SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K/A
(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 Company issued over 47,000 senior health
insurance policies and over 35,000 senior life insurance policies,
increases of 21% and 137%, respectively.
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.
Group Medical Division. The Group Medical Division underwrites and
markets 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 Company believes that
the Group Medical Division's use of managed care services, provided by
both the Medical Utilization Management Division and unaffiliated
companies, resulted in significant 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, third-party administrators health
maintenance organizations ("HMOs") and PPOs 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. Demographic trends
indicate that the number of Americans age 65 and over will increase
significantly. According to the U.S. Census Bureau, the age 65 and
over population group is estimated to grow from approximately 33
million in 1994 to approximately 37 million by the year 2005 and to over
53 million by 2020. Industry sources estimate that currently approximately
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. These same sources estimate
that 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 1994.
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. It is estimated that 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 evolves, 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 life insurance.
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 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 continue to provide the Company with
opportunities for additional 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 premium, 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
(dollars in thousands)
<S> <C> <C> <C>
Earned premiums (1) $ 217,382 $ 225,604 $ 243,482
Benefits (1) 143,226 137,853 154,561
Loss ratio 66% 61% 63%
___________________
(1) In the Company's statement of consolidated income, earned premium
represents premiums written, adjusted for reinsurance; the changes in
unearned premium are reflected in benefits.
</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 the
examination of 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 lead time 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 insurance 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. It is estimated that 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.
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 121% 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 serves as 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 premium, 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
(dollars in thousands)
<S> <C> <C> <C>
Earned premium (1) $ 414,160 $ 443,599 $ 375,275
Benefits (1) 261,336 279,419 251,955
Loss ratio 63% 63% 67%
___________________
(1) In the Company's statement of consolidated income, earned premium
represents premiums written, adjusted for reinsurance; the changes in
unearned premium are reflected in benefits.
</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
the examination 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 lead time 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 evolves, 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 82% of this division's products was sold through a sales force
of approximately 1700 career agents, and the remaining 18% 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 collected premium
(computed on a statutory basis) 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
(dollars in thousands)
<S> <C> <C> <C>
Traditional $ 44,276 $ 32,238 $ 26,353
Interest Sensitive and
Universal Life Policies 21,215 17,590 16,300
Annuities 19,639 22,807 10,004
Total $ 85,130 $ 72,635 $ 52,657
</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 fiscal year 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
(dollars in millions)
<S> <C> <C> <C>
Traditional $ 14,863 $ 10,803 $ 10,320
Interest Sensitive and
Universal Life Policies 2,880 1,779 1,503
Total $ 17,743 $ 12,582 $ 11,823
</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, subject to certain minimum guaranteed
rates. 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, subject to certain minimum guaranteed rates.
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 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.
Revenues for this division increased 64% to $17.1 million in 1995,
compared to $10.4 million in 1994, primarily due to the July 1995
acquisition of ACMG as well as to increased sales.
Marketing. This division markets its services to insurance companies,
government agencies, self-insured businesses, 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 March 1996 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 March 1996, the Company acquired 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 (33.6% of total mortgage-backed securities) compared to
$83.9 million at December 31, 1994 (29.1% 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 a significant portion 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 on
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. Various bills pending in the U.S. Congress which
would provide for 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 requirements, 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
$28.2 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 26%, 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 50% from $1.2
million to $0.6 million.
Other income increased $1.9 million, or 11%, 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 income, earned premium
represents premiums written, adjusted for reinsurance; the changes
in unearned premium are reflected in benefits.
The Company has historically held reserve margins in its accident and
health claims reserve to provide for potential adverse deviation. Based
on a review of prior year reserve developments, the Company reduced 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 revenue.
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 57%, 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 income, earned premium
represents premiums written, adjusted for reinsurance; the changes in
unearned premium are reflected in 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.
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 62%, 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 102%, 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 high 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 6%, 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 offset by a decrease in interest expense due to the
conversion of the Company's 8% Debentures.
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 21%, 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 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. 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. Invested assets increased
44% to $1,043 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 primarily 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.
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.
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. The 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.
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, and is based upon either a prime rate,
LIBOR or a CD rate, plus a margin. The March 1995 Term Loan bore interest
at 5% per annum at March 1, 1995. 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 based on either a prime rate LIBOR, or a CD
rate, plus a margin. The August 1995 Term Loan bore interest at 8.25%
per annum at March 1, 1996. 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. Amounts
borrowed under the Credit Facility accrue interest at a rate per annum
based upon either a prime rate,LIBOR or a CD rate, plus a margin. At
March 1, 1995 the Credit Facility bore interest at 8.25% per annum. 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."
In March 1996 the Company acquired all of the outstanding stock of
Universal Fidelity for a total purchase price of approximately $26.0
million. In order to finance the acquiition, the Company incurred
$26 million of additional indebtedness, including $7.8 million of
intercompany indebtedness and $6 million of notes issued to the sellers.
The Company expects to refinance the intercompany indebtedness after
completion of this offering. The seller notes bear interest at an annual
rate of 6%, are due in two equal installments on the first and second
anniversary of the closing and are backed by letters of credit.
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 (Term A) 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)
10 (u) Credit Agreement (Term B) dated August 30,
1995 (filed herewith)
10 (v) Amendment to Amended and Restated Credit
Agreement dated August 30, 1995 (filed
herewith)
10 (w) Amendment to Credit Agreement (Term A)
dated August 30, 1995 (filed herewith)
10 (x) Second Amendment to Amended and Restated
Credit Agreement dated January 19, 1995
(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, and that increase is expected to result in an increase in
assessments by state guaranty funds to cover losses to policyholders of
insolvent or rehabilitated companies. Those mandatory assessments may be
partially recovered through a reduction in future premium taxes in some
states. For all assessment notifications received, PFS has accrued for
those assessments net of estimated future premium tax reductions.
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 $ 38,032 $ 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.
March 20, 1996 /S/ Peter W. Nauert
Peter W. Nauert
Chairman and Chief Executive Officer
March 20, 1996 /S/ David I. Vickers
David I. Vickers
Treasurer and Chief Financial Officer
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 10 (m)
$30,000,000
THIRD AMENDED AND RESTATED
RECEIVABLES PURCHASE AGREEMENT
DATED AS OF NOVEMBER 1, 1995
BETWEEN
DESIGN BENEFIT PLANS, INC.,
AS SELLER
AND
NATIONAL FUNDING CORPORATION,
AS BUYER
TABLE OF CONTENTS
Page
ARTICLE I
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Certain Defined Terms . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Other Definitional Provisions . . . . . . . . . . . . . . . . . . 18
ARTICLE II
Agreement to Purchase and Sell . . . . . . . . . . . . . . . . . . . . 18
2.1 Agreement to Purchase and Sell . . . . . . . . . . . . . . . . . 18
2.2 Purchase and Sale Procedure . . . . . . . . . . . . . . . . . . . 19
2.3 Payment of Purchase Price; Purchase Fee . . . . . . . . . . . . . 20
2.4 Reassignment . . . . . . . . . . . . . . . . . . . . . . . . . . 22
2.5 Interest on Overdue Payments . . . . . . . . . . . . . . . . . . 22
2.6 Fee and Interest Calculations . . . . . . . . . . . . . . . . . . 22
2.7 Indemnification by Seller . . . . . . . . . . . . . . . . . . . . 22
2.8 Distribution of Collections and Other Payments . . . . . . . . . 22
2.9 Netting of Payments . . . . . . . . . . . . . . . . . . . . . . . 22
2.10 Grant of Security Interest . . . . . . . . . . . . . . . . . . . 23
ARTICLE III
Collections; Maintenance of Records . . . . . . . . . . . . . . . . . 23
3.1 Collections and Applications . . . . . . . . . . . . . . . . . . 23
3.2 Collections by the Seller . . . . . . . . . . . . . . . . . . . . 26
3.3 Maintenance of Records . . . . . . . . . . . . . . . . . . . . . 28
3.4 Rebates, Adjustments and Reductions; Modifications; Additions;
Repurchase of DBP Lead Receivables . . . . . . . . . . . . . . . 28
ARTICLE IV
Settlements; Termination . . . . . . . . . . . . . . . . . . . . . . . 30
4.1 Settlement Statements . . . . . . . . . . . . . . . . . . . . . . 30
4.2 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
ARTICLE V
Covenants, Representations and Warranties . . . . . . . . . . . . . . 31
5.1 Representations and Warranties of the Seller . . . . . . . . . . 31
5.2 Covenants of the Seller. . . . . . . . . . . . . . . . . . . . . 34
5.3 Effect of Breach by the Seller. . . . . . . . . . . . . . . . . . 39
ARTICLE VI
Conditions to Effectiveness; Purchases . . . . . . . . . . . . . . . . 39
6.1 Effective Date . . . . . . . . . . . . . . . . . . . . . . . . . 39
6.2 Condition to each Purchase . . . . . . . . . . . . . . . . . . . 41
ARTICLE VII
Events of Termination . . . . . . . . . . . . . . . . . . . . . . . . 42
7.1 Events of Termination . . . . . . . . . . . . . . . . . . . . . . 42
ARTICLE VIII
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
8.1 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . 45
8.2 Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
8.3 Costs and Expenses . . . . . . . . . . . . . . . . . . . . . . . 46
8.4 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . 46
8.5 No Waiver; Cumulative Remedies . . . . . . . . . . . . . . . . . 47
8.6 Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
8.7 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . 47
8.8 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
8.9 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . 47
8.10 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . 48
8.11 Submission to Jurisdiction . . . . . . . . . . . . . . . . . . . 48
8.12 Waiver of Jury Trial . . . . . . . . . . . . . . . . . . . . . . 48
8.13 Entire Agreement; Amendment and Restatement . . . . . . . . . . . 48
Schedules
SCHEDULE I Chief Executive Office, Corporate Names and Subsidiaries of the
Seller
SCHEDULE II Accounts for Receiving Collections on the Receivables
SCHEDULE III Description of Chargeback Procedures
SCHEDULE IV Insurance Agency Agreements (Related to the Program)
Exhibits
Exhibit A-1 Form of Seller Assignment
Exhibit A-2 Form of Markman Assignment
Exhibit A-3 Form of CNL Assignment
Exhibit B-1 Form of Seller Agent Contract
Exhibit B-2 Form of CNL Agent Contract
Exhibit B-3 Form of Markman Agent Contract
Exhibit C-1 Form of Opinion of McDermott, Will & Emery, counsel to the
Seller
Exhibit C-2 Form of Opinion of Assistant General Counsel of the Seller
Exhibit C-3 Form of Opinion of Assistant General Counsel of Financial
Services
Exhibit D Form of Certificate
Exhibit E CNL Qualifying Insurance Policies
Exhibit F Form of Report of Milliman and Robertson
Exhibit G-1 Form of Acknowledgement of Assignment (for each Insurance
Company which is not an Eligible Fronting Company)
Exhibit G-2 Form of Acknowledgement of Assignment (for each Eligible
Fronting Company)
Exhibit H Form of Settlement Statement
Exhibit I Form of Managing General Agent Agreement
THIRD AMENDED AND RESTATED RECEIVABLES PURCHASE AGREEMENT
This Third Amended and Restated Receivables Purchase Agreement is dated as
of November 1, 1995, and is between DESIGN BENEFIT PLANS, INC., an Illinois
corporation (the "Seller"), and NATIONAL FUNDING CORPORATION, a Delaware
corporation (the "Buyer").
W I T N E S S E T H:
WHEREAS, the Seller in the ordinary course of its business generates
Receivables (as hereinafter defined);
WHEREAS, the Seller desires to sell to the Buyer, and, subject to the terms
and conditions hereof, the Buyer is agreeable to purchasing, a percentage
Undivided Interest (as hereinafter defined) in all of the Seller's right, title
and interest in, to and under Eligible Receivables (as hereinafter defined) and
in the rights of the Seller in, to and under all guarantees thereof and all
collateral security therefor; and
WHEREAS, the Seller and the Buyer entered into a Second Amended and
Restated Receivables Purchase Agreement, dated as of October 1, 1994 (the
"Second Amended Purchase Agreement"), and Seller has requested that the Second
Amended Purchase Agreement be amended and restated as provided herein;
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants herein contained, the parties hereto agree as follows:
ARTICLE I.
DEFINITIONS
A. CERTAIN DEFINED TERMS. As used in this Agreement the following
capitalized terms shall have the following meanings and, unless the context
indicates otherwise, shall include the plural as well as the singular:
"Acknowledgment of Assignment" shall mean, with respect to each Insurance
Company, the Acknowledgment of Assignment in the form of Exhibit G-1 (for each
Insurance Company which is not an Eligible Fronting Company) or Exhibit G-2 (for
each Eligible Fronting Company) executed and delivered by such Insurance Company
to L/C Bank.
"Addition" shall mean on a Closing Date, an increase in the Buyer's
Undivided Interest equal to the difference between (a) the Undivided Interest of
the Buyer as determined as of the Date of Sale immediately preceding such
Closing Date and assuming the remittance to the Buyer of all Principal
Collections attributable to its Undivided Interest which are held by the Seller
on such Closing Date on account of the Settlement Period preceding such Closing
Date and (b) the Undivided Interest of the Buyer in the Portfolio of Eligible
Receivables after giving effect to the purchase and sale on such Closing Date.
"Affiliate" shall mean any Person which, directly or indirectly, controls,
is controlled by, or is under common control with, another Person. For purposes
of this definition, a Person shall be deemed to be "controlled by" another
Person if the other Person possesses, directly or indirectly, power either to
(i) vote 10% or more of the securities having ordinary voting power for the
election of directors of such Person or (ii) direct or cause the direction of
the management and policies of such Person whether by contract or otherwise.
"Agent Contract" shall mean (i) each financing agreement and note in the
form of Exhibit B-1 (with such modifications as shall be approved by the Buyer
and L/C Bank) by which an Agent Obligor is bound to make payments to the Seller
to repay funds lent by the Seller to such Agent Obligor and to pay interest
and/or other finance charges to Seller by such Agent Obligor, and pursuant to
which such Agent Obligor has assigned his, her or its Assigned Commissions as
collateral, (ii) each promissory note and security agreement in the form of
Exhibit B-2 (with such modifications as shall be approved by the Buyer and L/C
Bank) by which a CNL Agent Obligor is bound to make payments to CNL to repay
funds lent by CNL to such CNL Agent Obligor and to pay interest and/or finance
charges to CNL by such CNL Agent Obligor and pursuant to which such CNL Agent
Obligor has assigned his, her or its Assigned Commissions as collateral, and
(iii) each financing agreement - note - security agreement in the form of
Exhibit B-3 (with such modifications as shall be approved by Buyer and L/C Bank)
by which a Markman Agent Obligor is bound to make payments to Pioneer Life to
repay funds lent by Pioneer Life to such Markman Agent Obligor and to pay
interest and/or other finance charges to Pioneer Life by such Markman Agent
Obligor, and pursuant to which such Markman Agent Obligor has assigned his, her
or its Assigned Commissions as collateral.
"Agent Obligor" shall mean any agent of the Seller who is obligated to make
payments to the Seller on an Agent Receivable.
"Agent Receivable" shall mean the obligation of a Person to repay the
principal amount of and interest and other finance charges on a loan made by the
Seller to such Person, in the ordinary course of its business, and which loan is
secured by amounts due or to become due to such Person as commissions on
insurance policies sold by such Person (or Persons within such Person's
supervisory control) as an agent of the Seller; provided, however, that "Agent
Receivable" shall not include any such obligation of any Person, unless the
Seller designates such Person as a Person whose obligations are to be "Agent
Receivables" in a written notice to the Buyer as provided herein.
"Agreement" shall mean this Third Amended and Restated Receivables Purchase
Agreement, as the same may from time to time be amended, supplemented or
otherwise modified as provided for herein.
"ANB" shall mean American National Bank and Trust Company of Chicago, a
national banking association.
"Application Account" shall mean the account of the Buyer held and
maintained at the offices of ANB located at 33 North LaSalle Street, Chicago,
Illinois 60690, and in the name of the Buyer and over which the Buyer shall have
sole dominion and control, entitled:
Name of Account Account No.
"National Funding Corporation, 4236114
Proceeds of Design Benefit Plans,
Inc. Receivables - Application
Account".
"Assigned Commissions" shall mean the aggregate first-year and renewal-year
commissions due or to become due to Agent Obligors, CNL Agent Obligors, Markman
Agent Obligors, any CNL Managing General Agent or Markman with respect to
insurance policies issued by Insurance Companies and sold by such Agent
Obligors, CNL Agent Obligors or Markman Agent Obligors or any CNL Managing
General Agent or Markman, which commissions have been assigned (i) by such Agent
Obligors to the Seller, (ii) by such CNL Agent Obligors or such CNL Managing
General Agent to CNL and (iii) by such Markman Agent Obligors or Markman to
Pioneer Life, in each case as collateral to secure the payment of the
Receivables owing by such Agent Obligors, CNL Agent Obligors or Markman Agent
Obligors or any CNL Managing General Agent or Markman, as the case may be.
"Assignment" shall mean each instrument of assignment, substantially in the
form of Exhibits A-1, A-2 or A-3 attached hereto, delivered pursuant to
Section 2.2.
"Authorized Control Level RBC" shall have the same meaning as the term
"Authorized Control Level RBC" as defined in the NAIC Risk-Based Capital (RBC)
for Life and/or Health Insurers Model Act, as such term may be amended by the
NAIC from time to time.
"Bankers Multiple Line" shall mean Bankers Multiple Line Insurance Company,
a New York insurance corporation.
"Bankers Security Life" shall mean Bankers Security Life Insurance Society,
a New York insurance corporation.
"Business Day" shall mean any day of the week other than a Saturday, Sunday
or a day on which commercial banks located in Chicago, Illinois, Milwaukee,
Wisconsin or any city in which the principal office of the Trustee or the
Remarketing Agent is located are authorized or required by law to close.
"Business Day Received" shall have the meaning assigned in subsection
3.1(d).
"Buyer" shall have the meaning assigned in the recitals hereto.
"Buyer Security Agreement" shall mean the Pledge and Security Agreement,
dated as of October 1, 1994, made by the Buyer to ANB, as the same may from time
to time be amended, supplemented or otherwise modified as provided herein.
"Capital and Surplus" shall mean, with respect to an Insurance Company,
such Insurance Company's capital and surplus as reported on such Insurance
Company's annual or quarterly accounting statements prepared in accordance with
Statutory Accounting Principles most recently filed with the department of
insurance of such Insurance Company's state of incorporation.
"Closing Date" shall have the meaning assigned in subsection 2.2(a).
"CNL" shall mean Connecticut National Life Insurance Company, an Illinois
corporation.
"CNL Agent Obligor" shall mean any agent of CNL who is obligated to make
payments to CNL on a CNL Agent Receivable.
"CNL Agent Receivable" shall mean the obligation of a Person to repay the
principal amount of and interest and other finance charges on a loan made by CNL
to such Person, in the ordinary course of its business, and which loan is
secured by amounts due or to become due to such Person from CNL as commissions
on CNL Qualifying Insurance Policies sold by such Person (or Persons within such
Person's supervisory control) as an agent of the CNL Managing General Agent;
provided, however, that "CNL Agent Receivable" shall not include any such
obligation of any Person, unless the Seller designates such Person as a Person
whose obligations are to be "CNL Agent Receivables" in a written notice to Buyer
as provided herein.
"CNL Managing General Agent" shall mean an entity which is a party to a
Managing General Agent Agreement with CNL.
"CNL Managing General Agent Contract" shall mean the Managing General Agent
Secured Promissory Note and the Managing General Agent Security Agreement in the
form of Exhibit B-2 (with such modifications as shall be approved by the Buyer
and L/C Bank) by which one or more CNL Managing General Agents is bound to make
payments to CNL to repay funds lent by CNL to any CNL Managing General Agent,
and to pay interest and finance charges to CNL by any CNL Managing General
Agent, and pursuant to which any CNL Managing General Agent, has assigned its
Assigned Commissions as collateral.
"CNL Managing General Agent Receivable" shall mean the obligation of one or
more CNL Managing General Agents, to repay the principal amount of and interest
and other finance charges on a loan made by CNL to any CNL Managing General
Agent, in the ordinary course of its business, and which loan is secured by
amounts due or to become due to any CNL Managing General Agent, from CNL as
commissions on CNL Qualifying Insurance Policies sold by agents of any CNL
Managing General Agent.
"CNL Qualifying Insurance Policies" shall mean insurance policies issued by
CNL of the type described on Exhibit E attached hereto.
"CNL Receivables" shall mean, collectively, CNL Agent Receivables and CNL
Managing General Agent Receivables.
"Collateral Account" shall have the meaning assigned in the Buyer Security
Agreement.
"collections" shall mean the collective reference to all principal
collections and all finance charge collections.
"Collections" shall mean the collective reference to all Principal
Collections and all Finance Charge Collections.
"Complete Servicing Transfer" shall have the meaning assigned in subsection
3.2(d).
"Consent and Agreement" shall mean the Consent and Agreement, dated as of
the date hereof, among the Seller, the Buyer, Financial Services and L/C Bank,
as the same may from time to time be amended, supplemented or otherwise
modified.
"Contract" shall mean any Agent Contract, in the case of the Agent
Receivables, CNL Agent Receivables or Markman Agent Receivables, a CNL Managing
General Agent Contract, in the case of CNL Managing General Agent Receivables,
the Markman Contract, in the case of Markman Marketing Manager Receivables, or
an Insurance Agency Agreement in the case of the DBP Lead Receivables.
"Date of Sale" shall have the meaning assigned in subsection 2.2(b).
"DBP Lead Commissions" shall mean the aggregate first-year and renewal
commissions payable by an Insurance Company to the Seller pursuant to the
Insurance Agency Agreement between such Insurance Company and the Seller with
respect to an Insurance Policy, other than Assigned Commissions.
"DBP Lead Obligor" shall mean, with respect to each DBP Lead Receivable,
the Insurance Company which is obligated to pay DBP Lead Commissions with
respect thereto.
"DBP Lead Receivable" shall mean, with respect to each Insurance Policy, an
amount equal to 75% of the aggregate first-year DBP Lead Commissions payable by
such Insurance Company to the Seller in respect of such Insurance Policy;
provided, however, that "DBP Lead Receivable" shall not include any such DBP
Lead Commissions payable by an Insurance Company unless the Seller designates
such Insurance Company as an Insurance Company whose first year DBP Lead
Commissions are to be "DBP Lead Receivables" in a written notice to the Buyer as
provided herein.
"Default Rate" as of the last day of any Settlement Period shall mean the
product of (i) four times (ii) the ratio (expressed as a percentage), with
respect to any quarterly period (consisting of such Settlement Period and the
preceding two Settlement Periods), of the aggregate principal amount of
Defaulted Receivables arising (or written off) during such quarterly period to
the Gross Amount Due on the Portfolio of Eligible Receivables as of the last day
of such period.
"Defaulted Receivable" shall mean a Receivable as to which any amount
thereon remains unpaid for more than 60 days after the original due date
thereof.
"Dollars" and "$" shall mean lawful money of the United States of America.
"Eligible Fronting Company" shall mean the collective reference to
Philadelphia Life Insurance Company, a Pennsylvania stock life insurance
corporation, Foundation Health, a California Health Plan, Mutual of Omaha
Insurance Company, United World Life Insurance Company, Foundation Health, a
Texas Health Plan, Manhattan National Life Insurance Company, Blue Cross and
Blue Shield of New Jersey, Inc., Provident Life and Accident Insurance Company,
Continental Life & Accident Company, Time Insurance Company, and United Health
and Life Insurance Company of Illinois, upon their execution of an
Acknowledgement of Assignment in the form of Exhibit G-2 and each insurance
company or other corporation legally authorized to issue insurance contracts as
shall be proposed by the Seller and approved by the Buyer and which shall first
execute an Acknowledgement of Assignment in the form of Exhibit G-2.
"EFC Receivable" shall mean any Receivable with respect to which any of the
Assigned Commissions securing such Receivable, or any DBP Lead Commissions
giving rise to such Receivable, arise out of policies issued by Eligible
Fronting Companies.
"Eligible Receivable" shall mean a Receivable:
a. which is owned by the Seller free and clear of all security
interests, liens, charges and encumbrances, except for liens granted in the
Assigned Commissions securing such Receivable or the DBP Lead Commissions
underlying such Receivable to Insurance Companies and agents of the Seller
in the ordinary course of business and consistent with past practice, all
of which liens are subordinate in right to the liens granted to the Buyer
hereunder pursuant to subordination agreements in form and substance
satisfactory to L/C Bank;
b. which has arisen in the ordinary course of the Seller's
business, or in the case of CNL Agent Receivables, CNL Managing General
Agent Receivables, Markman Agent Receivables and Markman Marketing Manager
Receivables have been sold and assigned to Seller as contemplated by this
Agreement;
c. which represents, the genuine, legal, valid and binding payment
obligation in writing of the Obligor thereon, enforceable by the Seller in
accordance with its terms, and is freely assignable by the Seller to the
Buyer and, upon such assignment, will be enforceable by the Buyer in
accordance with its terms;
d. which complies with all legal requirements of the federal,
state and local jurisdictions where it originated;
e. which is payable in Dollars in the United States of America by
a Person who is an Obligor and who is not, at such time, the Obligor on any
Defaulted Receivable;
f. which is evidenced by a Contract (which, in the case of the
Agent Contracts, shall conform in all material respects to Exhibit B-1, B-2
or B-3, as the case may be) which shall have been delivered to the Buyer at
or before the time of the initial creation of an interest in such
Receivable hereunder;
g. which is not payable by an Obligor which is located or
incorporated in any jurisdiction outside of the United States of America;
h. which, in any case where the provisions of subsection 3.1(b)
shall have become operative, is payable by an Obligor which shall have been
directed to make all payments thereon in accordance with subsection 3.1(b)
to an account over which the Buyer has sole right, title and interest and
dominion and control;
i. which in the case of an Agent Receivable is secured by a valid
assignment and grant of a security interest by the related Agent Obligor to
the Seller of and in all of such Agent Obligor's rights to receive any
commissions, service fees and bonuses payable to such Agent Obligor by the
Seller or any applicable Insurance Company, which security interest in the
case of an Agent Receivable shall, if required pursuant to subsection
5.2(s) of this Agreement, be perfected by the filing of a financing
statement under applicable state law (and such financing statement shall
not have expired or been terminated);
j. which in the case of a Markman Agent Receivable is secured by a
valid assignment and grant of a security interest by the related Markman
Agent Obligor to Pioneer Life of and in all of such Markman Agent Obligor's
rights to receive any commissions, service fees and bonuses payable to such
Markman Agent Obligor by Pioneer Life, which security interest in the case
of a Markman Agent Receivable shall, if required pursuant to subsection
5.2(s) of this Agreement, be perfected by the filing of a financing
statement under applicable state law (and such financing statement shall
not have expired or been terminated) and which Markman Agent Receivable and
all collateral therefor has been sold and assigned to Seller by Pioneer
Life pursuant to an Assignment in the form of Exhibit A-2 attached hereto;
k. which in the case of a CNL Agent Receivable is secured by a
valid assignment and grant of a security interest by the related CNL Agent
Obligor to CNL of and in all of such CNL Agent Obligor's rights to receive
any commissions, service fees and bonuses payable to such CNL Agent Obligor
by CNL, which security interest in the case of a CNL Agent Receivable
shall, if required pursuant to subsection 5.2(s) of this Agreement, be
perfected by the filing of a financing statement under applicable state law
(and such financing statement shall not have expired or been terminated)
and which CNL Agent Receivable and all collateral therefor has been sold
and assigned to Seller by CNL pursuant to an Assignment in the form of
Exhibit A-3 attached hereto;
l. which in the case of a Markman Marketing Manager Receivable is
secured by a valid assignment and grant of a security interest by Markman
to Pioneer Life of and in all of Markman's rights to receive any
commissions, service fees and bonuses payable to Markman by Pioneer Life,
which security interest in the case of a Markman Marketing Manager
Receivable shall, if required pursuant to subsection 5.2(s) of this
Agreement, be perfected by the filing of a financing statement under
applicable state law (and such financing statement shall not have expired
or been terminated) and which Markman Marketing Manager Receivable and all
collateral therefor has been sold and assigned to Seller by Pioneer Life
pursuant to an Assignment in the form of Exhibit A-2 attached hereto;
m. which in the case of an CNL Managing General Agent Receivable
is secured by a valid assignment and grant of a security interest by the
applicable CNL Managing General Agent to CNL of and in all of such CNL
Managing General Agent's rights to receive any commissions, service fees
and bonuses payable to such CNL Managing General Agent by CNL, which
security interest in the case of a CNL Managing General Agent Receivable
shall, if required pursuant to subsection 5.2(s) of this Agreement, be
perfected by the filing of a financing statement under applicable state law
(and such financing statement shall not have expired or been terminated)
and which CNL Managing General Agent Receivable and all collateral therefor
has been sold and assigned to Seller by CNL pursuant to an Assignment in
the form of Exhibit A-3 attached hereto;
n. which in the case of an Agent Receivable, a Markman Agent
Receivable, a Markman Marketing Manager Receivable bears interest at a rate
greater than the interest rate then prevailing on the Notes;
o. which is not, at the time of the initial creation of an
interest in such Receivable hereunder, subject to any defense, dispute,
offset or counterclaim, whether arising out of the transactions represented
by such Receivable or independently thereof and whether arising out of any
assertion by any Obligor that its obligations in respect of such Receivable
are, or may be, payable to a third party, instead of the owner of such
Receivable, or otherwise;
p. which is not an EFC Receivable, unless, in each case, such
Eligible Fronting Company shall have in full force and effect with the
Seller an Insurance Agency Agreement which shall not have been terminated;
q. which at the time of the initial creation of an interest in
such Receivable hereunder is not a Defaulted Receivable;
r. which has not been designated by the Seller in writing as
ineligible for purchase by the Buyer under this Agreement; provided, that
the Seller shall not be permitted to designate as ineligible any Receivable
subsequent to the sale to the Buyer hereunder of such Receivable (or any
interest on such Receivable); and provided, further, that notwithstanding
any such designation by the Seller, the Buyer shall continue to have a
security interest in all such designated Receivables pursuant to Section
2.10; and
s. which is not at the time of sale hereunder payable by an
Obligor (i) which is subject to any case, proceeding or other action (A)
under any existing or future law of any jurisdiction, domestic or foreign,
relating to bankruptcy, insolvency, reorganization or relief of debtors,
seeking to have an order for relief entered with respect to it, or seeking
to adjudicate it a bankrupt or insolvent, or seeking arrangement,
adjustment or other relief with respect to it or its debts, (B) seeking
appointment of a receiver, trustee, custodian or other similar official for
it or for all or any substantial part of its assets, or such Obligor shall
make a general assignment for the benefit of its creditors or (C) seeking
issuance of a warrant of attachment, execution, distraint or similar
process against all or any substantial part of its assets which results in
the entry of an order for any such relief which shall not have been
vacated, discharged, or stayed or bonded pending appeal within 90 days from
the entry thereof, or (ii) which shall generally not, or shall be unable
to, or shall admit in writing its inability to, pay its debts as they
become due.
"Finance Charge Account" shall mean the account of the Buyer held and
maintained at the office of ANB located at 33 North LaSalle Street, Chicago,
Illinois 60690, and in the name of the Buyer and over which the Buyer shall have
sole dominion and control, entitled:
Name of Account Account
"National Funding Corporation, 4236076
Proceeds of Design Benefit Plans,
Inc. Receivables - Finance
Charge Account."
"finance charge collections" shall mean, with respect to the Agent
Receivables, CNL Agent Receivables, Markman Agent Receivables, CNL Managing
General Agent Receivables or Markman Marketing Manager Receivables, all cash
payments and collections made or received on account of the finance charges, if
any, owing on such Receivables including, without limitation, any payments or
collections realized upon the sale of property of any Obligor securing in whole
or in part the payment by such Obligor of a Receivable, any payments or
collections realized under guarantees of payment of such Receivable (including,
without limitation under regional manager agreements, if any) and proceeds of
such Receivable.
"Finance Charge Collections" shall mean, with respect to the Seller's
Portfolio of Eligible Receivables, all cash payments and collections made or
received on account of the Finance Charges, if any, owing on the Eligible
Receivables in which the Buyer has purchased an Undivided Interest, including,
without limitation, any payments or collections realized upon the sale of
property, if any, of any Obligor securing in whole or in part the payment by
such Obligor of an Eligible Receivable, any payments or collections realized
under guarantees, if any, of payment of such Eligible Receivable and proceeds of
such Eligible Receivable.
"Finance Charges" shall mean, with respect to any Agent Receivable, CNL
Agent Receivable, Markman Agent Receivable, CNL Managing General Agent
Receivable or Markman Marketing Manager Receivable, the interest and other
finance charges, if any, charged by the Seller, CNL or Pioneer Life, as the case
may be, on such Receivable.
"Financial Services" shall mean Pioneer Financial Services, Inc., a
Delaware corporation.
"Financial Services Credit Agreement" shall mean the Credit Agreement dated
as of December 22, 1993, among Financial Services, ANB, Firstar Bank Milwaukee,
N.A. and Bank One, Rockford N.A., as such agreement may from time to time be
amended, supplemented or otherwise modified in accordance with the terms
thereof.
"Financing Documents" shall mean the collective reference to this
Agreement, the Reimbursement Agreement, the Buyer Security Agreement, the
Consent and Agreement, the Acknowledgements of Assignment, the Tender Pledge
Agreement and the Note Agreements.
"GAAP" shall mean generally accepted accounting principles as in effect
from time to time in the United States.
"Gross Amount Due" shall mean (i) with respect to any Receivable, the
principal amount (net of any write-offs) due and to become due on such
Receivable, (ii) with respect to any DBP Lead Receivable, the initial amount of
such DBP Lead Receivable minus all Collections on such DBP Lead Receivable (net
of any writeoffs, but in no event less than zero) and (iii) with respect to the
Portfolio of Eligible Receivables, the aggregate of the amounts specified in the
preceding clauses (i) and (ii) with respect to the Receivables comprising such
Portfolio of Eligible Receivables.
"Holdback Account" shall mean the account of the Buyer held and maintained
at the office of ANB located at 33 North LaSalle Street, Chicago, Illinois
60690, and in the name of the Buyer and over which the Buyer shall have sole
dominion and control (provided that amounts held therein shall be applied
strictly in accordance with the terms of this Agreement), entitled:
Name of Account Account No.
National Funding Corporation- 4236092
"Holdback Account."
"Indemnified Liability" shall have the meaning assigned in Section 8.3.
"Indenture" shall mean the Trust Indenture dated as of October 1, 1994
between the Buyer and PNC Bank, Ohio, National Association, as trustee, as the
same may from time to time be amended, supplemented or otherwise modified.
"Insurance Agency Agreements" shall mean the collective reference to the
insurance agency agreements listed on Schedule IV attached hereto, as each is in
effect on the date hereof or as each such agreement may be amended, supplemented
or otherwise modified in accordance with the terms hereof and such other
insurance agency agreements between Seller and companies which become Insurance
Companies or Eligible Fronting Companies after the date hereof.
