,145
Preferred stock dividends 1,805 1,904 2,021
Income applicable to
common stockholders $ 19,163 $ 15,245 $ 10,124
See note to condensed financial statements.
*Eliminated in consolidation.
</TABLE>
SCHEDULE II
PIONEER FINANCIAL SERVICES, INC. (Parent Company)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT--Continued
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31
1995 1994 1993
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 20,968 $ 17,149 $ 12,145
Adjustments to reconcile net
income to net cash provided (used)
by operating activities:
Change in other assets and
liabilities 3,728 1,095 1,678
Equity in undistributed net
income of subsidiaries* (26,116) (14,409) (8,554)
NET CASH PROVIDED (USED)
BY OPERATING ACTIVITIES (1,420) 3,835 5,269
INVESTING ACTIVITIES
Additional investment in
consolidated subsidiaries* (1,605) (10,758) (15,219)
FINANCING ACTIVITIES
Decrease in notes receivable
from PLIC - - 29,128
Increase in notes receivable from UGH (2,238) (1,209) (37,495)
Net proceeds from issuance of
convertible subordinated debentures - - 54,055
Increase in notes payable 9,343 18,950 -
Repayment of notes payable (1,225) (50) (31,600)
Decrease (increase) in other notes
receivable from subsidiaries* (483) (3,114) 3,591
Stock options exercised 1,520 495 451
Dividends paid-preferred (1,805) (1,904) (2,021)
Dividends paid-common (1,253) (930) -
Purchase of treasury stock (486) (4,963) (4,720)
Retirement of preferred stock (460) (1,993) (315)
Other 13 87 44
NET CASH PROVIDED BY
FINANCING ACTIVITIES 2,926 5,369 11,118
INCREASE (DECREASE) IN CASH (99) (1,554) 1,168
CASH AT BEGINNING OF YEAR 157 1,711 543
CASH AT END OF YEAR $ 58 $ 157 $ 1,711
See note to condensed financial statements.
*Eliminated in consolidation.
</TABLE>
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, 1995 and 1994, 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.
SCHEDULE III
PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
(In thousands)
<TABLE>
<CAPTION>
December 31
Deferred Future Policy
Policy Benefits and
Acquisition Policy and Unearned Other Policy
Segment Costs Contract Claims Premiums Liabilities
<S> <C> <C> <C> <C>
1995:
Group Medical $ 62,255 $127,205 $ 15,932 $ 3,122
Senior Health 88,790 181,616 55,218 3,355
Life Insurance 68,829 818,417 - 9,600
Medical Utilization
Management - - - -
$219,874 $1,127,238 $ 71,150 $ 16,077
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
</TABLE>
SCHEDULE III (continued)
PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
(In thousands)
<TABLE>
<CAPTION>
Amortization
Net of
Premiums Investment Deferred
and Income and Policy Other
Policy Realized Gains Acquisition Other Operating
Segment Charges and Losses* Benefits Costs Income Expenses*
<S> <C> <C> <C> <C> <C> <C>
1995:
Group Medical $404,911 $ 7,107 $253,444 $ 38,03 $ 18,867 $119,680
Senior Health 221,040 13,959 145,527 21,601 1,557 52,675
Life Insurance 61,092 53,902 76,846 9,566 551 22,005
Medical Utilization
Management - - - - 17,098 16,359
Corporate Expenses - - - - - 12,627
$687,043 $ 74,968 $475,817 $ 69,199$ 38,073 $223,346
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
*Allocations of net investment income and other operating expenses are based
on a number of assumptions and estimates and results would change if
different methods were applied. Interest expense has been included with
other operating expenses. Realized investment gains and losses were
allocated to the appropriate segment.
</TABLE>
SCHEDULE IV
PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES
REINSURANCE
(In thousands)
<TABLE>
<CAPTION>
Assumed Percentage
Ceded to from of Amount
Gross Other Other Net Assumed
Amount Companies Companies Amount to net
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1995:
Life insurance in force* $17,742,813 $ 7,466,875 $ - $10,275,938 -
Premiums and Policy Charges:
Group Medical $ 404,600 $ 7,484 $ 7,795 $ 404,911 1.9%
Senior Health 228,388 9,682 2,334 221,040 1.1
Life Insurance 106,774 49,027 3,345 61,092 5.5
Medical Utilization
Management - - - -
$ 739,762 $ 66,193 $ 13,474 $ 687,043
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
Management - - - -
$ 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
*At end of year
</TABLE>
SCHEDULE V
PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<CAPTION>
Deductions-
Doubtful
Accounts
Written
Balance at Additions- off During Balance
Beginning Charged to the Year at End
of Year Expense /Disposals of Year
Description
<S> <C> <C> <C> <C>
Year Ended December 31, 1995:
Allowance for doubtful accounts $ 895 $ 1,452 $ 799 $ 1,548
Accumulated depreciation on
building and equipment 19,325 5,172 1,127 23,370
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
</TABLE>
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 8, 1996
/S/ Peter W. Nauert /S/ Michael A. Cavataio
Peter W. Nauert, Chairman, Michael A. Cavataio
Chief Executive Officer, and Director and Vice Chairman
Director
/S/ William B. Van Vleet /S/ R. Richard Bastian, III
William B. Van Vleet, Director R. Richard Bastian, III
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
EXHIBIT 10(f)
EMPLOYMENT AGREEMENT
The Agreement is made as of September 1, 1995 between PIONEER FINANCIAL
SERVICES, INC., a Delaware corporation with its principal place of business at
1750 E. Golf Road, Schaumburg, IL 60173 (hereinafter "Pioneer Financial"); and
PETER W. NAUERT, an individual residing at 913 N. Main Street, Rockford, IL
61103 ( "Nauert").
W I T N E S S E T H:
WHEREAS, Pioneer Financial is an insurance holding company which has life
and accident and health insurance subsidiaries and affiliated administrative
service and marketing companies; and
WHEREAS, Nauert is currently Chairman and Chief Executive Officer of
Pioneer Financial and Nauert possesses valuable skills, expertise and abilities
in the life and accident and health insurance business; and
WHEREAS, Pioneer Financial is desirous of retaining the services of Nauert
as a key managerial employee; and
WHEREAS, Nauert desires to be employed by Pioneer Financial on the terms
set forth herein;
NOW, THEREFORE, for and in consideration of the covenants contained herein,
Pioneer Financial hereby employs Nauert and Nauert accepts such employment with
Pioneer Financial upon the terms and conditions hereinafter set forth.
1. Employment. Pioneer Financial hereby employs Nauert and Nauert hereby
agrees to be employed by Pioneer Financial for a continually renewing term of
three (3) years commencing on September 1, 1995, and continuing, without further
action on the part of Pioneer Financial or Nauert, until terminated as provided
herein (the "Term"), to perform the duties set forth herein.
2. Duties. Subject to the control of the Board of Directors of Pioneer
Financial, Nauert shall serve during the Term as Chairman and Chief Executive
Officer of Pioneer Financial, and in such capacity shall render such services as
the Board of Directors of Pioneer Financial shall direct. In addition, Nauert
shall serve in such other offices or capacities as the Board of Directors of
Pioneer Financial may from time to time determine. Nauert shall have such
executive powers and authority as may reasonably be required by him in order to
discharge such duties in an efficient and proper manner.
3. Compensation. Pioneer Financial shall in the aggregate pay to Nauert
for all services to be rendered hereunder:
(a) an annual base salary in an amount of not less than One Million
Dollars ($1,000,000); provided that the Board of Directors of Pioneer Financial
shall annually make a review of Nauert's salary and increase such annual base
salary as it deems appropriate; and
(b) such annual bonus, as may be determined by the Compensation
Committee of the Board of Directors of Pioneer Financial, based upon the
achievement of such Pioneer Financial company-wide performance standards as may
be established by such Committee and approved by the stockholders of Pioneer
Financial, provided, however, that Nauert shall be entitled to receive a bonus
for 1995 based upon the criteria heretofore established by the Committee.
4. Prior Employment Agreements. This Agreement supersedes all other
existing employment agreements between Pioneer Financial or its subsidiaries and
Nauert; provided, however, that Section 4 of that certain Employment Agreement,
dated as of December 3, 1993, between Pioneer Financial and Nauert, all other
provisions of such Agreement relating to the transactions contemplated in such
Section 4, and the rights and obligations of the parties thereunder and under
the Note relating to the transactions contemplated in such Section 4, shall
remain in full force and effect in accordance with their respective terms.
5. Stock Options. Simultaneously with the execution and delivery of this
Agreement, Pioneer Financial is issuing to Nauert options to purchase an
aggregate of 500,000 shares of Pioneer Financial common stock. Such options are
being issued subject to the approval by the stockholders of Pioneer Financial of
an appropriate amendment to the Pioneer Financial 1994 Omnibus Stock Incentive
Program (the "Plan") which would, among other things, increase the number of
options which may be granted under the Plan to any participant in any year.
Such options are exercisable as follows: 100,000 on or after the date of the
execution and delivery of this Agreement at $15.25 per share; 100,000 on or
after September 1, 1996 at $16.75 per share; 100,000 on or after September 1,
1997 at $18.50 per share; 100,000 on or after September 1, 1998 at $20.25 per
share; and 100,000 on or after September 1, 1999 at $22.25 per share; provided,
however, that none of such options are exercisable within six months of the date
of grant. Such options (x) are exercisable only if Nauert is employed by PFS
or one of its subsidiaries at the time they can first be exercised; and (y) have
been issued on such other terms and conditions as are contained in the Option
Agreement relating thereto.
6. Benefits. During his employment hereunder, Nauert shall be entitled
to participate in all employee benefits made available to management personnel
of Pioneer Financial and its subsidiaries.
7. Death. Nauert's employment by Pioneer Financial will terminate
immediately upon his death; provided, however, that in the event of Nauert's
death during the Term, Nauert's estate shall be entitled to receive the payment
described in the last sentence of Section 9(c).
8. Disability. If during Nauert's employment hereunder, Nauert becomes
totally or partially disabled, Pioneer Financial shall continue to pay to Nauert
as long as such disability continues during the Term (or until Nauert's
employment is terminated by Pioneer Financial in accordance with Section 9 (if
earlier)) the level of annual salary payable to Nauert at the date his
disability is determined, reduced dollar-for-dollar to the extent of any
disability insurance payments paid to Nauert through insurance programs, the
premiums for which were paid by Pioneer Financial or its subsidiaries. For
purposes of this Agreement, the term "total disability" shall mean Nauert's
inability due to illness, accident or other physical or mental incapacity to
engage in the full time performance of his duties under this Agreement as
reasonably determined by the Board of Directors of Pioneer Financial based on
such evidence as such Board shall deem appropriate. For purposes of this
Agreement, "partial disability" shall mean Nauert's ability due to illness,
accident or other physical or mental incapacity to engage in only the partial
performance of his duties under this Agreement, as reasonably determined by the
Board of Directors of Pioneer Financial based on such evidence as such Board
shall deem appropriate.
9. Termination.
(a) End of Term. Pioneer Financial shall have the right at any time
during the Term, by action of its Board of Directors, to terminate this
Agreement upon thirty-six (36) months prior written notice to Nauert.
(b) For Cause. Pioneer Financial shall have the right to terminate
Nauert's employment hereunder at any time during the Term "for cause". For
purposes of this Agreement, "for cause" shall mean any of the following actions
(or inactions) by Nauert: illegal conduct of a severity greater than a
misdemeanor, gross neglect of, and the continued failure to perform
substantially, Nauert's duties under this Agreement. Notwithstanding anything
herein to the contrary, Nauert's inability to perform the duties of his position
due to his total or partial disability (as defined herein) shall not be deemed
to constitute cause.
If, in the opinion of the Board of Directors of Pioneer Financial,
Nauert's employment shall become subject to termination for cause, such Board of
Directors shall give Nauert notice to that effect, which notice shall describe
the matter or matters constituting such cause. If, at the end of such thirty
(30) day period, Nauert has not substantially eliminated or cured each such
matter or matters, then Pioneer Financial shall have the right to give Nauert
notice of the termination of his employment. Nauert's employment hereunder
shall be considered terminated for cause as of the date specified in such notice
of termination unless and until there is a final determination by a court of
competent jurisdiction that the cause of termination of Nauert's employment did
not exist at the time of giving said notice of termination. Upon termination of
Nauert's employment "for cause", this Agreement shall terminate without further
obligations to Nauert other than Pioneer Financial's obligation (a) to pay to
Nauert in a lump sum in cash within thirty (30) days after the date of
termination Nauert's base salary through the date of termination to the extent
not theretofore paid and (b) to the extent not theretofore paid or provided, to
pay or provide to pay, to Nauert on a timely basis any other amounts or benefits
required to be paid or provided or which Nauert is eligible to receive under any
plan, program, policy or practice or contract or agreement of Pioneer Financial.
(c) Without Cause. Pioneer Financial shall have the right to
terminate Nauert's employment hereunder without cause at any time during the
Term. If the Board of Directors determines to terminate Nauert's employment
without cause, Pioneer Financial shall give notice of such termination to Nauert
and Nauert's employment hereunder shall be considered terminated without cause
as of the date specified in such notice of termination. Upon the date of the
termination of Nauert's employment without cause, Nauert shall be paid an amount
equal to the present value, discounted to the present at an annual rate of 8%,
of the salary which would have been payable during a period equal to the
remainder of the Term, commencing on the date of termination at the rate of
annual base salary payable to Nauert at the date of termination.
(d) By Nauert. Nauert may terminate his employment hereunder at any
time by retirement or resignation, upon notice to Pioneer Financial. Upon such
termination by Nauert, no compensation for any period after the date of such
termination shall be payable to Nauert; provided, however, that if such
termination by Nauert is for "good reason" (as defined in Section 10(c)), then
Nauert shall be entitled to the payment described in the last sentence of
Section 9(c).
(e) Change in Control Effect. No payments shall be made to Nauert
pursuant to this Section 9 in the event that Nauert is entitled to Change in
Control Compensation pursuant to Section 10.
10. Change in Control.
(a) Change in Control Severance Compensation. If (x) within 180 days
following a Change of Control (as defined in Section 10(b)) is terminated by
Nauert for any reason whatsoever, or (y) within two years following a Change in
Control, Nauert's employment is terminated by Pioneer Financial other than "for
cause" (as defined in Section 9(b) or is terminated by Nauert for "good reason"
(as defined in Section 10(c)), then Nauert shall be entitled to receive from
Pioneer Financial a lump sum cash payment in an amount ("Change in Control
Compensation") equal to three times the average income reflected on the W-2
form or forms issued to Nauert by Pioneer Financial or its subsidiaries for
services performed for them for the five (5) calendar years preceding the year
in which such Change of Control occurs. Pioneer Financial shall pay such amount
to Nauert within thirty (30) days of the date of termination. If Nauert's
employment is terminated by Pioneer Financial for cause, by reason of Nauert's
death or retirement, or by Nauert without good reason, the Change in Control
Compensation will not be paid. If Nauert was totally or partially disabled as
of the Change in Control, the Change in Control Compensation will not be paid.
b) Change In Control. For purposes of this Agreement, "Change in Control"
shall mean the occurrence of any of the following events:
(i) any person or persons acting as a group, other than a person
which as of the date of this Agreement is the beneficial owner of voting
securities of Pioneer Financial and other than Nauert or a group including
Nauert, shall become the beneficial owner of securities of Pioneer Financial
representing at least thirty-four percent (34%) of the combined voting power of
Pioneer Financial's then outstanding securities; or
(ii) any consolidation or merger to which Pioneer Financial is a
party, if following such consolidation or merger, stockholders of Pioneer
Financial immediately prior to such consolidation or merger shall not
beneficially own securities representing at least sixty-seven percent (67%) of
the combined voting power of the outstanding voting securities of the surviving
or continuing corporation; or
(iii) any sale, lease, exchange or other transfer (in one
transaction or in a series of related transactions) of all, or substantially
all, of the assets of Pioneer Financial, other than to an entity (or entities)
of which Pioneer Financial or the stockholders of Pioneer Financial immediately
prior to such transaction beneficially own securities representing at least
sixty-seven percent (67%) of the combined voting power of the outstanding voting
securities.
(c) Good Reason. For purposes of this Agreement, "good reason" shall
mean any of the following:
(i) a change in Nauert's status or position, the assignment to
Nauert of any duties or responsibilities which are inconsistent with Nauert's
status and position or a reduction in the duties and responsibilities to be
exercised by Nauert;
(ii) any action by Pioneer Financial which renders Nauert unable
to effectively discharge his duties and responsibilities hereunder;
(iii) the failure to maintain Nauert's minimum annual base
salary in accordance with Section 3(a) or; in the event that such salary is
increased during the Term as provided herein, any reduction in Nauert's then
current annual base salary.
(iv) a failure by Pioneer Financial to continue in effect,
without material change, any benefit or incentive plan or arrangement in which
Nauert and all other executive officers of Pioneer Financial participate, or the
taking of any action by Pioneer Financial which would materially and adversely
affect Nauert's participation in, or materially reduce Nauert's benefits under,
any such plan or arrangement;
(v) a relocation of Nauert's workplace by Pioneer Financial to
any place outside the Chicago, Illinois metropolitan area, except for required
travel by Nauert on Pioneer Financial's business to an extent substantially
consistent with Nauert's business travel obligations hereunder prior to such
relocation;
(vi) a reduction by Pioneer Financial in Nauert's eligibility for
paid vacation benefits under a program or policy applicable to Nauert and all
other executive officers of Pioneer Financial; or
(vii) any failure by Pioneer Financial to obtain the
assumption of this Agreement by any successor or assignee thereto.
11. Confidential Information and Trade Secrets.
(a) Nature. During Nauert's employment by Pioneer Financial, Nauert
will enjoy access to Pioneer Financial's "confidential information" and "trade
secrets". For purposes of this Agreement, "confidential information" shall mean
information which is not publicly available, including without limitation,
information concerning customers, material sources, suppliers, financial
projections, marketing plans and operation methods, Nauert's access to which
derives solely from Nauert's employment with Pioneer Financial. For purposes of
this Agreement, "trade secrets" shall mean Pioneer Financial's processes,
methodologies and techniques known only to those employees of Pioneer Financial
who need to know such secrets in order to perform their duties on behalf of
Pioneer Financial. Pioneer Financial takes numerous steps, including these
provisions, to protect the confidentiality of its confidential information and
trade secrets, which it considers unique, valuable and special assets.
(b) Restricted Use and Non-Disclosure. Nauert, recognizing Pioneer
Financial's significant investment of time, efforts and money in developing and
preserving its confidential information, shall not, during his employment
hereunder and for a two (2) year period after the end of Nauert's employment
hereunder, use for his direct or indirect personal benefit any of Pioneer
Financial's confidential information or trade secrets. For a two (2) year
period after the end of Nauert's employment hereunder, Nauert shall not disclose
to any person any of Pioneer Financial's confidential information or trade
secrets.
(c) Return of Pioneer Financial Property. Upon termination of
Nauert's employment with Pioneer Financial, for whatever reason and in whatever
manner, Nauert shall return to Pioneer Financial all copies of all writings and
records relating to Pioneer Financial's business, confidential information or
trade secrets which are in Nauert's possession of such time.
12. Non-Competition and Non-Solicitation.
(a) Pioneer Financial's Investment. Pioneer Financial is spending
and will spend much time, money and effort in building relationships with agents
and insureds, and will pay Nauert valuable consideration pursuant hereto in
exchange for Nauert's promises herein, including without limitation the
covenants in Section 11 and in this Section 12. Pioneer Financial has engaged
Nauert as Chairman and Chief Executive Officer of Pioneer Financial in order to,
among other reasons, take advantage of Nauert's unique knowledge of, and
contacts within, the life and accident and health insurance industry. Further,
Pioneer Financial will invest significant time and money in the further
development of Nauert's business ability, image and standing. As Nauert is
Chairman and Chief Executive Officer of Pioneer Financial, the reputation and
success of Nauert will be closely tied to the reputation and success of Pioneer
Financial and, during the Term, Nauert will be heavily identified with Pioneer
Financial's business.
(b) Non-Competition. During Nauert's employment hereunder and for a
twelve (12) month period after termination of such employment, unless such
termination is made by Pioneer Financial without cause or unless there has been
a Change in Control prior to such termination, Nauert shall not engage, directly
or indirectly, whether as an owner, partner, employee, officer, director, agent,
consultant or otherwise, in any location where Pioneer Financial or any of its
subsidiaries is engaged in business after the date hereof and prior to the
termination of Nauert's employment, in a business the same as or similar to, any
business now, or at any time after the date hereof and prior to Nauert's
termination, conducted by Pioneer Financial or any of its subsidiaries,
provided, however, that the mere ownership of 5% or less of the stock of a
company whose shares are traded on a national securities exchange or are quoted
on the National Association of Securities Dealers Automated Quotation System
shall not be deemed ownership which is prohibited hereunder.
(c) Non-Solicitation. During the twenty-four (24) month period
following termination of Nauert's employment with Pioneer Financial, Nauert
shall not, directly or indirectly induce employees of Pioneer Financial or any
of its subsidiaries to leave such employment with the result that such employees
would engage in business activities which are substantially similar or are
closely related to the business activities such employee performed on behalf of
Pioneer Financial and which compete against Pioneer Financial. Notwithstanding
the above, in the event Nauert is terminated by Pioneer Financial without cause,
then the twenty-four (24) month period referred to in this Section 12(c) shall
be reduced to twelve (12) months.
(d) Enforceability. The necessity of protection against the
competition of Nauert and the nature and scope of such protection has been
carefully considered by the parties hereto. The parties hereto agree and
acknowledge that the duration, scope and geographic areas applicable to the non-
competition covenant in this Section 12 are fair, reasonable and necessary, that
adequate compensation has been received by Nauert for such obligations, and that
these obligations do not prevent Nauert from earning a livelihood. If, however
for any reason any court determines that the restrictions in this Agreement are
not reasonable, that consideration is inadequate or that Nauert has been
prevented from earning a livelihood, such restrictions shall be interpreted,
modified or rewritten to include as much of the duration, scope and geographic
area identified in this Section 12 as will render such restrictions valid and
enforceable.
13. Retention of Pioneer Financial Stock. During the Term, Nauert shall
retain, directly or indirectly, ownership of not less than 1,000,000 shares of
Pioneer Financial common stock unless, and except to the extent, released from
this obligation by a written release from Pioneer Financial. For purposes of
this Agreement, "retain indirectly" shall mean and refer to any shares of
Pioneer Financial common stock, which would be considered to be owned by Nauert
under Section 267(c) of the Code, or the income of which would be taxable to
Nauert, his spouse or his children, or to any trust of which Nauert would be
deemed the owner under any of Sections 671 through 677, inclusive, of the Code.
14. Right of First Refusal. During the Term, Nauert shall not transfer
any shares of stock of Pioneer Financial for consideration to any person other
than a relative of Nauert, unless Nauert has offered to transfer such shares to
Pioneer Financial on the same terms, provided, however, that this provision
shall not apply at any time when the average last reported sale price for Common
Stock of Pioneer Financial on the New York Stock Exchange for the immediately
preceding five (5) trading days is greater than or equal to $12.00 per share.
15. Breach or Threatened Breach of Non-Competition Covenant. In the event
of a breach or threatened breach by Nauert of any provision of Section 11 or 12
hereof, Nauert acknowledges that the remedy at law would be inadequate and that
Pioneer Financial shall be entitled to an injunction restraining Nauert from
such act or threatened breach. Nothing herein contained shall be construed as
prohibiting Pioneer Financial from pursuing any other remedies available to it
for such breach or threatened breach, including the recovery of monetary
damages.
16. Business Days. Any date specified in this Agreement which is a
Saturday, Sunday or legal holiday shall be extended to the first regular
business day after such date which is not a Saturday, Sunday or legal holiday.
17. Choice of Law. This Agreement has been executed and made in
accordance with the laws of the State of Illinois and is to be construed,
enforced and governed in accordance therewith.
18. Counterparts. This Agreement may be executed in several counterparts,
each of which shall be an original, but all of which together shall constitute
one and the same instrument.
19. Entire Agreement Amendments. This Agreement contains the entire
agreement among the parties hereto with respect to the subject matter hereof
and, except as provided in Section 4 above, supersedes all other existing
employment agreements between Pioneer Financial or its subsidiaries and Nauert.
No change or modification of this Agreement, or any waiver of the provisions
hereof, shall be valid unless the same is in writing and signed by the parties
hereto. Waiver by any party hereto of a breach by the other party of any
provisions of this Agreement shall not operate or be construed as a waiver of
any subsequent breach by such party.
20. Headings. The headings used herein are for ease of interpretation and
shall have no effect on the interpretation of any provision of this Agreement.
21. Notices. All notices, requests, demands and other communications
hereunder shall be in writing and shall, until receipt of contrary written
instructions, be delivered personally to, or mailed by certified or registered
mail with proper postage prepaid, to the party at the address as follows:
TO PIONEER FINANCIAL: Pioneer Financial Services, Inc.
1750 E. Golf Road
Schaumburg, IL 60173
TO NAUERT: Mr. Peter W. Nauert
913 N. Main Street
Rockford, IL 61103
22. Severability. If any provision of this Agreement is held for any
reason to be invalid, it will not invalidate any other provisions of this
Agreement which are in themselves valid, nor will it invalidate the provisions
of any other agreement between the parties hereto. Rather, such invalid
provision shall be construed so as to give it the maximum effect allowed by
applicable law. Any other written agreement between the parties hereto shall be
conclusively deemed to be an agreement independent of this Agreement.
23. Successors and Assigns. This Agreement and all the provisions hereof
shall be binding upon and inure to the benefit of the parties hereto and their
respective heirs, legal representatives, successors and permitted assigns. This
Agreement and the rights and obligations hereunder may not be assigned by either
party without the prior written consent of the other.
24. Time of the Essence. Time is of the essence of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Employment
Agreement to be executed on December 22, 1995, but to be effective as of the
date first above written.
Attest: "Pioneer Financial"
PIONEER FINANCIAL SERVICES, INC.
_____________________________ By: ___________________________________
Title: __________________________________
Witness: "Nauert"
______________________________ ________________________________________
Peter W. Nauert
g:\acw\nauert\pwnag.d20f
EXHIBIT 10(i)
EMPLOYMENT AGREEMENT
The Agreement is made as of September 1, 1995 between PIONEER FINANCIAL
SERVICES, INC., a Delaware corporation with its principal place of business at
1750 E. Golf Road, Schaumburg, IL 60173 (hereinafter "Pioneer Financial"); and
THOMAS J. BROPHY, an individual residing at 461 W. Rosiland Drive, Palatine, IL
60074.
W I T N E S S E T H:
WHEREAS, Pioneer Financial is an insurance holding company which has life
and accident and health insurance subsidiaries and affiliated administrative
service and marketing companies; and
WHEREAS, Brophy is currently President of the Health Division of Pioneer
Financial and Brophy possesses valuable skills, expertise and abilities in the
life and accident and health insurance business; and
WHEREAS, Pioneer Financial is desirous of retaining the services of Brophy
as a key managerial employee; and
WHEREAS, Brophy desires to be employed by Pioneer Financial on the terms
set forth herein;
NOW, THEREFORE, for and in consideration of the covenants contained herein,
Pioneer Financial hereby employs Brophy and Brophy accepts such employment with
Pioneer Financial upon the terms and conditions hereinafter set forth.
1. Employment. Pioneer Financial hereby employs Brophy and Brophy hereby
agrees to be employed by Pioneer Financial for a term (the "Term") of three (3)
years commencing on September 1, 1995, and continuing through August 31, 1998,
to perform the duties set forth herein.
2. Duties. Subject to the control of the Board of Directors of Pioneer
Financial, Brophy shall serve during the Term as President of the Health
Division of Pioneer Financial or in such other senior executive offices or
capacities as the Board of Directors of Pioneer Financial may from time to time
determine; and in such capacity shall render such services as the Board of
Directors of Pioneer Financial shall direct. Brophy shall have such executive
powers and authority as may reasonably be required by him in order to discharge
such duties in an efficient and proper manner.
3. Compensation. Pioneer Financial shall in the aggregate pay to Brophy
for all services to be rendered hereunder:
(a) Base Salary. An annual base salary in an amount of not less than
Three Hundred Thousand Dollars ($300,000); provided that the Board of Directors
of Pioneer Financial shall annually make a review of Brophy's salary and
increase such annual base salary as it deems appropriate; and
(b) Bonus. Such annual bonus, as may be determined by the
Compensation Committee of the Board of Directors of Pioneer Financial, based
upon the achievement of such Pioneer Financial company-wide performance
standards as may be established by such Committee.
4. Stock Options. Simultaneously with the execution and delivery of this
Agreement, Pioneer Financial is issuing to Brophy options to purchase an
aggregate of 75,000 shares of Pioneer Financial common stock. Such options are
being issued subject to the approval by the stockholders of Pioneer Financial of
an appropriate amendment to the Pioneer Financial 1994 Omnibus Stock Incentive
Program (the "Plan") which would, among other things, increase the number of
options which may be granted under the Plan to any participant in any year. Such
options are exercisable as follows: 25,000 on or after the date of the
execution and delivery of this Agreement at $15.25 per share; and 25,000 on or
after September 1, 1996 at $16.75 per share; 25,000 on or after September 1,
1997 at $18.50 per share; provided, however, that none of such options are
exercisable within six months of the date of grant. Such options are (x) vested
upon grant, (y) but are exercisable only if Brophy is employed by Pioneer
Financial or one of its subsidiaries at the time they can first be exercised;
and (z) have been issued on such other terms and conditions as are contained in
the Option Agreement relating thereto.
5. Benefits. During his employment hereunder, Brophy shall be entitled
to participate in all employee benefits made available to management personnel
of Pioneer Financial and its subsidiaries. Furthermore, in the event of the
termination of Brophy's employment with Pioneer Financial or its subsidiaries
for any reason whatsoever (including without limitation the expiration of this
agreement), other than termination for cause (as hereinafter defined) or by
Brophy without good reason (as hereinafter defined), then Pioneer Financial
shall provide (or cause to be provided) to Brophy, or makes such payments to
Brophy as shall enable Brophy to obtain at no cost to himself, until he reaches
the age of 65 the health insurance which would have been available to Brophy
during such period as an employee of Pioneer Financial or its subsidiaries
except for such termination; provided, however, that Pioneer Financial shall
have no such obligation in the event that Brophy becomes entitled to receive
substantially similar health insurance coverage as an employee of another
company.
6. Death. Brophy's employment by Pioneer Financial will terminate
immediately upon his death; provided, however, that in the event of Brophy's
death during the Term, Brophy's estate shall be entitled to receive the payment
described in the last sentence of Section 8(b).
7. Disability. If during Brophy's employment hereunder, Brophy becomes
totally or partially disabled, Pioneer Financial shall continue to pay to Brophy
as long as such disability continues during the Term (or until Brophy's
employment is terminated by Pioneer Financial in accordance with Section 8 (if
earlier)) the level of annual salary payable to Brophy at the date his
disability is determined, reduced dollar-for-dollar to the extent of any
disability insurance payments paid to Brophy through insurance programs, the
premiums for which were paid by Pioneer Financial or its subsidiaries. For
purposes of this Agreement, the term "total disability" shall mean Brophy's
inability due to illness, accident or other physical or mental incapacity to
engage in the full time performance of his duties under this Agreement as
reasonably determined by the Board of Directors of Pioneer Financial based on
such evidence as such Board shall deem appropriate. For purposes of this
Agreement, "partial disability" shall mean Brophy's ability due to illness,
accident or other physical or mental incapacity to engage in only the partial
performance of his duties under this Agreement, as reasonably determined by the
Board of Directors of Pioneer Financial based on such evidence as such Board
shall deem appropriate.
8. Termination.
(a) For Cause. Pioneer Financial shall have the right to terminate
Brophy's employment hereunder at any time during the Term "for cause". For
purposes of this Agreement, "for cause" shall mean any of the following actions
(or inactions) by Brophy: illegal conduct of a severity greater than a
misdemeanor, gross neglect of, and the continued failure to perform
substantially, Brophy's duties under this Agreement. Notwithstanding anything
herein to the contrary, Brophy's inability to perform the duties of his position
due to his total or partial disability (as defined herein) shall not be deemed
to constitute cause.
If, in the opinion of the Board of Directors of Pioneer Financial,
Brophy's employment shall become subject to termination for cause, such Board of
Directors shall give Brophy notice to that effect, which notice shall describe
the matter or matters constituting such cause. If, at the end of such thirty
(30) day period, Brophy has not substantially eliminated or cured each such
matter or matters, then Pioneer Financial shall have the right to give Brophy
notice of the termination of his employment. Brophy's employment hereunder
shall be considered terminated for cause as of the date specified in such notice
of termination unless and until there is a final determination by a court of
competent jurisdiction that the cause of termination of Brophy's employment did
not exist at the time of giving said notice of termination. Upon termination of
Brophy's employment "for cause", this Agreement shall terminate without further
obligations to Brophy other than Pioneer Financial's obligation (a) to pay to
Brophy in a lump sum in cash within thirty (30) days after the date of
termination Brophy's base salary through the date of termination to the extent
not theretofore paid and (b) to the extent not theretofore paid or provided, to
pay or provide to pay, to Brophy on a timely basis any other amounts or benefits
required to be paid or provided or which Brophy is eligible to receive under any
plan, program, policy or practice or contract or agreement of Pioneer Financial.
(b) Without Cause. Pioneer Financial shall have the right to
terminate Brophy's employment hereunder without cause at any time during the
Term. If the Board of Directors determines to terminate Brophy's employment
without cause, Pioneer Financial shall give notice of such termination to Brophy
and Brophy's employment hereunder shall be considered terminated without cause
as of the date specified in such notice of termination. Upon the date of the
termination of Brophy's employment without cause, Brophy shall be paid an amount
equal to the present value, discounted to the present at an annual rate of 8%,
of an amount equal to the lesser of (x) the salary which would have been payable
during a period equal to the remainder of the Term, commencing on the date of
termination, at the rate of the annual base salary payable to Brophy at the date
of termination, or (y) two times his then current annual base salary.