"Insurance Companies" shall mean the collective reference to National Group
Life Insurance Company, an Illinois insurance corporation, Pioneer Life
Insurance Company of Illinois, an Illinois insurance corporation, Manhattan
National Life Insurance Company, an Illinois insurance corporation, Connecticut
National Life Insurance Company, a Connecticut corporation, each Eligible
Fronting Company (but only if any EFC Receivables relating to such Eligible
Fronting Company constitute Eligible Receivables hereunder), and each other
insurance company as shall be proposed by the Seller and approved by the Buyer.
"Insurance Policies" shall mean the insurance policies issued by the
Insurance Companies and sold by Agent Obligors, CNL Agent Obligors or Markman
Agent Obligors, under which any commissions that are due or become due to Agent
Obligors, CNL Agent Obligors or Markman Agent Obligors constitute Assigned
Commissions.
"Investment Grade Obligations" shall mean investments having an NAIC
investment rating of 1 and 2; or a Standard & Poor's rating within the range of
ratings from AAA to BBB-; or a Moody's rating within the range of ratings from
Aaa to Baa3.
"L/C Bank" shall mean ANB and its successors and assigns. Upon the
issuance and effectiveness of any letter of credit delivered in substitution or
replacement of a Letter of Credit, "L/C Bank" shall mean the issuer of such
replacement or substitute Letter of Credit and its successors and assigns.
"Letter of Credit" shall mean the Letter of Credit as defined in the
Reimbursement Agreement.
"Liquidation Period" shall mean the period commencing on the earlier of the
(i) Purchase Termination Date and (ii) the date on which the conditions
precedent set forth in Section 6.2 (except for subsection 6.2(f)) are not
satisfied (unless such conditions are subsequently waived by the Buyer or cured
by the Seller with the express written consent of the Buyer) and ending upon the
termination of this Agreement pursuant to Section 4.2.
"Losses" shall mean, during the Liquidation Period, the outstanding
principal amount of each Sold Receivable (or portion thereof) which, in
accordance with GAAP, is written off of the books of the Seller as
uncollectible.
"M&R Report" shall mean the report prepared by Milliman and Robertson, or
other actuary reasonably acceptable to the Buyer (with the related certificate
of the Seller attached thereto), substantially in the form of Exhibit F.
"Managing General Agent Agreement" shall mean a Managing General Agent
Agreement attached hereto as Exhibit I.
"Marketing Agreement" shall mean the Marketing Agreement, dated as of May
1, 1995, between Pioneer Life and Markman, as the same may from time to time be
amended, supplemented or otherwise modified as permitted herein.
"Markman" shall mean Markman International, L.L.C., a Delaware limited
liability company.
"Markman Advance and Pledge Agreement" shall mean the Advance and Pledge
Agreement, dated as of May 1, 1995, by and between Pioneer Life and Markman.
"Markman Agent Obligor" shall mean any agent of Pioneer Life assigned to
Markman as contemplated by the Marketing Agreement who is obligated to make
payments to Pioneer Life on a Markman Agent Receivable.
"Markman Agent Receivable" shall mean the obligation of a Person to repay
the principal amount of and interest and other finance charges on a loan made by
Pioneer Life to such Person in the ordinary course of its business, and which
loan is secured by amounts due or to become due to such Person as commissions on
insurance policies sold by such Person (or Persons within such Person's
supervision) as an agent of Pioneer Life assigned to Markman as contemplated by
the Marketing Agreement; provided, however, that "Markman Agent Receivable"
shall not include any such obligation of any Person, unless the Seller
designates such Person as a Person whose obligations are to be "Markman Agent
Receivables" in a written notice to the Buyer as provided herein.
"Markman Contract" shall mean the Agent Promissory Note and the Advance and
Pledge Agreement in the form of Exhibit B-3 (with such modifications as shall be
approved by the Buyer and L/C Bank) by which Markman is bound to make payments
to Pioneer Life to repay funds lent by Pioneer Life to Markman and to pay
interest and finance charges to Pioneer Life by Markman and pursuant to which
Markman has assigned its rights to Assigned Commissions as collateral.
"Markman Marketing Manager Receivable" shall mean the obligation of Markman
to repay the principal amount of and interest and other finance charges on a
loan made by Pioneer Life to Markman in the ordinary course of business and
pursuant to the Markman Advance and Pledge Agreement, and which loan is secured
by amounts due or to become due to Markman as commissions on insurance policies
sold by Markman as an agent of Pioneer Life.
"Maximum Purchase Amount" shall mean $7,600,000, as such amount may be
(i) increased on any Settlement Date upon the written request of the Seller
pursuant to the related Settlement Statement, provided that any such increase
shall be in an amount equal to $100,000 or an integral multiple thereof and
provided, further, that, with respect to Receivables, other than CNL
Receivables, the Seller shall have no right to request any such increase if,
after giving effect thereto, the Maximum Purchase Amount with respect thereto
would exceed the product of 0.90 times the Gross Amount Due upon the Portfolio
of Eligible Receivables, excluding therefrom CNL Receivables (determined as of
the last day of the preceding Settlement Period), and provided, further, that,
with respect to CNL Receivables, the Seller shall have no right to request any
such increase if, after giving effect thereto, the Maximum Purchase Amount with
respect thereto would exceed the product of 0.80 times the Gross Amount Due upon
the portion of the Portfolio of Eligible Receivables comprised of CNL
Receivables (determined as of the last day of the preceding Settlement Period)
or (ii) reduced upon five Business Days' written notice from the Seller to the
Buyer, provided that any such reduction shall be in an amount equal to $100,000
or an integral multiple thereof, and provided, further, that if (A) at any time
the Maximum Purchase Amount shall exceed the outstanding principal amount of the
Notes, such Maximum Purchase Amount shall be automatically reduced to an amount
not to exceed such outstanding principal amount or (B) at any time either the
Maximum Purchase Amount, with respect to Receivables, other than CNL
Receivables, shall exceed the product of 0.90 times the Gross Amount Due upon
the Portfolio of Eligible Receivables, excluding therefrom CNL Receivables
(determined as of the last day of the preceding Settlement Period) or the
Maximum Purchase Amount with respect to CNL Receivables shall exceed the product
of 0.80 times the Gross Amount Due upon the portion of the Portfolio of Eligible
Receivables comprised of CNL Receivables (determined as of the last day of the
preceding Settlement Period), such Maximum Purchase Amount shall be
automatically reduced to an amount equal to the largest integral multiple of
$100,000 which does not exceed such product.
"Moody's" shall mean Moody's Investors Service, Inc.
"Mortgages" shall mean, as of any date, the amount of mortgage loans on
real estate calculated in accordance with Statutory Accounting Principles.
"NAIC" shall mean the National Association of Insurance Commissioners.
"Net Purchase Outstanding" shall mean, at any time, the positive remainder,
if any, of (a) the aggregate Purchase Price paid by the Buyer for its Undivided
Interest minus (b) the sum of (i) aggregate Principal Collections attributable
to the Buyer's Undivided Interest remitted by the Seller to the Buyer (whether
or not used by the Buyer to purchase an Addition to its Undivided Interest) on
each Settlement Date pursuant to this Agreement or otherwise and (ii) the
aggregate principal collections remitted to the Buyer pursuant to the proviso in
Section 3.1(f).
"Non-Investment Grade Obligations" shall mean any fixed maturity debt
instrument investment that is not an Investment Grade Obligation.
"Note Agreements" shall mean the Indenture, the Notes, the Placement
Agreement and the Remarketing Agreement.
"Notes" shall mean the Floating Rate Option Notes, Series 1994-A, of the
Buyer, issued pursuant to the Indenture.
"Obligor" shall mean any Agent Obligor, CNL Agent Obligor, Markman Agent
Obligor or CNL Managing General Agent, Markman or DBP Lead Obligor.
"Person" shall mean an individual, partnership, corporation, business
trust, joint stock company, trust, unincorporated association, joint venture,
governmental authority or other entity of whatever nature.
"Pioneer Life" shall mean Pioneer Life Insurance Company of Illinois, an
Illinois corporation.
"Placement Agent" shall mean Banc One Capital Corporation, as placement
agent for the Notes.
"Placement Agreement" shall mean the Placement Agreement dated October 4,
1994 among the Seller, the Buyer and the Placement Agent.
"Policy Lapse Rate" shall mean the termination rate for each month
calculated by the Seller and, at the end of each fiscal quarter, by Milliman &
Robertson or other actuary acceptable to the Buyer, with respect to Insurance
Policies which are outstanding on the last day of the immediately preceding
month, provided that with respect to any calculation made for a month other than
a month immediately following the end of a quarterly fiscal period, Insurance
Policies underwritten after the end of the quarterly fiscal period immediately
preceding such month shall be excluded from such calculation.
"Portfolio of Eligible Receivables" of the Seller shall mean, as of any
date of determination, all of the Seller's Eligible Receivables as of the last
day of the Settlement Period immediately preceding such date of determination.
"Present Value of Assigned Commissions" shall mean, as of each monthly date
of determination, the amount determined in the M&R Report to be the present
value of all Assigned Commissions and DBP Lead Commissions scheduled to be paid
for the two-year period from such date computed by using as the discount factor
a percentage not less than the greater of (a) twelve percent (12%) per annum and
(b) the Prime Rate plus 3%, provided, however, that the actuary preparing the
M&R Report shall (i) exclude Assigned Commissions and DBP Lead Commissions
relating to Receivables which are not Eligible Receivables, (ii) exclude
Assigned Commissions and DBP Lead Commissions relating to Defaulted Receivables,
(iii) exclude Assigned Commissions, relating to renewal commissions on Insurance
Policies, that are assigned by Agent Obligors to National Group Marketing
Training Corporation, and (iv) net against the Assigned Commissions and DBP Lead
Commissions the amount of any chargebacks.
"Prime Rate" shall mean the rate as designated by L/C Bank from time to
time as its prime rate in the United States of America, such rate to change as
and when such designated rate changes. The prime rate is not intended to be the
lowest rate of interest charged by L/C Bank in connection with extensions of
credit to debtors.
"principal collections" shall mean, with respect to the Receivables, all
cash payments and collections made or received on account of the Receivables
exclusive of finance charges attributable thereto, but including, without
limitation, any payments or collections realized upon the sale of property of
any Obligor securing in whole or in part the payment by such Obligor of a
Receivable, any payments or collections realized under any guarantees of payment
of such Receivable and proceeds of such Receivable.
"Principal Collections" shall mean, with respect to the Seller's Portfolio
of Eligible Receivables, all cash payments and collections made or received on
account of the Eligible Receivables in which the Buyer has purchased an
Undivided Interest, exclusive of Finance Charges attributable thereto, but
including, without limitation, any payments or collections realized upon the
sale of property of any Obligor securing in whole or in part the payment by such
Obligor of an Eligible Receivable, any payments or collections realized under
any guarantees of payment of such Eligible Receivable and proceeds of such
Eligible Receivable.
"Prior Purchase Agreement" shall have the meaning assigned in Section 8.13.
"Purchase Fee" shall have the meaning assigned in subsection 2.3(c).
"Purchase Price" shall have the meaning assigned in subsection 2.3(a).
"Purchase Termination Date" shall mean the earlier of (i) December 31, 1997
or such later date as shall be agreed in accordance with subsection 4.2(b) and
(ii) the date of termination of the commitment of the Buyer hereunder pursuant
to Section 7.1.
"Real Estate Concentration Ratio" means, as of any date, the ratio of (a)
the sum of (i) Real Estate Investments plus (ii) Mortgages to (b) Capital and
Surplus.
"Real Estate Investments" shall mean, as of any date, the sum of (a) the
book value of properties acquired in satisfaction of debt calculated in
accordance with Statutory Accounting Principles plus (b) the investment in
investment real estate calculated in accordance with Statutory Accounting
Principles; provided, that the properties occupied by Pioneer Financial Services
or any Subsidiary shall be excluded from the calculation of Real Estate
Investments for purposes of this Agreement.
"Receivable" shall mean each Agent Receivable, CNL Agent Receivable, CNL
Managing General Agent Receivable, Markman Agent Receivable, Markman Marketing
Manager Receivable and each DBP Lead Receivable. An obligation arising from any
one advance, loan or transaction shall constitute a Receivable separate from a
Receivable consisting of the obligation arising from any other advance, loan or
other transaction.
"Reimbursement Agreement" shall mean the Reimbursement Agreement, dated as
of October 1, 1994, between the Buyer and L/C Bank, as the same may from time to
time be amended, supplemented or otherwise modified.
"Remarketing Agent" shall mean Banc One Capital Corporation, as remarketing
agent for the Notes.
"Remarketing Agreement" shall mean the Remarketing Agreement between the
Buyer and the Remarketing Agent, dated as of October 1, 1994.
"Reserve Account" shall mean the account of the Seller held and maintained
at the office of ANB located at 33 North LaSalle Street, Chicago, Illinois
60690, entitled:
Name of Account Account
Design Benefit Plans, Inc. #4248082
Receivables - Agent Reserve Account
"S&P" shall mean Standard & Poor's Ratings Group.
"Seller" shall have the meaning assigned in the preamble hereto.
"Settlement Date" shall mean (i) October 27, 1994, and thereafter (ii) the
20th calendar day of each succeeding month or, if such 20th day is not a
Business Day, the next succeeding Business Day.
"Settlement Period" shall mean, with respect to any Settlement Date, the
calendar month first preceding the calendar month in which such Settlement Date
occurs.
"Settlement Statement" shall mean the Settlement Statement, substantially
in the form of Exhibit H, to be delivered by the Seller to the Buyer pursuant to
Section 4.1.
"Sold Receivable" shall mean each Eligible Receivable in the Portfolio of
Eligible Receivables in which an Undivided Interest has been purchased by the
Buyer hereunder.
"Statutory Accounting Principles" shall mean statutory reporting practices
prescribed or permitted by the State of Illinois Department of Insurance or by a
regulatory body of another state, as applicable to an Insurance Company, for the
preparation of financial statements and other reports by insurance companies of
the same type as the Insurance Companies in Illinois applied on a basis
consistent with the most recent financial statements of the Insurance Companies
in Illinois delivered to the Buyer prior to the date of this Agreement.
"Subsidiary" shall mean, in the case of any Person, any corporation or
other entity of which securities or other ownership interests having ordinary
voting power to elect a majority of the board of directors or other Persons
performing similar functions are at the time directly or indirectly owned by
such Person.
"Subsidiary Insurance Company" shall mean an Insurance Company which is a
Subsidiary of Financial Services.
"Taxes" shall mean any present or future sales, gross receipts, general
corporation, personal property, income, franchise, privilege, license, stamp or
other taxes, levies, imposts, duties, charges, fees, deductions or withholdings,
now or hereafter imposed, levied, collected, withheld or assessed by any govern-
mental authority, excluding, in the case of L/C Bank net income and franchise
taxes based upon net income imposed on L/C Bank by the jurisdiction under the
laws of which it is organized or in which is located any office from or at which
L/C Bank is making or maintaining its loans or advances, or any political
subdivision or taxing authority thereof or therein.
"Tender Pledge Agreement" shall mean the Tender Pledge and Security
Agreement, dated as of October 1, 1994, made by the Buyer to L/C Bank pursuant
to Section 2.9 of the Reimbursement Agreement.
"Termination Event" shall have the meaning assigned in Section 7.1.
"Time of Full Payout" shall mean the date on which the Net Purchase
Outstanding shall have been reduced to zero at the close of business on such
date.
"Total Adjusted Capital" shall have the same meaning as the term "Total
Adjusted Capital" as defined in the NAIC Risk-Based Capital (RBC) for Life
and/or Health Insurers Model Act, as such term may be amended by the NAIC from
time to time.
"Total Invested Assets" shall mean, as of any date, as to each Insurance
Company (other than Eligible Fronting Companies), the amount of such Insurance
Company's cash and invested assets calculated in accordance with Statutory
Accounting Principles.
"Transfer Notice" shall have the meaning assigned in subsection 3.2(d).
"Trustee" shall mean PNC Bank, Ohio, National Association, as trustee under
the Indenture or any successor trustee appointed pursuant to the terms contained
therein.
"Undivided Interest" of the Buyer in the Seller's Portfolio of Eligible
Receivables shall mean an undivided participating ownership interest in the
Portfolio of Eligible Receivables equal, at any time, to the percentage
equivalent of a fraction the numerator of which is the Net Purchase Outstanding
of the Buyer in the Portfolio of Eligible Receivables at such time and the
denominator of which is the Gross Amount Due upon the Portfolio of Eligible
Receivables at such time; provided, however, that such percentage equivalent, as
computed as of the day immediately preceding the first day of the Liquidation
Period, shall remain constant at all times during the Liquidation Period until
it shall be reduced to zero at such time as the Net Purchase Outstanding shall
have been reduced to zero and all other amounts owing to the Buyer hereunder
shall have been paid in full.
B. OTHER DEFINITIONAL PROVISIONS.
1. The words "hereof", "herein" and "hereunder" and words of similar
import when used in this Agreement shall refer to this Agreement as a whole and
not to any particular provision of this Agreement, and section, subsection,
schedule and exhibit references are to this Agreement unless otherwise
specified.
2. As used herein and in any certificate or other document made or
delivered pursuant hereto, accounting terms relating to the Seller or its
Affiliates or its Subsidiaries, unless otherwise defined herein or therein,
shall have the respective meanings given to them under GAAP.
ARTICLE II.
AGREEMENT TO PURCHASE AND SELL
A. AGREEMENT TO PURCHASE AND SELL. Subject to the terms and conditions
of this Agreement, the Seller may at its option sell to the Buyer without
recourse (except as expressly provided for herein), and the Buyer agrees (to the
extent the Buyer has funds available to it) to purchase from the Seller, from
the effective date of this Agreement to but not including the Purchase
Termination Date, an Undivided Interest (and Additions thereto) in all right,
title and interest of the Seller in, to and under the Seller's Portfolio of
Eligible Receivables, including, without limitation, all monies due and to
become due thereunder and all guarantees thereof and collateral security
therefor and all proceeds thereof.
B. PURCHASE AND SALE PROCEDURE.
1. Sales of Undivided Interests and Additions thereto hereunder may
take place on any Settlement Date occurring on or after the effective date
of this Agreement and prior to the Purchase Termination Date (each date on
which a sale of an Undivided Interest or an Addition thereto occurs
hereunder being herein referred to as the "Closing Date" applicable to such
sale), provided that the Seller shall have given the Buyer at least three
Business Days' prior written, telegraphic, telex, facsimile or telephonic
notice (effective upon receipt) of its intention to sell an Undivided
Interest or an Addition thereto hereunder on such date. Also, not less
than three Business Days prior to each Closing Date hereunder, the Seller
shall deliver to the Buyer the Settlement Statement referred to in Section
4.1 hereof.
2. Each sale hereunder of an Undivided Interest or an Addition
thereto shall be as of the close of business on the last Business Day of
the calendar month immediately preceding the related Closing Date (each
said "as of" date being herein called the "Date of Sale") and shall take
place at the office of the Buyer or such other place as may be agreed upon.
No later than 11:00 a.m. (Chicago time) on each Closing Date hereunder the
Seller shall deliver to the Buyer (i) a certificate in substantially the
form of Exhibit D, duly executed by an authorized officer of the Seller,
dated such Closing Date, certifying as to (w) the Net Purchase Outstanding
before giving effect to the purchase and sale to be effected on such
Closing Date and assuming the remittance to the Buyer on such Closing Date
of any Principal Collections attributable to the Undivided Interest of the
Buyer in the Portfolio of Eligible Receivables and then held by the Seller
on account of the Settlement Period ending on such Closing Date, (x) the
total Collections so held and a breakdown of Finance Charge Collections and
Principal Collections and the portion of each attributable to the Buyer's
Undivided Interest, (y) the Purchase Price for any amount of the Undivided
Interest or Addition thereto being sold on such Closing Date and (z) that
Section 2.2(c) will not be violated by the purchase of such Undivided
Interest or Addition, and (ii) an Assignment, dated the related Date of
Sale, assigning and transferring to the Buyer an Undivided Interest or
Addition thereto in all right, title and interest of the Seller in and to
the Seller's Portfolio of Eligible Receivables on such Date of Sale, all
monies to become due thereunder, and in and to any and all guarantees
thereof and collateral security therefor and all proceeds thereof.
3. The Buyer shall have no obligation to purchase an Undivided
Interest or Addition thereto on any Closing Date hereunder to the extent
that (i) the sum of (x) the Net Purchase Outstanding (as calculated and set
forth in the certificate delivered above) plus (y) the proposed Purchase
Price payable by the Buyer on such Closing Date would exceed the Maximum
Purchase Amount or (ii) the sum of (x) the Net Purchase Outstanding (as
calculated and set forth in the certificate delivered above) with respect
to CNL Receivables plus (y) the proposed Purchase Price payable by the
Buyer on such Closing Date with respect to CNL Receivables would exceed
Five Million Dollars ($5,000,000), or (iii) the Buyer does not have
available funds in the Collateral Account which may, consistent with
Section 6.3(a) of the Buyer Security Agreement, be used to pay any portion
of the Purchase Price still owing after application of funds as provided in
clause first of the first sentence of Section 2.3(b) of this Agreement.
4. The Seller agrees that the Purchase Price it specifies to the
Buyer pursuant to this Section 2.2 shall not exceed the amount the Seller
would be permitted to request if any Undivided Interest or Addition did not
include any DBP Lead Receivables and the Buyer shall not be obligated to
pay to the Seller a Purchase Price in excess of such amount.
C. PAYMENT OF PURCHASE PRICE; PURCHASE FEE.
1. The purchase price for the Undivided Interest or any Addition
thereto sold to the Buyer on any Closing Date pursuant to Section 2.2
shall, subject to the limitation in Section 2.2(c), be the amount specified
by the Seller (the "Purchase Price").
2. The Purchase Price with respect to the Undivided Interest or the
Addition thereto being purchased from the Seller on a Closing Date shall be
paid: first, by applying all, but not less than all (except as provided in
the next succeeding sentence), of the Principal Collections attributable to
the Buyer's Undivided Interest received, by or on behalf of the Seller
during the Settlement Period immediately preceding such Closing Date and to
be delivered to the Buyer on such Closing Date under subsection 3.1(a), and
second, to the extent necessary, the Buyer shall pay any remaining portion
of the Purchase Price. In the event that the Purchase Price with respect
to the Undivided Interest or the Addition thereto being purchased on a
Closing Date is less than the Principal Collections attributable to the
Buyer's Undivided Interest received by or on behalf of the Seller during
the Settlement Period immediately preceding such Closing Date, such
Principal Collections shall be applied first to the payment of such
Purchase Price and second any remainder thereof shall be distributed to the
Buyer.
3. As consideration for the Buyer's purchase of an Undivided
Interest or an Addition thereto and in lieu of purchasing such Undivided
Interest or an Addition thereto at any initial discount, the Seller shall,
on each Settlement Date (and as provided below, upon the request of the
Buyer), pay to the Buyer a purchase fee (the "Purchase Fee") equal in the
aggregate to the Buyer's fees, costs and expenses incurred since the
preceding Settlement Date (or in the case of the first Settlement Date,
since the effective date of this Agreement) in connection with the
transactions contemplated by this Agreement and the Financing Documents and
the issuance by the Buyer of the Notes, including (i) all fees, expenses
and costs payable by the Buyer or L/C Bank under the Reimbursement
Agreement, the Buyer Security Agreement, and the Note Agreement,
(ii) without duplication of any amounts payable under clause (iii) below,
interest accrued and to accrue on the Notes (together with any amounts due
in respect of "grossing-up" for withholding or other Taxes), but not the
principal amount of the Notes, (iii) interest accrued and to accrue under
the Reimbursement Agreement and amounts in respect of interest paid by L/C
Bank to the Trustee or the holders of the Notes, which amounts are payable
by the Buyer to L/C Bank under the Reimbursement Agreement (together with
any amounts due under Section 2.8 of the Reimbursement Agreement in respect
of "grossing-up" for withholding or other Taxes), but not amounts
constituting principal owing under the Reimbursement Agreement or amounts
in respect of the principal amount of the Notes, (iv) indemnities incurred
or owing by the Buyer under or in connection with the Reimbursement Agree-
ment, the Buyer Security Agreement or the Note Agreements and (v) the costs
of preparing income and other tax returns, the cost of maintaining a
registered agent and a place of business in the State of Delaware and
federal, state and local income and other taxes (if any); provided, that,
so long as no Termination Event shall have occurred and be continuing, the
Seller shall be entitled to a credit against the Purchase Fee payable under
this subsection 2.3(c) on such Settlement Date (but not against any
Purchase Fee payable upon the request of the Buyer as provided below) equal
to the sum of (x) the amount of the Finance Charge Collections attributable
to the Buyer's Undivided Interest paid by the Seller to the Buyer on the
preceding Settlement Date plus (y) all interest and other amounts earned on
the deposited funds in the Collateral Account, the Application Account and
the Finance Charge Account from and including the preceding Settlement Date
(or, in the case of the first Settlement Date, the effective date of this
Agreement) to but not including such Settlement Date (and, to the extent
the sum of (x) and (y) exceed such Purchase Fee payable on such Settlement
Date, the Seller shall be entitled to a rebate of such excess). Without in
any way limiting the Seller's obligations under this subsection 2.3(c) on
any Settlement Date, if the Buyer notifies the Seller at or prior to 5:00
p.m. (Chicago time) on any Business Day that it wishes the Seller to pay on
the immediately succeeding Business Day any amount under this subsection
2.3(c) which is or will be accrued as of such succeeding Business Day, then
the Seller shall pay to the Buyer such amount as provided in Section 8.2 at
or prior to 11:00 a.m. (Chicago time) on such immediately succeeding
Business Day; provided, that any amounts so paid by the Seller shall not be
considered owing on the next succeeding Settlement Date. Each reference to
each of the Financing Documents in this subsection 2.3(c) shall be to such
agreements as in effect on the date hereof or as the same may be amended,
supplemented or otherwise modified in accordance with the terms thereof and
with the consent of the Seller. All calculations made by the Buyer
pursuant to this subsection 2.3(c) shall be conclusive, absent manifest
error.
4. As further consideration for the Buyer's purchase of an
Undivided Interest or an Addition thereto, the Seller agrees to pay to the
Buyer in advance (i) a nonrefundable annual fee of $10,000 on October 31,
1994 and on each October 31 thereafter until the Time of Full Payout and
(ii) a nonrefundable semiannual fee of $5,324 on the last Business Day of
June and December commencing December 1994 until Buyer's Preferred Stock is
redeemed in full, at which time the Seller agrees to pay to the Buyer a
final nonrefundable fee in an amount equal to the product of $5,324
multiplied by a fraction the numerator of which is equal to the number of
days between the last semiannual payment date and such redemption date and
the denominator of which is 180.
D. REASSIGNMENT.
1. If the Net Purchase Outstanding shall at any time exceed the
Maximum Purchase Amount, the Buyer shall reassign to the Seller, free of
liens created by the Buyer but otherwise without recourse, representation
or warranty, such portion of the Undivided Interest as is necessary so
that, after giving effect to such reassignment, the Net Purchase
Outstanding would not exceed such Maximum Purchase Amount.
2. Each such reassignment shall be made for a purchase price
(payable by the Seller upon request in immediately available funds) equal
to the amount of the Undivided Interest so reassigned multiplied by the
Gross Amount Due upon the Portfolio of Eligible Receivables as of the last
day of the Settlement Period immediately preceding the date of such
reassignment.
E. INTEREST ON OVERDUE PAYMENTS. If any amount payable by the Seller to
the Buyer, whether on account of fees or expenses or on account of amounts
collected by the Seller or otherwise, is not paid on the relevant Settlement
Date or other relevant date, such amount shall bear interest for each day from
such Settlement Date or other relevant date, as the case may be, until such
amount is paid in full at a rate per annum equal to 3% above the Prime Rate in
effect on each such day.
F. FEE AND INTEREST CALCULATIONS. Calculations of per annum rates under
this Agreement shall be made on the basis of a 360-day year for actual days
elapsed.
G. INDEMNIFICATION BY SELLER. The Seller hereby agrees to pay, and to
indemnify and hold harmless the Buyer and the Buyer's officers, directors,
employees, agents and shareholders from (a) any Taxes which may at any time be
imposed in respect of this Agreement, the Financing Documents or the subject
matter hereof or thereof or as a result of the issuance by the Buyer of the
Notes or by the transactions contemplated hereby or thereby, and (b) reasonable
costs, expenses and counsel fees in defending against the same, whether arising
by reason of the acts to be performed by the Seller hereunder or imposed against
the Buyer, the Seller, the property involved or otherwise.
H. DISTRIBUTION OF COLLECTIONS AND OTHER PAYMENTS. All amounts in
respect of Collections attributable to the Buyer's Undivided Interest shall be
remitted by the Seller without set-off or counterclaim, to the Buyer on each
Settlement Date and all amounts in respect of other payments owing by the Seller
pursuant to this Agreement shall be remitted to the Buyer as promptly as
practicable without set-off or counterclaim.
I. NETTING OF PAYMENTS. Anything contained in this Agreement to the
contrary notwithstanding, the Buyer may, in its complete discretion, net any
amounts the Buyer is required to make available to the Seller on any Settlement
Date pursuant to this Agreement against any amounts the Seller is required to
make available to the Buyer on such Settlement Date pursuant to this Agreement.
J. GRANT OF SECURITY INTEREST. The parties hereto agree that this
Agreement is intended to constitute the sale of an Undivided Interest (and any
Additions thereto) in all right, title and interest of the Seller in, to and
under the Portfolio of Eligible Receivables. In addition, the parties hereto
agree that (a) this Agreement constitutes a grant by the Seller to the Buyer of
a perfected first priority security interest in all of the Seller's right, title
and interest in, to and under each Receivable (whether or not an Eligible
Receivable), all guarantees thereof, all collateral security therefor
(including, without limitation, all Contracts and Assigned Commissions) and all
of the DBP Lead Commissions, all monies due or to become due thereon in each
case and all amounts received with respect thereto in each case and all
"proceeds" (as defined in Section 9-306 of the Uniform Commercial Code as in
effect in the applicable jurisdiction) thereof in each case, whether now
existing or hereafter arising, (b) such security interest is intended to secure,
without limitation, all now and hereafter outstanding obligations of the Seller
to the Buyer and (c) this Agreement shall constitute a security agreement under
applicable law.
ARTICLE III.
COLLECTIONS; MAINTENANCE OF RECORDS
A. COLLECTIONS AND APPLICATIONS.
1. The Seller hereby agrees that on or before the initial Date of
Sale on which an Undivided Interest shall be sold hereunder, the Seller
will have established a cash management system whereby the Seller can
identify from all cash received all Collections which are attributable to
the Portfolio of Eligible Receivables and the Buyer's Undivided Interest
therein (and the portion thereof constituting Principal Collections and the
portion thereof constituting Finance Charge Collections) and all
collections attributable to Receivables (and the portion thereof
constituting principal collections and the portion thereof constituting
finance charge collections). The Seller shall, during each Settlement
Period, identify those Collections which are on account of the Buyer's
Undivided Interest in the Portfolio of Eligible Receivables and shall
(i) with respect to such Collections constituting Principal Collections,
subject to the provisions of subsection 2.3(b), not later than 12:00 noon
(Chicago time) on the Settlement Date immediately succeeding such
Settlement Period, cause all such Principal Collections to be deposited in
the Application Account and (ii) with respect to such Collections
constituting Finance Charge Collections, not later than 12:00 noon (Chicago
time) on each such Settlement Date, cause all such Finance Charge
Collections to be deposited in the Finance Charge Account; provided,
however, that during the Liquidation Period, the Seller shall deliver all
principal collections and finance charge collections which are attributable
to the Receivables (including collections which are not attributable to the
Buyer's Undivided Interest, which collections shall be applied in the
manner specified in subsections 3.1(f) and (g) below) to the Buyer on each
Settlement Date in the manner specified in clauses (i) and (ii) above; and
provided, further, however, that at any time after the occurrence and
during the continuance of a Termination Event and upon two Business Days'
prior written request of the Buyer, determined in the Buyer's sole
discretion, the Seller shall transfer or cause to be transferred on a daily
basis in immediately available funds (x) to the Application Account an
amount not less than the aggregate amount of all identified principal
collections (including all principal collections which are not attributable
to the Buyer's Undivided Interest, which collections shall be applied in
the manner specified in subsections 3.1(f) and (g) below) received prior to
the time of such transfer and not previously transferred and (y) to the
Finance Charge Account an amount not less than the aggregate amount of all
identified finance charge collections (including all finance charge
collections which are not attributable to the Buyer's Undivided Interest,
which collections shall be applied in the manner specified in subsection
3.1(f) and (g) below) received prior to the time of such transfer and not
previously transferred.
2. The Seller agrees that, upon (i) the occurrence and during the
continuance of any Termination Event or any event which, with the giving of
notice or the lapse of time or both, would constitute a Termination Event,
and (ii) the written request of the Buyer, the Seller shall transfer to the
Buyer all of the Seller's right, title and interest in, to and under each
and every bank account to which the Obligors (or applicable Insurance
Companies) shall previously have been directed to remit payments (or
Assigned Commissions or DBP Lead Commissions in the case of Insurance
Companies) on account of or with respect to Receivables or which are used
by the Seller to concentrate such payments. Each such transfer shall be
effected pursuant to such agreements, documents and instruments as the
Buyer shall, in its sole discretion, require. The Seller shall, from time
to time, execute and deliver such other documentation in form and substance
satisfactory to the Buyer as may be reasonably requested by the Buyer to
obtain sole dominion and control over each such bank account. Each such
bank account shall, after any transfer effected pursuant to this paragraph
(b), be maintained in accordance with the terms and conditions of such
documentation. Commencing upon any transfer of bank accounts described in
this paragraph (b), all collections then on deposit or thereafter deposited
in, and all credits in, such bank accounts shall be transferred to the
Application Account (in the case of principal collections) and the Finance
Charge Account (in the case of finance charge collections). In the event
the Seller has not established such a system of bank accounts, it will
promptly establish and maintain such a system of bank accounts in form
satisfactory to the Buyer.
3. The Buyer agrees that, in any case where the provisions of
subsection 3.1(b) shall become applicable, as soon as practicable but in
any event not later than the Business Day following the date of
establishment to its satisfaction by the Seller that any of the collected
funds received by the Buyer in any of the Buyer's bank accounts referred to
in subsection 3.1(b) do not constitute collections on account of Agent
Receivables, CNL Receivables, Markman Agent Receivables, Markman Marketing
Manager Receivables or DBP Lead Commissions, the Buyer shall remit to the
Seller such moneys which do not constitute such collections (provided that
amounts which constitute collections but which are not attributable to the
Buyer's Undivided Interest shall be applied in the manner specified in
subsection 3.1(f) and (g) below). The Buyer agrees that, upon the request
of the Seller, it will furnish to the Seller such information regarding
moneys received on such bank accounts as may be reasonably necessary to
permit the Seller to identify such moneys which do not constitute such
collections.