(c) By Brophy. Brophy may terminate his employment hereunder at any
time by retirement or resignation, upon notice to Pioneer Financial. Upon such
termination by Brophy, no compensation for any period after the date of such
termination shall be payable to Brophy; provided, however, that if such
termination by Brophy is for "good reason" (as defined in Section 9(c)), then
Brophy shall be entitled to the payment described in the last sentence of
Section 8(b).
(d) Change in Control Effect. No payments shall be made to Brophy
pursuant to this Section 8 in the event that Brophy is entitled to Change in
Control Compensation pursuant to Section 9.
9. Change in Control.
(a) Change in Control Severance Compensation. If, during the term of
this Agreement, within two years following a Change in Control (as defined in
Section 9(b)), Brophy's employment is terminated by Pioneer Financial other than
"for cause" (as defined in Section 8(a) or is terminated by Brophy for "good
reason" (as defined in Section 9(c)), Brophy shall be entitled to receive from
Pioneer Financial a lump sum cash payment in an amount ("Change in Control
Compensation") equal to (x) three times the average income reflected on the W-2
form or forms issued to Brophy by Pioneer Financial or its subsidiaries for
services performed for them for the five (5) calendar years preceding the year
in which such Change of Control occurs, minus (y) one dollar ($1.00) and the
amount of any other items that are construed as a "parachute payment" under
Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"),
other than any payment due pursuant to Section 9(d) below. Pioneer Financial
shall pay such amount to Brophy within ten (10) days of the date of termination.
If Brophy's employment is terminated by Pioneer Financial for cause, by reason
of Brophy's death or retirement, or by Brophy without good reason, the Change in
Control Compensation will not be paid. If Brophy was totally or partially
disabled as of the Change in Control, the Change in Control Compensation will
not be paid.
(b) Change In Control. For purposes of this Agreement, "Change in
Control" shall mean the occurrence of any of the following events:
(i) any person or persons acting as a group, other than a person
which as of the date of this Agreement is the beneficial owner of voting
securities of Pioneer Financial and other than Brophy or a group including
Brophy, shall become the beneficial owner of securities of Pioneer Financial
representing at least thirty-four percent (34%) of the combined voting power of
Pioneer Financial's then outstanding securities; or
(ii) any consolidation or merger to which Pioneer Financial is a
party, if following such consolidation or merger, stockholders of Pioneer
Financial immediately prior to such consolidation or merger shall not
beneficially own securities representing at least sixty-seven percent (67%) of
the combined voting power of the outstanding voting securities of the surviving
or continuing corporation; or
(iii) any sale, lease, exchange or other transfer (in one
transaction or in a series of related transactions) of all, or substantially
all, of the assets of Pioneer Financial, other than to an entity (or entities)
of which Pioneer Financial or the stockholders of Pioneer Financial immediately
prior to such transaction beneficially own securities representing at least
sixty-seven percent (67%) of the combined voting power of the outstanding voting
securities.
(c) Good Reason. For purposes of this Agreement, "good reason" shall
mean any of the following:
(i) a change in Brophy's status or position, the assignment to
Brophy of any duties or responsibilities which are inconsistent with Brophy's
status and position or a reduction in the duties and responsibilities to be
exercised by Brophy;
(ii) any action by Pioneer Financial which renders Brophy unable
to effectively discharge his duties and responsibilities hereunder;
(iii) the failure to maintain Brophy's minimum annual base
salary in accordance with Section 3(a) or; in the event that such salary is
increased during the Term as provided herein, any reduction in Brophy's then
current annual base salary; or
(iv) any failure by Pioneer Financial to obtain the assumption of
this Agreement by any successor or assignee thereto.
10. Confidential Information and Trade Secrets.
(a) Nature. During Brophy's employment by Pioneer Financial, Brophy
will enjoy access to Pioneer Financial's "confidential information" and "trade
secrets". For purposes of this Agreement, "confidential information" shall mean
information which is not publicly available, including without limitation,
information concerning customers, material sources, suppliers, financial
projections, marketing plans and operation methods, Brophy's access to which
derives solely from Brophy's employment with Pioneer Financial. For purposes of
this Agreement, "trade secrets" shall mean Pioneer Financial's processes,
methodologies and techniques known only to those employees of Pioneer Financial
who need to know such secrets in order to perform their duties on behalf of
Pioneer Financial. Pioneer Financial takes numerous steps, including these
provisions, to protect the confidentiality of its confidential information and
trade secrets, which it considers unique, valuable and special assets.
(b) Restricted Use and Non-Disclosure. Brophy, recognizing Pioneer
Financial's significant investment of time, efforts and money in developing and
preserving its confidential information, shall not, during his employment
hereunder and for a two (2) year period after the end of Brophy's employment
hereunder, use for his direct or indirect personal benefit any of Pioneer
Financial's confidential information or trade secrets. For a two (2) year
period after the end of Brophy's employment hereunder, Brophy shall not disclose
to any person any of Pioneer Financial's confidential information or
tradesecrets.
(c) Return of Pioneer Financial Property. Upon termination of
Brophy's employment with Pioneer Financial, for whatever reason and in whatever
manner, Brophy shall return to Pioneer Financial all copies of all writings and
records relating to Pioneer Financial's business, confidential information or
trade secrets which are in Brophy's possession of such time.
11. Non-Competition and Non-Solicitation.
(a) Pioneer Financial's Investment. Pioneer Financial is spending
and will spend much time, money and effort in building relationships with agents
and insureds, and will pay Brophy valuable consideration pursuant hereto in
exchange for Brophy's promises herein, including without limitation the
covenants in Section 10 and in this Section 11. Pioneer Financial has engaged
Brophy as a senior executive officer of Pioneer Financial in order to, among
other reasons, take advantage of Brophy's unique knowledge of, and contacts
within, the life and accident and health insurance industry. Further, Pioneer
Financial will invest significant time and money in the further development of
Brophy's business ability, image and standing. As Brophy is a senior executive
officer of Pioneer Financial, the reputation and success of Brophy will be
closely tied to the reputation and success of Pioneer Financial and, during the
Term, Brophy will be heavily identified with Pioneer Financial's business.
(b) Non-Competition. During Brophy's employment hereunder and for a
twenty-four (24) month period after termination of such employment, unless such
termination is made by Pioneer Financial without cause or unless there has been
a Change in Control prior to such termination, Brophy shall not engage, directly
or indirectly, whether as an owner, partner, employee, officer, director, agent,
consultant or otherwise, in any location where Pioneer Financial or any of its
subsidiaries is engaged in business after the date hereof and prior to Brophy's
termination, conducted by Pioneer Financial or any of its subsidiaries,
provided, however, that the mere ownership of 5% or less of the stock of a
company whose shares are traded on a national securities exchange or are quoted
on the National Association of Securities Dealers Automated Quotation System
shall not be deemed ownership which is prohibited hereunder.
(c) Non-Solicitation. During the twenty-four (24) month period
following termination of Brophy's employment with Pioneer Financial, Brophy
shall not, directly or indirectly induce employees of Pioneer Financial or any
of its subsidiaries to leave such employment with the result that such employees
would engage in business activities which are substantially similar or are
closely related to the business activities such employee performed on behalf of
Pioneer Financial and which compete against Pioneer Financial. Notwithstanding
the above, in the event Brophy is terminated by Pioneer Financial without cause,
then the twenty-four (24) month period referred to in this Section 11(c) shall
be reduced to twelve (12) months.
(d) Enforceability. The necessity of protection against the
competition of Brophy and the nature and scope of such protection has been
carefully considered by the parties hereto. The parties hereto agree and
acknowledge that the duration, scope and geographic areas applicable to the non-
competition covenant in this Section 11 are fair, reasonable and necessary, that
adequate compensation has been received by Brophy for such obligations, and that
these obligations do not prevent Brophy from earning a livelihood. If, however
for any reason any court determines that the restrictions in this Agreement are
not reasonable, that consideration is inadequate or that Brophy has been
prevented from earning a livelihood, such restrictions shall be interpreted,
modified or rewritten to include as much of the duration, scope and geographic
area identified in this Section 11 as will render such restrictions valid and
enforceable.
12. Breach or Threatened Breach of Non-Competition Covenant. In the event
of a breach or threatened breach by Brophy of any provision of Section 10 or 11
hereof, Brophy acknowledges that the remedy at law would be inadequate and that
Pioneer Financial shall be entitled to an injunction restraining Brophy from
such act or threatened breach. Nothing herein contained shall be construed as
prohibiting Pioneer Financial from pursuing any other remedies available to it
for such breach or threatened breach, including the recovery of monetary
damages.
13. Business Days. Any date specified in this Agreement which is a
Saturday, Sunday or legal holiday shall be extended to the first regular
business day after such date which is not a Saturday, Sunday or legal holiday.
14. Choice of Law. This Agreement has been executed and made in
accordance with the laws of the State of Illinois and is to be construed,
enforced and governed in accordance therewith.
15. Counterparts. This Agreement may be executed in several counterparts,
each of which shall be an original, but all of which together shall constitute
one and the same instrument.
16. Entire Agreement Amendments. This Agreement contains the entire
agreement among the parties hereto with respect to the subject matter hereof.
No change or modification of this Agreement, or any waiver of the provisions
hereof, shall be valid unless the same is in writing and signed by the parties
hereto. Waiver by any party hereto of a breach by the other party of any
provisions of this Agreement shall not operate or be construed as a waiver of
any subsequent breach by such party.
17. Headings. The headings used herein are for ease of interpretation and
shall have no effect on the interpretation of any provision of this Agreement.
18. Notices. All notices, requests, demands and other communications
hereunder shall be in writing and shall, until receipt of contrary written
instructions, be delivered personally to, or mailed by certified or registered
mail with proper postage prepaid, to the party at the address as follows:
TO PIONEER FINANCIAL: Pioneer Financial Services, Inc.
1750 E. Golf Road
Schaumburg, IL 60173
TO BROPHY: Mr. Thomas J. Brophy
461 W. Rosiland Drive
Palatine, IL 60074
19. Severability. If any provision of this Agreement is held for any
reason to be invalid, it will not invalidate any other provisions of this
Agreement which are in themselves valid, nor will it invalidate the provisions
of any other agreement between the parties hereto. Rather, such invalid
provision shall be construed so as to give it the maximum effect allowed by
applicable law. Any other written agreement between the parties hereto shall be
conclusively deemed to be an agreement independent of this Agreement.
20. Successors and Assigns. This Agreement and all the provisions hereof
shall be binding upon and inure to the benefit of the parties hereto and their
respective heirs, legal representatives, successors and permitted assigns. This
Agreement and the rights and obligations hereunder may not be assigned by either
party without the prior written consent of the other.
21. Time of the Essence. Time is of the essence of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Employment
Agreement to be executed on December 12, 1995, but to be effective as of the
date first above written.Attest: "Pioneer Financial"
PIONEER FINANCIAL SERVICES, INC.
______________________________ By: ___________________________________
Title: __________________________________
Witness: "Brophy"
______________________________ ________________________________________
THOMAS J. BROPHY
g:\acw\agreemen\BROPHY.d11
EXHIBIT 10(j)
EMPLOYMENT AGREEMENT
The Agreement is made as of September 1, 1995 between PIONEER FINANCIAL
SERVICES, INC., a Delaware corporation with its principal place of business at
1750 E. Golf Road, Schaumburg, IL 60173 (hereinafter "Pioneer Financial"); and
CHARLES SCHEPER, an individual residing at 216 Kennedy Street, Covington, KY
41011-1722.
W I T N E S S E T H:
WHEREAS, Pioneer Financial is an insurance holding company which has life
and accident and health insurance subsidiaries and affiliated administrative
service and marketing companies; and
WHEREAS, Scheper is currently President of the Life Division of Pioneer
Financial and Scheper possesses valuable skills, expertise and abilities in the
life and accident and health insurance business; and
WHEREAS, Pioneer Financial is desirous of retaining the services of Scheper
as a key managerial employee; and
WHEREAS, Scheper desires to be employed by Pioneer Financial on the terms
set forth herein;
NOW, THEREFORE, for and in consideration of the covenants contained herein,
Pioneer Financial hereby employs Scheper and Scheper accepts such employment
with Pioneer Financial upon the terms and conditions hereinafter set forth.
1. Employment. Pioneer Financial hereby employs Scheper and Scheper
hereby agrees to be employed by Pioneer Financial for a term (the "Term") of
three (3) years commencing on September 1, 1995, and continuing through August
31, 1998, to perform the duties set forth herein.
2. Duties. Subject to the control of the Board of Directors of Pioneer
Financial, Scheper shall serve during the Term as President of the Life Division
of Pioneer Financial or in such other senior executive offices or capacities as
the Board of Directors of Pioneer Financial may from time to time determine; and
in such capacity shall render such services as the Board of Directors of Pioneer
Financial shall direct. Scheper shall have such executive powers and authority
as may reasonably be required by him in order to discharge such duties in an
efficient and proper manner.
3. Compensation. Pioneer Financial shall in the aggregate pay to Scheper
for all services to be rendered hereunder:
(a) Base Salary. An annual base salary in an amount of not less than
Three Hundred Thousand Dollars ($300,000); provided that the Board of Directors
of Pioneer Financial shall annually make a review of Scheper's salary and
increase such annual base salary as it deems appropriate; and
(b) Bonus. Such annual bonus, as may be determined by the
Compensation Committee of the Board of Directors of Pioneer Financial, based
upon the achievement of such Pioneer Financial company-wide performance
standards as may be established by such Committee.
4. Stock Options. Simultaneously with the execution and delivery of this
Agreement, Pioneer Financial is issuing to Scheper options to purchase an
aggregate of 75,000 shares of Pioneer Financial common stock. Such options are
being issued subject to the approval by the stockholders of Pioneer Financial of
an appropriate amendment to the Pioneer Financial 1994 Omnibus Stock Incentive
Program (the "Plan") which would, among other things, increase the number of
options which may be granted under the Plan to any participant in any year.
Such options are exercisable as follows: 25,000 on or after the date of the
execution and delivery of this Agreement at $15.25 per share; and 25,000 on or
after September 1, 1996 at $16.75 per share; 25,000 on or after September 1,
1997 at $18.50 per share; provided, however, that none of such options are
exercisable within six months of the date of grant. Such options are (x) vested
upon grant, (y) but are exercisable only if Scheper is employed by Pioneer
Financial or one of its subsidiaries at the time they can first be exercised;
and (z) have been issued on such other terms and conditions as are contained in
the Option Agreement relating thereto.
5. Benefits. During his employment hereunder, Scheper shall be entitled
to participate in all employee benefits made available to management personnel
of Pioneer Financial and its subsidiaries. Furthermore, in the event of the
termination of Scheper's employment with Pioneer Financial or its subsidiaries
for any reason whatsoever (including without limitation the expiration of this
agreement) other than termination for cause (as hereinafter defined) or by
Scheper without good reason (as hereinafter defined), then Pioneer Financial
shall provide (or cause to be provided) to Scheper, or makes such payments to
Scheper as shall enable Scheper to obtain at no cost to himself, until he
reaches the age of 65, the health insurance which would have been available to
Scheper during such period as an employee of Pioneer Financial or its
subsidiaries except for such termination; provided, however, that Pioneer
Financial shall have no such obligation in the event that Scheper becomes
entitled to receive substantially similar health insurance coverage as an
employee of another company.
6. Death. Scheper's employment by Pioneer Financial will terminate
immediately upon his death; provided, however, that in the event of Scheper's
death during the Term, Scheper's estate shall be entitled to receive the payment
described in the last sentence of Section 8(b).
7. Disability. If during Scheper's employment hereunder, Scheper becomes
totally or partially disabled, Pioneer Financial shall continue to pay to
Scheper as long as such disability continues during the Term (or until Scheper's
employment is terminated by Pioneer Financial in accordance with Section 8 (if
earlier)) the level of annual salary payable to Scheper at the date his
disability is determined, reduced dollar-for-dollar to the extent of any
disability insurance payments paid to Scheper through insurance programs, the
premiums for which were paid by Pioneer Financial or its subsidiaries. For
purposes of this Agreement, the term "total disability" shall mean Scheper's
inability due to illness, accident or other physical or mental incapacity to
engage in the full time performance of his duties under this Agreement as
reasonably determined by the Board of Directors of Pioneer Financial based on
such evidence as such Board shall deem appropriate. For purposes of this
Agreement, "partial disability" shall mean Scheper's ability due to illness,
accident or other physical or mental incapacity to engage in only the partial
performance of his duties under this Agreement, as reasonably determined by the
Board of Directors of Pioneer Financial based on such evidence as such Board
shall deem appropriate.
8. Termination.
(a) For Cause. Pioneer Financial shall have the right to terminate
Scheper's employment hereunder at any time during the Term "for cause". For
purposes of this Agreement, "for cause" shall mean any of the following actions
(or inactions) by Scheper: illegal conduct of a severity greater than a
misdemeanor, gross neglect of, and the continued failure to perform
substantially, Scheper's duties under this Agreement. Notwithstanding anything
herein to the contrary, Scheper's inability to perform the duties of his
position due to his total or partial disability (as defined herein) shall not be
deemed to constitute cause.