4. The Buyer shall treat all immediately available funds received by
it or deposited in the Application Account as "Principal Collections"
attributable to its Undivided Interest for purposes of this Agreement and
shall treat all immediately available funds received by it or deposited in
the Finance Charge Account as "Finance Charge Collections" and all such
funds shall be treated as having been received as of the Business Day
Received (as defined in the immediately succeeding sentence). As used
herein, the term "Business Day Received" shall mean (i) if funds are
deposited in such Application Account or Finance Charge Account by 12:00
noon (Chicago time), such day of deposit and (ii) if funds are deposited in
such Application Account or Finance Charge Account after 12:00 noon
(Chicago time), the Business Day next following such day of deposit.
5. Neither the Seller nor any other Person claiming by, through or
under the Seller shall have any right, title or interest in, or any control
over the use of, or any right to withdraw moneys from, the Application
Account, the Finance Charge Account or the Holdback Account.
6. During the Liquidation Period, all collections which are not
attributable to the Buyer's Undivided Interest which are deposited in the
Application Account and the Finance Charge Account shall be segregated by
the Buyer, shall be deposited in the Holdback Account and shall be applied
by the Buyer in accordance with the provisions of subsections 3.1(g) and
(h); provided, however, that during the Liquidation Period, a percentage
(equal to the percentage equivalent representing the Buyer's Undivided
Interest in all Sold Receivables) of all collections attributable to the
Receivables which are not attributable to the Buyer's Undivided Interest
shall be paid to the Buyer until such time as the Net Purchase Outstanding
shall equal zero.
7. On each Settlement Date occurring during the Liquidation Period,
the Buyer shall deduct from the Holdback Account (to the extent of the
funds therein) and pay to the Application Account an amount equal to the
sum of (i) all Losses occurring during the preceding Settlement Period plus
(ii) all Losses occurring during any prior Settlement Period and not
previously so reimbursed to the Buyer.
8. At the end of the Liquidation Period, all funds on deposit in the
Holdback Account, to the extent not used to offset Losses as set forth in
subsection 3.1(g) above, shall be returned to the Seller.
B. COLLECTIONS BY THE SELLER.
1. The Seller will, at the Seller's cost and expense and as agent
for the Buyer (but subject, at any time after the occurrence of a
Termination Event, to the right of the Buyer to direct and control),
endeavor to collect, consistent with its past practices (as to the
Receivables owned by it) as and when the same becomes due, the amount owing
on each Receivable. The Seller will not make any material changes in its
administrative servicing and collection systems without the prior approval
of the Buyer, such approval not to be unreasonably withheld. In the event
of default under any Sold Receivable, the Seller shall have the power and
authority, on behalf of the Buyer, to take such action in respect of such
Sold Receivable, as the Seller, in the absence of contrary instructions
from the Buyer, may deem advisable. In the enforcement or collection of
any Sold Receivable, the Seller shall be entitled to sue thereon in its own
name, if possible, or, if, but only if, the Buyer consents in writing, as
agent of the Buyer. In no event shall the Seller make the Buyer a party to
any litigation without the Buyer's express prior written consent. The
Buyer may, as set forth in subsection 3.2(d), (i) by notice in writing
terminate the authority of the Seller to act as agent for and on behalf of
the Buyer and/or (ii) notify any Obligor of the assignment to the Buyer of
an Undivided Interest in any Sold Receivable hereunder and/or (iii) direct
any Obligor to make all payments in respect of Sold Receivables in the name
of the Buyer.
2. The Seller hereby agrees to defend and indemnify the Buyer
against all costs, expenses, claims and liabilities in respect of any
action taken by the Seller relative to any Receivable, or arising out of
any failure of compliance of any Receivable hereunder with the provisions
of any law or regulation, whether Federal, state or local, applicable
thereto (including, without limitation, any usury law, the Federal Truth in
Lending Act or Regulation Z of the Board of Governors of the Federal
Reserve System). The Buyer shall have no obligation to, and unless and
until the occurrence of an event described in clauses (i) and (ii) of the
first sentence of subsection 3.1(b), the Buyer shall not, take any action
or commence any proceedings to realize upon any Receivable (including,
without limitation, any Defaulted Receivable) or to enforce any of its
rights or remedies with respect thereto.
3. The Seller hereby irrevocably grants to the Buyer an irrevocable
power of attorney, with full power of substitution, coupled with an
interest, to take in the name of the Seller or in its own name all steps
necessary or advisable to endorse, negotiate or otherwise realize on any
writing or other right of any kind held or owned by the Seller or
transmitted to or received by the Buyer as payment on account or otherwise
in respect of any Receivable. In addition, in order to effect the purposes
of this Agreement and the sale of Undivided Interests and Additions thereto
and to evidence the ownership interest of the Buyer in the Sold Receivables
and the security interest of the Buyer in all other Receivables, the Seller
hereby irrevocably grants to the Buyer an irrevocable power of attorney,
with full power of substitution, coupled with an interest, to take in the
name of the Seller or in its own name all actions in respect of the
preparation, execution and filing of any and all notices and instruments
necessary or advisable under the Uniform Commercial Code.
4. The Buyer may at any time, after the occurrence of a Termination
Event, by notice in writing to the Seller (a "Transfer Notice") terminate
the Seller's functions as to all of the administrative, servicing and
collection functions provided for in this Article III (the termination of
such functions being referred to as a "Complete Servicing Transfer"). Upon
the occurrence of a Complete Servicing Transfer, (i) the Buyer or its
designee shall administer the administrative, servicing and collection
functions, including, but not limited to, the issuance of demands for
payment under the Receivables, in any manner it deems fit, provided that
the Buyer will furnish or cause to be furnished to the Seller such
information as the Seller needs to perform its obligations under Section
4.1, (ii) the Buyer shall, at any time thereafter, be entitled to notify
the Obligors on any Receivables to make payment of amounts due thereunder
in the name of and directly to the Buyer and to notify the applicable
Insurance Companies to make payments of all Assigned Commissions or DBP
Lead Commissions in the name of and directly to the Buyer and (iii) the
Seller shall, at its own expense, (x) if so requested by the Buyer, endorse
each instrument, if any, evidencing any Receivable to the Buyer in such
manner as the Buyer shall direct and (y) perform any and all acts and
execute any and all documents as may be reasonably requested by the Buyer
in order to effect the purposes of this Agreement and the sale of Undivided
Interests and Additions thereto and to evidence the ownership interest of
the Buyer in the Sold Receivables and the security interest of the Buyer in
the other Receivables.
5. The Seller shall execute and deliver such additional documents,
shall take such further action as the Buyer may reasonably request to
effect or evidence the transfer of an Undivided Interest in the Portfolio
of Eligible Receivables and a security interest in the Receivables and
shall execute and deliver to the Buyer such powers of attorney (in addition
to the power of attorney provided for in subsection 3.2(c)) as may be
necessary or appropriate to enable the Buyer to endorse for payment any
check, draft or other instrument delivered in payment of any amount under
or in respect of any Receivable. If, at any time, when the provisions of
subsection 3.1(b) shall have become operative, the Seller receives any cash
or checks, drafts or other instruments for the payment of money on account
or otherwise in respect of Receivables, the Seller shall segregate such
cash and other items, hold such cash and other items in trust for the
benefit of the Buyer and cause such cash and other items (properly
endorsed, where required, so that such items may be collected by the Buyer)
to be transmitted or delivered to the Buyer within one Business Day after
the date any such cash or other item shall have been identified and
segregated by the Seller as being on account of a Receivable.
6. All collections on account of the Receivables of each Obligor
shall be applied in the order of maturity thereof unless specifically
identified otherwise in writing by such Obligor.
7. In the event of any Complete Servicing Transfer the Seller shall
be liable for all costs, fees, expenses and reimbursements payable to the
Buyer or its designee who shall have undertaken the administration,
servicing and collection functions provided for herein in respect of the
Receivables.
C. MAINTENANCE OF RECORDS. The Seller will or will cause one or more of
the Insurance Companies to hold in trust for the Buyer at the office of the
Seller books of account and other records as will enable the Buyer or its
designee to determine at any time the status of the Eligible Receivables and the
Receivables and all collections and payments in respect thereof. The Seller
will or will cause one or more of the Insurance Companies to permit the Buyer,
at any time and from time to time during the Seller's or such Insurance
Companies' regular business hours, to inspect, audit, check and make abstracts
from the Seller's or such Insurance Companies' books, accounts, records, or
other papers pertaining to such Receivables. From time to time upon the written
request of the Buyer, the Seller, at its own expense, will deliver or will cause
one or more Insurance Companies to deliver to the Buyer (a) a schedule of the
Receivables, identifying separately the Sold Receivables sold by Seller and the
Eligible Receivables, indicating as to each such Receivable information as to
the Obligor thereon, the unpaid balance thereof, and such other information as
the Buyer may reasonably deem appropriate and (b) copies of any such records and
invoices pertaining thereto and evidence thereof as the Buyer may deem necessary
to enable it to enforce its rights thereunder. Following a Complete Servicing
Transfer, upon the written request of the Buyer, the Seller will deliver all
such records and invoices pertaining thereto and other evidence thereof to the
Buyer or any agent selected by the Buyer. Each computer record relating to the
Eligible Receivables or the Receivables will be marked to indicate the interest
of the Buyer therein. Upon request of the Buyer, the Seller will or will cause
one or more of the Insurance Companies to segregate from all other receivables
then owned or being serviced by the Seller or such Insurance Companies all
records, invoices and other documents relating to a Receivable and will, or will
cause such Insurance Companies to, hold in trust and safely keep such records,
invoices and other documents in such place or places as shall be designated by
the Buyer.
D. REBATES, ADJUSTMENTS AND REDUCTIONS; MODIFICATIONS; ADDITIONS;
REPURCHASE OF DBP LEAD RECEIVABLES.
(a) With respect to the Sold Receivables, the amount of any rebate,
discount, refund, adjustment, chargeback or similar item (including,
without limitation, as a result of the application of any special or other
discounts or any reconciliations) of any Sold Receivable, the amount owing
for any cancellations or the amount of any other reduction of any payment
under any Sold Receivable shall be treated as a collection thereon by the
Seller for purposes of this Agreement and shall be paid to the Buyer on the
next Settlement Date. The Seller may be reimbursed for chargebacks relating
to policies written by an Agent Obligor, a CNL Agent Obligor, or a Markman
Agent Obligor, or CNL Managing General Agent or Markman out of amounts
deposited in the Reserve Account with respect to such Agent Obligor, CNL
Agent Obligor, Markman Agent Obligor, CNL Managing General Agent or Markman
or, to the extent such amounts are insufficient, out of Assigned
Commissions payable to such Agent Obligor, CNL Agent Obligor, Markman Agent
Obligor, CNL Managing General Agent or Markman, as the case may be;
provided that the Seller may be reimbursed out of Assigned Commissions of
an Agent Obligor, a CNL Agent Obligor, or a Markman Agent Obligor, or CNL
Managing General Agent or Markman only to the extent that such Assigned
Commissions exceed the aggregate amount payable with respect to the
outstanding Agent Receivables of such Agent Obligor, CNL Agent Obligor,
Markman Agent Obligor, CNL Managing General Agent or Markman, as the case
may be.
(b) During the Liquidation Period with respect to the Receivables,
the amount of any rebate, discount, refund, adjustment, chargeback or
similar item (including, without limitation, as a result of the application
of any special or other discounts or any reconciliations) of any
Receivable, the amount owing for any cancellations or the amount of any
other reduction of any payment under any Receivable shall be treated as a
collection thereon by the Seller for purposes of this Agreement and shall
be paid to the Buyer on the next Settlement Date. The Seller may be
reimbursed for chargebacks relating to policies written by an Agent
Obligor, a CNL Agent Obligor, or a Markman Agent Obligor, or CNL Managing
General Agent or Markman out of amounts deposited in the Reserve Account
with respect to such Agent Obligor, CNL Agent Obligor, Markman Agent
Obligor, CNL Managing General Agent or Markman or, to the extent such
amounts are insufficient, out of Assigned Commissions payable to such Agent
Obligor, CNL Agent Obligor, Markman Agent Obligor, CNL Managing General
Agent or Markman; provided that the Seller may be reimbursed out of
Assigned Commissions of an Agent Obligor, a CNL Agent Obligor, or a Markman
Agent Obligor, or CNL Managing General Agent or Markman only to the extent
that such Assigned Commissions exceed the aggregate amount payable with
respect to the outstanding Agent Receivables of such Agent Obligor, CNL
Agent Obligor, Markman Agent Obligor, CNL Managing General Agent or
Markman.
(c) Without limiting the generality of the foregoing provisions of
this Section 3.4, in the event that any Insurance Company fails to make any
DBP Lead Commission payment within 30 days after such payment is due
(whether because of the lapse or cancellation of the underlying Insurance
Policy or for any other reason) and such DBP Lead Commissions were payable
with respect to a DBP Lead Receivable in which an Undivided Interest was
sold hereunder (a "Defaulted Lead Receivable") then the Seller shall
repurchase from Buyer on the next Settlement Date, Buyer's Undivided
Interest in such Defaulted Lead Receivable for an amount equal to the
product of (i) the Undivided Interest times (ii) the Gross Amount Due
(without deduction for any write-offs) upon such Defaulted Lead Receivable.
(d) Notwithstanding any other provision in this Agreement (or any
exhibit or schedule hereto) the Seller may at any time charge back to an
agent's account any unearned advances, whether the result of a lapsed
policy or a policy not taken out, subject, however, to the limitations on
such chargebacks contained in this Agreement regarding matters other than
time.
ARTICLE IV.
SETTLEMENTS; TERMINATION
A. SETTLEMENT STATEMENTS. Not later than three Business Days prior to
each Settlement Date until the Undivided Interest of the Buyer in the Portfolio
of Eligible Receivables has been reduced to zero, the Seller shall submit to the
Buyer a Settlement Statement, substantially in the form of Exhibit H, setting
forth the items listed on such Exhibit H and such other information as the Buyer
may reasonably consider appropriate for the purpose of effecting an accounting
and settlement hereunder. The Seller agrees to notify the Buyer promptly after
any collections manager or supervisor thereof, any member of the legal
department or any vice president or other executive officer of the Seller
obtains actual knowledge of any event with respect to any Obligor or Insurance
Company of the type described in subsection 7.1(e).
B. TERMINATION.
1. This Agreement will terminate at such time on or after the
Purchase Termination Date, or on or after such earlier date as to which the
Seller shall have given the Buyer 30 days notice, when the Net Purchase
Outstanding has been reduced to zero and all other amounts owing to the
Buyer hereunder shall have been paid in full; provided, however, that the
indemnities of the Seller to the Buyer set forth in this Agreement shall
survive such termination. Upon the termination of the commitment of the
Buyer to purchase Eligible Receivables hereunder in its entirety, whether
pursuant to this Article IV, Article VII or otherwise, and the collection,
repurchase or other final resolution of all Eligible Receivables, the
Buyer, shall, at the expense of the Seller, execute such Uniform Commercial
Code termination statements and such other documents as the Seller may
reasonably request to evidence the termination of the ownership interest or
security interest of the Buyer in Receivables. Prior to the collection,
repurchase or other final resolution of all Receivables, however, the
termination of the commitment of the Buyer to purchase Eligible Receivables
hereunder shall not affect the Seller's responsibilities pursuant to
Article III hereof, except in accordance with the provisions of such
Article III.
2. The Seller may request an extension of the Purchase Termination
Date then in effect for an additional one-year period by submitting such
request in writing to the Buyer at least 180 days prior to the then
effective Purchase Termination Date, so long as no Termination Event shall
have occurred and be continuing. If the Buyer shall approve such extension
in writing, the Purchase Termination Date shall automatically and without
further action be extended for such one-year period. There shall be no
limit on the number of such one-year extensions which the Seller may
request. However, in no event shall Buyer have any obligation to approve
such a request for extension nor shall Buyer have any liability whatsoever
for failing or refusing to approve such a request for extension.
(c) When all amounts payable with respect to all Receivables of a
particular Agent Obligor, CNL Agent Obligor or Markman Agent Obligor or CNL
Managing General Agent or Markman have been paid in full and neither the
Seller nor such Agent Obligor, CNL Agent Obligor or Markman Agent Obligor
or CNL Managing General Agent or Markman, as the case may be, intend to
create any additional Receivables with respect to such Obligor (herein
referred to as an "Earned Basis Agent"), the Seller may (at the request of
such Earned Basis Agent or on the Seller's own accord) deliver to the Buyer
(with a copy to L/C Bank) a request to terminate the UCC financing
statement of such Earned Basis Agent, if any, accompanied by a certificate
executed by a duly authorized officer of the Seller and certifying the date
on which all amounts payable with respect to all Receivables of such Earned
Basis Agent were paid in full (the "Payment Date"). Upon the later of (i)
the Buyer's receipt of the certificate referred to in the previous sentence
and (ii) one calendar year plus one day following the Payment Date, the
Seller may execute a UCC termination statement with respect to such Earned
Basis Agent, and the Buyer and L/C Bank shall promptly deliver to the
Seller the original Contract relating to such Earned Basis Agent and shall
execute and deliver any necessary UCC termination statements prepared by
the Seller with respect to such Earned Basis Agent (all at the Sellers'
sole cost and expense).
ARTICLE V.
COVENANTS, REPRESENTATIONS AND WARRANTIES
A. REPRESENTATIONS AND WARRANTIES OF THE SELLER. The Seller hereby
represents and warrants to the Buyer that, on the effective date of this
Agreement and on each Closing Date:
1. Closing Conditions. Each of the conditions set forth in clauses
(i) and (ii) of subsection 2.2(b) have been satisfied (after giving effect
to the proposed purchase and sale on such Closing Date).
2. Eligible Receivables. Each Receivable in which an Undivided
Interest, or Addition thereto, is then being sold to the Buyer is an
Eligible Receivable.
3. Gross Amount Due. The principal amount of the indebtedness due
and to become due on the Portfolio of Eligible Receivables in which an
Undivided Interest, or Addition thereto, is being sold to the Buyer will be
the amount set forth as the Gross Amount Due on account of the Portfolio of
Eligible Receivables in the Settlement Statement to be furnished pursuant
to Section 4.1.
4. Buyer's Ownership Interest. Each Assignment, when executed and
delivered pursuant hereto, (i) will vest in the Buyer an undivided,
participating ownership interest in all of the right, title and interest of
the Seller in, to and under each Eligible Receivable described therein and
the unpaid indebtedness evidenced thereby and in and to any and all
guarantees thereof, all collateral security therefor, all monies due or to
become due thereon and all amounts received with respect thereto and all
"proceeds" (as defined in Section 9-306 of the Uniform Commercial Code as
in effect under applicable law) thereof, whether now existing or hereafter
arising, and (ii) will constitute a valid assignment of such undivided,
participating ownership interest in such Eligible Receivables and such
guarantees and collateral security enforceable against all creditors of and
purchasers from the Seller.
5. Compliance with Laws. All the requirements of all laws and
regulations, whether Federal, state or local (including, without
limitation, usury laws, the Federal Truth in Lending Act and Regulation Z
of the Board of Governors of the Federal Reserve System), have been duly
complied with in all material respects with respect to the Seller, its
business, all Receivables and all related Contracts.
6. Organization; Good Standing; Authority. The Seller is duly
organized, validly existing and in good standing under the laws of the
state of its incorporation and has the corporate power and authority and
the legal right to enter into and perform, and has taken all necessary
corporate action to authorize the execution, delivery and performance of,
this Agreement, the Consent and Agreement, each Assignment and any other
Financing Documents to which it is a party to be delivered by it, all of
which will constitute legal, valid and binding obligations of the Seller,
enforceable in accordance with their respective terms except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium and other similar laws relating to or affecting
creditors' rights generally and by general equitable principles.
7. No Violations of Laws; Litigation; Material Adverse Effect.
(i) None of this Agreement, the Consent and Agreement nor the Assignments
to be delivered by the Seller nor the performance by the Seller of its
obligations hereunder or thereunder will violate any provision of law or of
any agreement, indenture, note or other instrument binding upon the Seller
(including, without limitation, the Contract out of which such Receivable
arose or any arrangement between the Seller and any Insurance Company) or
any judgment, order or decree of any court or its articles of incorporation
or by-laws or give cause for acceleration of any indebtedness of the
Seller; (ii) no litigation, investigation or proceeding of or before any
court, governmental body, commission, agency or arbitrator is pending or,
to the knowledge of the Seller, threatened by or against the Seller or
against any of its properties or revenues with respect to this Agreement,
the Consent and Agreement or the Assignments or any of the transactions
contemplated hereby or thereby; and (iii) no material impairment exists in
the ability of the Seller to perform its obligations hereunder, under the
Consent and Agreement or under the Assignments or in connection with any of
the transactions contemplated hereby or thereby.
8. Approvals and Consents. No consent or authorization of, filing
with, or other act by or in respect of any court, governmental body,
commission, agency, arbitrator or any other Person (including any
shareholder, creditor or other Affiliate of the Seller) is required in
connection with the execution, delivery, performance, validity or
enforceability of this Agreement, the Consent and Agreement or the
Assignments.
9. Qualification and Enforceability. The Seller and each Insurance
Company is duly qualified and in good standing in each jurisdiction in
which failure to qualify would render any Receivable unenforceable by the
Seller or the Buyer.
10. U.C.C. Filings. (i) The chief executive office of the Seller is
listed on Schedule I, which office is the place where the Seller is
"located" for the purposes of Section 9-103 of the Uniform Commercial Code
of the State of Illinois, and the offices of the Seller where the Seller
keeps its records concerning the Receivables are also listed on said
Schedule; (ii) Schedule I also sets forth all corporate names, tradenames
and fictitious names utilized by Seller; and (iii) all filings and other
acts necessary or advisable (including but not limited to all filings and
other acts necessary or advisable under the Uniform Commercial Code of each
relevant jurisdiction) have been made or performed in order to grant the
Buyer an ownership interest in respect of all Sold Receivables and a
security interest in all Receivables, free and clear of any security
interest, lien, claim, charge or encumbrance of any other Person except for
liens granted in the Assigned Commissions securing the Receivables and in
the DBP Lead Commissions to Insurance Companies and agents of the Seller in
the ordinary course of business and consistent with past practice, which
liens in each case are subordinate in right to the liens granted to Buyer
hereunder.
11. Financial Statements. The balance sheets of Seller, as at
December 31, 1994 and June 30, 1995 and the related statements of income
and retained earnings and changes in cash flow for the fiscal year and six
months ended on such dates, respectively, previously delivered to the Buyer
pursuant to subsection 6.1(e), are complete and correct and present fairly
the financial condition of Seller, as at such dates, and the results of its
operations and changes in financial position for the periods then ended.
Seller did not have, as of the dates of such financial statements, any
material (i) obligation, (ii) contingent liability or liability for taxes
or (iii) long-term lease which is not reflected in such financial
statements. There has not been as of the date of this Agreement and there
will not be as of the date of any purchase of Receivables hereunder any
material adverse change in the business, operations, property or other
financial condition of Seller or any of its Subsidiaries from the business,
operations, property or other financial condition of Seller or any such
Subsidiary as of June 30, 1995.
12. Termination Events. No Termination Event or event which, with
the giving of notice or lapse of time or both, would constitute a
Termination Event has occurred and is continuing.
13. Chargebacks. The description, attached hereto as Schedule III,
of the procedures used with respect to chargebacks on the Insurance
Policies is a true, correct and complete summary of such procedures.
14. Transfers of the Receivables. The Seller has not sold, pledged,
assigned or transferred, or granted any security interest in any of the
Receivables (except for liens granted in the Assigned Commissions and the
DBP Lead Commissions securing such Receivables to Insurance Companies and
agents of the Seller in the ordinary course of business, which liens are
subordinate in right to the liens granted to Buyer hereunder) or any
guarantee or proceeds thereof or collateral security therefor.
B. COVENANTS OF THE SELLER. The Seller hereby covenants to the Buyer
that:
1. Transfers of the Receivables. The Seller will not sell, pledge,
assign or transfer, or grant any security interest in, any of the
Receivables (except for liens granted in the Assigned Commissions and DBP
Lead Receivables securing such Receivables to Insurance Companies, agents
of the Seller, agents of CNL and agents of Pioneer Life in the ordinary
course of business, which liens are subordinate in right to the liens
granted to Buyer hereunder), any of the DBP Lead Commissions or any
guarantee or proceeds thereof or collateral security therefor, or any
interest therein, to any other Person.
2. Compliance with Laws. All the requirements of all laws and
regulations, whether Federal, state or local (including, without
limitation, usury laws, the Federal Truth in Lending Act and Regulation Z
of the Board of Governors of the Federal Reserve System), will be duly
complied with in all material respects with respect to the Seller, its
business, all Receivables and all related Contracts.
3. Compliance with Past Business Practices. The Seller will
continue to comply in all material respects with its past business
practices in generating, servicing and maintaining the Receivables.
4. Fulfillment of Obligations. The Seller will duly fulfill all
material obligations on its part to be fulfilled under or in connection
with each Receivable (including, without limitation, all of its obligations
in the Insurance Agency Agreements) and will do nothing to impair the
rights of the Buyer to such Receivables.
5. Accounting for the Transaction. The Seller will not (except with
respect to the DBP Lead Receivables) prepare any financial statements which
shall account for the transactions contemplated hereby in a manner which
is, nor will it in any other respect account for the transactions
contemplated hereby in a manner which is, inconsistent with the Buyer's
undivided participating ownership interest in the Sold Receivables.
6. Advance Rate. The Seller will not increase its advance rate with
respect to Receivables (i) to an amount in excess of 75% of the annualized
first-year commissions at the point of sale, less a holdback of 15% for
chargebacks, for Persons engaged by Seller's Advance Benefit Concepts
division, (ii) to an amount in excess of 75% of the annualized first-year
commissions at the point of policy issuance with respect to Markman and any
agent of Pioneer Life assigned to Markman, (iii) to an amount in excess of
80% of the annualized first-year commissions at the point of policy
issuance with respect to any CNL Managing General Agent or any agent of any
CNL Managing General Agent, or (iv) to an amount in excess of 100% of the
annualized first-year commissions at the point of policy issuance for
Persons other than those referred to in clauses (i), (ii) and (iii) of this
subsection and the Seller will not make any advances against renewal
commissions without the consent of the Buyer. The Seller will not make any
advances with respect to Receivables prior to the point of submission of
policy application or the point of policy issuance, as applicable and as
set forth in this subsection 5.2(f).
7. Conduct of Business; Good Standing. The Seller will continue to
engage in business of the same general type as now conducted by it and
preserve, renew and maintain its corporate existence, rights, franchises
and privileges in the jurisdiction of its incorporation, and qualify and
remain qualified in good standing as a foreign corporation in each
jurisdiction where it does business and take all reasonable action to
maintain all other rights, privileges and franchises necessary or desirable
in the normal conduct of its business except where the failure to preserve
and maintain such existence, rights, franchises, privileges and
qualification would not materially adversely affect the interests of the
Buyer hereunder or in the Receivables or the ability of the Seller to
perform its obligations hereunder.
8. Communications with Buyer. The Seller will at any time and from
time to time during regular business hours upon prior notice, permit the
Buyer, or its agents or representatives, (i) to examine and make copies of
documents (including, without limitation, computer tapes and disks) in the
possession or under the control of the Seller relating to Receivables, and
(ii) to visit the offices and properties of the Seller for the purpose of
examining such materials described in clause (i) above, and to discuss
matters relating to Receivables or the Seller's performance hereunder with
any of the officers or employees of the Seller having knowledge of such
matters.
9. Principal Executive Office. The Seller will not change the
location of its principal executive office or of any of the offices where
it keeps its records with respect to the Receivables without prior notice
being given to the Buyer and all necessary or advisable filings under the
Uniform Commercial Code being made.
10. Information to be Provided by Seller. The Seller will furnish to
the Buyer:
(i) Annual Financial Information. As soon as available, but in
any event no later than 90 days after the end of each fiscal year of
Financial Services, copies of (a) the audited consolidated balance
sheet of Financial Services, as at the end of such fiscal year and the
related audited statements of income, retained earnings and changes in
cash flows for such fiscal year, setting forth in comparative form the
corresponding figures for the previous fiscal year, such audited
statement to be certified without qualifications or exception by
independent certified public accounts of national standing acceptable
to the Buyer, and (b) the annual unaudited consolidating balance
sheets and related annual unaudited consolidating statements of
operations for National Benefit Plans, Inc. and the Seller which
support and form the basis for the corresponding annual audited
financial statements of Financial Services;
(ii) Quarterly Financial Information. As soon as available, but
in any event no later than 45 days after the end of each fiscal
quarter of Seller, copies of the consolidated and consolidating
balance sheet of Seller as at the end of such quarter and the related
consolidated statements of income and retained earnings of Seller for
such quarter and for the portion of the fiscal year then ended,
setting forth in comparative form the corresponding figures for the
corresponding periods in the previous fiscal year, certified by the
appropriate financial officer of the Seller (subject to normal year-
end audit adjustments), all such financial statements delivered
pursuant to this subsection 5.2(j) to be complete and correct in all
material respects and to be prepared in reasonable detail and in
accordance with GAAP applied consistently throughout the periods
reflected therein (except as approved by the accountants and as
disclosed therein);
(iii) M&R Report. On the effective date of this Agreement,
on December 31, 1995 and on each June 30 and December 31 thereafter
occurring during the term of this Agreement, the M&R Report which
shall be prepared in a manner and using a methodology consistent with
that in preparation of the M&R Report dated June 30, 1995 delivered to
the Seller on the effective date of this Agreement;
(iv) Material Adverse Changes; Termination Events. Prompt notice
of (1) a material adverse change in the business, operations, property
or financial or other condition of the Seller and (2) the occurrence
of any Termination Event or event which, with the giving of notice or
lapse of time or both, would constitute a Termination Event;
(v) Certification of Covenants. The Seller will furnish to the
Buyer (A) within 45 days after the end of each quarterly fiscal period
a statement (certified by the appropriate financial officer of the
Seller) setting forth whether the covenants referred to in subsection
7.1(t) hereof were satisfied, and with respect to the financial
covenants referred to therein, the Seller shall also furnish all
information reasonably requested by the Buyer to allow the Buyer to
determine independently whether such financial covenants were
satisfied; (B) concurrently with the delivery by the Seller of the
statement referred to in (A) above, a certificate of the President,
Chief Executive Officer, Chief Financial Officer, any Vice President
or General Counsel of the Seller stating that, to the best of such
officer's knowledge after diligent inquiry, the Seller has observed
and performed all of its covenants and other agreements, and satisfied
every condition, contained in this Agreement, the Consent and
Agreement and each Financing Document to which the Seller is a party
to be observed, performed or satisfied by it, and that such officer
has obtained no knowledge of any Termination Event or if any such
Termination Event exists, specifying the nature thereof, the period of
existence thereof and the action the Seller proposes to take with
respect thereto; and (C) concurrently with the information to be
provided by the Seller pursuant to subsection 5.2(j)(i), a certificate
of the independent public accountants of the Seller certifying that
nothing has come to their attention which would constitute a
Termination Event or any event which with notice or lapse of time or
both would constitute such a Termination Event has occurred or if such
a Termination Event or event has occurred or been discovered,
specifying the nature and extent thereof; and
(vi) Designated Agents and Insurance Companies. The Seller will
furnish to Buyer on the initial Closing Date and, not less often than
monthly thereafter commencing January, 1995, a list designating (a)
those Persons whose obligations are to be Agent Receivables, CNL Agent
Receivable, Markman Agent Receivable, CNL Managing General Agent
Receivables or Markman Marketing Manager Receivables, and (b) those
Insurance Companies whose first year DBP Lead Commissions are to be
DBP Lead Receivables, who, in each case, had not theretofore been so
designated by the Seller to Buyer.
11. [RESERVED]
12. Receipt of Collection. The Seller shall use only the accounts
listed on Schedule II for receiving Collections on the Receivables.
13. Delivery of Contracts. On each Closing Date the Seller will
deliver the originally executed copy of each Agent Contract, CNL Managing
General Agent Contract and Markman Contract (or any other contract, note,
financing agreement or other document, in lieu of an Agent Contract,
evidencing an Agent Receivable, CNL Agent Receivable, Markman Agent
Receivable or interest therein) with respect to an Agent Receivable, CNL
Managing General Agent Receivable or Markman Marketing Manager Receivable
executed since the immediately preceding Closing Date.
14. Amendments and Modifications. The Seller shall not amend or
modify any Insurance Agency Agreement or Contract or CNL Managing General
Agent Contract, or Markman Contract or Managing General Agent Agreement or
Marketing Agreement without the prior consent of the Buyer, which shall not
be unreasonably withheld, and the Seller shall promptly notify the Buyer
upon its receipt from any Insurance Company of a notice of termination
pursuant to the Insurance Agency Agreement between the Seller and such
Insurance Company; provided, however, that the Seller shall be permitted to
amend or modify any such Insurance Agency Agreement or Contract without the
consent of the Buyer so long as such amendment or modification does not
materially adversely affect the Buyer's interest in or the collectibility
of the Receivables.
15. Termination of Insurance Agency Agreements. The Seller shall not
terminate an Insurance Agency Agreement to which National Group Life
Insurance Company or Pioneer Life Insurance Company of Illinois is a party,
except in accordance with the terms of such agreements as in effect on the
date hereof.
16. Indebtedness. The Seller shall not incur any indebtedness to any
Insurance Company except for (i) indebtedness constituting chargebacks and
other similar items incurred in the ordinary course of business and
consistent with past practice; (ii) those insurance agency agreements
identified on Schedule IV hereto, complete and accurate copies of which
have been supplied to the Buyer and L/C Bank; and (iii) intercompany loans
provided that such loans are not secured by or related to the Receivables.
17. Changes to the Program Documents. The Seller shall not make any
material adverse change to the documents relating to the Receivables or DBP
Lead Commissions identified in and delivered along with the certificate of
the Chief Financial Officer of the Seller without the express written
consent of the Buyer and L/C Bank.
18. [RESERVED]
19. L/C Bank U.C.C. Filings. The Seller shall file UCC financing
statements with respect to each Person who is an Agent Obligor, CNL Agent
Obligor or Markman Agent Obligor on the date hereof and with respect to
each CNL Managing General Agent, and with respect to Markman showing such
Agent Obligor, CNL Agent Obligor, Markman Agent Obligor, each CNL Managing
General Agent and Markman, as the case may be, as Debtor with respect to
the Receivables of such Obligor and, prior to entering into any Agent
Contract with a Person who shall become an Agent Obligor of the Seller or a
CNL Agent Obligor or Markman Agent Obligor after November 22, 1995, shall
file UCC financing statements showing each such Person as Debtor with
respect to advances or loans to each such Person by the Seller or by CNL or
Pioneer Life which are assigned to the Seller hereunder. All such
financing statements to be filed pursuant to this subsection 5.2(s) shall
name the Seller as secured party and the Buyer and L/C Bank as assignees
and such financing statements shall be acceptable to the Buyer and L/C
Bank. In lieu of filing any UCC financing statements, the Seller may
maintain with L/C Bank an L/C Bank certificate of deposit in the aggregate
amount of $200,000, which certificate of deposit shall be pledged to L/C
Bank on terms and conditions reasonably satisfactory to it.
(t) The Seller shall cause each Insurance Company (other than
Eligible Fronting Companies) on an individual basis (A) to maintain at all
times Total Adjusted Capital equal to or greater than 270% of Authorized
Control Level RBC, (B) to maintain at all times a Real Estate Concentration
Ratio of less than 50%, and (C) to maintain at all times a ratio of (x)
Non-Investment Grade Obligations to (y) Total Invested Assets of less than
15%.
C. EFFECT OF BREACH BY THE SELLER. If any of the representations,
warranties or covenants contained in Sections 5.1 and 5.2 in respect of any Sold
Receivable shall be or have been materially incorrect or shall have been
materially breached at any applicable Closing Date, and such incorrectness or
breach shall not be corrected prior to the next Settlement Date which occurs
after such incorrectness or breach became known to the Seller or the Buyer, then
on such Settlement Date the Seller shall, at the option of the Buyer as
requested in writing, pay the Buyer an amount equal to the unpaid balance of
such Sold Receivable. Any amount paid by the Seller under this provision shall
be treated as a Principal Collection on account of the Buyer's Undivided
Interest for purposes of this Agreement. Upon receipt of such payment and all
other amounts then due under this Agreement in respect of any so affected Sold
Receivable, the Buyer shall reassign its interest in such affected Sold
Receivable to the Seller, subject to no liens created by Buyer, without
recourse, representation or warranty.
The obligations of the Seller to the Buyer under this Agreement shall not
be affected by reason of any invalidity, illegality or irregularity of any
Receivable or any sale of a Receivable.
ARTICLE VI.
CONDITIONS TO EFFECTIVENESS; PURCHASES
A. EFFECTIVE DATE. This Agreement shall become effective on the date
(the "effective date of this Agreement") on which:
1. The Seller shall have delivered to the Buyer copies of
resolutions of the Board of Directors of the Seller (and Financial
Services) authorizing the sales provided for herein and the execution,
delivery and performance of this Agreement, the Consent and Agreement, the
Assignment, and the other documents contemplated hereby certified by the
Secretary or an Assistant Secretary of the Seller on the effective date of
this Agreement, together with a certificate of such Secretary or Assistant
Secretary as to the incumbency of each officer of the Seller (or Financial
Services, as the case may be) authorized to execute this Agreement, the
Consent and Agreement, the Assignments and the other documents contemplated
hereby and thereby, and the Seller shall have delivered to the Buyer true
and correct copies of the Insurance Agency Agreements (together with the
amendments thereto regarding notice for termination) certified as to
authenticity by a duly authorized officer of the Seller;
2. There shall have been delivered to the Buyer the favorable
written opinion of (i) McDermott, Will and Emery, counsel to the Seller,
and (ii) A. Clark Waid III, Assistant General Counsel of the Seller and
Financial Services, in each case addressed to the Buyer and L/C Bank and
dated the effective date of this Agreement, such opinions to be
substantially in the form of Exhibits C-1, C-2 and C-3, respectively;
3. There shall have been delivered to the Buyer a certificate
executed by a duly authorized officer of the Seller, dated the effective
date of this Agreement, to the effect that appropriate financing statements
(naming the Buyer as the Secured Party and L/C Bank as Assignee) relating
to the Receivables of the Seller have been filed in each appropriate filing
office in each appropriate jurisdiction in which the Seller maintains an
office (which certificate shall also have annexed thereto a schedule
setting forth each office in which such financing statements have been
filed and the acknowledgement copies of such financing statements, showing
the recording data), and such certificate shall also state that such
offices are the only offices in which filing is required in order to
perfect the interest of the Buyer in such Receivables against all creditors
of and purchasers from the Seller;
4. The Buyer shall have received search reports satisfactory to it
dated a date reasonably near to the effective date of this Agreement,
listing all effective financing statements which name the Seller as debtor
and which are filed in the jurisdictions in which filings were made
pursuant to paragraph (c) above, together with copies of such other
financing statements none of which shall cover any Receivables, unless
UCC-3 termination statements with respect to such financing statements
shall be filed in the appropriate offices on or before the effective date
of this Agreement, (photostatic copies of which shall have been delivered
to the Buyer);
5. There shall have been delivered to the Buyer financial statements
of the Seller as of June 30, 1995 for the fiscal period ended on such date,
certified by the appropriate financial officer of the Seller, which
financial statements shall be satisfactory in form and substance to the
Buyer;
6. There shall have been delivered to the Buyer (i) a counterpart of
a reaffirmation of the Consent and Agreement, duly executed on behalf of
the Seller and Financial Services and (ii) an Acknowledgment of Assignment
of each Insurance Company, duly executed on behalf of such Insurance
Company; and
7. There shall have been delivered to the Buyer a copy of the
Articles of Incorporation of the Seller, certified by the Secretary of
State of Illinois.
B. CONDITION TO EACH PURCHASE. The obligation of the Buyer to make each
purchase of an Undivided Interest or Addition thereto hereunder from the Seller
(including its initial purchase) on any Closing Date hereunder is subject to the
conditions that:
1. No Termination Event, or event which, with the lapse of time or
the giving of notice or both, would constitute a Termination Event, shall
have occurred and then be continuing, and no such Termination Event or
event shall occur as a result of the proposed purchase on such Closing
Date;
2. The representations and warranties of the Seller set forth in
Article V shall be true and correct in all material respects on and as of
such Closing Date hereunder;
3. The Buyer shall be satisfied that the requirements of subsection
3.1(a) shall have been fulfilled with respect to such Receivables, and that
the documentation pursuant to which the applicable bank accounts are
required by subsection 3.1(b) to be maintained remains in full force and
effect;
4. The Gross Amount Due upon all EFC Receivables constituting
Eligible Receivables (i) shall constitute no more than $5,000,000, (ii) of
Foundation Health, a California Health Plan ("FHCHP"), shall constitute no
more than $2,500,000, and (iii) of any one Eligible Fronting Company (other
than FHCHP) shall constitute no more than $1,000,000;
(e) Each Eligible Fronting Company with EFC Receivables constituting
Eligible Receivables in excess of $250,000 shall have a Best rating of A-
or higher or, with respect to Foundation Health, a California Health Plan
and Foundation Health, a Texas Health Plan, and each other HMO or other
managed care company, shall have a S&P rating of BBB- or higher;
(f) The Seller's Insurance Agency Agreements with National Group Life
Insurance Company, Pioneer Life Insurance Company of Illinois and Manhattan
National Life Insurance Company shall be in full force and effect and no
notice of termination with respect to either of such agreements shall have
been given by any party; and
(g) All legal matters incident to the execution and delivery of this
Agreement and to the purchases by the Buyer of such Receivables shall be
reasonably satisfactory to counsel for the Buyer and counsel for L/C Bank.
Each sale of an Undivided Interest or Addition thereto on any Closing Date by
the Seller shall constitute a representation and warranty by the Seller that the
conditions to the purchase thereof on such Closing Date have been satisfied.
ARTICLE VII.
EVENTS OF TERMINATION
A. EVENTS OF TERMINATION. If any of the following events (herein called
"Termination Events") shall have occurred and be continuing:
1. The Seller shall fail, on any Settlement Date, to make any
payment reflected in the related Settlement Statement as being required to
be made by the Seller hereunder, or required to be made by the Seller
pursuant to subsection 3.4(c), on such Settlement Date;
2. The Seller shall fail to pay any other amount required to be paid
by the Seller hereunder within three Business Days after the date on which
such amount shall have become due and payable;
3. The Seller shall fail to observe or perform in any material
respect any covenant applicable to it contained (i) in subsection 5.2(f),
5.2(i), 5.2(j)(iv), 5.2(k), 5.2(l), 5.2(m), 5.2(n), 5.2(o), 5.2(p), 5.2(q)
, 5.2(s) or 5.2(t) and such failure shall continue for five days from the
date thereof or (ii) in any other provision of this Agreement and such
failure shall continue for five days from the date the Seller receives
notice thereof or an executive officer of Seller otherwise obtains actual
knowledge thereof;
4. Any representation, warranty, certification or statement made by
the Seller in this Agreement or in the Consent and Agreement or in any
certificate, financial statement or other document delivered pursuant to
this Agreement or the Consent and Agreement shall prove to have been
incorrect in any material respect when made; provided that no such breach
with respect to any Sold Receivable or Sold Receivables shall constitute a
Termination Event under this subsection 7.1(d) unless (i) the Buyer has
requested, pursuant to subsection 5.3 that the Seller repurchase such Sold
Receivable or Sold Receivables and (ii) the Seller has failed to pay
pursuant to subsection 5.3 to the Buyer an amount equal to the unpaid
balance of such Sold Receivable or Sold Receivables;
5. (i) The Seller, Financial Services or any Insurance Company
(other than an Eligible Fronting Company with respect to which (i) not more
than $250,000 of Receivables in the Portfolio of Eligible Receivables are
Receivables of such Eligible Fronting Company, and (ii) the Seller has
repurchased all of the Sold Receivables of such Eligible Fronting Company
within three (3) Business Days after receipt of a written request therefor
from the Buyer) shall commence any case, proceeding or other action
(A) under any existing or future law of any jurisdiction, domestic or
foreign, relating to bankruptcy, insolvency, reorganization or relief of
debtors, seeking to have an order for relief entered with respect to it, or
seeking to adjudicate it a bankrupt or insolvent, or seeking
reorganization, arrangement, adjustment, winding-up, liquidation,
dissolution, composition or other relief with respect to it or its debts,
or (B) seeking appointment of a receiver, trustee, custodian or other
similar official for it or for all or any substantial part of its assets,
or the Seller, Financial Services or any such Insurance Company shall make
a general assignment for the benefit of its creditors; or (ii) there shall
be commenced against the Seller, Financial Services or any such Insurance
Company any case, proceeding or other action of a nature referred to in
clause (i) above which (A) results in the entry of an order for relief or
any such adjudication or appointment or (B) remains undismissed,
undischarged or unbonded for a period of 90 days; or (iii) there shall be
commenced against the Seller, Financial Services or any Insurance Company
any case, proceeding or other action seeking issuance of a warrant of
attachment, execution, distraint or similar process against all or any
substantial part of its assets which results in the entry of an order for
any such relief which shall not have been vacated, discharged, or stayed or
bonded pending appeal within 90 such days from the entry thereof; or
(iv) the Seller, Financial Services or any such Insurance Company shall
take any action in furtherance of, or indicating its consent to, approval
of, or acquiescence in, any of the acts set forth in clause (i), (ii), or
(iii) above; or (v) the Seller, Financial Services or any such Insurance
Company shall generally not, or shall be unable to, or shall admit in
writing its inability to, pay its debts as they become due;
6. [RESERVED]
7. The Seller, Financial Services or any Insurance Company (except
any Insurance Company which is an Eligible Fronting Company) shall fail to
make any payment of principal, when required (after giving effect to any
grace periods) in respect of indebtedness for borrowed money with a value
in excess of $5,000,000, or there shall have occurred and be continuing an
event of default under any other agreement, contract or instrument relating
to indebtedness of the Seller, Financial Services or any such Insurance
Company with a value in excess of $5,000,000 which permits the holder of
such indebtedness to accelerate such indebtedness;
8. One or more judicial orders or decrees (not paid by or fully
covered by insurance) for the payment of money in excess, in the aggregate,
of more than $5,000,000 or its equivalent shall be rendered against the
Seller, Financial Services or any Insurance Company (except any Insurance
Company which is an Eligible Fronting Company), and such judgment or order,
or execution thereon, shall not have been paid, vacated, discharged, stayed
or bonded, if necessary, pending appeal or other appropriate proceeding or
motion within 90 days from the entry thereof;
9. On any Settlement Date, the Default Rate shall exceed 5.0% for
the period consisting of the fiscal quarter of the Seller preceding such
date;
10. Financial Services shall cease to own, directly or indirectly, at
least 51% (or such higher percentage as may be necessary to maintain voting
control) of the shares of the outstanding capital stock of the Seller;
11. The Consent and Agreement shall cease, for any reason, to be in
full force and effect, or any party thereto shall so assert in writing;
12. An Event of Default (as defined in the Reimbursement Agreement)
shall occur and be continuing;
13. On any Settlement Date (after giving effect to any purchases and
sales on such date and after giving effect to any reassignment required
pursuant to subsection 2.4 on such date), the Undivided Interest of the
Buyer (as of the last day of the related Settlement Period) in the Seller's
Portfolio of Eligible Receivables (expressed as a percentage) shall exceed
90%;
14. the Best rating (to the extent it has one) for any Insurance
Company (except any Insurance Company which is an Eligible Fronting Company
or Pioneer Life Insurance Company of Illinois) shall fall below B+ or the
Best rating for Pioneer Life Insurance Company of Illinois shall fall below
B-;
15. the Policy Lapse Rates for any quarterly fiscal period shall
exceed 7.5% for major medical or long term disability, 5.0% for Medicare
supplement or 3.0% for life annuity business;
16. the Present Value of Assigned Commissions, as set forth in any
M&R Report, shall be less than 300% of the Net Purchase Outstanding at such
time, provided that, notwithstanding any other provision in this Agreement
(or any exhibit or schedule hereto) the parties hereto confirm that when
computing compliance with this Section 7.1(p), the Seller shall include DBP
Lead Commissions when calculating the Present Value of Assigned
Commissions;
17. [RESERVED]
18. any Insurance Company (other than an Eligible Fronting Company)
(i) with a Best's rating on the date hereof shall fail to have a Best's
rating after such date or (ii) which obtains a Best's rating on a date
after the date hereof shall fail to have a Best's rating after such date;
19. any covenant contained in the Financial Services Credit Agreement
is breached (and the parties hereto agree such a breach shall constitute a
Termination Event hereunder regardless of whether such breach constitutes
an "Event of Default" under the Financial Services Credit Agreement) or any
note delivered in connection with such agreement shall be declared due and
payable in either event as the result of the occurrence of an "Event of
Default" under such agreement;
20. Financial Services shall fail to observe or perform in any
material respect any covenant applicable to it in the Consent and Agreement
and such failure shall continue for five days from the date thereof;
21. Financial Services shall fail (i) for any two consecutive
quarterly fiscal periods or (ii) for any fiscal year to earn profits on a
consolidated basis as calculated in accordance with GAAP; provided, however
that this condition shall not be breached as a result of a writeoff of
deferred policy acquisition costs ("DPAC"), in excess of normal recurring
DPAC amortization determined in accordance with past practice, based on a
recoverability analysis of policies of insurance conducted by M&R, written
evidence of which analysis shall be provided to the Buyer at its request;
or
22. any Subsidiary Insurance Company shall fail for any quarterly
fiscal period to earn profits as calculated in accordance with Statutory
Accounting Practices required or permitted by the applicable insurance
regulatory authority; provided, however, that this condition shall not be
breached unless at such time such Subsidiary Insurance Company shall have
failed to earn profits for the prior twelve month period (including such
quarterly fiscal period).
then, (A) if such event is a Termination Event described in paragraph (e) above
affecting or in any way relating to the Seller, automatically the commitment of
the Buyer to purchase Eligible Receivables hereunder shall thereupon terminate
without notice of any kind, which is hereby waived by the Seller and (B) if such
event is any other Termination Event, the Buyer may, by notice to the Seller
terminate the Buyer's commitment to purchase Undivided Interests and Additions
hereunder; provided, however, if the Buyer is prevented from giving such notice
by any applicable law or court order, such termination of the Buyer's commitment
hereunder shall be automatic as provided in clause (A) above.
ARTICLE VIII.
MISCELLANEOUS
A. FURTHER ASSURANCES. The Seller agrees, from time to time, to do and
perform any and all acts and to execute any and all further instruments required
or reasonably requested by the Buyer more fully to effect the purposes of this
Agreement and the sales of the Eligible Receivables hereunder, including,
without limitation, the execution of any financing statements or continuation
statements relating to Receivables for filing under the provisions of the
Uniform Commercial Code of any applicable jurisdiction.
B. PAYMENTS. Each payment to be made by either the Buyer or the Seller
hereunder shall be made on the required payment date in lawful money of the
United States and in immediately available funds and, in the case of payments by
the Seller, at the office of ANB located at 33 North LaSalle Street, Chicago,
Illinois 60690.
C. COSTS AND EXPENSES. The Seller agrees to pay all reasonable out-of-
pocket costs and expenses of the Buyer (including any expenses incurred in
connection with computer monitoring and related services and fees and
disbursements of the Buyer's counsel) in connection with (a) the preparation,
execution, delivery and administration of this Agreement, the Consent and
Agreement, any Financing Document and any other agreements contemplated hereby
or thereby, (b) the sale of Undivided Interests hereunder, (c) the perfection as
against all third parties whatsoever of the Buyer's right, title and interest
in, to and under the Receivables, (d) the enforcement by the Buyer of the
obligations and liabilities of the Seller under this Agreement, the Consent and
Agreement or any Financing Document and (e) the maintenance by the Buyer of, and
the obligations of the Buyer in connection with, any bank accounts referred to
in subsection 3.1(b) and the Seller agrees to pay all out-of-pocket costs and
expenses of the Buyer (including, without limitation, the fees and disbursements
of the Buyer's counsel) in connection with the enforcement by the Buyer of its
rights against the Seller under this Agreement, the Consent and Agreement and
any Financing Document. In addition, the Seller agrees to indemnify the Buyer
and the Buyer's officers, directors, employees, agents and shareholders
(collectively, the "Indemnified Parties") from and against any and all other
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses or disbursements of any kind or nature whatsoever (i) which may
at any time be imposed on, incurred by or asserted against the Indemnified
Parties in any way relating to or arising out of this Agreement or the
transactions contemplated hereby or by the Financing Documents or by the
issuance of the Notes by the Buyer or any action taken or omitted by the
Indemnified Parties under or in connection with any of the foregoing (all such
other liabilities, obligations, losses, damages, penalties, actions, judgments,
suits, costs, expenses and disbursements being herein called "Indemnified
Liabilities") and (ii) which would not have been imposed on, incurred by or
asserted against the Indemnified Parties but for its having entered into this
Agreement, provided, however, that the Seller shall in no event be liable to the
Indemnified Parties for any Indemnified Liabilities resulting from the gross
negligence or willful misconduct of the Indemnified Parties or Indemnified
Liabilities relating to or resulting from an employee benefit plan of the
Indemnified Parties covered by the Employee Retirement Income Security Act of
1974, as amended, provided, further, that nothing in this Section 8.3 shall be
deemed to constitute a guarantee of collection of the Receivables. The
agreements in the two preceding sentences shall survive the termination of this
Agreement.
D. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE DOMESTIC LAWS OF THE STATE OF ILLINOIS, WITHOUT GIVING
EFFECT TO ANY CHOICE OF LAW OR CONFLICT OF LAW PROVISION OR RULE (WHETHER OF THE
STATE OF ILLINOIS OR ANY OTHER JURISDICTION) THAT WOULD CAUSE THE APPLICATION OF
THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF ILLINOIS.
E. NO WAIVER; CUMULATIVE REMEDIES. No failure to exercise and no delay
in exercising, on the part of the Buyer, any right, remedy, power or privilege
hereunder, shall operate as a waiver thereof; nor shall any single or partial
exercise of any right, remedy, power or privilege hereunder preclude any other
or further exercise thereof or the exercise of any other right, remedy, power or
privilege. The rights, remedies, powers and privileges herein provided are
cumulative and not exhaustive of any rights, remedies, powers and privileges
provided by law.
F. AMENDMENTS. This Agreement may not be modified, amended, waived,
supplemented or, except as provided in Sections 4.2 or 7.1, terminated except
pursuant to a written instrument executed by the Seller and the Buyer.
G. SEVERABILITY. If any provision hereof is void or unenforceable in any
jurisdiction, such voiding or unenforceability shall not affect the validity or
enforceability of (i) such provision in any other jurisdiction or (ii) any other
provision hereof in such or any other jurisdiction.
H. NOTICES. All notices and other communications provided for hereunder
shall be in writing and, if to the Buyer, mailed, delivered, faxed or
transmitted to it at National Funding Corporation, Box 8841, Second Floor, 900
Market Street, Wilmington, Delaware 19801 (with a copy to Banc One Capital
Corporation, 10 West Broad Street, Suite 400, Columbus, Ohio 43215, Attention:
Samuel J. Butler, and to American National Bank and Trust Company of Chicago, 33
North LaSalle Street, Chicago, Illinois 60690, Attention: Arthur W. Murray and
to each "Participant" (as such term is defined in the Reimbursement Agreement)
at the addresses provided for in Schedule I to the Reimbursement Agreement); or
if to the Seller, mailed, delivered, faxed or transmitted to it at Design
Benefit Plans, Inc., 1750 East Golf Road, Suite 450, Schaumburg, Illinois 60173,
Attention: General Counsel; or as to such party at such other address or fax
number as shall be designated by such party in a written notice to the other
parties hereto. Unless otherwise expressly provided herein, each such notice
shall be deemed to have been given or made when delivered by hand, or three days
after depositing in the mail, first class postage prepaid, or, in the case of
telecopy notice, upon confirmation by the sender of receipt, or in the case of
overnight courier delivery, one day following deposit with reputable overnight
courier for next business morning delivery, or in the case of telegraphic
notice, when delivered to the telegraph company, or, in the case of telex
notice, when sent answerback received. Any communication with respect to a
change of address shall be deemed to be given or made when received by the party
to whom such communication was sent.
I. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
inure to the benefit of the Seller and the Buyer and their respective successors
and assigns, except that the Seller may not assign or transfer any of its rights
or obligations under this Agreement without the prior written consent of the
Buyer and the Buyer may not assign or transfer any of its rights or obligations
under this Agreement except as contemplated by the Buyer Security Agreement.
J. COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by different parties hereto in separate counterparts, each of
which when so executed shall be deemed to be an original, and all of which taken
together shall constitute one and the same agreement.
K. SUBMISSION TO JURISDICTION. The Buyer and the Seller hereby
irrevocably consent and agree that any legal action, suit or proceeding arising
out of or in any way connected with this Agreement may be instituted or brought
by the Buyer or the Seller in the courts of the State of Illinois or Cook
County, Illinois, or in the United States Courts for the Northern District of
Illinois, as the Buyer or the Seller may elect, and by execution and delivery of
this Agreement, the Buyer and the Seller hereby irrevocably accept and submit
to, for themselves and in respect of their property, generally and
unconditionally, the non-exclusive jurisdiction of any such court, and to all
proceedings in such courts. The Buyer and the Seller irrevocably consent to
service of any summons and/or legal process by registered or certified United
States air mail, postage prepaid, to the Buyer or the Seller at the addresses
set forth below, such method of service to constitute, in every respect,
sufficient and effective service of process in any legal action or proceeding.
Nothing in this Agreement shall affect the right to service of process in any
other manner permitted by law or limit the right of the Buyer or the Seller to
bring actions, suits or proceedings in the court of any other jurisdiction. The
Buyer and the Seller further agree that final judgment against either one of
them in any such legal action, suit or proceeding shall be conclusive and may be
enforced in any other jurisdiction, within or outside the United States of
America, by suit on the judgment, a certified or exemplified copy of which shall
be conclusive evidence of the fact and the amount of the liability.
L. WAIVER OF JURY TRIAL. The Seller and the Buyer each waive all right
to trial by jury in any action or proceeding arising out of or relating to any
of the transactions contemplated by this Agreement.
M. ENTIRE AGREEMENT; AMENDMENT AND RESTATEMENT. This Agreement, and the
Related Agreements and the agreements, documents and instruments executed in
connection herewith and therewith, constitute the entire agreement between the
Seller and the Buyer with respect to the subject matter herein. This Agreement
amends, supersedes, and restates in its entirety the Second Amended and Restated
Receivables Purchase Agreement, dated as of October 1, 1994, by and between the
Seller and the Buyer, as amended (the "Prior Purchase Agreement"); provided that
(i) the Buyer shall retain all of its right, title and interest in and to the
Undivided Interest (as defined in the Prior Purchase Agreement) outstanding on
the date hereof and (ii) all of the Seller's liabilities and obligations under
the Prior Purchase Agreement shall remain outstanding and be enforceable under
the terms of this Agreement and the Related Agreements until satisfied in full.
* * * * *
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized, all as of the
day and year first above written.
DESIGN BENEFIT PLANS, INC.,
as Seller
By:
Title: Executive Vice President
NATIONAL FUNDING CORPORATION, as Buyer
By:
Title: Vice President
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(t)
PIONEER FINANCIAL SERVICES, INC.
EXECUTIVE DEFERRED COMPENSATION PROGRAM
C E R T I F I C A T E
I, ___________________________, Secretary of Pioneer Financial
Services, Inc., hereby certify that the foregoing is a correct copy of the
Pioneer Financial Services, Inc. Executive Deferred Compensation Program,
effective January 1, 1996.
Dated this ____ day of ______________, 199_.
Secretary as Aforesaid
(Corporate Seal)
TABLE OF CONTENTS
PAGE
SECTION 1 1
Purpose 1
Purpose 1
Employers 1
Effective Date 1
Administrator 1
Notices 2
SECTION 2 3
Eligibility and Participation 3
Eligibility 3
Continuity of Participation 3
SECTION 3 5
Enrollment and Deferral Elections 5
Bonus Deferral Elections 5
Period for Which Deferral Election Effective 6
Distribution Elections 6
Deferral Account 7
Adjustment of Participants' Accounts 7
Statement of Account 11
SECTION 4 13
Distribution of Deferral Accounts 13
Distributions 13
Early and Normal Retirement Distributions 13
Designation of Beneficiary 14
Withholding; Employment Taxes 14
SECTION 5 15
Administration and Interpretation 15
SECTION 6 16
Miscellaneous 16
No Right to Company Assets; Limitations Related to Company Stock 16
No Employment Rights 17
Facility of Payment 17
Nonassignability 17
Effect on Other Benefits 18
Independence of Program 19
Responsibility For Legal Effect 19
Action by the Company 19
Successors, Acquisitions, Mergers, Consolidations 19
Gender and Number 19
Governing Laws 20
SECTION 7 21
Amendment and Termination 21
PIONEER FINANCIAL SERVICES, INC.
EXECUTIVE DEFERRED COMPENSATION PROGRAM
SECTION 1
Purpose
1.1. Purpose. PIONEER FINANCIAL SERVICES, INC. EXECUTIVE DEFERRED
COMPENSATION PROGRAM (the "program") has been established by PIONEER FINANCIAL
SERVICES, INC. (the "company") to enable designated employees to elect to defer
a portion of their bonuses and other cash compensation, subject to the terms of
the program.
1.2. Employers. The program as set forth below shall apply to
eligible employees of the company and each domestic subsidiary of the company
which adopts the program with the consent of the administrator. The company and
each domestic subsidiary of the company which adopts the program with the
administrator's consent will be referred to as an "employer" and may be
referred to collectively as the "employers."
1.3. Effective Date. The "effective date" of the program as set
forth below is January 1, 1996.
1.4. Administrator. The program will be administered by the company.
1.5. Notices. Any notice or document relating to the program which
is to be filed with the company may be delivered, or mailed by registered or
certified mail, postage prepaid, to __________________, in care of Pioneer
Financial Services, Inc., 304 North Main Street, Rockford, Illinois 61101.
SECTION 2
Eligibility and Participation
2.1. Eligibility. Each calendar year (beginning with the calendar
year ending December 31, 1996), the administrator will designate before the
beginning of the calendar year those employees who are eligible to participate
in the program. In general, employees eligible for the program will be limited
to a select group of management and highly-compensated employees with annual
compensation in excess of $100,000. An employee designated as eligible to
participate in the program for any calendar year may become a participant by
making a deferral election on a timely basis as described in subsection 3.1 or
3.2 below.
2.2. Continuity of Participation. A participant in the program
who separates from service with the company and all its subsidiaries and
affiliates will cease participation and will become entitled to distributions
as described in Section 4. However, the separation from service of an employee
with one employer will not interrupt the continuity of his participation if,
concurrently with or immediately after such separation, he is employed by one
or more of the other employers. A participant who separates from service with
all employers but remains in the employ of a subsidiary or affiliate of the
company which has not adopted the program, will become entitled to
distributions on the respective distribution dates selected by him pursuant
to subsection 3.4. A participant will separate from service upon the first to
occur of the following:
(a) Retirement on or after attaining age 65 years
(b) Retirement on account of disability at any age, as
determined by a qualified physician selected by the
administrator. A participant will be considered
disabled for purposes of the program if, on account of
a disability, he is no longer capable of performing the
duties assigned to him by his employer.
(c) The participant's death
(d) Resignation or dismissal from the employee of all the
employers before retirement and for a reason other than
disability.
SECTION 3
Enrollment and Deferral Elections
3.1. Bonus Deferral Elections. In order to defer a portion of his
bonus for any calendar year, an employee designated as a participant for that
calendar year may irrevocably elect to defer not less than 10 percent nor more
than 100 percent (in whole five percent increments) of his bonus for that year.
The amount deferred by a participant under the preceding sentence, together
with the compensation deferral elected under subsection 3.2, shall not be less
than $5,000 for any calendar year. A participant must make his bonus deferral
election in advance by signing a deferral agreement and filing it with the
administrator no later than the December 31 which precedes the calendar year to
which the election relates. A participant's deferral election filed with the
administrator is irrevocable on and after the December 31 deadline for the
election.
3.2 Compensation Deferral Elections. In order to defer a portion of
his cash compensation for any calendar year, an employee designated as a
participant for that calendar year may irrevocably elect to defer not less than
1% nor more than 50% (in whole 1% increments) of his cash compensation for that
year. Compensation deferral and bonus deferral elections are subject to the
$5,000 minimum set forth in subsection 3.1. A participant's "cash compensation"
means the participant's base pay as paid by an employer hereunder, and for
purposes of a deferral election a participant's rate of base pay on January 1
of any year shall be considered to remain at the same rate during that calendar
year. A participant must make his compensation deferral election in advance by
signing a compensation deferral agreement and filing it with the administrator
no later than the December 31 which precedes the calendar year to which the
election relates. A participant's compensation deferral election filed with the
administrator is irrevocable on and after the December 31 deadline for the
election.
3.3. Period for Which Deferral Election Effective. A participant's
deferral election shall remain in effect only for the calendar year specified
in the deferral agreement. No deferral election shall be effective for more
than one calendar year. A participant must file a separate deferral election
in advance of each calendar year in order to make deferrals for that year.
<PAGE>
3.4. Distribution Elections. Each deferral election made by a
participant under subsections 3.1 and 3.2 may, but need not, include an
election of the date on which the amount of such deferral (together with any
investment gains or losses thereon) will be distributed. Such date shall be
referred to as the "distribution date" and shall occur no later than March 15
(based on the December 31 valuation) following one of the following dates:
the second, third, fourth, fifth, sixth, seventh, eighth, ninth or tenth
calendar year after the calendar year to which the deferral election relates.
The distribution date, once elected by the participant, shall be irrevocable,
subject only to subsection 4.2.
3.5. Deferral Account. The administrator shall maintain in the name
of each participant a bookkeeping account known as the participant's "deferral
account." A participant's deferral account shall include a subaccount for each
calendar year that a participant's deferral election is in effect. Each such
subaccount shall reflect (i) the amount deferred during that year and
(ii) investment gains or losses on the investment funds and investment options
described in subsection 3.7 and 3.8. Deferred amounts shall be credited to
subaccounts as of the date bonuses or cash compensation would otherwise have
been paid to the participant but for his deferral election. Subaccounts will be
adjusted from time to time to reflect investment gains and losses, as provided
in subsection 3.6.
3.6. Adjustment of Participants' Accounts. As of each March 31, June
30, September 30 and December 31 (each date is referred to below as an
"accounting date"), the administrator shall:
(a) First, charge to the proper accounts all payments or
distributions made since the last preceding accounting date
that have not been charged previously;
(b) Next, credit participants' accounts with amounts deferred
which were applied to company stock as provided in subsection
3.7;
(c) Next, as to deferrals other than those in (b) above, credit
participants' accounts with a portion of the amounts deferred
on behalf of the participant since the last preceding
accounting date, to equitably reflect that deferrals were
made from time to time during the accounting period;
(d) Next, credit participants' accounts with their pro rata share
of any increase or charge such accounts with their pro rata
share of any decrease in the adjusted net worth (as defined
below) of each investment fund in which such accounts have an
interest of that date;
(e) Next, allocate and credit deferred amounts, not already
credited under subparagraph (b) above, that are to be
credited as of that date.
The "adjusted net worth" of an investment fund as at any date means the then
net worth of such investment fund as determined by the administrator, less
an amount equal to the deferred amounts deposited in such fund but not yet
allocated to the accounts of the participants.
3.7. Company Stock and Investment Funds. Until a participant attains
his target for stock ownership, all deferred amounts under the program will be
credited as a deemed investment consisting of shares of common stock of Pioneer
Financial Services, Inc. (the "company stock"). Company stock will be credited
to a participant's account taking into account a deemed purchase discount of
15%. In addition, the administrator may designate one or more investment funds
to form a part of this program, and the administrator may make investment fund
elections available to participants who have satisfied their targets for stock
ownership. The administrator may allow participants to elect one or more of the
investment funds for the investment of all or a portion of the amounts deferred
by the participant under the program. Each such election shall be made at such
time, in such manner and with respect to such investment funds as the
administrator shall determine, and shall be effective only in accordance with
such rules as the administrator shall establish. If a participant fails to make
an election under this subsection, his deferrals will be invested in a default
investment fund designated by the administrator. Prior to an accounting date, a
participant may elect in writing that all or part of his interest in an
investment fund be liquidated and the proceeds thereof transferred to one or
more of the other investment funds, in accordance with rules established from
time to time by the administrator. The investment funds described in this
subsection and the individual investment option in subsection 3.8 are for
recordkeeping purposes only and do not allow participants to direct any company
or trust assets, and this subsection does not create in any participant any
rights greater than those described in subsection 6.1. If there is a deemed
purchase or sale of the common stock of the company, then it shall be subject
to the company's policies which restrict trading in company securities, and
(ii) the election shall not be given effect until such policies would
allow the individual 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.
3.8. Individual Investment Option. In addition to the investment
funds described in subsection 3.7, amounts credited to a participant's deferral
account may be deemed credited to an individual investment option (as
hereinafter defined) chosen by such participant. The investment experience of
each individual investment option will be calculated by reference to the
closing price (as hereinafter defined) or net asset value of amounts deemed
credited to such individual 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 individual investment
option 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. The individual investment
option will consist of 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.
All money market funds which are elected as investment options must be money
market funds which invest solely in tax-exempt securities. A participant
may change his investment option by election made in accordance with
subsection 3.7. 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.
3.9. No Responsibility for Company Stock or Investment Decisions.
The investment funds, the company stock investment and other investment options
described in the plan are for recordkeeping purposes only and do not allow
participants to direct the manner of investment of any company or trust assets,
and no investment election creates in any participant rights greater than those
specified in subsection 6.1. Responsibility for the consequences of the company
stock investment, as well as for all decisions on investment funds and options,
belongs solely to the participant, and the company (including its employees,
officers and agents) provides no advice with respect to, and assumes no
responsibility for, any consequences of the company stock investment or of a
participant's investment elections.