If, in the opinion of the Board of Directors of Pioneer Financial,
Scheper's employment shall become subject to termination for cause, such Board
of Directors shall give Scheper notice to that effect, which notice shall
describe the matter or matters constituting such cause. If, at the end of such
thirty (30) day period, Scheper has not substantially eliminated or cured each
such matter or matters, then Pioneer Financial shall have the right to give
Scheper notice of the termination of his employment. Scheper's employment
hereunder shall be considered terminated for cause as of the date specified in
such notice of termination unless and until there is a final determination by a
court of competent jurisdiction that the cause of termination of Scheper's
employment did not exist at the time of giving said notice of termination. Upon
termination of Scheper's employment "for cause", this Agreement shall terminate
without further obligations to Scheper other than Pioneer Financial's obligation
(a) to pay to Scheper in a lump sum in cash within thirty (30) days after the
date of termination Scheper's base salary through the date of termination to the
extent not theretofore paid and (b) to the extent not theretofore paid or
provided, to pay or provide to pay, to Scheper on a timely basis any other
amounts or benefits required to be paid or provided or which Scheper is eligible
to receive under any plan, program, policy or practice or contract or agreement
of Pioneer Financial.
(b) Without Cause. Pioneer Financial shall have the right to
terminate Scheper's employment hereunder without cause at any time during the
Term. If the Board of Directors determines to terminate Scheper's employment
without cause, Pioneer Financial shall give notice of such termination to
Scheper and Scheper's employment hereunder shall be considered terminated
without cause as of the date specified in such notice of termination. Upon the
date of the termination of Scheper's employment without cause, Scheper shall be
paid an amount equal to the present value, discounted to the present at an
annual rate of 8%, of an amount equal to the lesser of (x) the salary which
would have been payable during a period equal to the remainder of the Term,
commencing on the date of termination, at the rate of the annual base salary
payable to Scheper at the date of termination, or (y) two times his then current
annual base salary.
(c) By Scheper. Scheper may terminate his employment hereunder at
any time by retirement or resignation, upon notice to Pioneer Financial. Upon
such termination by Scheper, no compensation for any period after the date of
such termination shall be payable to Scheper; provided, however, that if such
termination by Scheper is for "good reason" (as defined in Section 9(c)), then
Scheper shall be entitled to the payment described in the last sentence of
Section 8(b).
(d) Change in Control Effect. No payments shall be made to Scheper
pursuant to this Section 8 in the event that Scheper is entitled to Change in
Control Compensation pursuant to Section 9.
9. Change in Control.
(a) Change in Control Severance Compensation. If, during the term of
this Agreement, within two years following a Change in Control (as defined in
Section 9(b)), Scheper's employment is terminated by Pioneer Financial other
than "for cause" (as defined in Section 8(a) or is terminated by Scheper for
"good reason" (as defined in Section 9(c)), Scheper shall be entitled to receive
from Pioneer Financial a lump sum cash payment in an amount ("Change in Control
Compensation") equal to (x) three times the average income reflected on the W-2
form or forms issued to Scheper by Pioneer Financial or its subsidiaries for
services performed for them for the five (5) calendar years preceding the year
in which such Change of Control occurs, minus (y) one dollar ($1.00) and the
amount of any other items that are construed as a "parachute payment" under
Section 280G of the Internal Revenue Code of 1986, as amended (the "Code") other
than any payment due pursuant to Section 9(d) below. Pioneer Financial shall
pay such amount to Scheper within ten (10) days of the date of termination. If
Scheper's employment is terminated by Pioneer Financial for cause, by reason of
Scheper's death or retirement, or by Scheper without good reason, the Change in
Control Compensation will not be paid. If Scheper was totally or partially
disabled as of the Change in Control, the Change in Control Compensation will
not be paid.
(b) Change In Control. For purposes of this Agreement, "Change in
Control" shall mean the occurrence of any of the following events:
(i) any person or persons acting as a group, other than a
person which as of the date of this Agreement is the beneficial owner of voting
securities of Pioneer Financial and other than Scheper or a group including
Scheper, shall become the beneficial owner of securities of Pioneer Financial
representing at least thirty-four percent (34%) of the combined voting power of
Pioneer Financial's then outstanding securities; or
(ii) any consolidation or merger to which Pioneer Financial is
a party, if following such consolidation or merger, stockholders of Pioneer
Financial immediately prior to such consolidation or merger shall not
beneficially own securities representing at least sixty-seven percent (67%) of
the combined voting power of the outstanding voting securities of the surviving
or continuing corporation; or
(iii) any sale, lease, exchange or other transfer (in one
transaction or in a series of related transactions) of all, or substantially
all, of the assets of Pioneer Financial, other than to an entity (or entities)
of which Pioneer Financial or the stockholders of Pioneer Financial immediately
prior to such transaction beneficially own securities representing at least
sixty-seven percent (67%) of the combined voting power of the outstanding voting
securities.
(c) Good Reason. For purposes of this Agreement, "good reason" shall
mean any of the following:
(i) a change in Scheper's status or position, the assignment
to Scheper of any duties or responsibilities which are inconsistent with
Scheper's status and position or a reduction in the duties and responsibilities
to be exercised by Scheper;
(ii) any action by Pioneer Financial which renders Scheper
unable to effectively discharge his duties and responsibilities hereunder;
(iii) the failure to maintain Scheper's minimum annual base
salary in accordance with Section 3(a) or; in the event that such salary is
increased during the Term as provided herein, any reduction in Scheper's then
current annual base salary; or
(iv) any failure by Pioneer Financial to obtain the assumption
of this Agreement by any successor or assignee thereto.
10. Confidential Information and Trade Secrets.
(a) Nature. During Scheper's employment by Pioneer Financial,
Scheper will enjoy access to Pioneer Financial's "confidential information" and
"trade secrets". For purposes of this Agreement, "confidential information"
shall mean information which is not publicly available, including without
limitation, information concerning customers, material sources, suppliers,
financial projections, marketing plans and operation methods, Scheper's access
to which derives solely from Scheper's employment with Pioneer Financial. For
purposes of this Agreement, "trade secrets" shall mean Pioneer Financial's
processes, methodologies and techniques known only to those employees of Pioneer
Financial who need to know such secrets in order to perform their duties on
behalf of Pioneer Financial. Pioneer Financial takes numerous steps, including
these provisions, to protect the confidentiality of its confidential information
and trade secrets, which it considers unique, valuable and special assets.
(b) Restricted Use and Non-Disclosure. Scheper, recognizing Pioneer
Financial's significant investment of time, efforts and money in developing and
preserving its confidential information, shall not, during his employment
hereunder and for a two (2) year period after the end of Scheper's employment
hereunder, use for his direct or indirect personal benefit any of Pioneer
Financial's confidential information or trade secrets. For a two (2) year
period after the end of Scheper's employment hereunder, Scheper shall not
disclose to any person any of Pioneer Financial's confidential information or
trade secrets.
(c) Return of Pioneer Financial Property. Upon termination of
Scheper's employment with Pioneer Financial, for whatever reason and in whatever
manner, Scheper shall return to Pioneer Financial all copies of all writings and
records relating to Pioneer Financial's business, confidential information or
trade secrets which are in Scheper's possession of such time.
11. Non-Competition and Non-Solicitation.
(a) Pioneer Financial's Investment. Pioneer Financial is spending
and will spend much time, money and effort in building relationships with agents
and insureds, and will pay Scheper valuable consideration pursuant hereto in
exchange for Scheper's promises herein, including without limitation the
covenants in Section 10 and in this Section 11. Pioneer Financial has engaged
Scheper as a senior executive officer of Pioneer Financial in order to, among
other reasons, take advantage of Scheper's unique knowledge of, and contacts
within, the life and accident and health insurance industry. Further, Pioneer
Financial will invest significant time and money in the further development of
Scheper's business ability, image and standing. As Scheper is a senior
executive officer of Pioneer Financial, the reputation and success of Scheper
will be closely tied to the reputation and success of Pioneer Financial and,
during the Term, Scheper will be heavily identified with Pioneer Financial's
business.
(b) Non-Competition. During Scheper's employment hereunder and for a
twenty-four (24) month period after termination of such employment, unless such
termination is made by Pioneer Financial without cause or unless there has been
a Change in Control prior to such termination, Scheper shall not engage,
directly or indirectly, whether as an owner, partner, employee, officer,
director, agent, consultant or otherwise, in any location where Pioneer
Financial or any of its subsidiaries is engaged in business after the date
hereof and prior to Scheper's termination, conducted by Pioneer Financial or any
of its subsidiaries, provided, however, that the mere ownership of 5% or less of
the stock of a company whose shares are traded on a national securities
exchange or are quoted on the National Association of Securities Dealers
Automated Quotation System shall not be deemed ownership which is prohibited
hereunder.
(c) Non-Solicitation. During the twenty-four (24) month period
following termination of Scheper's employment with Pioneer Financial, Scheper
shall not, directly or indirectly induce employees of Pioneer Financial or any
of its subsidiaries to leave such employment with the result that such employees
would engage in business activities which are substantially similar or are
closely related to the business activities such employee performed on behalf of
Pioneer Financial and which compete against Pioneer Financial. Notwithstanding
the above, in the event Scheper is terminated by Pioneer Financial without
cause, then the twenty-four (24) month period referred to in this Section 11(c)
shall be reduced to twelve (12) months.
(d) Enforceability. The necessity of protection against the
competition of Scheper and the nature and scope of such protection has been
carefully considered by the parties hereto. The parties hereto agree and
acknowledge that the duration, scope and geographic areas applicable to the non-
competition covenant in this Section 11 are fair, reasonable and necessary, that
adequate compensation has been received by Scheper for such obligations, and
that these obligations do not prevent Scheper from earning a livelihood. If,
however for any reason any court determines that the restrictions in this
Agreement are not reasonable, that consideration is inadequate or that Scheper
has been prevented from earning a livelihood, such restrictions shall be
interpreted, modified or rewritten to include as much of the duration, scope and
geographic area identified in this Section 11 as will render such restrictions
valid and enforceable.
12. Breach or Threatened Breach of Non-Competition Covenant. In the event
of a breach or threatened breach by Scheper of any provision of Section 10 or 11
hereof, Scheper acknowledges that the remedy at law would be inadequate and that
Pioneer Financial shall be entitled to an injunction restraining Scheper from
such act or threatened breach. Nothing herein contained shall be construed as
prohibiting Pioneer Financial from pursuing any other remedies available to it
for such breach or threatened breach, including the recovery of monetary
damages.
13. Business Days. Any date specified in this Agreement which is a
Saturday, Sunday or legal holiday shall be extended to the first regular
business day after such date which is not a Saturday, Sunday or legal holiday.
14. Choice of Law. This Agreement has been executed and made in
accordance with the laws of the State of Illinois and is to be construed,
enforced and governed in accordance therewith.
15. Counterparts. This Agreement may be executed in several counterparts,
each of which shall be an original, but all of which together shall constitute
one and the same instrument.
16. Entire Agreement Amendments. This Agreement contains the entire
agreement among the parties hereto with respect to the subject matter hereof.
No change or modification of this Agreement, or any waiver of the provisions
hereof, shall be valid unless the same is in writing and signed by the parties
hereto. Waiver by any party hereto of a breach by the other party of any
provisions of this Agreement shall not operate or be construed as a waiver of
any subsequent breach by such party.
17. Headings. The headings used herein are for ease of interpretation and
shall have no effect on the interpretation of any provision of this Agreement.
18. Notices. All notices, requests, demands and other communications
hereunder shall be in writing and shall, until receipt of contrary written
instructions, be delivered personally to, or mailed by certified or registered
mail with proper postage prepaid, to the party at the address as follows:
TO PIONEER FINANCIAL: Pioneer Financial Services, Inc.
1750 E. Golf Road
Schaumburg, IL 60173
TO SCHEPER: Mr. Charles Scheper
216 Kennedy Street
Covington, KY 41011-1722
19. Severability. If any provision of this Agreement is held for any
reason to be invalid, it will not invalidate any other provisions of this
Agreement which are in themselves valid, nor will it invalidate the provisions
of any other agreement between the parties hereto. Rather, such invalid
provision shall be construed so as to give it the maximum effect allowed by
applicable law. Any other written agreement between the parties hereto shall be
conclusively deemed to be an agreement independent of this Agreement.
20. Successors and Assigns. This Agreement and all the provisions hereof
shall be binding upon and inure to the benefit of the parties hereto and their
respective heirs, legal representatives, successors and permitted assigns. This
Agreement and the rights and obligations hereunder may not be assigned by either
party without the prior written consent of the other.
21. Time of the Essence. Time is of the essence of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Employment
Agreement to be executed on December 12, 1995, but to be effective as of the
date first above written.
Attest: "Pioneer Financial"
PIONEER FINANCIAL SERVICES, INC.
______________________________ By: ___________________________________
Title: __________________________________
Witness: "Scheper"
______________________________ ________________________________________
Charles Scheper
g:\acw\agreemen\scheper.d11
EXHIBIT 10(k)
EMPLOYMENT AGREEMENT
The Agreement is made as of January 1, 1996 between PIONEER FINANCIAL
SERVICES, INC., a Illinois corporation with its principal place of business at
1750 E. Golf Road, Schaumburg, IL 60173 (hereinafter "Pioneer Financial"); and
ANTHONY J. PINO, an individual residing at 1114 Glenlake Way, Louisville,
Kentucky 40245 (hereinafter "Pino").
W I T N E S S E T H:
WHEREAS, Pioneer Financial is an insurance holding company and, through its
subsidiaries, owns 80% of the capital stock of Preferred Health Choice, Inc., an
Illinois corporation ("PHC");
WHEREAS, PHC is a holding company which, through its subsidiaries, provides
managed care services; and
WHEREAS, Pino is currently an executive officer of Pioneer Financial and
President and Chief Executive Officer of PHC; and Pino possesses valuable
skills, expertise and abilities in the life and accident and health insurance
and managed cares businesses; and
WHEREAS, Pioneer Financial is desirous of retaining the services of Pino as
a key managerial employee; and
WHEREAS, Pino desires to be employed by Pioneer Financial on the terms set
forth herein;
NOW, THEREFORE, for and in consideration of the covenants contained herein,
Pioneer Financial hereby employs Pino and Pino accepts such employment with
Pioneer Financial upon the terms and conditions hereinafter set forth.
1. Employment. Pioneer Financial hereby employs Pino and Pino hereby
agrees to be employed by Pioneer Financial for a term (the "Term") of three (3)
years commencing on January 1, 1996 to perform the duties set forth herein.
2. Duties. Subject to the control of the Board of Directors of Pioneer
Financial, Pino shall serve during the Term as President and Chief Executive
Officer of PHC or in such other senior executive offices or capacities as the
Board of Directors of Pioneer Financial may from time to time determine; and in
such capacity shall render such services as the Board of Directors of Pioneer
Financial shall direct. Pino shall have such executive powers and authority as
may reasonably be required by him in order to discharge such duties in an
efficient and proper manner.
3. Compensation. PHC shall in the aggregate pay to Pino for all services
to be rendered hereunder:
(a) Base Salary. An annual base salary in an amount of not less than
Two Hundred Seventy-Five Thousand Dollars ($275,000); provided that the Board of
Directors of Pioneer Financial shall annually make a review of Pino's salary and
increase such annual base salary as it deems appropriate; and
(b) Bonus. Such annual bonus, as may be determined by the
Compensation Committee of the Board of Directors of Pioneer Financial, based
upon the achievement of such PHC company-wide performance standards as may be
established by such Committee.
4. Benefits. During his employment hereunder, Pino shall be entitled to
participate in all employee benefits made available to management personnel of
Pioneer Financial and its subsidiaries. Furthermore, in the event of the
termination of Pino's employment with Pioneer Financial or its subsidiaries for
any reason whatsoever (including without limitation the expiration of this
agreement) prior to the occurrence of one of the events referred to in Section
9(b) below, other than termination for cause (as hereinafter defined) or by Pino
without good reason (as hereinafter defined), then Pioneer Financial shall
provide (or cause to be provided) to Pino, or make such payments to Pino as
shall enable Pino to obtain at no cost to himself, until he reaches the age of
65 the health insurance which would have been available to Pino during such
period as an employee of Pioneer Financial or its subsidiaries except for such
termination; provided, however, that Pioneer Financial shall have no such
obligation in the event that Pino becomes entitled to receive substantially
similar health insurance coverage as an employee of another company.
5. Death. Pino's employment by Pioneer Financial will terminate
immediately upon his death; provided, however, that in the event of Pino's death
during the Term, Pino's estate shall be entitled to receive the payment
described in the last sentence of Section 7(b).