3.10. Statement of Account. As soon as practicable after the end of
each calendar quarter the administrator shall furnish each participant with a
statement of the balance credited to the participant's deferral account and the
balance credited to each subaccount as at the end of that period.
SECTION 4
Distribution of Deferral Accounts
4.1. Distributions. Subject to subsection 4.2, amounts deferred
under this program for each calendar year (and investment gains and losses
thereon) shall be distributed in a lump sum in cash to the participant on the
applicable distribution date elected by the participant pursuant to subsection
3.4; provided, however, that if on any distribution date, any investment gains
or losses under subsection 3.6 cannot then be determined, such distribution
will be delayed until the accounting steps described in subsection
3.6 have been completed.
4.2. Early and Normal Retirement Distributions. If a participant
separates from service with the employers prior to attainment of age 65, the
entire balance in the participant's deferral account shall be distributed to
him in a lump sum in cash on or about March 15 (the "early distribution date")
following the calendar year in which the participant separates from service,
unless the administrator in its sole discretion determines that distributions
shall occur on the distribution dates elected by the participant. If a
participant separates from service with the employers on or after attainment of
age 65, the balances in the participant's deferral account shall be distributed
to the participant on the applicable distribution dates elected by the
participant pursuant to subsection 3.3, unless the administrator in its sole
discretion determines that distribution shall be made in a single sum payment
or in installations over a period not to exceed ten years. Distribution shall
be made to the participant or, in the event of his death, to his beneficiary.
4.3. Designation of Beneficiary. A participant may designate a
beneficiary under this program by filing a written notice with the
administrator in such form as it requires. A participant may from time to
time change his designated beneficiary without the consent of such
beneficiary by filing a new designation in writing with the administrator.
If no designation under this program is in effect at the death of the
participant, the beneficiary shall be the spouse of the participant
at the time of his death or, if no spouse is living at the death of
the participant, the representative of the participant's estate. A
participant's beneficiary designation form may specify whether payment
is to be made to the beneficiary in a single sum payment or in
installments over a period not to exceed ten years.
4.4. Withholding; Employment Taxes. To the extent required by law in
effect at the time distribution is made from the program, the employers shall
withhold any taxes required to be withheld by federal, state or local
governments.
SECTION 5
Administration and Interpretation
The administrator shall administer and interpret the program, and any
interpretation by the administrator shall be final and binding upon
participants and beneficiaries. The administrator may adopt such rules
and regulations relating to the program as it deems necessary or advisable.
The administrator may delegate administrative responsibilities to advisors
or other persons who may or may not be employees of the company and may rely
upon information or opinions of legal counsel or experts selected to render
advice with respect to the program. If a member of the administrator
is a participant, he may not decide or determine any matter or question
concerning his benefits under the program that he would not have the right
to decide or determine if he were not a member.
SECTION 6
Miscellaneous
6.1. No Right to Company Assets; Limitations Related to Company
Stock. No participant or other person shall acquire by reason of the program
any right in or title to any assets, funds or property of the employers
whatsoever including, without limiting the generality of the foregoing, any
specific funds, assets, or other property which the employers, in their sole
discretion, may set aside in anticipation of a liability hereunder. Any
benefits which become payable hereunder shall be paid from the general assets
of the employers. A participant shall have only a contractual right to the
amounts, if any, payable hereunder to that participant. The employers'
obligations under this program are not secured or funded in any manner. Even
though benefits provided under the plan are not funded, the company intends to
establish a trust to assist in the payment of benefits. Company stock held by
such a trust may be subject to restrictions that limit the sale of such stock
in the public markets. Accordingly, to the extent a participant's account is
deemed invested in company stock, there may be significant delays in the
distribution of plan benefits and in any transfer from company stock to other
deemed investments, pending liquidation of shares of company stock.
6.2. No Employment Rights. Nothing herein shall constitute a
contract of continuing service or in any manner obligate the company or any of
its subsidiaries to continue the employment of any participant, or obligate any
participant to continue in the employment of the company or any of its
subsidiaries, and nothing herein shall be construed as fixing or regulating the
compensation payable to a participant.
6.3. Facility of Payment. When a person entitled to benefits under
the program is under legal disability, or, in administrator's opinion, is in
any way incapacitated so as to be unable to manage his financial affairs, the
administrator may direct payment of benefits to such person's legal
representative, or to a relative or friend of such person for such person's
benefit, or the administrator may direct the application of such benefits for
the benefit of such person. Any payment made in accordance with the preceding
sentence shall be a full and complete discharge of any liability for such
payment under the plan.
6.4. Nonassignability. No participant or other person shall have any
right to commute, sell, assign, pledge, anticipate, mortgage or otherwise
encumber, transfer or convey in advance of actual receipt the amounts, if any,
payable hereunder. No amounts payable hereunder shall, prior to actual payment,
be subject to claims of creditors, seizure or sequestration for the payment of
any debts, judgments, alimony, domestic relations order or separate maintenance
owed by the participant or any other person, or be transferable by operation of
law in the event of the participant's or any other person's bankruptcy or
insolvency. Notwithstanding the foregoing, if an estate or trust is a
beneficiary entitled to distributions from the program upon the death of the
participant, the representatives of the estate or the trustees of the trust
may assign the right to receive such payments to the persons, estates or
trusts beneficially entitled thereto, and the administrator may rely
conclusively and without any liability on the certification.
6.5. Effect on Other Benefits. Except as provided below in this
subsection, the participant's compensation for purposes of calculating his
awards and benefits under any employee benefit plan or program maintained by
the company shall not be reduced on account of deferrals under this program.
However, amounts deferred under this program shall not be included when
calculating a participant's benefits or contributions under any 401(k) plan or
other plan sponsored by the company which is qualified under Section 401(a)
of the Internal Revenue Code. Any distributions made from this program shall be
excluded from a participant's compensation in years distributed for purposes of
calculating the participant's awards and benefits under any employee benefit
plan or program (other than this program) maintained by the company.
6.6. Independence of Program. Except as otherwise expressly provided
herein, the program shall be independent of, and in addition to, any employment
agreement or other plan or rights that may exist from time to time between an
employer and a participant in the program.
6.7. Responsibility For Legal Effect. No representations or
warranties, express or implied, are made by the employers or the administrator
and neither the employers nor the administrator assumes any responsibility
concerning the legal, tax, or other implications or effects of the program.
6.8. Action by the Company. Any action required or permitted to be
taken under the program by the company shall be by one or more officers
designated by the Board of Directors of the company.
6.9. Successors, Acquisitions, Mergers, Consolidations. The terms
and conditions of the program shall inure to the benefit of and bind the
employers, the participants, their successors, assigns, and personal
representatives.
6.10. Gender and Number. Wherever appropriate herein, the masculine
may mean the feminine and the singular may mean the plural or vice versa.
6.11. Governing Laws. This program shall be construed and
administered according to the laws of the State of Illinois.
6.12 Claims Procedure. The company will provide notice in writing to
any participant or beneficiary whose claim for benefits under the plan is
denied, and the company shall afford such participant or beneficiary a full and
fair review of its decision if so requested. The company has discretionary
authority and responsibility to construe and interpret the provisions of the
plan and make factual determinations thereunder, including the power to
determine the rights or eligibility of employees or participants and any other
persons, and the amounts of their benefits under the plan, and to remedy
ambiguities, inconsistencies or omissions, and each such determination by the
company shall be binding on all parties. Any interpretation of the provisions
of the plan and any decisions on any matter within the discretion of the company
made by the company in good faith shall be binding on all persons. Any
misstatement or other mistake of fact shall be corrected when it becomes known
and the company shall make such adjustment on account thereof as it considers
equitable and practicable.
SECTION 7
Amendment and Termination
The company reserves the right, in its sole discretion, to discontinue
or completely terminate the program at any time. If the program is discontinued
with respect to future deferrals, participants' deferral account balances shall
be distributed on the distribution dates elected in accordance with subsection
3.1, unless the administrator designates an earlier distribution date. As of
the date designated by the administrator following the date of complete
termination, each participant shall receive distribution of his entire
deferral account balance as if his elected distribution dates had occurred. The
program may be amended by a written instrument executed by the company,
provided that an amendment of the program may not reduce the balance in a
participant's deferral account as of the date the amendment is adopted.
Exhibit 10(u)
Execution
Copy
CREDIT AGREEMENT
Dated as of August 30, 1995
between
PIONEER FINANCIAL SERVICES, INC.
and
AMERICAN NATIONAL BANK AND TRUST
COMPANY OF CHICAGO,
FIRSTAR BANK MILWAUKEE, N.A.,
BANK ONE, ROCKFORD, NA
and
LASALLE NATIONAL BANK
(Term Loan B Credit Agreement)
TABLE OF CONTENTS
Page
SECTION 1
CERTAIN DEFINITIONS . . . . . . . . . . . . 1
SECTION 1.1 Terms Defined in this Agreement . . . . . . . . . . . . 1
SECTION 2
TERM LOAN; BORROWING PROCEDURES . . . . . . . . . 10
SECTION 2.1 Term Loan . . . . . . . . . . . . . . . . . . . . . . . 10
SECTION 2.2 Disbursement. . . . . . . . . . . . . . . . . . . . . . 10
SECTION 2.3 Repayment of Principal of the Loans . . . . . . . . . . 10
SECTION 2.4 Optional Prepayments. . . . . . . . . . . . . . . . . . 10
SECTION 2.5 Termination of the Loans; Termination Date. . . . . . . 11
SECTION 3
NOTES EVIDENCING THE LOANS . . . . . . . . . . . 11
SECTION 3.1 Notes . . . . . . . . . . . . . . . . . . . . . . . . . 11
SECTION 4
INTEREST, FEES AND COSTS . . . . . . . . . . . 11
SECTION 4.1 Interest . . . . . . . . . . . . . . . . . . . . . . . 11
SECTION 4.2 Conversion Elections. . . . . . . . . . . . . . . . . . 12
SECTION 4.3 Closing Fees. . . . . . . . . . . . . . . . . . . . . . 13
SECTION 4.4 Computation of Interest. . . . . . . . . . . . . . . . 13
SECTION 4.5 Increased Costs; Capital Adequacy . . . . . . . . . . . 13
SECTION 4.6 Funding Losses. . . . . . . . . . . . . . . . . . . . . 14
SECTION 5
MAKING OF PAYMENTS . . . . . . . . . . . . . 15
SECTION 5.1 Payments by the Company . . . . . . . . . . . . . . . . 15
SECTION 5.2 Payments by each Bank. . . . . . . . . . . . . . . . . 15
SECTION 5.3 Setoff . . . . . . . . . . . . . . . . . . . . . . . . 15
SECTION 5.4 Sharing of Payments. . . . . . . . . . . . . . . . . . 16
SECTION 6
REPRESENTATIONS AND WARRANTIES . . . . . . . . . . 16
SECTION 6.1 Corporate Organization . . . . . . . . . . . . . . . . 16
SECTION 6.2 Authorization; No Conflict . . . . . . . . . . . . . . 16
SECTION 6.3 Validity and Binding Nature . . . . . . . . . . . . . . 17
SECTION 6.4 Financial Statements . . . . . . . . . . . . . . . . . 17
SECTION 6.5 Litigation and Contingent Liabilities . . . . . . . . . 17
SECTION 6.6 Employee Benefit Plans . . . . . . . . . . . . . . . . 18
SECTION 6.7 Investment Company Act . . . . . . . . . . . . . . . . 18
SECTION 6.8 Regulation U . . . . . . . . . . . . . . . . . . . . . 18
SECTION 6.9 Accuracy of Information . . . . . . . . . . . . . . . . 18
SECTION 6.10 Labor Controversies . . . . . . . . . . . . . . . . . . 18
SECTION 6.11 Tax Status . . . . . . . . . . . . . . . . . . . . . . 19
SECTION 6.12 No Default . . . . . . . . . . . . . . . . . . . . . . 19
SECTION 6.13 Compliance with Applicable Laws . . . . . . . . . . . . 19
SECTION 6.14 Insurance . . . . . . . . . . . . . . . . . . . . . . . 19
SECTION 6.15 Solvency. . . . . . . . . . . . . . . . . . . . . . . . 19
SECTION 6.16 Use of Proceeds. . . . . . . . . . . . . . . . . . . . 20
SECTION 6.17 Subsidiaries. . . . . . . . . . . . . . . . . . . . . . 20
SECTION 7
COVENANTS . . . . . . . . . . . . . . . 20
SECTION 7.1 Reports, Certificates and Other Information . . . . . . 20
(a) Annual Report. . . . . . . . . . . . . . . . . . . . . 20
(b) Interim Reports. . . . . . . . . . . . . . . . . . . . 21
(c) Statutory Statements. . . . . . . . . . . . . . . . . . 21
(d) Reports to SEC. . . . . . . . . . . . . . . . . . . . . 21
(e) Certificates . . . . . . . . . . . . . . . . . . . . . 21
(f) Notice of Default, Litigation and ERISA Matters . . . . 21
(g) Other Information . . . . . . . . . . . . . . . . . . . 22
SECTION 7.2 Corporate Existence and Franchises . . . . . . . . . . 22
SECTION 7.3 Books, Records and Inspections . . . . . . . . . . . . 22
SECTION 7.4 Insurance . . . . . . . . . . . . . . . . . . . . . . . 22
SECTION 7.5 Taxes and Liabilities . . . . . . . . . . . . . . . . . 22
SECTION 7.6 Cash Flow Coverage . . . . . . . . . . . . . . . . . . 22
SECTION 7.7 Net Worth. . . . . . . . . . . . . . . . . . . . . . . 23
SECTION 7.8 Intentionally Omitted. . . . . . . . . . . . . . . . . 23
SECTION 7.9 Indebtedness. . . . . . . . . . . . . . . . . . . . . . 23
SECTION 7.10 Risk-Based Capital . . . . . . . . . . . . . . . . . . 23
SECTION 7.11 Real Estate Concentration. . . . . . . . . . . . . . . 23
SECTION 7.12 Investment Quality. . . . . . . . . . . . . . . . . . . 23
SECTION 7.13 Intentionally Omitted. . . . . . . . . . . . . . . . . 23
SECTION 7.14 Insurance Company Leverage Ratio. . . . . . . . . . . 23
SECTION 7.15 Insurance Ratings. . . . . . . . . . . . . . . . . . . 23
SECTION 7.16 Intentionally Omitted. . . . . . . . . . . . . . . . . 24
SECTION 7.17 Change in Nature of Business . . . . . . . . . . . . . 24
SECTION 7.18 Depository Relationship . . . . . . . . . . . . . . . . 24
SECTION 7.19 Employee Benefit Plans . . . . . . . . . . . . . . . . 24
SECTION 7.20 Use of Proceeds . . . . . . . . . . . . . . . . . . . . 24
SECTION 7.21 Other Agreements . . . . . . . . . . . . . . . . . . . 24
SECTION 7.22 Compliance with Applicable Laws . . . . . . . . . . . . 25
SECTION 7A
UNRESTRICTED SUBSIDIARIES . . . . . . . . . . . 25
SECTION 7A.1 Unrestricted Subsidiaries. . . . . . . . . . . . . . . 25
SECTION 7A.2 Additional Unrestricted Subsidiaries. . . . . . . . . . 26
SECTION 7A.3 Effectiveness of Designation. . . . . . . . . . . . . . 26
SECTION 8
CONDITIONS TO MAKING THE LOANS . . . . . . . . . . 26
SECTION 8.1 Conditions Precedent. . . . . . . . . . . . . . . . . . 26
(a) Fees and Expenses . . . . . . . . . . . . . . . . . . . 26
(b) Documents . . . . . . . . . . . . . . . . . . . . . . . 26
(c) No Default. . . . . . . . . . . . . . . . . . . . . . . 27
SECTION 9
EVENTS OF DEFAULT AND THEIR EFFECT . . . . . . . . . 27
SECTION 9.1 Events of Default . . . . . . . . . . . . . . . . . . . 27
(a) Nonpayment of the Loans . . . . . . . . . . . . . . . . 27
(b) Nonpayment of Other Indebtedness . . . . . . . . . . . 28
(c) Bankruptcy or Insolvency . . . . . . . . . . . . . . . 28
(d) Specified Noncompliance with this Agreement . . . . . . 28
(e) Other Noncompliance with this Agreement . . . . . . . . 29
(f) Representations and Warranties . . . . . . . . . . . . 29
(g) Employee Benefit Plans . . . . . . . . . . . . . . . . 29
(h) Judgments . . . . . . . . . . . . . . . . . . . . . . . 29
SECTION 9.2 Effect of Event of Default . . . . . . . . . . . . . . 29
SECTION 10
GENERAL . . . . . . . . . . . . . . . 29
SECTION 10.1 Amendments and Waivers . . . . . . . . . . . . . . . . 30
SECTION 10.2 Notices . . . . . . . . . . . . . . . . . . . . . . . . 30
SECTION 10.3 Accounting Terms; Computations . . . . . . . . . . . . 30
SECTION 10.4 Costs, Expenses and Taxes . . . . . . . . . . . . . . . 31
SECTION 10.5 Indemnification . . . . . . . . . . . . . . . . . . . . 31
SECTION 10.6 Captions and References . . . . . . . . . . . . . . . . 32
SECTION 10.7 No Waiver; Cumulative Remedies. . . . . . . . . . . . . 32
SECTION 10.8 Governing Law; Jury Trial; Severability . . . . . . . . 32
SECTION 10.9 Counterparts . . . . . . . . . . . . . . . . . . . . . 33
SECTION 10.10 Successors and Assigns . . . . . . . . . . . . . . . . 33
SECTION 10.11 Prior Agreements . . . . . . . . . . . . . . . . . . . 33
SECTION 10.12 Assignments; Participations . . . . . . . . . . . . . . 33
SECTION 10.13 Confidentiality. . . . . . . . . . . . . . . . . . . . 34
SECTION 10.14 Credit Decision . . . . . . . . . . . . . . . . . . . . 35
SCHEDULES AND EXHIBITS
SCHEDULE 5.1 Wire Transfer/Account Information
SCHEDULE 6.11 Tax Liabilities
SCHEDULE 6.17 Subsidiaries
EXHIBIT A Form of Note
EXHIBIT B Form of Notice of Conversion
CREDIT AGREEMENT
This Credit Agreement dated as of August 30, 1995 (this "Agreement"), is
between (i) PIONEER FINANCIAL SERVICES, INC., a Delaware corporation (herein,
together with its successors and assigns, called the "Company") and (ii)
AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO, a national banking
association (herein, together with its successors and assigns, called "ANB"),
FIRSTAR BANK MILWAUKEE, N.A., a national banking association (herein, together
with its successors and assigns, called "Firstar"), BANK ONE, ROCKFORD, NA, a
national banking association (herein, together with its successors and assigns,
called "Bank One") and LASALLE NATIONAL BANK, a national banking association
(herein, together with its successors and assigns, called "LaSalle") (ANB,
Firstar, Bank One and LaSalle collectively referred to as the "Banks" and
individually as a "Bank").
W I T N E S S E T H:
WHEREAS, the Company has requested the Banks severally to make available to
the Company a term loan facility for the purposes as set forth herein; and
WHEREAS, the Banks are willing to make available to the Company a term loan
facility in the aggregate amount of $11,100,000, under which each Bank severally
shall lend funds to the Company subject to the terms and conditions set forth in
this Agreement;
NOW, THEREFORE, in consideration of the mutual agreements contained herein,
the parties hereto agree as follows:
SECTION 1
CERTAIN DEFINITIONS
SECTION 1.1 Terms Defined in this Agreement. When used herein the
following terms shall have the following respective meanings:
"Adjusted Capital and Surplus" means, with respect to each Principal
Insurance Subsidiary as of any date, the sum of (i) Capital and Surplus for such
Principal Insurance Subsidiary and (ii) the asset valuation reserve of such
Principal Insurance Subsidiary as of such date determined in accordance with
Statutory Accounting Principles.
"Affiliate" means, with respect to any Person, any other Person directly or
indirectly controlling, controlled by, or under direct or indirect common
control with, such Person. A Person shall be deemed to control another Person
if such first Person possesses, directly or indirectly, the power to direct or
cause the direction of the management and policies of such other Person, whether
through ownership of voting securities, by contract or otherwise.
"Aggregate Commitment" means the combined Commitments of the Banks in the
amount of Eleven Million One Hundred Thousand Dollars ($11,100,000).
"Agreement" means this Credit Agreement as it may be amended, supplemented
or otherwise modified from time to time in accordance with the terms hereof.
"A.M. Best" means A.M. Best Company, and its successors and assigns.
"ANB" - see Preamble.
"Applicable Margin" means (a) with respect to Base Rate Loans, -0-, (b)
with respect to CD Rate Loans, two percent (2.00%) per annum, and (c) with
respect to Eurodollar Rate Loans, two percent (2.00%) per annum.
"Authorized Control Level RBC" shall have the same meaning as the term
"Authorized Control Level RBC" as defined in the NAIC Risk-Based Capital (RBC)
for Life and/or Health Insurers Model Act, as such term may be amended by the
NAIC from time to time.
"Authorized Officer" means the Chairman, the President, any Executive Vice
President, the Treasurer, any Vice President or any other officer of the Company
that are designated as authorized officers pursuant to a resolution of the Board
of Directors or the Executive Committee of the Board of Directors of the Company
(each Bank shall be entitled to rely on such resolution until revoked or amended
in writing by the Company).
"Available Cash Flow" means, with respect to the Company, for any period,
the net income of all Subsidiaries of the Company other than Insurance
Subsidiaries for such period, and shall include, without limitation, the net
income of Network Air Medical Systems, Inc., Association Management Corporation,
Design Benefit Plans, Inc., Administrators Service Corporation, and National
Health Services, Inc. for such period.
"Bank" or "Banks" - see Preamble.
"Bank One" - see Preamble.
"Bank Parties" - see Section 10.5.
"Base Rate" means, with respect to each Bank, at any time and from time to
time the rate of interest per annum which such Bank most recently announced as
its base rate in the city where such Bank's main office is located, which rate
shall not necessarily be the lowest rate of interest which such Bank charges its
customers.
"Base Rate Loans" means the Loans when such Loans bear interest based on
the Base Rate and the Applicable Margin with respect thereto.
"Business Day" means any day of the year on which each Bank is open for
business in the city where such Bank's main office is located.
"Capital and Surplus" means, with respect to each Principal Insurance
Subsidiary, such Principal Insurance Subsidiary's capital and surplus as
reported on such Principal Insurance Subsidiary's Statutory Statements most
recently filed with the department of insurance of such Principal Insurance
Subsidiary's state of incorporation.
"CD Rate" means, for each Bank, with respect to each Interest Period to be
applicable to CD Rate Loans, the rate of interest per annum payable on a
certificate or certificates of deposit purchased by the Company from such Bank
concurrently in connection with the Loans when the Loans are CD Rate Loans.
"CD Rate Loans" means the Loans when such Loans bear interest based on the
CD Rate and the Applicable Margin with respect thereto.
"Closing Date" means the date on which all conditions precedent set forth
in Section 8.1 are satisfied or waived by all the Banks.
"Commitment", with respect to each Bank, has the meaning specified in
Section 2.1.
"Commitment Percentage" means, as to any Bank, the percentage equivalent at
the time of determination of the outstanding principal amount of such Bank's
Loan divided by the aggregate outstanding principal amount of all Loans.
"Company" - see Preamble.
"Conversion Date" means any date on which the Company converts Loans that
are then Base Rate Loans to Eurodollar Rate Loans or CD Rate Loans; or Loans
that are then CD Rate Loans to Eurodollar Rate Loans or Base Rate Loans; or
Loans that are then Eurodollar Rate Loans to CD Rate Loans or Base Rate Loans.
"Debt Service Requirements" means, for any period, all expenses of the
Company on an unconsolidated basis, including, without limitation, the aggregate
of the principal, interest and other payments, dividends or distributions made
or required to be made (i) to each Bank under this Agreement, (ii) with respect
to other Indebtedness, (iii) with respect to all preferred stock and common
stock of the Company, and (iv) with respect to taxes paid or required to be paid
by the Company (minus any cash payments made by Subsidiaries of the Company to
the Company as reimbursement or otherwise as repayment for taxes paid by the
Company on behalf of such Subsidiaries).
"Dollar(s)" and the sign "$" means lawful money of the United States of
America.
"Earnings" means, for any period, as to any Insurance Subsidiary, the
earnings of such Insurance Subsidiary calculated in accordance with Statutory
Accounting Principles.
"Environmental Laws" means any and all federal, state or local
environmental or health and safety-related laws, regulations, rules, ordinances,
orders or directives.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, and any successor statute of similar import, together with the
regulations thereunder and under the Internal Revenue Code of 1986, as amended,
in each case as in effect from time to time. References to sections of ERISA
shall be construed to also refer to any successor sections.
"ERISA Affiliate" means any corporation, trade or business that is, along
with the Company, a member of a controlled group of corporations or a controlled
group of trades or businesses, as described in Sections 414(b) and 414(c),
respectively, of the Internal Revenue Code of 1986, as amended, or Section 4001
of ERISA.
"Eurodollar Rate Loans" means the Loans when such Loans bear interest based
on LIBOR and the Applicable Margin with respect thereto.
"Event of Default" means any of the events described in Section 9.1.
"Federal Reserve Board" means the Board of Governors of the Federal Reserve
System, or any entity succeeding to any of its principal functions.
"Firstar" - see Preamble.
GAAP means the generally accepted accounting principles in the United
States of America with such changes thereto as (i) shall be consistent with the
then-effective principles promulgated or adopted by the Financial Accounting
Standards Board and its predecessors and successors and (ii) shall be concurred
in by the independent certified public accountants of recognized standing
certifying any financial statements of the Company and its Subsidiaries.
"Indebtedness" means, as of any date, all indebtedness, obligations or
other liabilities of the Company and its Subsidiaries as of such date (i) for
borrowed money, (ii) evidenced by bonds, debentures, notes or other similar
instruments for borrowed money, or (iii) pursuant to any guarantee of any
indebtedness, obligations or other liabilities of any other Person of the type
described in clauses (i) or (ii); provided, however, that (a) the amounts set
forth in clauses (i), (ii) and (iii) shall not be double counted and shall
relate only to amounts actually owed or otherwise outstanding as of such date
and (b) Indebtedness shall not include indebtedness, obligations or other
liabilities of the Company to any Subsidiary or indebtedness, obligations or
other liabilities of any Subsidiary to the Company or another Subsidiary.
"Indemnified Liabilities" - see Section 10.5.
"Insurance Company Leverage Ratio" means, for each Principal Insurance
Subsidiary on an individual basis as of any date and for all Principal Insurance
Subsidiaries on a combined basis as of any date, the ratio of (x) Adjusted
Capital and Surplus to (y) Total Assets.
"Insurance Laws" means any and all federal or state laws, regulations,
rules, ordinances, orders or directives that pertain to the regulation of
insurance companies, as such.
"Insurance Subsidiaries" means, as of any date, all Subsidiaries of the
Company that are engaged in the insurance business and are subject to regulation
by the insurance commission or department of any state or other jurisdiction.
The Insurance Subsidiaries of the Company as of the date of this Agreement are
set forth in Schedule 6.17 attached hereto.
"Interest Payment Date" means each Principal Repayment Date and each date
upon which the Loans are prepaid or converted to Eurodollar Rate Loans, CD Rate
Loans, or Base Rate Loans, as the case may be.
"Interest Period" means, (a) if the Loans are then Eurodollar Rate Loans,
the period commencing on the Business Day the Loans are disbursed or continued
or on the Conversion Date on which the Loans are converted to Eurodollar Rate
Loans, as the case may be, and ending on the date three months thereafter; and
(b) if the Loans are then CD Rate Loans, the period commencing on the Business
Day the Loans are disbursed or continued or on the Conversion Date on which the
Loans are converted to CD Rate Loans, as the case may be, and ending 90 days
thereafter;
provided that:
(i) if any Interest Period pertaining to Loans that are then
Eurodollar Rate Loans or CD Rate Loans would otherwise end on a day which
is not a Business Day, that Interest Period shall be extended to the next
succeeding Business Day unless, if the Loans are then Eurodollar Rate
Loans, the result of such extension would be to carry such Interest Period
into another calendar month, in which event such Interest Period shall end
on the immediately preceding Business Day;
(ii) any Interest Period pertaining to Loans that are then Eurodollar
Rate Loans that begins on the last Business Day of a calendar month (or on
a day for which there is no numerically corresponding day in the calendar
month at the end of such Interest Period) shall end on the last Business
Day of the calendar month at the end of such Interest Period; and
(iii) no Interest Period for the Loans shall extend beyond a
Principal Repayment Date or the Termination Date.
"Investment Grade Obligations" means, as of any date for each Principal
Insurance Subsidiary, investments having an NAIC investment rating of 1 or 2; or
a Standard & Poor's rating within the range of ratings from AAA to BBB-; or a
Moody's rating within the range of ratings from Aaa to Baa3.
"LaSalle" - see Preamble.
"Liabilities" means any and all of the Company's obligations to the Banks,
howsoever created, arising or evidenced, whether direct or indirect, absolute or
contingent, now or hereafter existing, or due or to become due, which arise out
of or in connection with this Agreement or the Related Documents.
"LIBOR" means, with respect to each Interest Period to be applicable to
Eurodollar Rate Loans, the rate of interest per annum determined by ANB obtained
by dividing (a) the Telerate Screen Rate for such Interest Period or (b) if the
Telerate Screen Rate is unavailable at the time the LIBOR rate is to be
determined, a rate determined on the basis of the offered rates for deposits in
U.S. dollars for a period approximately equal to such Interest Period which
appear on the Reuters Screen LIBO Page, as of 11:00 a.m., London time, on the
day that is two London banking days preceding the beginning of such Interest
Period by (c) a percentage equal to 100% minus the stated maximum rate
(expressed as a percentage) as prescribed by the Federal Reserve Board of all
reserve requirements (including, without limitation, any marginal, emergency,
supplemental, special or other reserves) applicable on the first day of such
Interest Period to any member bank of the Federal Reserve System in respect of
Eurodollar funding or liabilities.
"Lien" means any mortgage, pledge, lien, security interest or other charge
or encumbrance, including the retained security title of a conditional vendor or
lessor.
"Loan" means the extension of credit by a Bank to the Company pursuant to
Section 2, and which shall be a Base Rate Loan, a CD Rate Loan or a Eurodollar
Rate Loan.
"Majority Banks" means at any time a group of Banks then holding at least
51% of the then aggregate unpaid principal amount of the Notes.
"Margin Stock" has the meaning given to such term in Regulation U.
"Material Subsidiary" means any Subsidiary of the Company, the financial
condition of which, when consolidated with the financial condition of the
Company, has a material effect on such financial condition of the Company, and
shall include, without limitation, each Principal Insurance Subsidiary.
"Mortgage" means, as of any date, as to each Principal Insurance
Subsidiary, the amount of such Principal Insurance Subsidiary's mortgage loans
on real estate calculated in accordance with Statutory Accounting Principles.
"Multiemployer Plan" means a "multiemployer plan" as defined in ERISA.
"NAIC" means the National Association of Insurance Commissioners and any
successor thereto.
"Net Worth" means, with respect to the Company, as at the time any
determination thereof is made, the consolidated shareholders' equity, including
common stock, additional paid-in capital, retained earnings, and net unrealized
gains and losses, but excluding any increase or decrease in the Company's
"available for sale investment portfolio" (as calculated in accordance with
GAAP) since June 30, 1995.
"Non-Investment Grade Obligations" means, as of any date, for each
Principal Insurance Subsidiary, any fixed maturity debt instrument investment
that is not an Investment Grade Obligation.
"Note" or "Notes" - see Section 3 and Exhibit A.
"Notice of Conversion" means a notice given by the Company to each Bank
pursuant to Section 4.2, in substantially the form of Exhibit B.
"PBGC" means the Pension Benefit Guaranty Corporation and any entity
succeeding to any or all of its functions under ERISA.
"Permitted Liens" means (i) purchase money security interests hereinafter
incurred in connection with the acquisition of assets or property; (ii) Liens
for taxes, assessments or governmental charges or levies on property of the
Company if the same shall not at the time be delinquent or thereafter can be
paid without penalty, or are being contested in good faith and by appropriate
proceedings and as to which the Company shall have set aside on its books such
reserves as are required by GAAP with respect to any such taxes, assessments or
other governmental charges; (iii) Liens imposed by law, such as carriers',
warehousemen's and mechanics' liens and other similar liens, which arise in the
ordinary course of business with respect to obligations not yet due or being
contested in good faith by appropriate proceedings and as to which the Company
shall have set aside on its books such reserves as are required by GAAP with
respect to any such Liens; (iv) Liens arising out of pledges or deposits under
insurance laws, worker's compensation laws, unemployment insurance, old age
pensions, or other Social Security or retirement benefits, or similar
legislation; (v) Liens consisting of mortgages, deeds of trust, liens or
security interests on any interest of the Company as sublessor under any
sublease of property which solely secure obligations of the Company as the
lessee of such property and extensions or renewals thereof; and (vi) Liens
consisting of mortgages, deeds of trust or similar encumbrances that may be
incurred by the Company or an Insurance Subsidiary of the Company in connection
with the Company's or such Insurance Subsidiary's purchase or refinancing of the
building and property located at 1750 Golf Road, Schaumburg, Illinois; provided,
however, that promptly after the creation of any Lien of the type referred to in
this subsection (vi), the Company shall provide to the Banks written notice of
the creation of such Lien, describing the amount of the obligation secured
thereby and the properties and assets subject to such Lien.
"Person" means an individual or a corporation, partnership, limited
liability company, trust, incorporated or unincorporated association, joint
venture, joint stock company, government (or any agency or political subdivision
thereof) or other entity of any kind.
"Plan" means an "employee pension benefit plan", as such term is defined in
Section 3(2) of ERISA, an "employee welfare benefit plan," as such term is
defined in Section 3(1) of ERISA, or any bonus, deferred compensation, stock
purchase, stock option, severance, salary continuation, vacation, sick leave,
fringe benefit, incentive, insurance, welfare or similar arrangement.
"Principal Insurance Subsidiaries" means, as of any date, any Insurance
Subsidiary that is or becomes engaged in a material amount of insurance business
and has been designated in writing by all of the Banks and the Company as a
Principal Insurance Subsidiary. The following Insurance Subsidiaries shall be
deemed to be Principal Insurance Subsidiaries as of the date of this Agreement
and until designated otherwise by all of the Banks and the Company : Pioneer
Life Insurance Company of Illinois, an Illinois corporation; National Group Life
Insurance Company, an Illinois corporation; and Manhattan National Life
Insurance Company, an Illinois corporation.
"Principal Repayment Date" - see Section 2.3.
"Real Estate Concentration Ratio" means, as of any date, as to each
Principal Insurance Subsidiary, the ratio of (a) the sum of (i) Real Estate
Investments plus (ii) Mortgages to (b) Capital and Surplus.
"Real Estate Investments" means, as of any date, as to each Principal
Insurance Subsidiary, the sum of (a) the book value of properties acquired in
satisfaction of debt calculated in accordance with Statutory Accounting
Principles plus (b) the investment in investment real estate calculated in
accordance with Statutory Accounting Principles; provided, that the properties
occupied by the Company or any Subsidiary shall be excluded from the calculation
of Real Estate Investments for purposes of this Agreement.
"Regulation U" means Regulation U of the Board of Governors of the Federal
Reserve System and any successor rule or regulation of similar import as in
effect from time to time.
"Related Documents" means, collectively, this Agreement, each Note issued
by the Company to each Bank, and all other documents, instruments and agreements
executed by the Company and delivered to the Banks pursuant to or in connection
with this Agreement or any of the foregoing.
"Reportable Event" means a reportable event (as defined in Section 4043(b)
of ERISA) for which notice has not been waived pursuant to applicable
regulations.
"Reuters Screen LIBO Page" means the display page designated "LIBO" on the
Reuters Monitor Money Rates Service (or such other page that may replace that
page on such service for the purpose of displaying comparable rates).
"Revolving Credit Agreement" means that certain Amended and Restated Credit
Agreement dated as of March 22, 1995 between the Company and ANB, Firstar and
Bank One, as amended, supplemented or otherwise modified from time to time.
"Statutory Accounting Principles" means the accounting principles used in
the preparation of Statutory Statements in accordance with the rules and
regulations prescribed by the insurance commission or department of each
Insurance Subsidiary's respective state of domicile in effect as of the date of
this Agreement. In the event that there is a material change in such accounting
principles subsequent to the date hereof, the covenants contained herein and
affected by such change shall be adjusted as necessary to preserve the force and
effect of such covenants by the Company (provided that prior to any such
adjustment the Company shall consult with the Banks with respect to any such
adjustment) subject to the reasonable objection of the Majority Banks.
"Statutory Statements" means, with respect to an Insurance Subsidiary, the
annual or quarterly accounting statement for such Insurance Subsidiary prepared
in accordance with Statutory Accounting Principles, as filed with the insurance
commissioner or department of each jurisdiction in which such Insurance
Subsidiary is subject to regulation.
"Subsidiary" means a corporation, association or business entity of which
the Company and/or its other Subsidiaries own, directly or indirectly, such
number of outstanding shares as have more than 50% of the ordinary voting power
for the election of such entity's directors.
"Telerate Screen Rate" means, for any Interest Period to be applicable to
Eurodollar Rate Loans, the rate for deposits in U.S. dollars for a period
approximately equal to such Interest Period which appears on Page 3750 of the
Dow Jones Telerate Service (or such other page that may replace that page on
such service for the purpose of displaying comparable rates) as of 11:00 a.m.,
London time, on the day that is two London banking days preceding the beginning
of such Interest Period.
"Termination Date" - see Section 2.5.
"Term Loan A Credit Agreement" means that certain Credit Agreement dated as
of March 22, 1995 between the Company and the Banks, as amended, supplemented or
otherwise modified from time to time.
"Total Adjusted Capital" shall have the same meaning as the term "Total
Adjusted Capital" as defined in the NAIC Risk-Based Capital (RBC) for Life
and/or Health Insurers Model Act, as such term may be amended by the NAIC from
time to time.
"Total Assets" means, as of any date, as to each Principal Insurance
Subsidiary, the total net admitted assets calculated as of such date in
accordance with Statutory Accounting Principles.
"Total Invested Assets" means, as of any date, as to each Principal
Insurance Subsidiary, the amount of such Principal Insurance Subsidiary's cash
and invested assets calculated in accordance with Statutory Accounting
Principles.
"Unrestricted Subsidiary" - see Section 7A.1.
"Unrestricted Subsidiary Indebtedness" means, as of any date, for any
Unrestricted Subsidiary, all indebtedness, obligations or other liabilities of
such Unrestricted Subsidiary and its Subsidiaries as of such date (i) for
borrowed money, (ii) evidenced by bonds, debentures, notes or other similar
instruments for borrowed money, or (iii) pursuant to any guarantee of any
indebtedness, obligations or other liabilities of any other Person of the type
<PAGE>
described in clauses (i) or (ii); provided, however, that the amounts set forth
in clauses (i), (ii) and (iii) shall not be double counted and shall relate only
to amounts actually owed or otherwise outstanding as of such date.
SECTION 2
TERM LOAN; BORROWING PROCEDURES
SECTION 2.1 Term Loan. (a) On the terms and subject to the conditions
set forth in this Agreement, each Bank severally agrees to make available to the
Company on the Closing Date of this Agreement a term loan (each such loan called
a "Loan" and collectively called the "Loans") in an aggregate amount not to
exceed at any time outstanding the amount set forth opposite such Bank's name on
the signature page hereof under the heading "Commitment" (such amount referred
to as such Bank's "Commitment").
(b) The Company agrees that, if the Loans are CD Rate Loans, the
Company shall purchase from each Bank a certificate or certificates of deposit
in an amount equal to the outstanding principal amount of such Bank's Loan and
which shall have a term equal to the Interest Period applicable to such Loan.
SECTION 2.2 Disbursement. Each Bank shall disburse the proceeds of its
Loan in immediately available funds to an account of the Company designated in
writing by the Company.
SECTION 2.3 Repayment of Principal of the Loans. The Company shall
repay the principal amount of the Loans in installments as follows: Nine Hundred
Twenty-Five Thousand Dollars ($925,000) in aggregate principal amount on the
last Business Day of November 1995 and on the last Business Day of each
February, May, August and November thereafter (each such day being a "Principal
Repayment Date") until the Loans are fully paid, provided, however, that the
final payment, if not sooner paid, shall be due on the Termination Date and
shall be equal to the aggregate principal amount of the Loans then outstanding.
The Company shall ratably repay to each Bank such Bank's Commitment Percentage
of the aggregate principal amount set forth in the preceding sentence.
SECTION 2.4 Optional Prepayments. Subject to Section 4.6, the Company
may, at any time or from time to time, ratably prepay the Loans in whole (in
which case the Loans shall terminate) or in part in any amount; provided that
the Company's written notice of such prepayment shall be delivered to each Bank
in accordance with Section 10.2 prior to 11:00 a.m. (Chicago time) (i) two
Business Days prior to the requested date of prepayment, if the Loans are then
Eurodollar Rate Loans; (ii) one Business Day prior to the requested date of
prepayment, if the Loans are then CD Rate Loans, and (iii) on the requested date
of prepayment, if the Loans are then Base Rate Loans. Such notice of prepayment
shall specify the date of prepayment, the aggregate amount of such prepayment,
and each Bank's Commitment Percentage of such prepayment. Such notice shall not
thereafter be revocable by the Company. If such notice is given by the Company,
the Company shall make such prepayment and the payment amount specified in such
notice shall be due and payable on the date specified therein, together with
accrued interest to each such date on the amount prepaid and any amounts
required pursuant to Section 4.6. Any amounts so prepaid may not be reborrowed.
SECTION 2.5 Termination of the Loans; Termination Date. The Loans shall
terminate without further action on the part of any Bank on the earlier of (i)
August 31, 1998 or (ii) the date of termination of the Loans pursuant to Section
2.4 or Section 9.2 hereof (the "Termination Date").
SECTION 3
NOTES EVIDENCING THE LOANS
SECTION 3.1 Notes. Each Bank's Loan shall be evidenced by a promissory
note (herein, as the same may be amended, modified or supplemented from time to
time, and together with any renewals thereof or exchanges or substitutions
therefor, individually called a "Note" and collectively called the "Notes"),
<PAGE>
substantially in the form set forth in Exhibit A, with appropriate insertions,
dated the Closing Date, payable to the order of such Bank in the principal
amount equal to such Bank's Commitment or the aggregate principal amount of the
Loan outstanding to such Bank, whichever is less. The date and amount of the
Loan made by each Bank and of each repayment of principal thereon received by
such Bank shall be recorded by such Bank in its records or, at its option, on
the schedule attached to its Note. The aggregate unpaid principal amount so
recorded shall be rebuttable presumptive evidence of the principal amount owing
and unpaid on such Note to such Bank. The failure so to record any such amount
or any error in so recording any such amount, however, shall not limit or
otherwise affect the Company's obligations hereunder or under such Note to repay
the principal amount of the Loan evidenced by such Note together with all
interest accruing thereon. Each Note shall provide for the payment of interest
as provided in Section 4.
SECTION 4
INTEREST, FEES AND COSTS
SECTION 4.1 Interest.
(a) Subject to Section 4.1(c), the Loans shall bear interest on the
outstanding principal amount thereof for the period commencing on the date when
the Loans were made until the Loans are paid in full at a rate per annum equal
to the CD Rate, LIBOR or the Base Rate, as the case may be, plus the Applicable
Margin.
(b) Interest on the Loans shall be paid in arrears on each Interest
Payment Date. Interest shall also be paid on the date of any prepayment of the
Loans pursuant to Section 2.4 for the portion of the Loans so prepaid and upon
payment (including prepayment) in full thereof, and, during the existence of any
Event of Default, interest shall be paid on demand.
(c) If any amount of principal of or interest on the Loans, or any
other amount payable hereunder or under any Related Document is not paid in full
when due (whether at stated maturity, by acceleration, demand or otherwise), the
Company agrees to pay interest on such unpaid principal or other amount, from
the date such amount becomes due until the date such amount is paid in full,
payable on demand, at a fluctuating rate per annum equal to the Base Rate plus
two percent (2.00%) per annum.
SECTION 4.2 Conversion Elections.
(a) The Company may upon irrevocable written notice to each Bank in
accordance with Section 4.2(b):
(i) if the Loans are then Base Rate Loans, elect to convert on
the last Business Day of each February, May, August or November all of such
Loans into Eurodollar Rate Loans or CD Rate Loans; or
(ii) if the Loans are then Eurodollar Rate Loans, elect to
convert on the last Business Day of each February, May, August or November
all of such Loans into Base Rate Loans or CD Rate Loans; or
(iii) if the Loans are then CD Rate Loans, elect to convert on the
last Business Day of each February, May, August or November all of such
Loans into Base Rate Loans or Eurodollar Rate Loans;
provided, that if the Loans are then either Eurodollar Rate Loans or CD Rate
Loans and the aggregate amount of the Loans shall have been reduced, by payment,
prepayment, or conversion thereof, to be less than $100,000, then such Loans
shall automatically convert into Base Rate Loans.
(b) The Company shall deliver a Notice of Conversion in accordance
with Section 10.2 to be received by each Bank not later than 11:00 a.m. (Chicago
time) at least two Business Days in advance of the Conversion Date specifying:
(A) the proposed Conversion Date, which date may only be the
last Business Day of each February, May, August or November;
(B) that the aggregate amount of all of the Loans shall be
converted on such proposed Conversion Date; and
(C) the nature of the proposed conversion.
(c) If the Company fails to deliver to each Bank a Notice of
Conversion in accordance with the terms of Section 4.2(b), the Company shall be
deemed to have elected to continue the Loans as, and the Loans shall thereupon
continue as, Eurodollar Rate Loans, CD Rate Loans or Base Rate Loans, as the
case may be. Notwithstanding the foregoing, if any Event of Default shall then
exist, the Company shall be deemed to have elected to convert such Loans into
Base Rate Loans effective as of the expiration date of such current Interest
Period.
(d) Unless the Majority Banks shall otherwise agree, during the
existence of an Event of Default, the Company may not elect to have the Loans
converted into or continued as Eurodollar Rate Loans or CD Rate Loans.
SECTION 4.3 Closing Fees. On the Closing Date the Company shall pay to
each Bank a one-time closing fee equal to 0.25% of such Bank's Commitment.
SECTION 4.4 Computation of Interest. All computations of interest in
respect of the Base Rate, LIBOR and the CD Rate shall be made on the basis of a
year of 365 or 366 days, as the case may be, and actual days elapsed. Interest
shall accrue during each period during which interest is computed from and
including the first day thereof to but excluding the last day thereof.
SECTION 4.5 Increased Costs; Capital Adequacy.
(a) If (i) Regulation D of the Federal Reserve Board, or (ii)
after the date hereof, the adoption of any applicable law, rule or regulation,
or any change therein, or any change in the interpretation or administration
thereof by any governmental authority, central bank or comparable agency charged
with the interpretation or administration thereof, or compliance by a Bank with
any request or directive (whether or not having the force of law) of any such
authority, central bank or comparable agency issued after the date hereof,
(A) shall subject such Bank to any tax, duty or other charge with
respect to Loans that are then Eurodollar Rate Loans or CD Rate Loans, the
Note issued to such Bank, such Bank's obligation to maintain any such Loan,
or shall change the basis of taxation of payments to such Bank of the
principal of or interest on any such Loan or any other amounts due under
this Agreement in respect of any such Loan or such Bank's obligation to
maintain any such Loan (except for changes in the rate of tax on the
overall income of such Bank imposed by any governmental authority); or
(B) shall impose, modify or deem applicable any reserve (including,
without limitation, any reserve imposed by the Federal Reserve Board but
excluding, if the Loans are then Eurodollar Rate Loans, any reserve
prescribed by the Federal Reserve Board included in the determination of
LIBOR), special deposit or similar requirement against assets of, deposits
with or for the account of, or credit extended by, such Bank;
and the result of any of the foregoing is to increase the cost to such Bank of
maintaining its Loan, or to reduce the amount of any sum received or receivable
by such Bank under this Agreement or under its Note with respect thereto, then
within 30 days after demand by such Bank (which demand shall be accompanied by a
statement setting forth in reasonable detail the basis of such demand), the
Company shall pay directly to such Bank such additional amount or amounts as
will compensate such Bank for such increased costs or such reduction, provided,
however, that any such amount or amounts payable by the Company shall not exceed
the increased costs or amount of reduction of such Bank in direct proportion to
its Loan.
(b) If either (i) the introduction of or any change in or in the
interpretation of any law or regulation or (ii) compliance by a Bank with any
new guideline or request from any central bank or other governmental authority
affects or would affect the amount of capital required or expected to be
maintained by such Bank or any corporation controlling such Bank and the amount
of such capital is increased by or based upon the existence of such Bank's
commitment to maintain its Loan hereunder, then, within 30 days after demand by
such Bank (which demand shall set forth in reasonable detail the basis of such
demand), the Company shall pay directly to such Bank, from time to time as
reasonably specified by such Bank, additional amounts sufficient to compensate
such Bank in the light of such circumstances, to the extent that such Bank
reasonably determines such increase in capital to be allocable to the existence
of such Bank's commitment to maintain its Loan hereunder, provided, however,
that any such amount or amounts payable by the Company shall not exceed the
increased amount of capital required to be maintained by such Bank and allocable
to its Loan in direct proportion to its Loan.
SECTION 4.6 Funding Losses. The Company agrees to reimburse each Bank
and to hold each Bank harmless from any loss or expense which such Bank may
sustain or incur as a consequence of:
(a) if the Loans are then Eurodollar Rate Loans or CD Rate Loans, the
failure of the Company to make when due any payment of principal of the Loans
(including payments made after any acceleration thereof) not resulting from such
Bank's failure to act;
(b) the failure of the Company to convert the Loans after the Company
has given (or is deemed to have given) a Notice of Conversion;
(c) the failure of the Company to make any prepayment after the
Company has given a notice in accordance with Section 2.4;
(d) if the Loans are then Eurodollar Rate Loans or CD Rate Loans, the
prepayment of the Loans on a day which is not the last day of the Interest
Period with respect thereto; or
(e) the conversion pursuant to Section 4.2 of Loans that are then
Eurodollar Rate Loans or CD Rate Loans to Loans of another type on a day that is
not the last day of the Interest Period with respect thereto;
including, in each case, (i) if the Loans are then Eurodollar Rate Loans or CD
Rate Loans, any such loss or expense arising from the liquidation or
reemployment of funds obtained by such Bank to maintain its Loan hereunder or
from fees payable to terminate the deposits from which such funds were obtained
and (ii) if the Loans are then CD Rate Loans, with respect to any certificate of
deposit purchased by the Company from each Bank in connection therewith, any
penalty assessed by such Bank for the early withdrawal of the funds deposited
under any such certificate of deposit in accordance with such Bank's usual and
customary practices that are not otherwise waived by such Bank, it being
understood that for purposes of this Section 4.6 any such penalty assessed by
such Bank for the early withdrawal of funds deposited under any such certificate
of deposit shall constitute the only losses and expenses of such Bank that may
be recovered by such Bank pursuant to this Section 4.6.
SECTION 5
MAKING OF PAYMENTS
SECTION 5.1 Payments by the Company.
(a) All payments (including prepayments) to be made by the Company on
account of principal, interest, fees and other amounts required hereunder shall
be made directly to each Bank without condition or reservation of right in
immediately available funds, no later than 12:00 noon (Chicago time) on the date
specified herein. The Company shall make such payments by wire transfer to such
account of each Bank as set forth in Schedule 5.1 hereof (or pursuant to such
other instructions or to such other account as such Bank may from time to time
notify the Company). Any payment which is received by a Bank later than 12:00
noon (Chicago time) shall be deemed to have been received on the immediately
succeeding Business Day and any applicable interest shall continue to accrue.
(b) Subject to the provisions set forth in the definition of
"Interest Period" herein, whenever any payment hereunder shall be stated to be
due on a day other than a Business Day, such payment shall be made on the next
succeeding Business Day, and such extension of time shall in such case be
included in the computation of interest.
SECTION 5.2 Payments by each Bank. The failure of any Bank to make its
Loan pursuant to Section 2.1 shall not relieve any other Bank of its obligation
hereunder to make its Loan, but no Bank shall be responsible for the failure of
any other Bank to make the Loan to be made by such other Bank.
SECTION 5.3 Setoff.
(a) The Company agrees that, if at any time (i) any amount owing by
it under this Agreement or any Related Document is then due and payable to a
Bank or (ii) any Event of Default shall have occurred and be continuing, then
such Bank, in its sole discretion, may apply to the payment of the Liabilities
any and all balances, credits, deposits, accounts or moneys of the Company then
or thereafter with such Bank.
(b) Without limitation of Section 5.3(a), the Company agrees that,
upon and during the continuance of any Event of Default, such Bank is hereby
authorized, at any time and from time to time, without notice to the Company,
(i) to set off against and to appropriate and apply to the payment of the
Liabilities any and all amounts which such Bank is obligated to pay over to the
Company (whether matured or unmatured, and, in the case of deposits, whether
general or special, time or demand and however evidenced) and (ii) pending any
such action, to the extent necessary, to hold such amounts as collateral to
secure such Liabilities.
(c) Notwithstanding any other provision of this Agreement, the Notes
or any other Related Document, the Banks shall not set off against, or
appropriate or apply to the payment of any Liabilities, any of the deposits,
accounts or other assets of any Insurance Subsidiary.
SECTION 5.4 Sharing of Payments. If, other than as expressly provided
elsewhere herein, any Bank shall obtain on account of the Liabilities held by
such Bank any payment (whether voluntary, involuntary, through the exercise of
any right of set-off, or otherwise) in excess of its Commitment Percentage of
payments on account of the Liabilities obtained by all the Banks, such Bank
shall promptly upon demand purchase from the other Banks a portion of the
Liabilities held by such other Banks as shall be necessary to cause such
purchasing Bank to share the excess payment ratably with each of them based upon
each Bank's Commitment Percentage; provided, however, that if all or any portion
of such excess payment is thereafter recovered from the purchasing Bank, such
purchase shall to that extent be rescinded and each other Bank shall repay to
the purchasing Bank the purchase price paid therefor, together with an amount
equal to such paying Bank's Commitment Percentage of any interest or other
amount paid or payable by the purchasing Bank in respect of the total amount so
recovered. The Company agrees that any Bank so purchasing a portion of another
Bank's Liabilities pursuant to this Section 5.4 may, to the fullest extent
permitted by law, exercise all of its rights of payment (including the right of
setoff) with respect to such purchased Liabilities as fully as if such Bank were
the direct creditor of the Company in the amount of such purchased Liabilities.
SECTION 6
REPRESENTATIONS AND WARRANTIES
To induce each Bank to enter into this Agreement and to make its Loan
hereunder, the Company represents and warrants to each Bank that:
SECTION 6.1 Corporate Organization. The Company is a corporation duly
existing and in good standing under the laws of the State of Delaware and is
duly qualified and in good standing as a foreign corporation authorized to do
business in Illinois, which is the only other jurisdiction in which the Company
is required to be duly qualified and in good standing as a foreign corporation.
The Company's failure to be so qualified in any other jurisdiction does not
materially and adversely affect the Company's business, operations or financial
condition or its ability to perform its obligations hereunder and under the
Related Documents to which it is a party.
SECTION 6.2 Authorization; No Conflict. The Company's execution,
delivery and performance of this Agreement and each of the Related Documents to
which it is a party and the consummation of the transactions contemplated by
this Agreement and each of the Related Documents are within the Company's
corporate powers, have been duly authorized by all necessary corporate action,
require no governmental, regulatory or other approval, and (a) do not and will
not contravene or conflict with any provision of (i) any law the failure of the
Company to comply with in the Company's determination materially and adversely
affects the Company's business, operations or financial condition or its ability
to perform its obligations hereunder and under the Related Documents to which it
is a party, (ii) any judgment, decree or order applicable to the Company, or
(iii) the Company's articles of incorporation or by-laws, and (b) do not and
will not contravene or conflict with any provision of any agreement or
instrument binding upon the Company or upon any property of the Company that in
the Company's determination materially and adversely affects the Company's
business, operations or financial condition or its ability to perform its
obligations hereunder or under the Related Documents to which it is a party.
SECTION 6.3 Validity and Binding Nature. This Agreement and the
Related Documents to which the Company is a party are (or, when duly executed
and delivered, will be) the legal, valid and binding obligations of the Company
enforceable against the Company in accordance with their respective terms except
as limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws affecting creditor's rights generally and by general principles of
equity (regardless of whether enforcement is sought in equity or at law).
SECTION 6.4 Financial Statements. The annual and quarterly balance
sheets and statements of operations that have been or shall hereafter be
furnished to each Bank by or at the direction of the Company for the purposes of
or in connection with this Agreement do and will present fairly the financial
condition of the Persons involved as of the dates thereof and the results of
their operations for the period(s) covered thereby, all in accordance with GAAP,
consistently applied, unless otherwise noted therein.
SECTION 6.5 Litigation and Contingent Liabilities.
(a) No litigation (including, without limitation, derivative
actions), arbitration proceedings, governmental proceedings or investigations or
regulatory proceedings are pending or, to the best of its knowledge, threatened
against the Company or any Material Subsidiary which in the Company's
determination materially and adversely affects the Company's or such Material
Subsidiary's business, operations or financial condition or the Company's
ability to perform its obligations hereunder and under the Related Documents to
which it is a party. In addition, to the best of the Company's knowledge, there
are no inquiries, formal or informal, which give rise to such actions,
proceedings or investigations.
(b) The Company and, to the best of the Company's knowledge, each
Material Subsidiary have obtained all licenses, permits, franchises and other
governmental authorizations necessary to the ownership of its properties or to
the conduct of its businesses, including without limitation all licenses,
permits, franchises and other governmental authorizations required under all
applicable Environmental Laws, a failure to obtain or violation of which in the
Company's determination materially and adversely affects the Company's or such
Material Subsidiary's business, operations or financial condition or the
Company's ability to perform its obligations hereunder and under the Related
Documents to which it is a party.
(c) The Company does not have any material contingent liabilities
required to be disclosed pursuant to GAAP that are not provided for or disclosed
in the financial statements referred to in Section 6.4 hereof.
SECTION 6.6 Employee Benefit Plans. To the best of the Company's
knowledge, each Plan complies in all material respects with all applicable
statutes and governmental rules and regulations (including, without limitation,
the requirements of Section 401(a) of the Internal Revenue Code of 1986, as
amended, to the extent that such Plan is intended to conform to that section)
and during the 12-consecutive-month period prior to the Closing Date, (i) no
Reportable Event has occurred and is continuing with respect to any Plan subject
to Title IV of ERISA, (ii) neither the Company nor any ERISA Affiliate has
withdrawn from any Plan subject to Title IV of ERISA or instituted steps to do
so, (iii) no steps have been instituted to terminate any Plan subject to Title
IV of ERISA, (iv) no contribution failure has occurred with respect to any Plan
sufficient to give rise to a lien under Section 302(f) of ERISA, or (v) each
Plan which is intended to be qualified pursuant to Section 401(a) of the
Internal Revenue Code of 1986, as amended, has received a favorable
determination letter. To the best of the Company's knowledge, no condition
exists or event or transaction has occurred in connection with any Plan which
would result in the incurrence by the Company or any ERISA Affiliate of any
liability, fine or penalty, which in the Company's determination materially and
adversely affects the Company's business, operations or financial condition, or
the ability of the Company to perform its obligations hereunder and under the
Related Documents to which it is a party. Neither the Company nor any ERISA
Affiliate presently maintains, contributes to or, to the best of the Company's
knowledge, has any liability (including current or potential withdrawal
liability) with respect to any Multiemployer Plan. To the best of the Company's
knowledge, neither the Company nor any ERISA Affiliate has any liability with
respect to any funded or unfunded postretirement benefit for employees or former
employees (including medical, health or life insurance) other than liability for
continuation coverage described in Part 6 of Title I of ERISA.
SECTION 6.7 Investment Company Act. The Company is not an "investment
company" or a company "controlled" by an "investment company", within the
meaning of the Investment Company Act of 1940, as amended.
SECTION 6.8 Regulation U. The Company is not engaged principally, or as
one of its important activities, in the business of extending credit for the
purpose of purchasing or carrying Margin Stock.
SECTION 6.9 Accuracy of Information. To the best of the Company's
knowledge, all factual information heretofore or contemporaneously furnished by
the Company to any Bank for purposes of or in connection with this Agreement or
any transaction contemplated hereby is, and all other factual information
hereafter furnished by the Company to any Bank will be, true and accurate in
every material respect on the date as of which such information is dated or
certified, and the Company has not knowingly omitted and will not knowingly omit
any material fact it deems necessary to prevent such information from being
false or misleading.
SECTION 6.10 Labor Controversies. There are no labor controversies
pending or threatened against the Company or any Material Subsidiary which in
the Company's determination materially and adversely affect the Company's or
such Material Subsidiary's business, operations or financial condition or the
Company's ability to perform its obligations hereunder and under the Related
Documents to which it is a party.
SECTION 6.11 Tax Status. Except as set forth in Schedule 6.11 hereto,
the Company and, to the best of the Company's knowledge, each Material
Subsidiary have made or filed all income and other tax returns, reports and
declarations required by any jurisdiction to which it is subject, have paid all
taxes, assessments and other charges shown or determined to be due on
such returns, reports and declarations (other than those being diligently
contested in good faith by appropriate proceedings), and have set aside adequate
reserves against liability for taxes, assessments and charges applicable to
periods subsequent to those covered by such returns, reports and declarations, a
failure of which to file, to pay or to set aside in the Company's determination
materially and adversely affects the Company's or such Material Subsidiary's
business, operations or financial condition or the Company's ability to perform
its obligations hereunder and under the Related Documents to which it is a
party.
SECTION 6.12 No Default. No event has occurred and no condition exists
which, upon the execution and delivery of, or consummation of any transaction
contemplated by, this Agreement or any Related Document, or upon the funding of
the Loans, will constitute an Event of Default. The Company and each Material
Subsidiary have not received notice of default with respect to any other
material agreement, security or contract, except those for which a default
exists that is not capable of being cured with the payment of money or as to
which a good faith dispute exists.
SECTION 6.13 Compliance with Applicable Laws. The Company and, to the
best of the Company's knowledge, each Material Subsidiary are in compliance with
the requirements of all applicable laws, rules, regulations, and orders of all
governmental authorities (federal, state, local or foreign, and including,
without limitation, Environmental Laws and Insurance Laws), a breach of which
would in the Company's determination materially and adversely affect the
Company's or such Material Subsidiary's business, operations or financial
condition, or the ability of the Company to perform its obligations hereunder
and under the Related Documents to which it is a party.
SECTION 6.14 Insurance. The Company, in its sole determination,
maintains adequate general liability, property and casualty insurance for its
benefit under policies issued by insurers of recognized responsibility.
SECTION 6.15 Solvency. After giving effect to the transactions
contemplated hereby and by the Related Documents, the Company is not
"insolvent", nor will the Company's incurrence of obligations to repay the Loans
render the Company "insolvent." For the purposes of this Section 6.15, a
corporation is "insolvent" if (i) the "present fair salable value" (as defined
below) of its assets is less than the amount that will be required to pay its
probable liability on its existing debts and other liabilities (including
contingent liabilities) as they become absolute and matured; (ii) the property
of the Company constitutes unreasonably small capital for the Company to carry
out its business as now conducted and as proposed to be conducted including the
capital needs of the Company; (iii) the Company intends to, or believes that it
will, incur debts beyond its ability to pay such debts as they mature (taking
into account the timing and amounts of cash to be received by the Company and
amounts to be payable on or in respect of debt of the Company), or the cash
available to the Company after taking into account all other anticipated uses of
the cash of the Company is anticipated to be insufficient to pay all such
amounts on or in respect of debt of the Company when such amounts are required
to be paid; or (iv) the Company believes that final judgments against the
Company in actions for money damages will be rendered at a time when, or in an
amount such that, the Company will be unable to satisfy any such judgments
promptly in accordance with their terms (taking into account the maximum
reasonable amount of such judgments in any such actions and the earliest
reasonable time (as determined in the Company's best judgment) at which such
judgments might be rendered), or the cash available to the Company after taking
into account all other anticipated uses of the cash of the Company (including
the payments on or in respect of debt referred to in clause (iii) of this
Section 6.15), is anticipated to be insufficient to pay all such judgments
promptly in accordance with their terms. For purposes of this Section 6.15, the
following terms have the following meanings: (x) the term "debts" includes any
legal liability, whether matured or unmatured, liquidated, absolute, fixed or
contingent, (y) the term "present fair salable value" of the Company's assets
means the amount which may be realized, within a reasonable time (as determined
in the Company's best judgment), either through collection or sale of such
assets at their regular market value and (z) the term "regular market value"
means the amount which a capable and diligent businessman (as determined in the
Company's best judgment) could obtain for the property in question within a
reasonable time (as determined in the Company's best judgment) from an
interested buyer who is willing to purchase under ordinary selling conditions
(as determined in the Company's best judgment).
SECTION 6.16 Use of Proceeds. The Company will use the proceeds of the
Loans to repay loans and other obligations incurred by the Company under the
Revolving Credit Agreement, the proceeds of which loans and other obligations
were used by the Company primarily for internal sales investment and for the
conversion of the Company's 8% Subordinated Convertible Debentures (due 2000)
into common stock of the Company.
SECTION 6.17 Subsidiaries. The Company has no Subsidiaries except as
listed on Schedule 6.17 hereto.
SECTION 7
COVENANTS
Until all Liabilities of the Company are paid in full, the Company agrees
that, unless at any time the Majority Banks (except with respect to such
sections that expressly require the written consent of all of the Banks) shall
otherwise expressly consent in writing, it will:
SECTION 7.1 Reports, Certificates and Other Information. Furnish to each
of the Banks:
(a) Annual Report. On or before the ninetieth (90th) day after each
of the Company's fiscal years, a copy of the consolidated and consolidating
financial statements of the Company and its Subsidiaries (i) in the case of such
consolidated statements, prepared in conformity with GAAP and audited and
certified by independent certified public accountants of recognized standing
selected by the Company and (ii) in the case of such consolidating statements,
prepared based upon unadjusted per book entries in the Company's and its
Subsidiaries' records, certified by an Authorized Officer.
(b) Interim Reports. On or before the forty-fifth (45th) day after
the end of each of the first three quarters of each fiscal year of the Company,
a copy of the unaudited consolidated and consolidating financial statements of
the Company prepared in a manner consistent with the financial statements
referred to in Section 7.1(a) hereof, certified by an Authorized Officer and
consisting of, at least, balance sheets as at the close of such quarter and
statements of earnings for such quarter and for the period from the beginning of
such fiscal year to the close of such quarter.
(c) Statutory Statements. Promptly upon the filing thereof, copies of
all Statutory Statements required to be filed by the Company and each Principal
Insurance Subsidiary with or to the insurance commission or department of such
Person's respective state of domicile.
(d) Reports to SEC. Promptly upon the filing or making thereof,
copies of each Form 10-K and Form 10-Q made by the Company with or to the
Securities and Exchange Commission.
(e) Certificates. Simultaneously with the furnishing of each annual
statement and each quarterly statement provided for in this Section 7.1, a
certificate of the Chief Financial Officer or another Authorized Officer stating
that no Event of Default has occurred and is continuing, or, if there is any
such event, setting forth the details thereof and the action that the Company is
taking or proposes to take with respect thereto and setting forth computations
in reasonable detail demonstrating compliance with each of the financial ratios
and restrictions set forth in this Section 7.
(f) Notice of Default, Litigation and ERISA Matters. Promptly upon
learning of the occurrence of any of the following, written notice thereof which
describes the same and the steps being taken by the Company with respect
thereto: (i) the occurrence of an Event of Default, (ii) the institution of, or
any adverse determination in, any litigation, arbitration proceeding or
governmental proceeding in which any injunctive relief is sought or in which
money damages in excess of $5,000,000 are sought, (iii) the occurrence of a
material Reportable Event with respect to any Plan subject to Title IV of ERISA,
(iv) the institution of any material steps by the Company, the PBGC or any other
Person to terminate any Plan subject to Title IV of ERISA, (v) the institution
of any material steps by the Company or any ERISA Affiliate to withdraw from any
Plan subject to Title IV of ERISA which would result in material liability to
the Company, (vi) the failure to make a material required contribution to any
Plan if such failure is sufficient to give rise to a lien under Section 302(f)
of ERISA, (vii) the taking of any material action with respect to a Plan which
could result in the requirement that the Company furnish a bond or other
security to the PBGC or such Plan, (viii) the occurrence of any event with
respect to any Plan which could result in the incurrence by the Company of any
liability, fine or penalty, which would in the Company's determination
materially and adversely affect the Company's business, operations or financial
condition or the ability of the Company to perform its obligations hereunder and
under the Related Documents to which it is a party, or (ix) promptly after the
incurrence thereof, notice of any material increase in the contingent liability
of the Company with respect to any postretirement Plan benefits.
(g) Other Information. Such other material information concerning
the Company as any Bank may reasonably request from time to time.
SECTION 7.2 Corporate Existence and Franchises. Except as otherwise
expressly permitted in this Agreement, maintain and cause each Material
Subsidiary to maintain in full force and effect its separate existence and all
rights, licenses, leases and franchises reasonably necessary in the Company's
sole discretion to the conduct of its and each Material Subsidiary's business.
SECTION 7.3 Books, Records and Inspections. Maintain, and cause each
Material Subsidiary to maintain, books and records in accordance with GAAP in
all material respects, each Bank to have access to the Company's books and
records, and permit each Bank, upon seven (7) days notice to the Company, to
inspect the Company's properties and operations during normal business hours and
at reasonable intervals, but no more frequently than semi-annually if no Event
of Default has occurred.