6. Disability. If during Pino's employment hereunder, Pino becomes
totally or partially disabled, Pioneer financial shall continue to pay to Pino
as long as such disability continues during the Term (or until Pino's employment
is terminated by Pioneer Financial in accordance with Section 7 (if earlier))
the level of annual salary payable to Pino at the date his disability is
determined, reduced dollar-for-dollar to the extent of any disability insurance
payments paid to Pino through insurance programs, the premiums for which were
paid by Pioneer Financial or its subsidiaries. For purposes of this Agreement,
the term "total disability" shall mean Pino's inability due to illness, accident
or other physical or mental incapacity to engage in the full time performance of
his duties under this Agreement as reasonably determined by the Board of
Directors of Pioneer Financial based on such evidence as such Board shall deem
appropriate. For purposes of this Agreement, "partial disability" shall mean
Pino's ability due to illness, accident or other physical or mental incapacity
to engage in only the partial performance of his duties under this Agreement, as
reasonably determined by the Board of Directors of Pioneer Financial based on
such evidence as such Board shall deem appropriate.
7. Termination.
(a) For Cause. Pioneer Financial shall have the right to terminate
Pino's employment hereunder at any time during the Term "for cause". For
purposes of this Agreement, "for cause" shall mean any of the following actions
(or inactions) by Pino: illegal conduct of a severity greater than a
misdemeanor, gross neglect of, and the continued failure to perform
substantially, Pino's duties under this Agreement. Notwithstanding anything
herein to the contrary, Pino's inability to perform the duties of his position
due to his total or partial disability (as defined herein) shall not be deemed
to constitute cause.
If, in the opinion of the Board of Directors of Pioneer Financial,
Pino's employment shall become subject to termination for cause, such Board of
Directors shall give Pino notice to that effect, which notice shall describe the
matter or matters constituting such cause. If, at the end of such thirty (30)
day period, Pino has not substantially eliminated or cured each such matter or
matters, then Pioneer Financial shall have the right to give Pino notice of the
termination of his employment. Pino's employment hereunder shall be considered
terminated for cause as of the date specified in such notice of termination
unless and until there is a final determination by a court of competent
jurisdiction that the cause of termination of Pino's employment did not exist at
the time of giving said notice of termination. Upon termination of Pino's
employment "for cause", this Agreement shall terminate without further
obligations to Pino other than Pioneer Financial's obligation (a) to pay to Pino
in a lump sum in cash within thirty (30) days after the date of termination
Pino's base salary through the date of termination to the extent not theretofore
paid and (b) to the extent not theretofore paid or provided, to pay or provide
to pay, to Pino on a timely basis any other amounts or benefits required to be
paid or provided or which Pino is eligible to receive under any plan, program,
policy or practice or contract or agreement of Pioneer Financial.
(b) Without Cause. Pioneer Financial shall have the right to
terminate Pino's employment hereunder without cause at any time during the Term.
If the Board of Directors determines to terminate Pino's employment without
cause, Pioneer Financial shall give notice of such termination to Pino and
Pino's employment hereunder shall be considered terminated without cause as of
the date specified in such notice of termination. Upon the date of the
termination of Pino's employment without cause, Pino shall be paid an amount
equal to the present value, discounted to the present at an annual rate of 8%,
of an amount equal to the lesser of (x) the salary which would have been payable
during a period equal to the remainder of the Term, commencing on the date of
termination, at the rate of the annual base salary payable to Pino at the date
of termination, or (y) two times his then current annual base salary.
(c) By Pino. Pino may terminate his employment hereunder at any time
by retirement or resignation, upon notice to Pioneer Financial. Upon such
termination by Pino, no compensation for any period after the date of such
termination shall be payable to Pino; provided, however, that if such
termination by Pino is for "good reason" (as defined in Section 8(c)), then Pino
shall be entitled to the payment described in the last sentence of Section 7(b).
(d) Change in Control Effect. No payments shall be made to Pino
pursuant to this Section 7 in the event that Pino is entitled to Change in
Control Compensation pursuant to Section 8.
8. Change in Control.
(a) Change in Control Severance Compensation. Subject to the
provisions of Section 12 below, if, during the term of this Agreement, within
two years following a Change in Control (as defined in Section 8(b)), Pino's
employment is terminated by Pioneer Financial other than "for cause" (as defined
in Section 7(a) or is terminated by Pino for "good reason" (as defined in
Section 8(c)), Pino shall be entitled to receive from Pioneer Financial a lump
sum cash payment in an amount ("Change in Control Compensation") equal to (x)
three times the average income reflected on the W-2 form or forms issued to Pino
by Pioneer Financial or its subsidiaries for services performed for them for the
five (5) calendar years preceding the year in which such Change of Control
occurs, minus (y) one dollar ($1.00) and the amount of any other items that are
construed as a "parachute payment" under Section 280G of the Internal Revenue
Code of 1986, as amended (the "Code") other than any payment due pursuant to
Section 8(d) below. Pioneer Financial shall pay such amount to Pino within ten
(10) days of the date of termination. If Pino's employment is terminated by
Pioneer Financial for cause, by reason of Pino's death or retirement, or by Pino
without good reason, the Change in Control Compensation will not be paid. If
Pino was totally or partially disabled as of the Change in Control, the Change
in Control Compensation will not be paid.
(b) Change In Control. For purposes of this Agreement, "Change in Control"
shall mean the occurrence of any of the following events (provided, however,
that the events referred to in Section 9 below shall not be deemed to result in
a Change of Control):
(i) any person or persons acting as a group, other than a person
which as of the date of this Agreement is the beneficial owner of voting
securities of Pioneer Financial and other than Pino or a group including Pino,
shall become the beneficial owner of securities of Pioneer Financial
representing at least thirty-four percent (34%) of the combined voting power of
Pioneer Financial's then outstanding securities; or
(ii) any consolidation or merger to which Pioneer Financial is a
party, if following such consolidation or merger, stockholders of Pioneer
Financial immediately prior to such consolidation or merger shall not
beneficially own securities representing at least sixty-seven percent (67%) of
the combined voting power of the outstanding voting securities of the surviving
or continuing corporation; or
(iii) any sale, lease, exchange or other transfer (in one
transaction or in a series of related transactions) of all, or substantially
all, of the assets of Pioneer Financial, other than to an entity (or entities)
of which PHC or the stockholders of Pioneer Financial immediately prior to such
transaction beneficially own securities representing at least sixty-seven
percent (67%) of the combined voting power of the outstanding voting securities.
(c) Good Reason. For purposes of this Agreement, "good reason" shall
mean any of the following:
(i) a change in Pino's status or position, the assignment to
Pino of any duties or responsibilities which are inconsistent with Pino's status
and position or a reduction in the duties and responsibilities to be exercised
by Pino;
(ii) any action by Pioneer Financial which renders Pino unable to
effectively discharge his duties and responsibilities hereunder;
(iii) the failure to maintain Pino's minimum annual base
salary in accordance with Section 3(a) or; in the event that such salary is
increased during the Term as provided herein, any reduction in Pino's then
current annual base salary; or
(iv) any failure by Pioneer Financial to obtain the assumption of
this Agreement by any successor or assignee thereto.
9. Assignment of Agreement to PHC.
(a) In the event of the consummation of a transaction referred to in
Section 9(b) below, Pioneer Financial shall cause this Agreement, and its
rights and obligations hereunder to be assigned to, and assumed by, PHC; and to
cause PHC to agree to assume, and to perform fully and in a timely manner, all
of Pioneer Financial's obligations hereunder. Pino agrees that, upon such
assignment and assumption, Pioneer Financial shall have no further obligation
hereunder
(b) Events.
(i) a public offering of shares of common stock of PHC pursuant to
which, immediately after the issuance thereof, the purchasers thereof become
the beneficial owners of securities of PHC representing more than 50% of the
combined voting power of PHC's then outstanding securities; or
(ii) the sale of PHC securities (in one transaction or in a series
of related transactions) in which any person or persons acting as a group, other
than Pioneer Financial, its subsidiaries or affiliates or a group including Pino
or his affiliates, become the beneficial owners of securities of PHC
representing more than 50% of the combined voting power of PHC's then
outstanding securities; or
(iii) any merger to which PHC is a party, if following such merger,
stockholders or PHC immediately prior to such merger shall not beneficially own
securities representing more than 50% of the combined voting power of the
outstanding voting securities of the surviving or continuing corporation.
10. Confidential Information and Trade Secrets.
(a) Nature. During Pino's employment by Pioneer Financial, Pino will
enjoy access to Pioneer Financial's and PHC's "confidential information" and
"trade secrets". For purposes of this Agreement, "confidential information"
shall mean information which is not publicly available, including without
limitation, information concerning customers, material sources, suppliers,
financial projections, marketing plans and operation methods, Pino's access to
which derives solely from Pino's employment with Pioneer Financial. For
purposes of this Agreement, "trade secrets" shall mean Pioneer Financial's and
PHC's processes, methodologies and techniques known only to those employees of
Pioneer Financial or PHC who need to know such secrets in order to perform their
duties on behalf of Pioneer Financial or PHC. Pioneer Financial and PHC take
numerous steps, including these provisions, to protect the confidentiality of
their confidential information and trade secrets, which they consider unique,
valuable and special assets.
(b) Restricted Use and Non-Disclosure. Pino, recognizing Pioneer
Financial's and PHC's significant investment of time, efforts and money in
developing and preserving their confidential information, shall not, during his
employment hereunder and for a two (2) year period after the end of Pino's
employment hereunder, use for his direct or indirect personal benefit any of
Pioneer Financial's or PHC's confidential information or trade secrets. For a
two (2) year period after the end of Pino's employment hereunder, Pino shall not
disclose to any person any of Pioneer Financial's or PHC's confidential
information or trade secrets.
(c) Return of Pioneer Financial and PHC Property. Upon termination
of Pino's employment with Pioneer Financial, for whatever reason and in whatever
manner, Pino shall return to Pioneer Financial and PHC all copies of all
writings and records relating to Pioneer Financial's and PHC's businesses,
respectively, confidential information or trade secrets which are in Pino's
possession of such time.
11. Non-Competition and Non-Solicitation.
(a) PHC's Investment. Pioneer Financial and PHC are spending and will
spend much time, money and effort in building relationships with agents,
insureds and customers and will pay Pino valuable consideration pursuant hereto
in exchange for Pino's promises herein, including without limitation the
covenants in Section 10 and in this Section 11. Pioneer Financial has engaged
Pino as a senior executive officer of Pioneer Financial and PHC in order to,
among other reasons, take advantage of Pino's unique knowledge of, and contacts
within, the life and accident and health insurance and the managed care
industries. Further, Pioneer Financial and PHC will invest significant time and
money in the further development of Pino's business ability, image and standing.
As Pino is a senior executive officer of Pioneer Financial and PHC, the
reputation and success of Pino will be closely tied to the reputation and
success of Pioneer Financial and PHC and, during the Term, Pino will be heavily
identified with Pioneer Financial's and PHC's businesses.
(b) Non-Competition. During Pino's employment hereunder and for a
twenty-four (24) month period after termination of such employment, unless such
termination is made by Pioneer Financial without cause or unless there has been
a Change in Control prior to such termination, Pino shall not engage, directly
or indirectly, whether as an owner, partner, employee, officer, director, agent,
consultant or otherwise, in any location where Pioneer Financial or any of its
subsidiaries is engaged in business after the date hereof and prior to Pino's
termination, conducted by Pioneer Financial or any of its subsidiaries,
provided, however, that the mere ownership of 5% or less of the stock of a
company whose shares are traded on a national securities exchange or are quoted
on the National Association of Securities Dealers Automated Quotation System
shall not be deemed ownership which is prohibited hereunder.
(c) Non-Solicitation. During the twenty-four (24) month period
following termination of Pino's employment with Pioneer Financial, Pino shall
not, directly or indirectly induce employees of Pioneer Financial or any of its
subsidiaries to leave such employment with the result that such employees would
engage in business activities which are substantially similar or are closely
related to the business activities such employee performed on behalf of Pioneer
Financial and which compete against Pioneer Financial. Notwithstanding the
above, in the event Pino is terminated by Pioneer Financial without cause, then
the twenty-four (24) month period referred to in this Section 11(c) shall be
reduced to twelve (12) months.
(d) Enforceability. The necessity of protection against the
competition of Pino and the nature and scope of such protection has been
carefully considered by the parties hereto. The parties hereto agree and
acknowledge that the duration, scope and geographic areas applicable to the non-
competition covenant in this Section 11 are fair, reasonable and necessary, that
adequate compensation has been received by Pino for such obligations, and that
these obligations do not prevent Pino from earning a livelihood. If, however
for any reason any court determines that the restrictions in this Agreement are
not reasonable, that consideration is inadequate or that Pino has been prevented
from earning a livelihood, such restrictions shall be interpreted, modified or
rewritten to include as much of the duration, scope and geographic area
identified in this Section 11 as will render such restrictions valid and
enforceable.
12. Breach or Threatened Breach of Non-Competition Covenant. In the event
of a breach or threatened breach by Pino of any provision of Section 10 or 11
hereof, Pino acknowledges that the remedy at law would be inadequate and that
Pioneer Financial shall be entitled to an injunction restraining Pino from such
act or threatened breach. Nothing herein contained shall be construed as
prohibiting Pioneer Financial from pursuing any other remedies available to it
for such breach or threatened breach, including the recovery of monetary
damages.
13. Business Days. Any date specified in this Agreement which is a
Saturday, Sunday or legal holiday shall be extended to the first regular
business day after such date which is not a Saturday, Sunday or legal holiday.
14. Choice of Law. This Agreement has been executed and made in
accordance with the laws of the State of Illinois and is to be construed,
enforced and governed in accordance therewith.
15. Counterparts. This Agreement may be executed in several counterparts,
each of which shall be an original, but all of which together shall constitute
one and the same instrument.
16. Entire Agreement Amendments. This Agreement contains the entire
agreement among the parties hereto with respect to the subject matter hereof.
No change or modification of this Agreement, or any waiver of the provisions
hereof, shall be valid unless the same is in writing and signed by the parties
hereto. Waiver by any party hereto of a breach by the other party of any
provisions of this Agreement shall not operate or be construed as a waiver of
any subsequent breach by such party.
17. Headings. The headings used herein are for ease of interpretation and
shall have no effect on the interpretation of any provision of this Agreement.
18. Notices. All notices, requests, demands and other communications
hereunder shall be in writing and shall, until receipt of contrary written
instructions, be delivered personally to, or mailed by certified or registered
mail with proper postage prepaid, to the party at the address as follows:
TO PIONEER FINANCIAL: PIONEER FINANCIAL SERVICES, INC.
1750 E. Golf Road
Schaumburg, Illinois 60173
TO PINO: Mr. Anthony J. Pino
1114 Glenlake Way
Louisville, Kentucky 40245
19. Severability. If any provision of this Agreement is held for any
reason to be invalid, it will not invalidate any other provisions of this
Agreement which are in themselves valid, nor will it invalidate the provisions
of any other agreement between the parties hereto. Rather, such invalid
provision shall be construed so as to give it the maximum effect allowed by
applicable law. Any other written agreement between the parties hereto shall be
conclusively deemed to be an agreement independent of this Agreement.
20. Successors and Assigns. This Agreement and all the provisions hereof
shall be binding upon and inure to the benefit of the parties hereto and their
respective heirs, legal representatives, successors and permitted assigns. This
Agreement and the rights and obligations hereunder may not be assigned by either
party without the prior written consent of the other.
21. Time of the Essence. Time is of the essence of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Employment
Agreement to be executed on December 7, 1995, but to be effective as of the date
first above written.
Attest: "Pioneer Financial"
PIONEER FINANCIAL SERVICES, INC.
______________________________ By: ___________________________________
Title: __________________________________
Witness: "Pino"
______________________________ ________________________________________
Anthony J. Pino
acw\agreemen\Pino.d11
EXHIBIT 11
PIONEER FINANCIAL SERVICES, INC.
STATEMENT OF COMPUTATION OF PER SHARE
NET INCOME
For the Year Ended December 31
1995 1994 1993
Net Income $ 20,968,000 $ 17,149,000 $ 12,145,000
Less Dividends on
Preferred Stock (1,805,000) (1,904,000) (2,021,000)
Primary Basis-Net Income $ 19,163,000 $ 15,245,000 $ 10,124,000
Fully Diluted Basis-
Net Income ** $ 23,266,000 $ 20,145,000 $ 13,507,000
Average shares outstanding 7,586,908 6,221,216 6,546,719
Common Stock equivalents
from dilutive stock
options, based on the
treasury stock method
using average market
price 252,501 237,847 176,883
TOTAL-PRIMARY BASIS 7,839,409 6,459,063 6,723,602
Additional shares assuming
conversion of Preferred
Stock 1,358,240 1,387, 1,515,200
Additional shares assuming
conversion of Subordinated
Debentures 3,231,282 4,887,404 2,282,774
Additional Common Stock
equivalents from dilutive
stock options, based on the
treasury stock method
using closing market price 179,483 - 209,618
TOTAL-FULLY DILUTED 12,608,414 12,734,14 10,731,194
Net income per share-
Primary $ 2.44 $ 2.36 $ 1.51
Net income per share-
Fully Diluted $ 1.85 $ 1.58 $ 1.26
** Fully diluted net income per share was calculated after
adding tax effected interest and amortization of offering costs
on Subordinated Debentures of $2,298,000, $2,996,000, and
$1,362,000 for the years ended December 31, 1995, 1994, and 1993,
respectively.