SECTION 7.4 Insurance. Maintain, and cause each Material Subsidiary to
maintain, such insurance as is required by law.
SECTION 7.5 Taxes and Liabilities. Promptly pay, and cause each
Material Subsidiary to pay, when due all taxes, duties, assessments and other
liabilities (except such taxes, duties, assessments and other liabilities as the
Company or such Material Subsidiary is diligently contesting in good faith and
by appropriate proceedings; provided that the Company or such Material
Subsidiary has provided for and is maintaining adequate reserves with respect
thereto in accordance with GAAP), a failure of which to pay in the Company's
determination materially and adversely affects the Company's or such Material
Subsidiary's business, operations or financial condition or the Company's
ability to perform its obligations hereunder and under the Related Documents to
which it is a party.
SECTION 7.6 Cash Flow Coverage. Maintain either:
(A) a ratio of (x) the sum of (i) Available Cash Flow plus (ii) the
Earnings of Pioneer Life Insurance Company of Illinois, National Group Life
Insurance Company and Continental Life and Accident Company to (y) Debt
Service Requirements equal to or greater than 1.35 to 1 at the end of each
fiscal quarter, such ratio to be calculated for the period of the four
fiscal quarters ending on the most recent fiscal quarter end prior to the
date of computation, or
(B) a ratio of (x) Available Cash Flow to (y) Debt Service
Requirements equal to or greater than 1.00 to 1 at the end of each fiscal
quarter, such ratio to be calculated for the period of the four fiscal
quarters ending on the most recent fiscal quarter end prior to the date of
computation.
SECTION 7.7 Net Worth. Not permit the Net Worth of the Company to be
less than $112,000,000 at the end of each fiscal quarter of the Company.
SECTION 7.8 Intentionally Omitted.
SECTION 7.9 Indebtedness. Not, without the prior written consent of all
of the Banks, incur or permit to exist any Indebtedness that by its terms or
otherwise is senior in right of payment to the Liabilities, except (i)
Indebtedness incurred in connection with Permitted Liens and (ii) Indebtedness
hereinafter incurred that in the aggregate when added to all other senior
Indebtedness incurred after the Closing Date does not exceed $5,000,000.
SECTION 7.10 Risk-Based Capital. Shall cause each Principal Insurance
Subsidiary on an individual basis to maintain at all times Total Adjusted
Capital equal to or greater than 270% of Authorized Control Level RBC.
SECTION 7.11 Real Estate Concentration. Shall cause each Principal
Insurance Subsidiary on an individual basis to maintain at all times a Real
Estate Concentration Ratio equal to or less than 50%.
SECTION 7.12 Investment Quality. Shall cause each Principal Insurance
Subsidiary on an individual basis to maintain at all times a ratio of (x)
Non-Investment Grade Obligations to (y) Total Invested Assets to be equal to or
less that 15%.
SECTION 7.13 Intentionally Omitted.
SECTION 7.14 Insurance Company Leverage Ratio. Shall cause (a) all
Principal Insurance Subsidiaries on a combined basis to maintain at all times an
aggregate Insurance Company Leverage Ratio of greater than 8.33%, and (b) each
Principal Insurance Subsidiary on an individual basis to maintain at all times
an Insurance Coverage Leverage Ratio of greater than 7.50%.
SECTION 7.15 Insurance Ratings. Shall cause each of the following
Subsidiaries to maintain at all times an insurance rating from A.M. Best equal
to or better than the rating set forth opposite such Subsidiary's name:
Subsidiary Rating
Pioneer Life Insurance Company of Illinois B
Manhattan National Life Insurance Company A-
National Group Life Insurance Company B
If A.M. Best shall cease to issue ratings for the above-referenced Subsidiaries,
the Banks and the Company shall negotiate in good faith to agree upon a
substitute rating agency and after such substitute rating agency is agreed upon,
the foregoing minimum ratings will be amended to reflect the equivalent rating
by such substitute rating agency.
SECTION 7.16 Intentionally Omitted.
SECTION 7.17 Change in Nature of Business. Not, and not permit the
Company and its Material Subsidiaries as a whole to, make any material change in
the nature of its business carried on as of the date first stated above,
provided, however, the Company or any Material Subsidiary may make changes in
the nature of its business provided that any such change made is related in any
way to the medical or insurance businesses.
SECTION 7.18 Depository Relationship. The Company shall maintain its
primary depository and remittance relationship with the Banks. Pursuant to such
primary depository and remittance relationship, the Company shall maintain with
each Bank average available demand deposits equal to the amount needed to cover
non-credit services provided by such Bank to the Company and its Subsidiaries,
such amount to be determined according to the published fee schedules of such
Bank; provided, however, that the failure of the Company to maintain such amount
with each Bank shall not be an Event of Default under this Agreement. The
Company agrees that if the amount of available demand deposits maintained by the
Company with such Bank are insufficient to equal the amount needed to cover
non-credit services provided by such Bank, then such Bank may charge the Company
a deficiency fee sufficient to cover such non-credit services, such deficiency
fee to be determined according to the published fee schedules of such Bank or
the fees being charged to the Company at that time, whichever are less.
SECTION 7.19 Employee Benefit Plans. Not permit, and not permit any
ERISA Affiliate to permit, any condition to exist in connection with any Plan
which might constitute grounds for the PBGC to institute proceedings to have
such Plan terminated or a trustee appointed to administer such Plan; and not
engage in, or permit to exist or occur, or permit any ERISA Affiliate to engage
in, or permit to exist or occur, any other condition, event or transaction with
respect to any Plan which would result in the incurrence by the Company or any
ERISA Affiliate of any liability, fine or penalty, which in either case would in
the Company's determination materially and adversely affect the Company's
business, operations or financial condition, or the ability of the Company to
perform its obligations hereunder and under the Related Documents to which it is
a party.
SECTION 7.20 Use of Proceeds. Not, and not permit any Subsidiary to, use
or permit the direct or indirect use of any proceeds of or with respect to the
Loans for the purpose, whether immediate, incidental or ultimate, of "purchasing
or carrying" (within the meaning of Regulation U) Margin Stock.
SECTION 7.21 Other Agreements. Not, and not permit any Material
Subsidiary to, enter into any agreement containing any provision which would be
violated or breached by the performance of the Company's obligations hereunder,
under any Related Document or under any instrument or document delivered or to
be delivered by the Company hereunder or thereunder or in connection herewith or
therewith or which would violate or breach any provision hereof or thereof or of
any such instrument or document.
SECTION 7.22 Compliance with Applicable Laws. Comply, and cause each
Material Subsidiary to comply, with the requirements of all applicable laws,
rules, regulations, and orders of all governmental authorities (federal, state,
local or foreign, and including, without limitation, Environmental Laws and
Insurance Laws), a breach of which would in the Company's determination
materially and adversely affect the Company's or such Material Subsidiary's
business, operations or financial condition, or which would impair the Company's
ability to perform its obligations hereunder and under the Related Documents to
which it is a party.
SECTION 7A
UNRESTRICTED SUBSIDIARIES
SECTION 7A.1 Unrestricted Subsidiaries. The Company may, from time to
time, by written notice to each Bank, designate a Subsidiary as an Unrestricted
Subsidiary (referred to herein as an "Unrestricted Subsidiary") provided that
each of the following conditions is satisfied:
(a) the proposed Unrestricted Subsidiary shall not be a Material
Subsidiary existing on the Closing Date;
(b) the aggregate Unrestricted Subsidiary Indebtedness of all
Unrestricted Subsidiaries, including the Unrestricted Subsidiary Indebtedness of
the proposed Unrestricted Subsidiary, shall not exceed $40,000,000;
(c) the proposed Unrestricted Subsidiary shall have no financial
obligations, liabilities or dealings of any kind with the Company or any
Material Subsidiary of the Company, except for (i) ordinary overhead
allocations, (ii) marketing agreements, administration agreements and other
agreements which the Company customarily enters into with its Subsidiaries so
long as the terms of such agreements are no less favorable to the Company than
the terms of agreements the Company enters into with its other Subsidiaries, and
(iii) other customary inter-corporate dealings so long as the terms of such
dealings are no less favorable to the Company than the terms of dealings the
Company enters into with its other Subsidiaries; and
(d) the proposed Unrestricted Subsidiary shall not have, permit to
exist or incur any undertaking, indebtedness, obligation or other liability
pursuant to which recourse may be made to the Company or any Material Subsidiary
of the Company, and neither the Company nor any Material Subsidiary of the
Company shall be or become a guarantor or surety of, or otherwise be or become
responsible in any manner (whether by support agreement or agreement to purchase
any obligations, stock, assets, goods or services, or to supply or advance any
funds, assets, goods or services, or otherwise) with respect to any undertaking,
indebtedness, obligation or other liability of such proposed Unrestricted
Subsidiary; provided, however, that the proposed Unrestricted Subsidiary shall
be permitted to engage in the types of transactions prohibited by this Section
7A.1(d), and the Company shall be permitted to provide guarantees and sureties,
if the Company's obligations under such transactions, guaranties and sureties
(i) are expressly subordinated to the Company's obligations under this Agreement
and (ii) shall not exceed $2,000,000 in the aggregate for any one Unrestricted
Subsidiary.
SECTION 7A.2 Additional Unrestricted Subsidiaries. In addition to the
Unrestricted Subsidiaries designated pursuant to Section 7A.1 above, the Company
and the Majority Banks can agree to designate any Subsidiary as an Unrestricted
Subsidiary. Any Unrestricted Subsidiary Indebtedness of an Unrestricted
Subsidiary designated as such pursuant to this Section 7A.2 shall be excluded
from the calculation of the aggregate Unrestricted Subsidiary Indebtedness
permitted pursuant to Section 7A.1.
SECTION 7A.3 Effectiveness of Designation. The designation by the
Company of a Subsidiary as an Unrestricted Subsidiary shall become effective
five (5) Business Days after the Company delivers a written notice of such
designation to each Bank, which notice shall certify that all of the conditions
set forth in Section 7A.1 have been satisfied with respect to such Unrestricted
Subsidiary.
SECTION 7A.4 Effect of Designation. Other than for purposes of the
financial statements referenced in Section 7.1 hereof, the assets, liabilities,
Unrestricted Subsidiary Indebtedness, income, losses, cash flow, net worth,
liens and other relevant amounts and factors concerning any Unrestricted
Subsidiary shall be excluded from the computations referenced in Sections 7.6
and 7.9 of this Agreement and, to the extent applicable, the computations
referenced in Sections 7.10 through 7.16, inclusive, of this Agreement, and the
Unrestricted Subsidiaries shall not be subject to any of the other limitations
or restrictions contained herein.
SECTION 8
CONDITIONS TO MAKING THE LOANS
SECTION 8.1 Conditions Precedent. Each Bank's obligation to make its
Loan is subject to the satisfaction of each of the following conditions
precedent:
(a) Fees and Expenses. The Company shall have paid all fees owed to
each of the Banks and reimbursed each of the Banks for all expenses due and
payable hereunder on or before the Closing Date including, but not limited to,
ANB's counsel fees provided for in Section 10.4 to the extent such counsel shall
have requested payment of such fees.
(b) Documents. Each Bank shall have received all of the following,
each duly executed and delivered and dated the Closing Date, in form and
substance satisfactory to each Bank:
(i) Agreement. This Agreement, executed by the Company and each
Bank.
(ii) Note. A Promissory Note, substantially in the form of Exhibit A
hereto, with appropriate insertions, issued to such Bank and executed by
the Company.
(iii) Resolutions. Certified copies of resolutions of
the Company's Board of Directors or the Executive Committee of the
Company's Board of Directors authorizing the execution, delivery and
performance of this Agreement and the Related Documents to which the
Company is a party and any other documents provided for herein or therein
to be executed by the Company.
(iv) Consents. Certified copies of all documents evidencing any
necessary corporate action, consents and governmental approvals, if any,
with respect to this Agreement, the Related Documents, and any other
documents provided for herein or therein to be executed by the Company.
(v) Incumbency and Signatures. A certificate of the Secretary or an
Assistant Secretary of the Company certifying the names of the officer or
officers of the Company authorized to sign this Agreement and the Related
Documents to which the Company is a party and any other documents provided
for herein or therein to be executed by the Company, together with a sample
of the true signature of each such officer. Each Bank may conclusively
rely on each such certificate until formally advised by a like certificate
of any changes therein.
(vi) Opinion of Counsel. Opinion of the general counsel or the
assistant general counsel to the Company in form and substance reasonably
satisfactory to each Bank.
(vii) Constitutive Documents. Certified copies of the Company's
articles of incorporation and by-laws.
(viii) Good Standing Certificates. Certificates of good standing
for the Company in Delaware and Illinois and a certificate of the insurance
commissioner or similar official of the jurisdiction of incorporation of
each Principal Insurance Subsidiary as to the good standing of such
Principal Insurance Subsidiary.
(ix) Other. Such other documents as each Bank may reasonably request.
(c) No Default. No Event of Default shall have occurred and be
continuing or will result from the making of the Loans requested to be made on
the Closing Date.
SECTION 9
EVENTS OF DEFAULT AND THEIR EFFECT
SECTION 9.1 Events of Default. Each of the following shall constitute
an Event of Default under this Agreement following the expiration of any
applicable notice or cure period:
(a) Nonpayment of the Loans. Default in the payment when due of the
principal of or interest on the Loans, or the payment when due of any fees or
any other amounts payable by the Company hereunder and continuance of such
default for five (5) Business Days after the applicable due date, or default in
<PAGE>
the payment when due of the principal of or interest on any loan made under the
Revolving Credit Agreement or the Term Loan A Credit Agreement, or the payment
when due of any fees or any other amounts payable by the Company under the
Revolving Credit Agreement or the Term Loan A Credit Agreement, and continuance
of such default beyond the applicable grace period as set forth in the Revolving
Credit Agreement or the Term Loan A Credit Agreement, as the case may be.
(b) Nonpayment of Other Indebtedness. Default in the payment when
due (subject to any applicable grace period), whether by acceleration or
otherwise, of any other Indebtedness of, or guaranteed by, the Company or any
Material Subsidiary if the aggregate amount of any such other Indebtedness that
is accelerated or due and payable, or that may be accelerated or otherwise
become due and payable, by reason of such default is $5,000,000 or more, or
default in the performance or observance of any obligation or condition with
respect to any such other Indebtedness if the effect of such default is to
accelerate the maturity of any such Indebtedness or cause any of such
Indebtedness of $5,000,000 or more to be prepaid, purchased or redeemed or to
permit the holder or holders thereof, or any trustee or agent for such holders,
to cause such Indebtedness of $5,000,000 or more to become due and payable prior
to its expressed maturity or to cause such Indebtedness of $5,000,000 or more to
be prepaid, purchased or redeemed.
(c) Bankruptcy or Insolvency. The Company becomes insolvent or
generally fails to pay, or admits in writing its general inability to pay, debts
as they become due; or the Company applies for, consents to, or acquiesces
in the appointment of, a trustee, receiver or other custodian for the Company,
or any property thereof, or makes a general assignment for the benefit of
creditors; or, in the absence of such application, consent or acquiescence, a
trustee, receiver or other custodian is appointed for the Company or for a
substantial part of the property thereof and is not discharged within 60 days;
or any bankruptcy, reorganization, debt arrangement, or other case or proceeding
under any bankruptcy or insolvency law, or any dissolution or liquidation
proceeding, is commenced in respect of the Company, and if such case or
proceeding is not commenced by the Company, it is consented to or acquiesced in
by the Company or remains for 60 days undismissed; or the Company takes any
corporate action to authorize, or in furtherance of, any of the foregoing or the
insurance commission or department of any Principal Insurance Subsidiary's state
of domicile takes any action against such Principal Insurance Subsidiary or the
Company in connection with any of the foregoing.
(d) Specified Noncompliance with this Agreement. Failure by the
Company to comply with or to perform under Section 7.2 (only with respect to the
maintenance of the existence of the Company), Sections 7.6 through 7.16,
inclusive, and Section 7.21 hereunder and continuance of such failure for five
(5) Business Days after (i) written notice thereof to the Company from the
Majority Banks or (ii) any Authorized Officer of the Company knew or should have
known of such failure to comply or perform; provided, however, that, with
respect to the failure by the Company to comply with or to perform under
Sections 7.10 through 7.14, inclusive, the continuance of such failure shall be
extended from five (5) Business Days to thirty (30) days if each Bank receives
written notice from the Company prior to the expiration of such five (5)
Business Day period that such failure is curable within such thirty (30) day
period.
(e) Other Noncompliance with this Agreement. Failure by the Company
to comply with or to perform any provision of this Agreement (and not
constituting an Event of Default under any of the other provisions of this
Section 9) and continuance of such failure for sixty (60) days after (i) written
notice thereof to the Company from the Majority Banks or (ii) any Authorized
Officer of the Company knew of such failure to comply or perform.
(f) Representations and Warranties. Any representation or warranty
made by the Company herein or in any Related Document is breached in any
material respect or is known by the Company to have been false or misleading in
any material respect when given, or any schedule, certificate, financial
statement, report, notice, or other writing furnished by the Company to any Bank
is known by the Company to have been false or misleading in any material respect
on the date as of which the facts therein set forth are stated or certified.
(g) Employee Benefit Plans. (i) Institution by the PBGC, the Company
or any ERISA Affiliate of steps to terminate a Plan subject to Title IV of ERISA
if as a result of such termination, the Company or any ERISA Affiliate would be
required to make a material contribution to such Plan, or would incur a material
liability or obligation to such Plan, (ii) occurrence of a contribution failure
with respect to any Plan sufficient to give rise to a lien under Section 302(f)
of ERISA, or (iii) incurrence of any material liability (including current or
potential withdrawal liability) by the Company or any ERISA Affiliate with
respect to any Multiemployer Plan.
(h) Judgments. There shall be entered against the Company one or
more final unappealable judgments or decrees in excess of $5,000,000 in the
aggregate at any one time outstanding for the Company, excluding those judgments
or decrees (i) that shall have been stayed, vacated or bonded, (ii) that shall
have been outstanding less than 30 days from the entry thereof, (iii) for and to
the extent to which the Company is insured and with respect to which the insurer
specifically has determined that it shall assume responsibility in writing or
(iv) for and to the extent to which the Company is otherwise indemnified if the
terms of such indemnification are satisfactory to the Majority Banks.
SECTION 9.2 Effect of Event of Default. If any Event of Default
described in Section 9.1(c) shall occur, the Loans, the Notes and all other
Liabilities shall become immediately due and payable, all without presentment,
demand or notice of any kind, all of which, except as expressly set forth
herein, are hereby expressly waived by the Company; and, in the case of any
other Event of Default, the Majority Banks may, by written notice to the
Company, declare the Loans, the Notes and all other Liabilities to be due and
payable, whereupon the Loans, the Notes and all other Liabilities shall become
immediately due and payable, all without presentment, demand or notice of any
kind, all of which, except as expressly set forth herein, are hereby expressly
waived by the Company.
SECTION 10
GENERAL
SECTION 10.1 Amendments and Waivers. No amendment or waiver of any
provision of this Agreement or any other Related Document, and no consent with
respect to any departure by the Company therefrom, shall be effective unless the
same shall be in writing and signed by the Majority Banks, and, in the case of
amendments, signed by the Company, and then any such waiver shall be effective
only in the specific instance and for the specific purpose for which given;
provided, however, that no such waiver, amendment, or consent shall, unless in
writing and signed by all the Banks, and, in the case of an amendment, signed by
the Company, do any of the following:
(a) subject any Bank to any additional obligations;
(b) postpone or delay any date fixed for any payment of principal,
interest, fees or other amounts due to the Banks (or any of them) hereunder or
under any other Related Document;
(c) reduce the principal of, or the rate of interest specified herein
on the Loans, or of any fees or other amounts payable hereunder or under any
other Related Document;
(d) change the percentage of the Commitments which shall be required
for the Banks or any of them to take action hereunder; or
(e) amend this Section 10.1 or any provision providing for consent or
other action by all Banks.
SECTION 10.2 Notices. All notices hereunder shall be in writing.
Notices given by mail shall be deemed to have been given (i) five (5) Business
Days after the date sent if sent by registered or certified mail, postage
prepaid, (ii) the next Business Day if sent by overnight delivery service, (iii)
the day sent if sent by telecopy or telex if sent prior to 5:00 p.m. local time
on a Business Day, otherwise the following day, or (iv) the day delivered if
sent by personal messenger, and:
(a) if to the Company, addressed to the Company at its address shown
below its signature hereto; or
(b) if to a Bank, addressed to such Bank at the address shown below
its signature hereto;
or in the case of any party, such other address as such party, by
written notice received by the other parties to this Agreement, may have
designated as its address for notices.
SECTION 10.3 Accounting Terms; Computations. Unless otherwise indicated,
all accounting terms used herein and not expressly defined in this Agreement
shall have the respective meanings given to them in accordance with GAAP as in
effect on the Closing Date. Where the character or amount of any asset or
liability or item of income or expense is required to be determined, or any
consolidation or other accounting computation is required to be made, for
purposes of this Agreement such determination or calculation shall, to the
extent applicable and except as otherwise specified in this Agreement or agreed
to in writing by the Majority Banks, be made in accordance with GAAP as then in
effect.
SECTION 10.4 Costs, Expenses and Taxes.
(a) The Company agrees to pay within thirty (30) days after demand by
each Bank all of such Bank's reasonable out-of-pocket costs and expenses
(including the reasonable fees and out-of-pocket expenses of such Bank's
counsel) in connection with the preparation, execution and delivery of this
Agreement, the Related Documents and all other instruments or documents provided
for herein or delivered or to be delivered hereunder or in connection herewith
(including, without limitation, all amendments, supplements and waivers executed
and delivered pursuant hereto or in connection herewith).
(b) The reasonable costs and expenses which any Bank incurs in any
manner or way with respect to the following shall be part of the Liabilities,
payable by the Company within thirty (30) days after demand if at any time after
the date of this Agreement such Bank: (i) reasonably employs counsel for advice
or other representation (A) to represent such Bank in any litigation, contest,
dispute, suit or proceeding or to commence, defend or intervene or to take
any other action in or with respect to any litigation, contest, dispute, suit or
proceeding (whether instituted by such Bank, any other Bank, the Company or any
other Person) in any way or respect relating to this Agreement or the Related
Documents or (B) to enforce any of such Bank's rights with respect to the
Company under this Agreement and the Related Documents; and/or (ii)
reasonably seeks to enforce or enforces any of such Bank's rights and remedies
with respect to the Company under this Agreement and the Related Documents.
(c) All of the Company's obligations provided for in this Section
10.4 shall be Liabilities of the Company hereunder.
SECTION 10.5 Indemnification. In consideration of each Bank's execution
and delivery of this Agreement and each Bank's agreement to make and maintain
its Loan, the Company hereby agrees to indemnify, exonerate and hold such Bank
and each of its officers, directors, employees and agents (herein collectively
called the "Bank Parties" and individually called a "Bank Party") free and
harmless from and against any and all actions, causes of action, suits, losses,
costs (including, without limitation, all documentary or other stamp taxes or
duties), liabilities and damages, and expenses in connection therewith
(irrespective of whether such Bank Party is a party to the action for which
indemnification hereunder is sought) (the "Indemnified Liabilities"), including,
without limitation, reasonable attorneys' fees and disbursements, incurred by
such Bank Parties or any of them as a result of, or arising out of, or relating
to (except for such Indemnified Liabilities arising on account of such Bank
Party's gross negligence or willful misconduct):
(a) any transaction financed or to be financed in whole or in part,
directly or indirectly, with the proceeds of the Loans;
(b) the execution, delivery, performance, administration
or enforcement of this Agreement and the Related Documents in accordance with
their respective terms by any of such Bank Parties;
(c) any misrepresentation or breach of any representation or warranty
or covenant herein by the Company.
If and to the extent that the foregoing agreements described in this Section
10.5 may be unenforceable for any reason, the Company hereby agrees to make the
maximum contribution to the payment and satisfaction of each of the Indemnified
Liabilities which is permissible under applicable law.
SECTION 10.6 Captions and References. The recitals to this Agreement
(except for definitions) and the section captions used in this Agreement are for
convenience only, and shall not affect the construction of this Agreement.
SECTION 10.7 No Waiver; Cumulative Remedies. No failure to exercise and
no delay in exercising, on the part of the Banks or any Bank, any right, remedy,
power or privilege hereunder, shall operate as a waiver thereof; nor shall any
single or partial exercise of any right, remedy, power or privilege hereunder
preclude any other or further exercise thereof or the exercise of any other
right, remedy, power or privilege.
SECTION 10.8 Governing Law; Jury Trial; Severability. This Agreement and
each Note shall be a contract made under and governed by the laws of the State
of Illinois, without regard to conflict of laws principles. Wherever possible,
each provision of this Agreement shall be interpreted in such manner as to be
effective and valid under applicable law, but if any provision of this Agreement
shall be prohibited by or invalid under such law, such provision shall be
ineffective only to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of this
Agreement. All obligations of the Company and rights of each Bank, which
obligations and rights are described herein or in the Note issued to such Bank,
shall be in addition to and not in limitation of those provided by applicable
law.
THE COMPANY HEREBY IRREVOCABLY WAIVES ANY RIGHT TO TRIAL BY JURY IN ANY
ACTION OR PROCEEDING (i) TO ENFORCE OR DEFEND ANY RIGHTS UNDER OR IN CONNECTION
WITH THIS AGREEMENT, THE RELATED DOCUMENTS, THE LOANS, OR ANY AMENDMENT,
INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE
DELIVERED IN CONNECTION HEREWITH OR THEREWITH, OR (ii) ARISING FROM ANY DISPUTE
OR CONTROVERSY IN CONNECTION WITH OR RELATED TO THIS AGREEMENT, THE RELATED
DOCUMENTS, THE LOANS, OR ANY SUCH AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT,
AND AGREES THAT ANY SUCH ACTION OR COUNTERCLAIM SHALL BE TRIED BEFORE A COURT
AND NOT BEFORE A JURY.
____________________
Agreed and Acknowledged by the Company
THE COMPANY IRREVOCABLY AGREES THAT, SUBJECT TO EACH BANK'S SOLE AND
ABSOLUTE ELECTION, ANY ACTION OR PROCEEDING IN ANY WAY, MANNER OR RESPECT
ARISING OUT OF THIS AGREEMENT, THE RELATED DOCUMENTS, THE LOANS, OR ANY
AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE
FUTURE BE DELIVERED IN CONNECTION HEREWITH OR THEREWITH, OR ARISING FROM ANY
DISPUTE OR CONTROVERSY ARISING IN CONNECTION WITH OR RELATED TO THIS AGREEMENT,
THE RELATED DOCUMENTS, THE LOANS, OR ANY SUCH AMENDMENT, INSTRUMENT, DOCUMENT OR
AGREEMENT SHALL BE LITIGATED IN THE COURTS HAVING SITUS WITHIN THE CITY OF
CHICAGO, THE STATE OF ILLINOIS, AND THE COMPANY HEREBY CONSENTS AND SUBMITS TO
THE JURISDICTION OF ANY LOCAL, STATE OR FEDERAL COURT LOCATED WITHIN SUCH CITY
AND STATE. THE COMPANY HEREBY WAIVES ANY RIGHT IT MAY HAVE TO TRANSFER OR
CHANGE THE VENUE OF ANY LITIGATION BROUGHT AGAINST THE COMPANY BY ANY BANK IN
ACCORDANCE WITH THIS SECTION 10.8.
SECTION 10.9 Counterparts. This Agreement and any amendment or
supplement hereto or any waiver or consent granted in connection herewith may be
executed in any number of counterparts and by the different parties on separate
counterparts and each such counterpart shall be deemed to be an original, but
all such counterparts shall together constitute but one and the same Agreement.
SECTION 10.10 Successors and Assigns. Subject to Section 10.12, this
Agreement shall be binding upon the Company, each Bank and their respective
successors and assigns, and shall inure to the benefit of the Company, each Bank
and each Bank's successors and assigns. The Company shall have no right to
assign its rights or delegate its duties under this Agreement.
SECTION 10.11 Prior Agreements. The terms and conditions set forth in
this Agreement shall supersede all prior negotiations, agreements, discussions,
correspondence, memoranda and understandings (whether written or oral) of the
Company and the Banks concerning or relating to the subject matter of this
Agreement.
SECTION 10.12 Assignments; Participations. (a) Each Bank shall have the
right to assign, with the written consent of the Company, which shall not be
unreasonably withheld, to any Affiliate of such Bank and to one or more banks or
other financial institutions, all or a portion of its rights and obligations
under this Agreement (including, without limitation, all or a portion of its
Loan and the Note issued to such Bank) and the Related Documents. For purposes
of this Section, it shall not be unreasonable for the Company to withhold its
consent to a proposed assignee if, as a result of such proposed assignment, any
one Bank's Commitment Percentage would be in excess of fifty percent (50%) or
there would be more than six (6) banks or financial institutions party to this
Agreement. Upon any such assignment, (x) the assignee shall become a party
hereto and, to the extent of such assignment, have all rights and obligations of
such Bank hereunder and under the Related Documents and (y) such Bank shall, to
the extent of such assignment, relinquish its rights and be released from its
obligations hereunder and under the Related Documents. The Company hereby
agrees to execute and deliver such documents, and to take such other actions, as
such Bank may reasonably request to accomplish the foregoing. Upon such
assignment, this Agreement shall be deemed to be amended to the extent, but only
to the extent, necessary to reflect the addition of the assignee and the
resulting adjustment of the Commitment Percentages arising therefrom.
(b) In addition to the assignments permitted in clause (a) of this
Section 10.12, each Bank and any assignee pursuant to clause (a) above shall
have the right with the written consent of the Company to grant participations
to one or more banks or other financial institutions in or to its Loan, the
Related Documents, and the Note held by such Bank or such assignee, provided
that (i) each Bank's obligations under this Agreement shall remain unchanged and
(ii) the Company shall continue to deal solely and exclusively with such Bank.
No holder of a participation in all or any part of a Loan, the Related
Documents, or any Note shall have any rights under this Agreement; provided,
however, that, to the extent permitted by applicable law, each holder of a
participation shall have the same rights as each Bank under Section 5.3.
(c) The Company hereby consents to the disclosure of any information
obtained in connection herewith (i) by each Bank, to any bank or other financial
institution which is an assignee or potential assignee with respect to which the
Company has given its written consent pursuant to clause (a) above, and (ii) by
each Bank and any assignee pursuant to clause (a) above, to any bank or other
financial institution which is a participant or potential participant with
respect to which the Company has given its written consent pursuant to
clause (b) above, it being understood that each Bank and each assignee shall
advise any such bank or other financial institution of its obligation to keep
confidential any nonpublic information disclosed to it pursuant to this
Section 10.12 .
SECTION 10.13 Confidentiality. Each Bank agrees to take normal and
reasonable precautions and exercise due care to maintain the confidentiality of
all information provided to it by the Company in connection with this Agreement
or any other Related Document, and neither it nor any of its Affiliates shall
use any such information for any purpose or in any manner other than pursuant to
the terms contemplated by this Agreement, except to the extent such information
(i) was or becomes generally available to the public other than as a result of a
disclosure by such Bank, or (ii) was or becomes available on a non-confidential
basis from a source other than the Company, provided that such source is not
bound by a confidentiality agreement with the Company known to such Bank;
provided, further, however, that any Bank may disclose such information (A) at
the request or pursuant to any requirement of any governmental or regulatory
authority to which such Bank is subject or in connection with an examination of
such Bank by any such authority; (B) pursuant to subpoena or other court
process, provided that, if it is lawful to do so, such Bank shall give prompt
notice to the Company of service thereof so that the Company may seek a
protective order or other appropriate remedy or waive compliance with the
provisions of this Section 10.13; (C) when required to do so in accordance with
the provisions of any applicable requirement of law; (D) to the extent
reasonably required in connection with any litigation or proceeding to which any
Bank or their respective Affiliates may be party, (E) to the extent reasonably
required in connection with the exercise of any remedy hereunder or under any
other Related Document, and (F) to such Bank's independent auditors and other
professional advisors provided that each such entity agrees to maintain the
confidentiality of such information pursuant to the terms of this Section.
SECTION 10.14 Credit Decision. Each Bank expressly acknowledges that no
other Bank has made any representation or warranty to it and that no act by any
other Bank hereinafter taken, including any review of the affairs of the Company
and its Subsidiaries, shall be deemed to constitute any representation or
warranty by such other Bank to any Bank. Each Bank represents to the other
Banks that it has independently and without reliance upon such other Banks and
based on such documents and information as it has deemed appropriate, made its
own appraisal of and investigation into the business, prospects, operations,
property, financial and other condition and creditworthiness of the Company and
its Subsidiaries, and all applicable bank regulatory and other laws and
regulations relating to the transactions contemplated thereby, and made its own
decision to enter into this Agreement and extend credit to the Company
hereunder. Each Bank also represents that it will, independently and without
reliance upon the other Banks and based on such documents and information as it
shall deem appropriate at the time, continue to make its own credit analysis,
appraisals and decisions in taking or not taking action under this Agreement and
the other Related Documents, and to make such investigations as it deems
necessary to inform itself as to the business, prospects, operations, property,
financial and other condition and creditworthiness of the Company and its
Subsidiaries. No Bank shall have any duty or responsibility to provide any
other Bank with any credit or other information concerning the business,
prospects, operations, property, financial and other condition or
creditworthiness of the Company which may come into the possession of such Bank.
IN WITNESS WHEREOF, the Company and each Bank have caused this Agreement
to be executed and delivered as of the day and year first above written.
THE COMPANY:
PIONEER FINANCIAL SERVICES, INC.
By:
Title:
1750 Golf Road
Schaumburg, Illinois 60101
Attention: David Vickers
Val Rajic
Telephone: (708) 995-0400
Telecopy: (708) 413-7195
THE BANKS:
COMMITMENT: AMERICAN NATIONAL BANK AND TRUST
$1,930,435 COMPANY OF CHICAGO
By
Vice President
33 North LaSalle Street
Chicago, Illinois 60690
Attention: Arthur W. Murray
Telephone: (312) 661-6943
Telecopy: (312) 661-6675
$965,217 FIRSTAR BANK MILWAUKEE, N.A.
By
Title:
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
Attention: Azad J. Virani
Telephone: (414) 765-6932
Telecopy: (414) 765-6236
$4,826,087 BANK ONE, ROCKFORD, NA
By
Title:
East State at Mulford Road
Rockford, Illinois 61110-4900
Attention: Robert Opperman
Telephone: (815) 962-3771
Telecopy: (815) 394-1889
$3,378,261 LASALLE NATIONAL BANK
By
Title:
120 South LaSalle Street
Chicago, Illinois 60603
Attention: James C. Tucker
Telephone: (312) ___-____
<PAGE>
Telecopy: (312) ___-____
Schedule 5.1
Wire Transfer/Account Information
American National Bank and
Trust Company of Chicago
ABA #: 071000770
Account No.: 4069692
Reference: Pioneer Term Loan B
Firstar Bank Milwaukee, N.A.