PIONEER FINANCIAL SERVICES, INC.
EMPLOYEE STOCK PURCHASE PLAN
1. Purpose. Pioneer Financial Services, Inc., a Delaware corporation
(the "Company"), hereby adopts this Employee Stock Purchase Plan (the "Plan").
The purpose of the Plan is to provide an opportunity for the employees of the
Company and any designated subsidiaries to purchase shares of the Common Stock
of the Company through voluntary automatic payroll deductions, thereby
attracting, retaining and rewarding such persons and strengthening the mutuality
of interest between such persons and the Company's stockholders.
2. Shares Subject to Plan. An aggregate of 500,000 shares (the
"Shares") of Common Stock of the Company may be sold pursuant to the Plan and
Pioneer Financial Services, Inc. Career Agent Stock Purchase Plan. Such Shares
may be authorized but unissued Common Stock, treasury shares or Common Stock
purchased in the open market. If there is any change in the outstanding shares
of Common Stock by reason of a stock dividend or distribution, stock split,
recapitalization, combination or exchange of shares, or a merger, consolidation
or other corporate reorganization in which the Company is the surviving
corporation, the number of Shares available for sale shall be equitably adjusted
by the Committee appointed to administer the Plan to give proper effect to such
change.
3. Administration. The Plan shall be administered by a committee
(the "Committee") which shall be the Compensation Committee of the Board of
Directors or another committee consisting of not less than two directors of the
Company appointed by the Board of Directors, none of whom shall participate in
the Plan and all of whom shall qualify as disinterested persons within the
meaning of Securities and Exchange Commission Regulation Section 240.16b-3 or
any successor regulation. The Committee is authorized, subject to the provisions
of the Plan, to establish such rules and regulations as it deems necessary for
the proper administration of the Plan and to make such determinations and
interpretations and to take such action in connection with the Plan and any
Shares made available hereunder as it deems necessary or advisable. All
determinations and interpretations made by the Committee shall be binding and
conclusive on all participants and their legal representatives. No member of
the Board, no member of the Committee and no employee of the Company shall be
liable for any act or failure to act hereunder, by any other member or employee
or by any agent to whom duties in connection with the administration of this
Plan have been delegated or, except in circumstances involving his or her bad
faith, gross negligence or fraud, for any act or failure to act by the member or
employee.
4. Eligibility. All regular employees of the Company, and of each
qualified subsidiary of the Company designated for participation by the Board of
Directors, other than:
(a) employees whose customary employment is 20 hours or less per
week; and
(b) employees whose customary employment is for not more than 5
months per year;
shall be eligible to participate in the Plan. For the purposes of this Plan,
the term "qualified subsidiary" means any subsidiary, 50% or more of the total
combined voting power of all classes of stock in which is now owned or hereafter
acquired by the Company or any such qualified subsidiary.
5. Participation. An eligible employee may elect to participate in
the Plan as of any "Enrollment Date". Enrollment Dates shall occur on the first
day of an Offering Period (as defined in paragraph 8). Any such election shall
be made by completing and forwarding to the Company an enrollment and payroll
deduction authorization form prior to such Enrollment Date, authorizing payroll
deductions in such amount as the employee may request but in no event less than
the minimum nor more than the maximum amount as the Committee shall determine.
A participating employee may increase or decrease his payroll deductions as of
any subsequent Enrollment Date by completing and forwarding to the Company a
revised payroll deduction authorization form; provided, that changes in payroll
deductions shall not be permitted to the extent that they would result in total
payroll deductions below the minimum or above the maximum amount as is specified
by the Committee. An eligible employee may not initiate, increase or decrease
payroll deductions as of any date other than an Enrollment Date except by
withdrawing from the Plan as provided in paragraph 7.
6. Payroll Deduction Accounts. The Company shall establish on its
books and records a "Payroll Deduction Account" for each participating employee,
and shall credit all payroll deductions made on behalf of each employee pursuant
to paragraph 5 to his or her Payroll Deduction Account. No interest shall be
credited to any Payroll Deduction Account.
7. Withdrawals. An employee may withdraw from an Offering Period at
any time by completing and forwarding a written notice to the Company. Upon
receipt of such notice, payroll deductions on behalf of the employee shall be
discontinued commencing with the immediately following payroll period. Amounts
credited to the Payroll Deduction Account of any employee who withdraws shall be
refunded to the employee as soon as practicable after the withdrawal. The
employee may resume participation in the Plan at the next Enrollment Date, by
filing a new election in accordance with paragraph 5.
8. Offering Periods. The Plan shall be implemented by consecutive
six-month Offering Periods with a new Offering Period commencing on the first
trading day on or after the first day of each January and July during the term
of the Plan, or on such other date as the Committee shall determine, and
continuing thereafter to the end of such period, subject to termination in
accordance with paragraph 17 hereof. Notwithstanding the foregoing, the first
Offering Period hereunder shall commence on March 1, 1996, and shall end June
30, 1996. "Trading day" shall mean a day on which the New York Stock Exchange
is open for trading. The Committee shall have the power to change the duration
of Offering Periods (including the commencement dates thereof) with respect to
future offerings. The last trading day of each Offering Period prior to the
termination of the Plan (or such other trading date as the Committee shall
determine) shall constitute the purchase dates (the "Share Purchase Dates") on
which each employee for whom a Payroll Deduction Account has been maintained
shall purchase the number of Shares determined under paragraph 9(a).
Notwithstanding the foregoing, the Company shall not permit the exercise of any
right to purchase Shares
(a) to an employee who, immediately after the right is granted,
would own shares possessing 5% or more of the total combined voting
power or value of all classes of stock of the Company or any
subsidiary; or
(b) which would permit an employee's rights to purchase shares
under this Plan, or under any other qualified employee stock purchase
plan maintained by the Company or any subsidiary, to accrue at a rate
in excess of $25,000 in fair market value for each calendar year.
For the purposes of subparagraph (a), the provisions of Section 424(d) of the
Internal Revenue Code shall apply in determining the stock ownership of an
employee, and the shares which an employee may purchase under outstanding rights
or options shall be treated as shares owned by the employee.
9. Purchase of Shares.
(a) Subject to the limitations set forth in paragraphs 7 and 8,
each employee participating in an offering shall purchase as many
whole Shares (plus any fractional interest in a Share) as may be
purchased with the amounts credited to his or her Payroll Deduction
Account seven days prior to the Share Purchase Date (or such other
date as the Committee shall determine) (the "Cutoff Date"). Employees
may purchase Shares only through payroll deductions, and cash
contributions shall not be permitted.
(b) The "Purchase Price" for Shares purchased under the Plan
shall be not less than the lesser of (i) an amount equal to 85% of the
closing price of shares of Common Stock at the beginning of the
Offering Period or (ii) an amount equal to 85% of the closing price of
shares of Common Stock on the Share Purchase Date. For these
purposes, the closing price shall be as reported on the New York Stock
Exchange Composite Transactions list as reported in the Wall Street
Journal, Midwest Edition. The Committee shall have the authority to
establish a different Purchase Price as long as any such Purchase
Price complies with the provisions of Section 423 of the Code.
(c) On each Share Purchase Date, the amount credited to each
participating employee's Payroll Deduction Account as of the
immediately preceding Cutoff Date shall be applied to purchase as many
whole Shares (plus any fractional interest in a Share) as may be
purchased with such amount at the applicable Purchase Price. Any
amount remaining in an employee's Payroll Deduction Account as of the
relevant Cutoff Date in excess of the amount that may properly be
applied to the purchase of Shares shall be refunded to the employee as
soon as practicable.
10. Brokerage Accounts or Plan Share Accounts. By enrolling in the
Plan, each participating employee shall be deemed to have authorized the
establishment of a brokerage account on his or her behalf at a securities
brokerage firm selected by the Committee. Alternatively, the Committee may
provide for Plan share accounts for each participating employee to be
established by the Company or by an outside entity selected by the Committee
which is not a brokerage firm. Shares purchased by an employee pursuant to the
Plan shall be held in the employee's brokerage or Plan share account ("Plan
Share Account") in his or her name, or if the employee so indicates on his or
her payroll deduction authorization form, in the employee's name jointly with a
member of the employee's family, with right of survivorship.
11. Rights as Stockholder. An employee shall have no rights as a
stockholder with respect to Shares subject to any rights granted under this Plan
until payment for such Shares has been completed at the close of business on the
relevant Share Purchase Date.
12. Certificates. Certificates for Shares purchased under the Plan
will not be issued automatically. However, certificates for whole Shares
purchased shall be issued as soon as practicable following an employee's written
request. The Company may make a reasonable charge for the issuance of such
certificates. Fractional interests in Shares shall be carried forward in an
employee's Plan Share Account until they equal one whole Share or until the
termination of the employee's participation in the Plan, in which event an
amount in cash equal to the value of such fractional interest shall be paid to
the employee in cash. If a share certificate is issued to an employee, the
employee will be required to notify the Company of his disposition of such
shares, if his disposition occurs within time periods established by the
Company.
13. Termination of Employment. If a participating employee's
employment is terminated for any reason, if an employee dies, if an employee is
granted a leave of absence of more than 90 days duration, or if an employee
otherwise ceases to be eligible to participate in the Plan, payroll deductions
on behalf of the employee shall be discontinued and any amounts then credited to
the employee's Payroll Deduction Account shall be refunded to the employee as
soon as practicable.
14. Rights Not Transferable. Rights granted under this Plan are not
transferable by a participating employee other than by will or the laws of
descent and distribution, and are exercisable during an employee's lifetime only
by the employee.
15. Employment Rights. Neither participation in the Plan, nor the
exercise of any right granted under the Plan, shall be made a condition of
employment, or of continued employment with the Company or any subsidiary.
Participation in the Plan does not limit the right of the Company or any
subsidiary to terminate a participating employee's employment at any time or
give any right to an employee to remain employed by the Company or any
subsidiary in any particular position or at any particular rate of remuneration.
16. Application of Funds. All funds received by the Company for
Shares sold by the Company on any Share Purchase Date pursuant to this Plan may
be used for any corporate purpose.
17. Amendments and Termination. The Board of Directors may amend the
Plan at any time, provided that no such amendment shall be effective unless
approved within 12 months after the date of the adoption of such amendment by
the affirmative vote of stockholders holding shares of Common Stock entitled to
a majority of the votes represented by all outstanding shares of Common Stock
entitled to vote if such stockholder approval is required for the Plan to
continue to comply with the requirements of Securities and Exchange Commission
Regulation Section 240.16b-3 and Section 423 of the Internal Revenue Code. The
Board of Directors may suspend the Plan or discontinue the Plan at any time.
Upon termination of the Plan, all payroll deductions shall cease and all amounts
then credited to the participating employees' Payroll Deduction Accounts shall
be equitably applied to the purchase of whole Shares then available for sale,
and any remaining amounts shall be promptly refunded to the participating
employees.
18. Applicable Laws. This Plan, and all rights granted hereunder,
are intended to meet the requirements of an "employee stock purchase plan" under
Section 423 of the Internal Revenue Code, as from time to time amended, and the
Plan shall be construed and interpreted to accomplish this intent. Sales of
Shares under the Plan are subject to, and shall be accomplished only in
accordance with, the requirements of all applicable securities and other laws.
19. Expenses. Except to the extent provided in paragraph 12, all
expenses of administering the Plan, including expenses incurred in connection
with the purchase of Shares in the open market for sale to participating
employees, shall be borne by the Company and its subsidiaries.
20. Stockholder Approval. The Plan was adopted by the Board of
Directors on December 14, 1995, subject to stockholder approval. The Plan and
any action taken hereunder shall be null and void if stockholder approval is not
obtained at the next annual meeting of stockholders.
EXHIBIT 10(p)
PIONEER FINANCIAL SERVICES, INC.
COMPENSATION DEFERRAL PLAN
THIS PLAN is adopted as of the 30th day of December, 1994, by Pioneer
Financial Services, Inc., a Delaware corporation (the "Company"). The Plan
covers the members of the Board of Directors of Pioneer Financial Services, Inc.
(the "Director(s)") and constitutes a plan of deferred compensation to be known
as Pioneer Financial Services, Inc. Compensation Deferral Plan (the "Plan")
which shall provide benefits at retirement, disability or death, as specified
herein.
WITNESSETH:
WHEREAS, in order to attract and retain qualified directors, the
Company desires to establish a plan to allow Directors to irrevocably elect to
defer the payment of a certain portion of their Compensation.
NOW, THEREFORE, the Plan shall have the following provisions.
(1)(a) Prior to December 31 of any given year a Director may
irrevocably elect to defer receipt of a portion or percentage of his
or her future Compensation earned in subsequent calendar years by
completing, signing and delivering to the Company an Election and
Enrollment Form. A Director may change the amount of Compensation
being deferred under the Plan as of the first day of any calendar
year, by delivering to the Company a new Election and Enrollment Form
prior to such date.
(1)(b) The term "Compensation" shall mean all fees payable by
the Company to a Director for attendance at regular and special
meetings of the Board of Directors and for service on committees of
the Board of Directors. Compensation shall not include expense
reimbursements or, for Directors who are also employees of Company,
wages and bonuses reportable on Form W-2.
(2) The Company shall establish a Deferred Compensation Account
(the "Compensation Account") for each Director who elects to
participate in the Plan. The Compensation Account shall be credited
with the portion of Compensation which each Director elects to defer
at the time such Compensation would have otherwise been payable to
such Director. The amounts credited to Compensation Accounts are for
recordkeeping purposes only, such amounts are not funded by the
Company in any way; and a Director's rights with respect to amounts
credited to his or her Compensation Account under the Plan are as
described in (7) below. Nevertheless, a Trust may be established by
the Company (the "Trust") to assist in providing the benefits
described in this Plan.
(3) The amounts credited to a Director's Compensation Account
shall be deemed credited to an Investment Option (as hereinafter
defined) chosen by such Director. Each Compensation Account, shall be
adjusted as of the end of each calendar quarter for hypothetical
investment experience. If a Director fails to specify an Investment
Option for any amount in his or her Compensation Account, then such
amount will be deemed to be invested in the Fidelity Tax Exempt Money
Market Trust or such other fund as the majority of the Directors may
approve. The investment experience of each Investment Option will be
calculated by reference to the Closing Price (as hereinafter defined)
or net asset value of such Investment Option, as applicable, as
reported in The Wall Street Journal on the last business day of
applicable calendar quarter. In addition, the amount credited to each
Director's Compensation Account will be reduced by an amount equal to
the brokerage or other transaction costs that would have been incurred
in connection with the deemed purchase or sale of an Investment
Option. The Investment Options shall be:
1. A deemed investment in the Common Stock of the Company.
2. A deemed investment in any mutual fund, money market fund,
common stock, preferred stock or other security so long as such
security is listed for trading on a national securities exchange or
the National Association of Securities Dealers Automated Quotation
System. However, all money market funds which are elected as
Investment Options must be money market funds which invest solely in
tax-exempt securities.
A Director may change his or her Investment Option by delivering to the Company
a written Election to Change Investment Option (in form prescribed by the
Company) to change Investment Options at least 10 business days prior to the
effective date of the change. Within three days of receipt of an Election to
Change Investment Option, the Human Resources Department will send a written
confirmation to such Director of the Director's change. If a Director's
Investment Option is changed in a manner that results in a deemed purchase or
sale of the Common Stock of the Company, then (i) the election shall be subject
to the Company's policies which restrict trading in Company securities by
Directors, and (ii) the election shall not be given effect until such policies
would allow the Director to purchase and sell Company securities. Amounts
deemed invested in the Common Stock of the Company shall be credited with an
amount equal to the dividends earned on such deemed investment. The term
"Closing Price" with respect to a security shall mean (i) the closing sale price
of such security if such security is traded on a national securities exchange,
or (ii) if such security is not traded on a national securities exchange, the
average of the highest bid and the lowest asked prices for such security.
(4) Title to and beneficial ownership of any assets, whether
cash or investments which the Company may earmark to pay amounts
credited to the Compensation Accounts, shall at all times remain in
the Company and no Director shall have any property interest
whatsoever in any specific assets of the Company. Notwithstanding the
previous sentence, any amounts in the Trust shall be the property of
the Trust, and shall be applied to provide benefits for the
participants in this Plan, subject to the terms and limitations of the
Trust Agreement. Although the Company and/or the trustee of the Trust
(the "Trustee") may use Company and/or Trust assets to wholly or
partially mirror the Investment Option specification of any Director,
neither the Company nor the Trustee is required by either this Plan or
the Trust to do so.
(5) Payment of amounts credited to a Director's Compensation
Account shall be made (or shall commence) as of the last day of the
calendar quarter following his or her seventy-fifth birthday, with
payouts occurring as provided in Section (6). No earlier payment with
respect to amounts credited to Compensation Accounts shall be
permitted unless one of the following events has occurred, in which
case payment shall be made as provided in Section (6).
(a) The death of a Director (in which case payment
shall be made to the Director's designated beneficiary as
provided in (10) below).
(b) The first day of the month following the
determination by the Board of Directors of Company that a
Director has become Disabled (as hereinafter defined). A
Director shall be deemed to be "Disabled" if the Board of
Directors determines that, as a result of any injury,
disease, or mental impairment which is expected to last for
at least 12 months, the Director is unable to engage in any
occupation or work for remuneration or profit for which such
Director is suited for on the basis of his education,
training, and previous working experience. However, any
injury, disease, or mental impairment which (i) resulted
from habitual use of alcohol or any controlled substance, or
(ii) was incurred while the individual was in the act of
committing a felonious act, or (iii) was intentionally self-
inflicted, or (iv) was incurred while the individual was on
an unapproved leave of absence without pay, or (v) was
incurred as a result of service in the armed forces of any
country, shall not result in a Director being Disabled.
(c) The first day of the month following
discontinuance of service as a Director.
(d) the first day of the month following a Director's
termination of his or her principal employment.
(6) Payment of amounts credited to a Director's Compensation
Account shall be made in ten approximately equal annual installments.
Prior to the date a Director's first deferral election becomes
effective, the Director may designate a payout schedule in writing to
the Company. Payment shall begin no sooner than the close of the
calendar quarter following the occurrence of the event described in
Section 5 which gave rise to such payments. If a Director does not
designate a payment schedule then the number of and scheduling for the
payments shall be determined solely by a majority of the other members
(the "Disinterested Directors") of the Board of Directors of the
Company (or such committee of Directors, consisting of at least two
Disinterested Directors, as the Board of Directors may designate)
considering the best financial interests of the Director or his or her
beneficiary. Furthermore, in their sole discretion, the Disinterested
Directors (or such committee of Directors, consisting of at least two
Disinterested Directors, as the Board of Directors may designate) may
revise a payout schedule designated by a Director if such
Disinterested Directors consider it to be in the best financial
interests of the Director or his or her beneficiary.
(7) In the performance and administration of this Plan, Company
shall be under no obligation to segregate any funds to be credited to
the Compensation Accounts (other than as may be required under any
applicable trusts), nor shall anything contained in this Plan and/or
any action taken pursuant to the provisions of this Plan create or be
construed to create a trust of any kind, or a fiduciary relationship
between Company and the Directors. Each Director's interest in his or
her Compensation Account shall be limited to the right to receive
payments pursuant to this Plan and such right shall be no greater than
the right of any unsecured general creditor of Company.
Notwithstanding the foregoing, to the extent amounts are invested in
the Trust, Trust assets shall be used for the purpose of meeting the
Company's obligations to such Director under this Plan, subject to the
terms and limitations conditions of the Trust Agreement.
(8) Except as provided herein, the Directors shall not have the
right to commute, sell, assign, pledge, transfer or otherwise convey
or encumber, in whole or in part, the right to receive any payments
under this Plan.
(9) The Company shall administer the Plan and shall have the
sole authority to interpret and construe the Plan, and determine all
questions arising under the Plan and any agreements made pursuant to
the Plan.
(10) The terms and conditions of this Plan shall be binding upon
the heirs, beneficiaries and other successors in interest of each
Director to the same extent that said terms and conditions are binding
upon him. A Director may designate a beneficiary or beneficiaries to
receive payment of his or her Plan benefits in the event of his or her
death. A beneficiary designation form will be valid only if filed
with the Company during the Director's lifetime. If no beneficiary
has been designated, the Director's benefits shall be payable to his
or her executor or personal representative.
(11) The Company may terminate this Plan at any time and in
satisfaction of its obligations hereunder pay each Director or his or
her beneficiary an amount equal to the value of the amounts credited
to his or her Compensation Account as of the date of termination of
the Plan.
(12) Any notices permitted or required to be given by the
Directors under this Plan shall be in writing and addressed to the
attention of the Director of Human Resources at the Company's office
in Rockford, Illinois. Any notices permitted or required to be given
by Company shall be sent to each Director at the address shown on the
latest deferral election unless notice of a change thereof has been
received by Company. The Company may change the address for receiving
notices by giving written notice of such new address to all of the
Directors. All such notices shall be delivered in person or by U.S.
mail, first class or by facsimile. Notices given to the Company shall
not be deemed given until actually received by the Company.
(13) Except as provided in Paragraph 10, this Plan may not be
changed, modified or amended, except by action of the majority of the
Board of Directors. No such action shall cause a reduction in the
balance last credited to a Director's Compensation Account.
(14) The invalidity or unenforceability of any provisions of
this Plan shall in no way affect the validity or enforceability of any
other provision hereof.
(15) This Plan may be adopted by any subsidiary of the Company,
with the approval of the Board of Directors of the Company.
(16) Neither the Company nor any of its Directors or employees
shall be liable for any decision or action taken by the Company in
good faith in connection with the administration or interpretation of
the Plan or the provisions thereof.
(17) Except to the extent subject to the laws of the United
States, this Plan shall be governed by the laws of the State of
Illinois, applicable to agreements to be performed in that State.
PIONEER FINANCIAL SERVICES, INC.
COMPENSATION DEFERRAL PLAN
DESIGNATION OF BENEFICIARY
In the event of my death, I hereby designate
_________________________________________________ as my beneficiary for the
funds held in the Compensation Account under the Pioneer Financial Services,
Inc. Compensation Deferral Plan.
, 19
Director's Signature
Director's Name Printed: Beneficiary's Address:
PIONEER FINANCIAL SERVICES, INC.
COMPENSATION DEFERRAL PLAN
ELECTION AND ENROLLMENT FORM
After its effective date, the most recent Election and Enrollment Form
executed by a Director shall override inconsistencies on any Election and
Enrollment Form previously executed by such Director. Capitalized terms used
in this Form shall have the meanings given to them in the Pioneer Financial
Services, Inc. Compensation Deferral Plan.
A. Enrollment<F1>
I hereby irrevocably elect to defer payment of [please complete one of
the options and cross out the other three]:
[none of my Compensation], or
[_____% of my Compensation], or
[up to $________ of my Compensation,] or
[all of my Compensation in excess of $__________,]
as defined in section 1(b) of the Pioneer Financial Services, Inc. Compensation
Deferral Plan.
This election shall remain in effect until: [please choose one of the
options and cross out the other option]:
[the end of the current calendar year]
[the Company receives a written notice from me electing to
terminate my election to defer payment of my Compensation; provided,
however, that my election to terminate my election shall not take
effect until the end of the calendar year in which it is given]
[FN] The amount of Compensation being deferred may only be changed as of the
first day of a calendar year.
B. Payout Schedule
Payment shall be made as follows or as the Board of Directors of the
Company shall direct in accordance with section 6 of the Plan:<F2>
[you may describe how you would prefer that the amounts in your
Compensation Account be paid to you]
[FN] A Director may only designate a payout schedule when initially enrolling in
the Plan.
C. Investment Options
List below the Investment Option(s) for amounts credited to your Compensation
Account and the percentage of the deferred amounts credited to such Investment
Option. If a Director fails to specify an Investment Option for any amount in
his or her Compensation Account, then such amount will be deemed to be invested
in the Fidelity Tax Exempt Money Market Trust.
Investment Option Percentage of Deferral
% Total (must
equal 100)
, 19__
Director's Signature
Name Printed:
Date of Birth:
Address:
PIONEER FINANCIAL SERVICES, INC.
COMPENSATION DEFERRAL PLAN
ELECTION TO CHANGE INVESTMENT OPTION
After its effective date, the most recent Election to Change Investment
Option shall override inconsistencies on any Election to Change Investment
Option or Election and Enrollment Form previously submitted. List below the
Investment Option(s) for amounts credited to your Compensation Account and the
amounts allocated to each investment Option. If a Director fails to specify an
Investment Option for any amount in his or her Compensation Account, then such
amount will be deemed to be invested in the Fidelity Tax Exempt Money Market
Trust. Capitalized terms used in this Election shall have the meanings given to
them in the Pioneer Financial Services, Inc. Compensation Deferral Plan.
Investment Option Amount
$
$
$
$
The effective date of this Election shall be 10 business days after receipt by
the Human Resources Department at Pioneer Financial Services, Inc.
Directors Signature
Name Printed:
EXHIBIT 10(f)
EMPLOYMENT AGREEMENT
The Agreement is made as of September 1, 1995 between PIONEER FINANCIAL
SERVICES, INC., a Delaware corporation with its principal place of business at
1750 E. Golf Road, Schaumburg, IL 60173 (hereinafter "Pioneer Financial"); and
PETER W. NAUERT, an individual residing at 913 N. Main Street, Rockford, IL
61103 ( "Nauert").
W I T N E S S E T H:
WHEREAS, Pioneer Financial is an insurance holding company which has life
and accident and health insurance subsidiaries and affiliated administrative
service and marketing companies; and
WHEREAS, Nauert is currently Chairman and Chief Executive Officer of
Pioneer Financial and Nauert possesses valuable skills, expertise and abilities
in the life and accident and health insurance business; and
WHEREAS, Pioneer Financial is desirous of retaining the services of Nauert
as a key managerial employee; and
WHEREAS, Nauert desires to be employed by Pioneer Financial on the terms
set forth herein;
NOW, THEREFORE, for and in consideration of the covenants contained herein,
Pioneer Financial hereby employs Nauert and Nauert accepts such employment with
Pioneer Financial upon the terms and conditions hereinafter set forth.
1. Employment. Pioneer Financial hereby employs Nauert and Nauert hereby
agrees to be employed by Pioneer Financial for a continually renewing term of
three (3) years commencing on September 1, 1995, and continuing, without further
action on the part of Pioneer Financial or Nauert, until terminated as provided
herein (the "Term"), to perform the duties set forth herein.
2. Duties. Subject to the control of the Board of Directors of Pioneer
Financial, Nauert shall serve during the Term as Chairman and Chief Executive
Officer of Pioneer Financial, and in such capacity shall render such services as
the Board of Directors of Pioneer Financial shall direct. In addition, Nauert
shall serve in such other offices or capacities as the Board of Directors of
Pioneer Financial may from time to time determine. Nauert shall have such
executive powers and authority as may reasonably be required by him in order to
discharge such duties in an efficient and proper manner.
3. Compensation. Pioneer Financial shall in the aggregate pay to Nauert
for all services to be rendered hereunder:
(a) an annual base salary in an amount of not less than One Million
Dollars ($1,000,000); provided that the Board of Directors of Pioneer Financial
shall annually make a review of Nauert's salary and increase such annual base
salary as it deems appropriate; and
(b) such annual bonus, as may be determined by the Compensation
Committee of the Board of Directors of Pioneer Financial, based upon the
achievement of such Pioneer Financial company-wide performance standards as may
be established by such Committee and approved by the stockholders of Pioneer
Financial, provided, however, that Nauert shall be entitled to receive a bonus
for 1995 based upon the criteria heretofore established by the Committee.
4. Prior Employment Agreements. This Agreement supersedes all other
existing employment agreements between Pioneer Financial or its subsidiaries and
Nauert; provided, however, that Section 4 of that certain Employment Agreement,
dated as of December 3, 1993, between Pioneer Financial and Nauert, all other
provisions of such Agreement relating to the transactions contemplated in such
Section 4, and the rights and obligations of the parties thereunder and under
the Note relating to the transactions contemplated in such Section 4, shall
remain in full force and effect in accordance with their respective terms.
5. Stock Options. Simultaneously with the execution and delivery of this
Agreement, Pioneer Financial is issuing to Nauert options to purchase an
aggregate of 500,000 shares of Pioneer Financial common stock. Such options are
being issued subject to the approval by the stockholders of Pioneer Financial of
an appropriate amendment to the Pioneer Financial 1994 Omnibus Stock Incentive
Program (the "Plan") which would, among other things, increase the number of
options which may be granted under the Plan to any participant in any year.
Such options are exercisable as follows: 100,000 on or after the date of the
execution and delivery of this Agreement at $15.25 per share; 100,000 on or
after September 1, 1996 at $16.75 per share; 100,000 on or after September 1,
1997 at $18.50 per share; 100,000 on or after September 1, 1998 at $20.25 per
share; and 100,000 on or after September 1, 1999 at $22.25 per share; provided,
however, that none of such options are exercisable within six months of the date
of grant. Such options (x) are exercisable only if Nauert is employed by PFS
or one of its subsidiaries at the time they can first be exercised; and (y) have
been issued on such other terms and conditions as are contained in the Option
Agreement relating thereto.
6. Benefits. During his employment hereunder, Nauert shall be entitled
to participate in all employee benefits made available to management personnel
of Pioneer Financial and its subsidiaries.
7. Death. Nauert's employment by Pioneer Financial will terminate
immediately upon his death; provided, however, that in the event of Nauert's
death during the Term, Nauert's estate shall be entitled to receive the payment
described in the last sentence of Section 9(c).
8. Disability. If during Nauert's employment hereunder, Nauert becomes
totally or partially disabled, Pioneer Financial shall continue to pay to Nauert
as long as such disability continues during the Term (or until Nauert's
employment is terminated by Pioneer Financial in accordance with Section 9 (if
earlier)) the level of annual salary payable to Nauert at the date his
disability is determined, reduced dollar-for-dollar to the extent of any
disability insurance payments paid to Nauert through insurance programs, the
premiums for which were paid by Pioneer Financial or its subsidiaries. For
purposes of this Agreement, the term "total disability" shall mean Nauert's
inability due to illness, accident or other physical or mental incapacity to
engage in the full time performance of his duties under this Agreement as
reasonably determined by the Board of Directors of Pioneer Financial based on
such evidence as such Board shall deem appropriate. For purposes of this
Agreement, "partial disability" shall mean Nauert's ability due to illness,
accident or other physical or mental incapacity to engage in only the partial
performance of his duties under this Agreement, as reasonably determined by the
Board of Directors of Pioneer Financial based on such evidence as such Board
shall deem appropriate.
9. Termination.
(a) End of Term. Pioneer Financial shall have the right at any time
during the Term, by action of its Board of Directors, to terminate this
Agreement upon thirty-six (36) months prior written notice to Nauert.
(b) For Cause. Pioneer Financial shall have the right to terminate
Nauert's employment hereunder at any time during the Term "for cause". For
purposes of this Agreement, "for cause" shall mean any of the following actions
(or inactions) by Nauert: illegal conduct of a severity greater than a
misdemeanor, gross neglect of, and the continued failure to perform
substantially, Nauert's duties under this Agreement. Notwithstanding anything
herein to the contrary, Nauert's inability to perform the duties of his position
due to his total or partial disability (as defined herein) shall not be deemed
to constitute cause.
If, in the opinion of the Board of Directors of Pioneer Financial,
Nauert's employment shall become subject to termination for cause, such Board of
Directors shall give Nauert notice to that effect, which notice shall describe
the matter or matters constituting such cause. If, at the end of such thirty
(30) day period, Nauert has not substantially eliminated or cured each such
matter or matters, then Pioneer Financial shall have the right to give Nauert
notice of the termination of his employment. Nauert's employment hereunder
shall be considered terminated for cause as of the date specified in such notice
of termination unless and until there is a final determination by a court of
competent jurisdiction that the cause of termination of Nauert's employment did
not exist at the time of giving said notice of termination. Upon termination of
Nauert's employment "for cause", this Agreement shall terminate without further
obligations to Nauert other than Pioneer Financial's obligation (a) to pay to
Nauert in a lump sum in cash within thirty (30) days after the date of
termination Nauert's base salary through the date of termination to the extent
not theretofore paid and (b) to the extent not theretofore paid or provided, to
pay or provide to pay, to Nauert on a timely basis any other amounts or benefits
required to be paid or provided or which Nauert is eligible to receive under any
plan, program, policy or practice or contract or agreement of Pioneer Financial.
(c) Without Cause. Pioneer Financial shall have the right to
terminate Nauert's employment hereunder without cause at any time during the
Term. If the Board of Directors determines to terminate Nauert's employment
without cause, Pioneer Financial shall give notice of such termination to Nauert
and Nauert's employment hereunder shall be considered terminated without cause
as of the date specified in such notice of termination. Upon the date of the
termination of Nauert's employment without cause, Nauert shall be paid an amount
equal to the present value, discounted to the present at an annual rate of 8%,
of the salary which would have been payable during a period equal to the
remainder of the Term, commencing on the date of termination at the rate of
annual base salary payable to Nauert at the date of termination.
(d) By Nauert. Nauert may terminate his employment hereunder at any
time by retirement or resignation, upon notice to Pioneer Financial. Upon such
termination by Nauert, no compensation for any period after the date of such
termination shall be payable to Nauert; provided, however, that if such
termination by Nauert is for "good reason" (as defined in Section 10(c)), then
Nauert shall be entitled to the payment described in the last sentence of
Section 9(c).
(e) Change in Control Effect. No payments shall be made to Nauert
pursuant to this Section 9 in the event that Nauert is entitled to Change in
Control Compensation pursuant to Section 10.