ABA #: 075000022
Reference: Pioneer Term Loan B
Bank One, Rockford, NA
ABA #: 071900401
Reference: Pioneer Term Loan B
LaSalle National Bank
ABA #: _______________
Reference: Pioneer Term Loan B
Schedule 6.11
Tax Liabilities
None
Schedule 6.17
Subsidiaries
Principal Insurance Subsidiaries
Insurance Subsidiaries
Other Subsidiaries
Exhibit 10 (v)
Execution
Copy
AMENDMENT TO CREDIT AGREEMENT
(Revolving Credit Agreement)
Amendment to Amended and Restated Credit Agreement (the "Amendment") dated
as of August 30, 1995 among (i) PIONEER FINANCIAL SERVICES, INC., a Delaware
corporation (the "Company"), (ii) AMERICAN NATIONAL BANK AND TRUST COMPANY OF
CHICAGO, as administrative agent (in such capacity, the "Agent") and (iii)
AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO ("ANB"), FIRSTAR BANK
MILWAUKEE, N.A. ("Firstar") and BANK ONE, ROCKFORD, NA ("Bank One") (ANB,
Firstar and Bank One collectively referred to as the "Banks" and individually as
a "Bank").
R E C I T A L S
WHEREAS, the Company, the Agent and the Banks have heretofore entered into
an Amended and Restated Credit Agreement dated as of March 22, 1995 (the
"Revolving Credit Agreement"), pursuant to which, among other things, the Banks
agreed, upon the terms and subject to the conditions set forth therein, to make
Loans (as defined in the Revolving Credit Agreement) to the Company;
WHEREAS, contemporaneously with the execution and delivery of this
Amendment, the Company, the Banks and LaSalle National Bank have entered into
that certain Credit Agreement dated as of the date hereof (the "Term Loan B
Credit Agreement") pursuant to which, among other things, the Banks and LaSalle
National Bank agreed, upon the terms and subject to the conditions set forth
therein, to make term loans to the Company in an aggregate principal amount of
$11,100,000;
WHEREAS, the Company and the Banks desire to amend certain provisions of
the Revolving Credit Agreement;
NOW THEREFORE, in consideration of the premises and the mutual agreements
contained herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
Section 1. Definitions, Ratification, References. Unless otherwise
specifically defined herein, each term used herein that is defined in the
Revolving Credit Agreement shall have the meaning assigned to such term in the
Revolving Credit Agreement. Except as amended and supplemented hereby, all of
the terms of the Revolving Credit Agreement shall remain and continue in full
force and effect and are hereby confirmed in all respects. Each reference to
"hereof", "hereunder", "herein" and "hereby" and each other similar reference
and each reference to "this Agreement" and each other similar reference
contained in the Revolving Credit Agreement shall from and after the date of
this Amendment refer to the Revolving Credit Agreement as amended by this
Amendment.
Section 2. Amendments to Revolving Credit Agreement.
2.1 The definition of "Term Loan Credit Agreement" that appears in Section
1 of the Revolving Credit Agreement is deleted and the following definitions are
added to Section 1 of the Revolving Credit Agreement:
"`Authorized Officer' means the Chairman, the President, any
Executive Vice President, the Treasurer, any Vice President or any
other officer of the Company that are designated as authorized
officers pursuant to a resolution of the Board of Directors or the
Executive Committee of the Board of Directors of the Company (each
Bank shall be entitled to rely on such resolution until revoked or
amended in writing by the Company).
"Indebtedness" means, as of any date, all indebtedness,
obligations or other liabilities of the Company and its Subsidiaries
as of such date (i) for borrowed money, (ii) evidenced by bonds,
debentures, notes or other similar instruments for borrowed money, or
(iii) pursuant to any guarantee of any indebtedness, obligations or
other liabilities of any other Person of the type described in clauses
(i) or (ii); provided, however, that (a) the amounts set forth in
clauses (i), (ii) and (iii) shall not be double counted and shall
relate only to amounts actually owed or otherwise outstanding as of
such date and (b) Indebtedness shall not include indebtedness,
obligations or other liabilities of the Company to any Subsidiary or
indebtedness, obligations or other liabilities of any Subsidiary to
the Company or another Subsidiary.
"Net Worth" means, with respect to the Company, as at the time
any determination thereof is made, the consolidated shareholders'
equity, including common stock, additional paid-in capital, retained
earnings, and net unrealized gains and losses, but excluding any
increase or decrease in the Company's "available for sale investment
portfolio" (as calculated in accordance with GAAP) since June 30,
1995.
"Permitted Liens" means (i) purchase money security interests
hereinafter incurred in connection with the acquisition of assets or
property; (ii) Liens for taxes, assessments or governmental charges or
levies on property of the Company if the same shall not at the time be
delinquent or thereafter can be paid without penalty, or are being
contested in good faith and by appropriate proceedings and as to which
the Company shall have set aside on its books such reserves as are
required by GAAP with respect to any such taxes, assessments or other
governmental charges; (iii) Liens imposed by law, such as carriers',
warehousemen's and mechanics' liens and other similar liens, which
arise in the ordinary course of business with respect to obligations
not yet due or being contested in good faith by appropriate
proceedings and as to which the Company shall have set aside on its
books such reserves as are required by GAAP with respect to any such
Liens; (iv) Liens arising out of pledges or deposits under insurance
laws, worker's compensation laws, unemployment insurance, old age
pensions, or other Social Security or retirement benefits, or similar
legislation; (v) Liens consisting of mortgages, deeds of trust, liens
or security interests on any interest of the Company as sublessor
under any sublease of property which solely secure obligations of the
Company as the lessee of such property and extensions or renewals
thereof; and (vi) Liens consisting of mortgages, deeds of trust or
similar encumbrances that may be incurred by the Company or an
Insurance Subsidiary of the Company in connection with the Company's
or such Insurance Subsidiary's purchase or refinancing of the building
and property located at 1750 Golf Road, Schaumburg, Illinois;
provided, however, that promptly after the creation of any Lien of the
type referred to in this subsection (vi), the Company shall provide to
the Agent written notice of the creation of such Lien, describing the
amount of the obligation secured thereby and the properties and assets
subject to such Lien.
"Term Loan A Credit Agreement" means that certain Credit
Agreement dated as of March 22, 1995 between the Company, the Banks
and LaSalle National Bank, as the same may be amended, supplemented or
otherwise modified from time to time.
"Term Loan B Credit Agreement" means that certain Credit
Agreement dated as of August 30, 1995 between the Company, the Banks
and LaSalle National Bank, as the same may be amended, supplemented or
otherwise modified from time to time.
"Unrestricted Subsidiary Indebtedness" means, as of any date, for
any Unrestricted Subsidiary, all indebtedness, obligations or other
liabilities of such Unrestricted Subsidiary and its Subsidiaries as of
such date (i) for borrowed money, (ii) evidenced by bonds,
debentures, notes or other similar instruments for borrowed money, or
(iii) pursuant to any guarantee of any indebtedness, obligations or
other liabilities of any other Person of the type described in clauses
(i) or (ii); provided, however, that the amounts set forth in clauses
(i), (ii) and (iii) shall not be double counted and shall relate only
to amounts actually owed or otherwise outstanding as of such date."
2.2 Section 4.3(a) of the Revolving Credit Agreement is amended in its
entirety to read as follows:
"(a) All computations of interest in respect of the Base Rate,
LIBOR and the CD Rate and all computations of letter of credit fees
pursuant to Section 4.2(c) shall be made on the basis of a year of 365
or 366 days, as the case may be, and actual days elapsed. All other
computations of fees under this Agreement shall be made on the basis
of a 360-day year and actual days elapsed. Interest and fees shall
accrue during each period during which interest or such fees are
computed from and including the first day thereof to but excluding the
last day thereof."
2.3 Section 7.7 of the Revolving Credit Agreement is amended by deleting
the term "$65,000,000" that appears in such Section and inserting in lieu
thereof the term "$112,000,000".
2.4 Section 7.9 of the Revolving Credit Agreement is amended by deleting
the phrase "pursuant to Section 7.16" that appears in such Section.
2.5 Section 9.1(a) of the Revolving Credit Agreement is amended in its
entirety to read as follows:
"(a) Nonpayment of any Loan. Default in the payment when due of
the principal of or interest on any Loan, or the payment when due or
any fees or any other amounts payable by the Company hereunder and
continuance of such default for five (5) Business Days after the
applicable due date, or default in the payment when due of the
principal of or interest on any loan made under the Term Loan A Credit
Agreement or the Term Loan B Credit Agreement, or the payment when due
of any fees or any other amounts payable by the Company under the Term
Loan A Credit Agreement or the Term Loan B Credit Agreement, and
continuance of such default beyond the applicable grace period as set
forth in the Term Loan A Credit Agreement or the Term Loan B Credit
Agreement, as the case may be."
Section 3. Effectiveness. This Amendment shall become effective as of
the date hereof upon the execution and delivery of this Amendment.
Section 4. Representations and Warranties. Each of the representations
and warranties made by the Company in Section 6 of the Revolving Credit
Agreement is true and correct as of the date hereof with the same effect as
though made on the date hereof (except to the extent that such representations
and warranties expressly refer to an earlier date, in which case they shall be
true and correct as of such earlier date).
Section 5. No Default. No Event of Default, or event which, with the
giving of notice or lapse of time, or both, would constitute an Event of
Default, has occurred and is continuing.
Section 6. Governing Law. This Amendment shall be governed by and
interpreted in accordance with the laws of the State of Illinois, without regard
to its conflicts of laws rules.
Section 7. Headings. Section headings herein are included for
convenience of reference only and shall not constitute a part of this Amendment
for any other purpose.
Section 8. Execution in Counterparts. This Amendment may be executed
in any number of counterparts and by the different parties on separate
counterparts and each such counterpart shall be deemed to be an original, but
all such counterparts shall together constitute only one agreement.
IN WITNESS WHEREOF, the Company and each Bank have caused this Amendment to
be executed and delivered as of day and year first above written.
THE COMPANY: PIONEER FINANCIAL SERVICES, INC.
By:
Title:
THE AGENT: AMERICAN NATIONAL BANK AND TRUST
COMPANY OF CHICAGO
By:
Vice President
THE BANKS: AMERICAN NATIONAL BANK AND TRUST
COMPANY OF CHICAGO
By:
Vice President
FIRSTAR BANK MILWAUKEE, N.A.
By:
Title:
BANK ONE, ROCKFORD, NA
By:
Title:
Exhibit 10 (w)
Execution
Copy
AMENDMENT TO CREDIT AGREEMENT
(Term Loan A Credit Agreement)
Amendment to Credit Agreement (the "Amendment") dated as of August 30, 1995
among (i) PIONEER FINANCIAL SERVICES, INC., a Delaware corporation (the
"Company"), and (ii) AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO
("ANB"), FIRSTAR BANK MILWAUKEE, N.A. ("Firstar"), LASALLE NATIONAL BANK
("LaSalle") and BANK ONE, ROCKFORD, NA ("Bank One") (ANB, Firstar, LaSalle and
Bank One collectively referred to as the "Banks" and individually as a "Bank").
R E C I T A L S
WHEREAS, the Company, ANB, Firstar and Bank One have heretofore entered
into a Credit Agreement dated as of March 22, 1995 (the "Term Loan A Credit
Agreement"), pursuant to which, among other things, ANB, Firstar and Bank One
agreed, upon the terms and subject to the conditions set forth therein, to make
Loans (as defined in the Term Loan A Credit Agreement) to the Company;
WHEREAS, immediately prior to the execution and delivery of this Amendment,
ANB and LaSalle have entered into that certain Assignment and Assumption
Agreement dated as of the date hereof (the "Assignment Agreement") pursuant to
which, among other things, ANB has sold and assigned to LaSalle, and LaSalle has
purchased and assumed from ANB, an interest in the Loan (as such term is defined
in the Term Loan A Credit Agreement) made by ANB to the Company in an amount
equal to $3,714,285.71 and a corresponding portion of all rights and obligations
of ANB under the Term Loan A Credit Agreement;
WHEREAS, pursuant to the Assignment Agreement, LaSalle has become a party
to the Term Loan A Credit Agreement and, to the extent of the interest assigned
pursuant to the Assignment Agreement, has all the rights and obligations of a
Bank under the Term Loan A Credit Agreement as if it were an original signatory
thereto;
WHEREAS, contemporaneously with the execution and delivery of this
Amendment, the Company and the Banks have entered into that certain Credit
Agreement dated as of the date hereof (the "Term B Credit Agreement") pursuant
to which, among other things, the Banks agreed, upon the terms and subject to
the conditions set forth therein, to make additional term loans to the Company
in an aggregate principal amount of $11,100,000;
WHEREAS, the Company and the Banks desire to amend certain provisions of
the Term Loan A Credit Agreement;
NOW THEREFORE, in consideration of the premises and the mutual agreements
contained herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
Section 1. Definitions, Ratification, References. Unless otherwise
specifically defined herein, each term used herein that is defined in the Term
Loan A Credit Agreement shall have the meaning assigned to such term in the Term
Loan A Credit Agreement. Except as amended and supplemented hereby, all of the
terms of the Term Loan A Credit Agreement shall remain and continue in full
force and effect and are hereby confirmed in all respects. Each reference to
"hereof", "hereunder", "herein" and "hereby" and each other similar reference
and each reference to "this Agreement" and each other similar reference
contained in the Term Loan A Credit Agreement shall from and after the date of
this Amendment refer to the Term Loan A Credit Agreement as amended by this
Amendment.
Section 2. Amendments to the Term Loan A Credit Agreement.
2.1 The following definitions that appears in Section 1 of the Term Loan A
Credit Agreement are amended in their entirety to read as follows:
"`Authorized Officer' means the Chairman, the President, any
Executive Vice President, the Treasurer, any Vice President or any
other officer of the Company that are designated as authorized
officers pursuant to a resolution of the Board of Directors or the
Executive Committee of the Board of Directors of the Company (each
Bank shall be entitled to rely on such resolution until revoked or
amended in writing by the Company).
"Available Cash Flow" means, with respect to the Company, for any
period, the net income of all Subsidiaries of the Company other than
Insurance Subsidiaries for such period, and shall include, without
limitation, the net income of Network Air Medical Systems, Inc.,
Association Management Corporation, Design Benefit Plans, Inc.,
Administrators Service Corporation, and National Health Services, Inc.
for such period.
"Commitment Percentage" means, as to any Bank, the percentage
equivalent at the time of determination of the outstanding principal
amount of such Bank's Loan divided by the aggregate outstanding
principal amount of all Loans."
"Indebtedness" means, as of any date, all indebtedness,
obligations or other liabilities of the Company and its Subsidiaries
as of such date (i) for borrowed money, (ii) evidenced by bonds,
debentures, notes or other similar instruments for borrowed money, or
(iii) pursuant to any guarantee of any indebtedness, obligations or
other liabilities of any other Person of the type described in clauses
(i) or (ii); provided, however, that (a) the amounts set forth in
clauses (i), (ii) and (iii) shall not be double counted and shall
relate only to amounts actually owed or otherwise outstanding as of
such date and (b) Indebtedness shall not include indebtedness,
obligations or other liabilities of the Company to any Subsidiary or
indebtedness, obligations or other liabilities of any Subsidiary to
the Company or another Subsidiary.
"Majority Banks" means at any time a group of Banks then holding
at least 51% of the then aggregate unpaid principal amount of the
Notes."
"Net Worth" means, with respect to the Company, as at the time
any determination thereof is made, the consolidated shareholders'
equity, including common stock, additional paid-in capital, retained
earnings, and net unrealized gains and losses, but excluding any
increase or decrease in the Company's "available for sale investment
portfolio" (as calculated in accordance with GAAP) since June 30,
1995.
"Permitted Liens" means (i) purchase money security interests
hereinafter incurred in connection with the acquisition of assets or
property; (ii) Liens for taxes, assessments or governmental charges or
levies on property of the Company if the same shall not at the time be
delinquent or thereafter can be paid without penalty, or are being
contested in good faith and by appropriate proceedings and as to which
the Company shall have set aside on its books such reserves as are
required by GAAP with respect to any such taxes, assessments or other
governmental charges; (iii) Liens imposed by law, such as carriers',
warehousemen's and mechanics' liens and other similar liens, which
arise in the ordinary course of business with respect to obligations
not yet due or being contested in good faith by appropriate
proceedings and as to which the Company shall have set aside on its
books such reserves as are required by GAAP with respect to any such
Liens; (iv) Liens arising out of pledges or deposits under insurance
laws, worker's compensation laws, unemployment insurance, old age
pensions, or other Social Security or retirement benefits, or similar
legislation; (v) Liens consisting of mortgages, deeds of trust, liens
or security interests on any interest of the Company as sublessor
under any sublease of property which solely secure obligations of the
Company as the lessee of such property and extensions or renewals
thereof; and (vi) Liens consisting of mortgages, deeds of trust or
similar encumbrances that may be incurred by the Company or an
Insurance Subsidiary of the Company in connection with the Company's
or such Insurance Subsidiary's purchase or refinancing of the building
and property located at 1750 Golf Road, Schaumburg, Illinois;
provided, however, that promptly after the creation of any Lien of the
type referred to in this subsection (vi), the Company shall provide to
the Banks written notice of the creation of such Lien, describing the
amount of the obligation secured thereby and the properties and assets
subject to such Lien.
"Unrestricted Subsidiary Indebtedness" means, as of any date, for
any Unrestricted Subsidiary, all indebtedness, obligations or other
liabilities of such Unrestricted Subsidiary and its Subsidiaries as of
such date (i) for borrowed money, (ii) evidenced by bonds,
debentures, notes or other similar instruments for borrowed money, or
(iii) pursuant to any guarantee of any indebtedness, obligations or
other liabilities of any other Person of the type described in clauses
(i) or (ii); provided, however, that the amounts set forth in clauses
(i), (ii) and (iii) shall not be double counted and shall relate only
to amounts actually owed or otherwise outstanding as of such date."
2.2 The following definition is added to Section 1 of the Term Loan A
Credit Agreement:
"`Term Loan B Credit Agreement' means that certain Credit
Agreement dated as of August 30, 1995 between the Company and the
Banks, as the same may be amended, supplemented or otherwise modified
from time to time."
2.3 Section 4.4 of the Term Loan A Credit Agreement is amended in its
entirety to read as follows:
"SECTION 4.4 Computation of Interest. All computations of
interest in respect of the Base Rate, LIBOR and the CD Rate shall be
made on the basis of a year of 365 or 366 days, as the case may be,
and actual days elapsed. Interest shall accrue during each period
during which interest is computed from and including the first day
thereof to but excluding the last day thereof."
2.4 Section 7.7 of the Term Loan A Credit Agreement is amended by deleting
the term "$65,000,000" that appears in such Section and inserting in lieu
thereof the term "$112,000,000".
2.5 Section 7.9 of the Term Loan A Credit Agreement is amended by deleting
the phrase "pursuant to Section 7.16" that appears in such Section.
2.6 Section 9.1(a) of the Term Loan A Credit Agreement is amended in its
entirety to read as follows:
"(a) Nonpayment of the Loans. Default in the payment when due of
the principal of or interest on the Loans, or the payment when due or
any fees or any other amounts payable by the Company hereunder and
continuance of such default for five (5) Business Days after the
applicable due date, or default in the payment when due of the
principal of or interest on any loan made under the Revolving Credit
Agreement or the Term Loan B Credit Agreement, or the payment when due
of any fees or any other amounts payable by the Company under the
Revolving Credit Agreement or the Term Loan B Credit Agreement, and
continuance of such default beyond the applicable grace period as set
forth in the Revolving Credit Agreement or the Term Loan B Credit
Agreement, as the case may be."
2.7 The parties acknowledge the assignment and assumption of a portion of
an interest in the Loan (as such term is defined in the Term Loan A Credit
Agreement) made by ANB to the Company and a corresponding portion of all rights
and obligations of ANB under the Term Loan A Credit Agreement to LaSalle
pursuant to the Assignment Agreement and acknowledge that the outstanding
principal amount of each Loan and each Bank's Commitment Percentage is as set
forth opposite such Bank's name below:
Outstanding Principal
Bank Amount of Such Bank's Loan Commitment Percentage
ANB $4,642,857.14 33.333333%
Firstar $3,714,285.71 26.666667%
LaSalle $3,714,285.71 26.666667%
Bank One $1,857,142.85 13.333333%
Section 3. Effectiveness. This Amendment shall become effective as of
the date hereof upon the execution and delivery of this Amendment.
Section 4. Representations and Warranties. Each of the representations
and warranties made by the Company in Section 6 of the Term Loan A Credit
Agreement is true and correct as of the date hereof with the same effect as
though made on the date hereof (except to the extent that such representations
and warranties expressly refer to an earlier date, in which case they shall be
true and correct as of such earlier date).
Section 5. No Default. No Event of Default, or event which, with the
giving of notice or lapse of time, or both, would constitute an Event of
Default, has occurred and is continuing.
Section 6. Governing Law. This Amendment shall be governed by and
interpreted in accordance with the laws of the State of Illinois, without regard
to its conflicts of laws rules.
Section 7. Headings. Section headings herein are included for
convenience of reference only and shall not constitute a part of this Amendment
for any other purpose.
Section 8. Execution in Counterparts. This Amendment may be executed
in any number of counterparts and by the different parties on separate
counterparts and each such counterpart shall be deemed to be an original, but
all such counterparts shall together constitute only one agreement.
IN WITNESS WHEREOF, the Company and each Bank have caused this Amendment to
be executed and delivered as of day and year first above written.
THE COMPANY: PIONEER FINANCIAL SERVICES, INC.
By:
Title:
THE BANKS: AMERICAN NATIONAL BANK AND TRUST
COMPANY OF CHICAGO
By:
Vice President
FIRSTAR BANK MILWAUKEE, N.A.
By:
Title:
LASALLE NATIONAL BANK
By:
Title:
BANK ONE, ROCKFORD, NA
By:
Title:
Exhibit 10 (x)
Execution
Copy
SECOND AMENDMENT
TO
AMENDED AND RESTATED CREDIT AGREEMENT
(Revolving Credit Agreement)
Second Amendment to Amended and Restated Credit Agreement (the "Amendment")
dated as of January 19, 1996 among (i) PIONEER FINANCIAL SERVICES, INC., a
Delaware corporation (the "Company"), (ii) AMERICAN NATIONAL BANK AND TRUST
COMPANY OF CHICAGO, as administrative agent (in such capacity, the "Agent"),
(iii) AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO ("ANB"), FIRSTAR BANK
MILWAUKEE, N.A. ("Firstar") and BANK ONE, ROCKFORD, NA ("Bank One") (ANB,
Firstar and Bank One collectively referred to as the "Existing Banks" and
individually as an "Existing Bank") and (iv) FLEET NATIONAL BANK OF CONNECTICUT
("Fleet") (the Existing Banks and Fleet collectively referred to as the "Banks"
and individually as a "Bank").
R E C I T A L S
WHEREAS, the Company, the Agent and the Existing Banks have heretofore
entered into an Amended and Restated Credit Agreement dated as of March 22,
1995, as amended by that certain Amendment to Credit Agreement dated as of
August 30, 1995 (as so amended, the "Revolving Credit Agreement"), pursuant to
which, among other things, the Existing Banks agreed, upon the terms and subject
to the conditions set forth therein, to make Loans (as defined in the Revolving
Credit Agreement) to the Company;
WHEREAS, Fleet desires to become a party to the Revolving Credit Agreement
and Bank One desires to increase its Commitment under the Revolving Credit
Agreement;
WHEREAS, the Company and the Banks desire to amend certain provisions of
the Revolving Credit Agreement to, among other things, affect the foregoing;
NOW THEREFORE, in consideration of the premises and the mutual agreements
contained herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
Section 1. Definitions, Ratification, References. Unless otherwise
specifically defined herein, each term used herein that is defined in the
Revolving Credit Agreement shall have the meaning assigned to such term in the
Revolving Credit Agreement. Except as amended and supplemented hereby, all of
the terms of the Revolving Credit Agreement shall remain and continue in full
force and effect and are hereby confirmed in all respects. Each reference to
"hereof", "hereunder", "herein" and "hereby" and each other similar reference
and each reference to "this Agreement" and each other similar reference
contained in the Revolving Credit Agreement shall from and after the date of
this Amendment refer to the Revolving Credit Agreement as amended by this
Amendment.
Section 2. Amendments to Revolving Credit Agreement.
2.1 The following definitions that appear in Section 1 of the Revolving
Credit Agreement are amended in their entirety to read as follows:
"`Aggregate Commitment' means the combined Commitments of the Banks in
the amount of twenty-seven million dollars ($27,000,000), as such amount
may be reduced from time to time pursuant to this Agreement."
"`Business Day' means any day of the year on which each Bank is open
for business in the city where such Bank's main office is located and, in
addition, with respect to Eurodollar Rate Loans, any day of the year on
which commercial banks are open for business (including dealings in U.S.
dollar deposits) in London, England."
"`Majority Banks' means at any time a group of Banks that shall
include ANB and shall hold at least 51% of the Aggregate Commitment, or if
the Commitments have expired or been terminated, a group of Banks that
shall include ANB and shall hold at least 51% of the sum of (a) the
aggregate principal amount of all Loans then outstanding and not repaid,
(b) the aggregate Stated Amount of all LCs previously issued and then
outstanding and (c) the aggregate amount of all Reimbursement Obligations."
"`Stated Amount' shall mean, with respect to any LC and as of the date
of determination, the maximum amount for which a draw or demand for payment
may then be made thereunder, whether or not (i) the conditions for making a
draw or demand for payment under such LC could then be met and (ii) such
maximum amount is defined in such LC as the "Stated Amount" thereof."
2.2 The term "Banks", wherever such term appears in the Revolving Credit
Agreement, shall mean and refer to ANB, Firstar, Bank One and Fleet collectively
and the term "Bank" shall mean and refer to any one such Bank individually.
2.3 Notwithstanding any provision of the Revolving Credit Agreement, the
parties acknowledge and agree that from and including the date hereof the
Commitments and Commitment Percentages of each Bank are as set forth opposite
such Bank's name below:
Bank Commitment Commitment Percentage
ANB $9,000,000 33.333333%
Firstar $3,000,000 11.111111%
Bank One $9,000,000 33.333333%
Fleet $6,000,000 22.222222%
__________ ___________
Total $27,000,000 $100.000000%
The parties further acknowledge and agree that (i) on the date hereof the
parties shall disburse between and among themselves such amounts representing
principal on outstanding Loans under the Revolving Credit Agreement in
accordance with that certain Disbursement Memorandum dated the date hereof from
the Agent to each of the other parties (the "Disbursement Memorandum"), (ii)
interest and fees shall be paid by the Company to the Banks on the next Interest
Payment Date or the next fee payment date in accordance with Section 4.2 of the
Revolving Credit Agreement, which payment shall take into account the
reallocation of principal of outstanding Loans as set forth in the Disbursement
Memorandum, and (iii) from and including the date hereof the rights and
obligations of each Bank shall be in proportion to the Commitment Percentages
set forth above.
2.4 Section 4.4(a) of the Revolving Credit Agreement is amended by adding
the phrase "or participating in any LC" immediately after the phrase "and the
result of any of the foregoing is to increase the cost to such Bank of making or
maintaining any Loan", which phrase appears immediately after subsection (B) of
such Section 4.4(a).
2.5 Section 4.4(b) of the Revolving Credit Agreement is amended in its
entirety to read as follows:
"(b) If either (i) of the introduction of or any change in or in the
interpretation of any law or regulation or (ii) compliance by a Bank with
any new guideline or request from any central bank or other governmental
authority affects or would affect the amount of capital required or
expected to be maintained by such Bank or any corporation controlling such
Bank and the amount of such capital is increased by or based upon the
existence of such Bank's commitment to make or maintain any Loan or to
participate in any LC by such Bank hereunder or in the case of the Issuing
Bank, its commitment to issue any LC hereunder, then, within 30 days after
demand by such Bank, with a copy to the Agent (which demand shall set forth
in reasonable detail the basis of such demand), the Company shall pay to
the Agent for the account of such Bank, from time to time as reasonably
specified by such Bank, additional amounts sufficient to compensate such
Bank in the light of such circumstances, to the extent that such Bank
reasonably determines such increase in capital to be allocable to the
existence of such Bank's commitment to make or maintain any Loan or to
participate in any LC hereunder or in the case of the Issuing Bank, its
commitment to issue any LC hereunder, provided, however, that any such
amount or amounts payable by the Company shall not exceed the increased
amount of capital required to be maintained by such Bank and allocable to
any such Loan or any such LC, as the case may be, in direct proportion to
any such Loan or any such LC."
2.6 A new Section 4.6 is added to the Revolving Credit Agreement as
follows:
"SECTION 4.6 Illegality. If, after the date hereof, the adoption of
any applicable law, rule or regulation, or any change therein, or any
change in the interpretation or administration thereof by any governmental
authority, central bank or comparable agency charged with the
interpretation or administration thereof, or compliance by a Bank with any
request or directive (whether or not having the force of law) of any such
authority, central bank or comparable agency, shall make it unlawful or
impossible for a Bank to make, maintain or fund its Eurodollar Rate Loans,
and such Bank shall so notify the Agent, the Agent shall forthwith give
notice thereof to the other Banks and the Company, whereupon until such
Bank notifies the Company and the Agent that the circumstances giving rise
to such suspension no longer exist, the obligation of such Bank to make
Eurodollar Rate Loans shall be suspended. If such Bank shall determine
that it may not lawfully continue to maintain and fund any of its
outstanding Eurodollar Rate Loans to maturity and shall so specify in such
notice, the Company shall immediately prepay in full the then outstanding
principal amount of each such Eurodollar Rate Loan, together with accrued
interest thereon. Concurrently with prepaying each such Eurodollar Rate
Loan, the Company shall borrow a Base Rate Loan or a CD Rate Loan as
determined by the Company from such Bank in a principal amount equal to the
principal amount of such affected Eurodollar Rate Loan for an Interest
Period coincident with the remaining term of the Interest Period applicable
to such affected Eurodollar Rate Loan and such Bank shall make such a Base
Rate Loan or CD Rate Loan, as the case may be."
2.7 Sections 10.1(a) and (b) of the Revolving Credit Agreement are amended
in their entirety to read as follows:
"(a) increase or extend the Commitment of any Bank (or reinstate any
Commitment pursuant to Section 2.9), extend the expiration date of any LC
to a date that is more than one year after the Termination Date, or subject
any Bank to any additional obligations;
(b) postpone or delay any date fixed for any payment of principal,
interest, fees or other amounts (including, without limitation, the payment
of any Reimbursement Obligations) due to the Banks (or any of them)
hereunder or under any other Related Document;"
2.8 Sections 10.1(d) and (e) of the Revolving Credit Agreement are
redesignated as Sections 10.1(e) and (f), respectively, and a new Section
10.1(d) is added as follows:
"(d) release any amounts paid pursuant to Section 2.7 of this
Agreement, except as expressly permitted by the terms of this Agreement;"
<PAGE>
2.9 Section 10.4(b) of the Revolving Credit Agreement is amended in its
entirety to read as follows:
"(b) The reasonable costs and expenses which the Agent, the Issuing
Bank or any Bank incurs in any manner or way with respect to the following
shall be part of the Liabilities, payable by the Company within thirty (30)
days after demand if at any time after the date of this Agreement the
Agent, the Issuing Bank or any Bank, as the case may be: (i) reasonably
employs counsel for advice or other representation (A) to represent the
Agent, the Issuing Bank or such Bank, as the case may be, in any
litigation, contest, dispute, suit or proceeding or to commence, defend or
intervene or to take any other action in or with respect to any litigation,
contest, dispute, suit or proceeding (whether instituted by the Agent, the
Issuing Bank, such Bank, any other Bank, the Company or any other Person)
in any way or respect relating to this Agreement or the Related Documents,
(B) to enforce any of the Agent's, the Issuing Bank's or such Bank's, as
the case may be, rights with respect to the Company under this Agreement
and the Related Documents; and/or (ii) reasonably seeks to enforce or
enforces any of the Agent's, the Issuing Bank's or such Bank's, as the case
may be, rights and remedies with respect to the Company under this
Agreement and the Related Documents."
2.10 Section 10.12(a) of the Revolving Credit Agreement is amended by
adding the following sentence to the end of such Section 10.12(a):
"In addition to the foregoing, any Bank may, without the written consent of
the Company, assign or pledge all or any portion of such Bank's rights to
payment under its Note to a Federal Reserve Bank, provided that no such
assignment or pledge shall release such Bank from any of its obligations
under this Agreement."
Section 3. Effectiveness.
3.1 This Amendment shall become effective as of the date hereof upon the
execution and delivery of this Amendment and the Agent's having received (i) a
Promissory Note substantially in the form of Exhibit A hereto appropriately
completed and executed in favor of Bank One, which Promissory Note shall amend,
restate and replace in its entirety the existing Promissory Note in favor of
Bank One and (ii) a Promissory Note substantially in the form of Exhibit B
hereto appropriately completed and executed in favor of Fleet.
3.2 As soon as administratively possible after the date hereof, Bank One
shall deliver to the Agent, and the Agent shall deliver to the Company, the
existing Promissory Note in favor of Bank One, marked "Superseded."
Section 4. Representations and Warranties. Each of the representations
and warranties made by the Company in Section 6 of the Revolving Credit
Agreement is true and correct as of the date hereof with the same effect as
though made on the date hereof (except to the extent that such representations
and warranties expressly refer to an earlier date, in which case they shall be
true and correct as of such earlier date).
Section 5. No Default. No Event of Default, or event which, with the
giving of notice or lapse of time, or both, would constitute an Event of
Default, has occurred and is continuing.
Section 6. Governing Law. This Amendment shall be governed by and
interpreted in accordance with the laws of the State of Illinois, without regard
to its conflicts of laws rules.
Section 7. Headings. Section headings herein are included for
convenience of reference only and shall not constitute a part of this Amendment
for any other purpose.
Section 8. Execution in Counterparts. This Amendment may be executed
in any number of counterparts and by the different parties on separate
<PAGE>
counterparts and each such counterpart shall be deemed to be an original, but
all such counterparts shall together constitute only one agreement.
IN WITNESS WHEREOF, the Company and each Bank have caused this Amendment to
be executed and delivered as of day and year first above written.
THE COMPANY: PIONEER FINANCIAL SERVICES, INC.
By:
Title:
THE AGENT: AMERICAN NATIONAL BANK AND TRUST
COMPANY OF CHICAGO
By:
Vice President
THE BANKS: AMERICAN NATIONAL BANK AND TRUST
COMPANY OF CHICAGO
By:
Vice President
FIRSTAR BANK MILWAUKEE, N.A.
By:
Title:
BANK ONE, ROCKFORD, NA
By:
Title:
FLEET NATIONAL BANK OF CONNECTICUT
By:
Title:
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, as amended, (Form 10-K/A) 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>
<OTHER-SE> 133,366<F4>
<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
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>Includes short-term and long-term borrowings and convertible subordinated
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>