10. Change in Control.
(a) Change in Control Severance Compensation. If (x) within 180 days
following a Change of Control (as defined in Section 10(b)) is terminated by
Nauert for any reason whatsoever, or (y) within two years following a Change in
Control, Nauert's employment is terminated by Pioneer Financial other than "for
cause" (as defined in Section 9(b) or is terminated by Nauert for "good reason"
(as defined in Section 10(c)), then Nauert shall be entitled to receive from
Pioneer Financial a lump sum cash payment in an amount ("Change in Control
Compensation") equal to three times the average income reflected on the W-2
form or forms issued to Nauert by Pioneer Financial or its subsidiaries for
services performed for them for the five (5) calendar years preceding the year
in which such Change of Control occurs. Pioneer Financial shall pay such amount
to Nauert within thirty (30) days of the date of termination. If Nauert's
employment is terminated by Pioneer Financial for cause, by reason of Nauert's
death or retirement, or by Nauert without good reason, the Change in Control
Compensation will not be paid. If Nauert was totally or partially disabled as
of the Change in Control, the Change in Control Compensation will not be paid.
b) Change In Control. For purposes of this Agreement, "Change in Control"
shall mean the occurrence of any of the following events:
(i) any person or persons acting as a group, other than a person
which as of the date of this Agreement is the beneficial owner of voting
securities of Pioneer Financial and other than Nauert or a group including
Nauert, shall become the beneficial owner of securities of Pioneer Financial
representing at least thirty-four percent (34%) of the combined voting power of
Pioneer Financial's then outstanding securities; or
(ii) any consolidation or merger to which Pioneer Financial is a
party, if following such consolidation or merger, stockholders of Pioneer
Financial immediately prior to such consolidation or merger shall not
beneficially own securities representing at least sixty-seven percent (67%) of
the combined voting power of the outstanding voting securities of the surviving
or continuing corporation; or
(iii) any sale, lease, exchange or other transfer (in one
transaction or in a series of related transactions) of all, or substantially
all, of the assets of Pioneer Financial, other than to an entity (or entities)
of which Pioneer Financial or the stockholders of Pioneer Financial immediately
prior to such transaction beneficially own securities representing at least
sixty-seven percent (67%) of the combined voting power of the outstanding voting
securities.
(c) Good Reason. For purposes of this Agreement, "good reason" shall
mean any of the following:
(i) a change in Nauert's status or position, the assignment to
Nauert of any duties or responsibilities which are inconsistent with Nauert's
status and position or a reduction in the duties and responsibilities to be
exercised by Nauert;
(ii) any action by Pioneer Financial which renders Nauert unable
to effectively discharge his duties and responsibilities hereunder;
(iii) the failure to maintain Nauert's minimum annual base
salary in accordance with Section 3(a) or; in the event that such salary is
increased during the Term as provided herein, any reduction in Nauert's then
current annual base salary.
(iv) a failure by Pioneer Financial to continue in effect,
without material change, any benefit or incentive plan or arrangement in which
Nauert and all other executive officers of Pioneer Financial participate, or the
taking of any action by Pioneer Financial which would materially and adversely
affect Nauert's participation in, or materially reduce Nauert's benefits under,
any such plan or arrangement;
(v) a relocation of Nauert's workplace by Pioneer Financial to
any place outside the Chicago, Illinois metropolitan area, except for required
travel by Nauert on Pioneer Financial's business to an extent substantially
consistent with Nauert's business travel obligations hereunder prior to such
relocation;
(vi) a reduction by Pioneer Financial in Nauert's eligibility for
paid vacation benefits under a program or policy applicable to Nauert and all
other executive officers of Pioneer Financial; or
(vii) any failure by Pioneer Financial to obtain the
assumption of this Agreement by any successor or assignee thereto.
11. Confidential Information and Trade Secrets.
(a) Nature. During Nauert's employment by Pioneer Financial, Nauert
will enjoy access to Pioneer Financial's "confidential information" and "trade
secrets". For purposes of this Agreement, "confidential information" shall mean
information which is not publicly available, including without limitation,
information concerning customers, material sources, suppliers, financial
projections, marketing plans and operation methods, Nauert's access to which
derives solely from Nauert's employment with Pioneer Financial. For purposes of
this Agreement, "trade secrets" shall mean Pioneer Financial's processes,
methodologies and techniques known only to those employees of Pioneer Financial
who need to know such secrets in order to perform their duties on behalf of
Pioneer Financial. Pioneer Financial takes numerous steps, including these
provisions, to protect the confidentiality of its confidential information and
trade secrets, which it considers unique, valuable and special assets.
(b) Restricted Use and Non-Disclosure. Nauert, recognizing Pioneer
Financial's significant investment of time, efforts and money in developing and
preserving its confidential information, shall not, during his employment
hereunder and for a two (2) year period after the end of Nauert's employment
hereunder, use for his direct or indirect personal benefit any of Pioneer
Financial's confidential information or trade secrets. For a two (2) year
period after the end of Nauert's employment hereunder, Nauert shall not disclose
to any person any of Pioneer Financial's confidential information or trade
secrets.
(c) Return of Pioneer Financial Property. Upon termination of
Nauert's employment with Pioneer Financial, for whatever reason and in whatever
manner, Nauert shall return to Pioneer Financial all copies of all writings and
records relating to Pioneer Financial's business, confidential information or
trade secrets which are in Nauert's possession of such time.
12. Non-Competition and Non-Solicitation.
(a) Pioneer Financial's Investment. Pioneer Financial is spending
and will spend much time, money and effort in building relationships with agents
and insureds, and will pay Nauert valuable consideration pursuant hereto in
exchange for Nauert's promises herein, including without limitation the
covenants in Section 11 and in this Section 12. Pioneer Financial has engaged
Nauert as Chairman and Chief Executive Officer of Pioneer Financial in order to,
among other reasons, take advantage of Nauert's unique knowledge of, and
contacts within, the life and accident and health insurance industry. Further,
Pioneer Financial will invest significant time and money in the further
development of Nauert's business ability, image and standing. As Nauert is
Chairman and Chief Executive Officer of Pioneer Financial, the reputation and
success of Nauert will be closely tied to the reputation and success of Pioneer
Financial and, during the Term, Nauert will be heavily identified with Pioneer
Financial's business.
(b) Non-Competition. During Nauert's employment hereunder and for a
twelve (12) month period after termination of such employment, unless such
termination is made by Pioneer Financial without cause or unless there has been
a Change in Control prior to such termination, Nauert shall not engage, directly
or indirectly, whether as an owner, partner, employee, officer, director, agent,
consultant or otherwise, in any location where Pioneer Financial or any of its
subsidiaries is engaged in business after the date hereof and prior to the
termination of Nauert's employment, in a business the same as or similar to, any
business now, or at any time after the date hereof and prior to Nauert's
termination, conducted by Pioneer Financial or any of its subsidiaries,
provided, however, that the mere ownership of 5% or less of the stock of a
company whose shares are traded on a national securities exchange or are quoted
on the National Association of Securities Dealers Automated Quotation System
shall not be deemed ownership which is prohibited hereunder.
(c) Non-Solicitation. During the twenty-four (24) month period
following termination of Nauert's employment with Pioneer Financial, Nauert
shall not, directly or indirectly induce employees of Pioneer Financial or any
of its subsidiaries to leave such employment with the result that such employees
would engage in business activities which are substantially similar or are
closely related to the business activities such employee performed on behalf of
Pioneer Financial and which compete against Pioneer Financial. Notwithstanding
the above, in the event Nauert is terminated by Pioneer Financial without cause,
then the twenty-four (24) month period referred to in this Section 12(c) shall
be reduced to twelve (12) months.
(d) Enforceability. The necessity of protection against the
competition of Nauert and the nature and scope of such protection has been
carefully considered by the parties hereto. The parties hereto agree and
acknowledge that the duration, scope and geographic areas applicable to the non-
competition covenant in this Section 12 are fair, reasonable and necessary, that
adequate compensation has been received by Nauert for such obligations, and that
these obligations do not prevent Nauert from earning a livelihood. If, however
for any reason any court determines that the restrictions in this Agreement are
not reasonable, that consideration is inadequate or that Nauert has been
prevented from earning a livelihood, such restrictions shall be interpreted,
modified or rewritten to include as much of the duration, scope and geographic
area identified in this Section 12 as will render such restrictions valid and
enforceable.
13. Retention of Pioneer Financial Stock. During the Term, Nauert shall
retain, directly or indirectly, ownership of not less than 1,000,000 shares of
Pioneer Financial common stock unless, and except to the extent, released from
this obligation by a written release from Pioneer Financial. For purposes of
this Agreement, "retain indirectly" shall mean and refer to any shares of
Pioneer Financial common stock, which would be considered to be owned by Nauert
under Section 267(c) of the Code, or the income of which would be taxable to
Nauert, his spouse or his children, or to any trust of which Nauert would be
deemed the owner under any of Sections 671 through 677, inclusive, of the Code.
14. Right of First Refusal. During the Term, Nauert shall not transfer
any shares of stock of Pioneer Financial for consideration to any person other
than a relative of Nauert, unless Nauert has offered to transfer such shares to
Pioneer Financial on the same terms, provided, however, that this provision
shall not apply at any time when the average last reported sale price for Common
Stock of Pioneer Financial on the New York Stock Exchange for the immediately
preceding five (5) trading days is greater than or equal to $12.00 per share.
15. Breach or Threatened Breach of Non-Competition Covenant. In the event
of a breach or threatened breach by Nauert of any provision of Section 11 or 12
hereof, Nauert acknowledges that the remedy at law would be inadequate and that
Pioneer Financial shall be entitled to an injunction restraining Nauert from
such act or threatened breach. Nothing herein contained shall be construed as
prohibiting Pioneer Financial from pursuing any other remedies available to it
for such breach or threatened breach, including the recovery of monetary
damages.
16. Business Days. Any date specified in this Agreement which is a
Saturday, Sunday or legal holiday shall be extended to the first regular
business day after such date which is not a Saturday, Sunday or legal holiday.
17. Choice of Law. This Agreement has been executed and made in
accordance with the laws of the State of Illinois and is to be construed,
enforced and governed in accordance therewith.
18. Counterparts. This Agreement may be executed in several counterparts,
each of which shall be an original, but all of which together shall constitute
one and the same instrument.
19. Entire Agreement Amendments. This Agreement contains the entire
agreement among the parties hereto with respect to the subject matter hereof
and, except as provided in Section 4 above, supersedes all other existing
employment agreements between Pioneer Financial or its subsidiaries and Nauert.
No change or modification of this Agreement, or any waiver of the provisions
hereof, shall be valid unless the same is in writing and signed by the parties
hereto. Waiver by any party hereto of a breach by the other party of any
provisions of this Agreement shall not operate or be construed as a waiver of
any subsequent breach by such party.
20. Headings. The headings used herein are for ease of interpretation and
shall have no effect on the interpretation of any provision of this Agreement.
21. Notices. All notices, requests, demands and other communications
hereunder shall be in writing and shall, until receipt of contrary written
instructions, be delivered personally to, or mailed by certified or registered
mail with proper postage prepaid, to the party at the address as follows:
TO PIONEER FINANCIAL: Pioneer Financial Services, Inc.
1750 E. Golf Road
Schaumburg, IL 60173
TO NAUERT Mr. Peter W. Nauert
913 N. Main Street
Rockford, IL 61103
22. Severability. If any provision of this Agreement is held for any
reason to be invalid, it will not invalidate any other provisions of this
Agreement which are in themselves valid, nor will it invalidate the provisions
of any other agreement between the parties hereto. Rather, such invalid
provision shall be construed so as to give it the maximum effect allowed by
applicable law. Any other written agreement between the parties hereto shall be
conclusively deemed to be an agreement independent of this Agreement.
23. Successors and Assigns. This Agreement and all the provisions hereof
shall be binding upon and inure to the benefit of the parties hereto and their
respective heirs, legal representatives, successors and permitted assigns. This
Agreement and the rights and obligations hereunder may not be assigned by either
party without the prior written consent of the other.
24. Time of the Essence. Time is of the essence of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Employment
Agreement to be executed on December 22, 1995, but to be effective as of the
date first above written.
Attest: "Pioneer Financial"
PIONEER FINANCIAL SERVICES, INC.
_____________________________ By: ___________________________________
Title: __________________________________
Witness: "Nauert"
______________________________ ________________________________________
Peter W. Nauert
g:\acw\nauert\pwnag.d20f
EXHIBIT 11
PIONEER FINANCIAL SERVICES, INC.
STATEMENT OF COMPUTATION OF PER SHARE
NET INCOME
<TABLE>
<CAPTION>
For the Year Ended December 31
1995 1994 1993
<S> <C> <C> <C>
Net Income $ 20,968,000 $ 17,149,000 $ 12,145,000
Less Dividends on
Preferred Stock (1,805,000) (1,904,000) (2,021,000)
Primary Basis-Net Income $ 19,163,000 $ 15,245,000 $ 10,124,000
Fully Diluted Basis-
Net Income ** $ 23,266,000 $ 20,145,000 $ 13,507,000
Average shares outstanding 7,586,908 6,221,216 6,546,719
Common Stock equivalents
from dilutive stock
options, based on the
treasury stock method
using average market
price 252,501 237,847 176,883
TOTAL-PRIMARY BASIS 7,839,409 6,459,063 6,723,602
Additional shares assuming
conversion of Preferred
Stock 1,358,240 1,387,680 1,515,200
Additional shares assuming
conversion of Subordinated
Debentures 3,231,282 4,887,404 2,282,774
Additional Common Stock
equivalents from dilutive
stock options, based on the
treasury stock method
using closing market price 179,483 - 209,618
TOTAL-FULLY DILUTED 12,608,414 12,734,147 10,731,194
Net income per share-
Primary $ 2.44 $ 2.36 $ 1.51
Net income per share-
Fully Diluted $ 1.85 $ 1.58 $ 1.26
** Fully diluted net income per share was calculated after adding tax effected
interest and amortization of offering costs on Subordinated Debentures of
$2,298,000, $2,996,000, and $1,362,000 for the years ended December 31, 1995,
1994, and 1993, respectively.
</TABLE>
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. Target Ad Group, Inc. formerly National
Benefit Finance, formerly Select Marketing
Corporation Illinois
14. Response Air Ambulance Network, Inc. Illinois
15. Direct Financial Services, Inc. Illinois
16. National Health Services, Inc. Wisconsin
17. Manhattan National Life Insurance Company North Dakota
18. United Group Holdings, Inc. Delaware
19. Advantage Financial Systems, Inc. Delaware
20. NHS Coordinated Care of Texas, Inc. formerly
American Managed Care of Texas, Inc. Texas
21. NHS Coordinated Care, Inc. Nevada
22. Continental Life & Accident Company Iowa
23. Continental Marketing Corporation Idaho
24. Healthcare Review Corporation Kentucky
25. Connecticut National Life Insurance Company Illinois
26. ACMG, Inc. Ohio
27. Preferred Health Choice, Inc. Illinois
28. PL Holdings, Inc. Nevada
29. Personal Healthcare, Inc. Delaware
30. Success Training Corporation Illinois
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
pertaining to the Nonqualified Stock Option Plan of Pioneer Financial Services,
Inc. (Form S-8 No. 33-37305), the Pioneer Financial Services, Inc. Employee
Savings and Stock Ownership Plan (Form S-8 No. 33-45894), and the National
Benefit Plans, Inc. 1992 Agent Stock Purchase Plan (Form S-8 No. 33-53686) of
our report dated March 8, 1996, 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, 1995.
ERNST & YOUNG LLP
Chicago, Illinois
March 8, 1996
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<DEBT-HELD-FOR-SALE> 246,041
<DEBT-CARRYING-VALUE> 597,078
<DEBT-MARKET-VALUE> 622,666
<EQUITIES> 15,570
<MORTGAGE> 9,253
<REAL-ESTATE> 18,250
<TOTAL-INVEST> 1,042,592
<CASH> 20,274
<RECOVER-REINSURE> 5,646
<DEFERRED-ACQUISITION> 219,874
<TOTAL-ASSETS> 1,558,921
<POLICY-LOSSES> 961,124
<UNEARNED-PREMIUMS> 71,150
<POLICY-OTHER> 166,111
<POLICY-HOLDER-FUNDS> 16,077
<NOTES-PAYABLE> 44,733<F1>
0
21,222<F2>
<COMMON> 11,208<F3>
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<TOTAL-LIABILITY-AND-EQUITY> 1,558,921
687,043
<INVESTMENT-INCOME> 70,975
<INVESTMENT-GAINS> 3,993
<OTHER-INCOME> 38,073
<BENEFITS> 475,817
<UNDERWRITING-AMORTIZATION> 69,199
<UNDERWRITING-OTHER> 223,346
<INCOME-PRETAX> 31,722
<INCOME-TAX> 10,754
<INCOME-CONTINUING> 20,968
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,968
<EPS-PRIMARY> 2.44
<EPS-DILUTED> 1.85
<RESERVE-OPEN> 0
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<FN>
<F1>Includes short-term and long-term borrowings and convertible subordinated
debentures.
<F2>Redeemable preferred stock at par value.
<F3>Common stock at par value.
<F4>Includes additional paid in capital and retained earnings less unrealized
depreciation of securities and treasury stock.
</FN>
</TABLE>
