<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-10890
HORACE MANN EDUCATORS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 37-0911756
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1 HORACE MANN PLAZA, SPRINGFIELD, 62715-0001
ILLINOIS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 217-789-2500
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
COMMON STOCK, PAR VALUE $0.001 PER NEW YORK STOCK EXCHANGE
SHARE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
Indicate by 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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 1, 1997, was approximately $1.0 billion.
As of March 1, 1997, 23,742,722 shares of Common Stock, par value $0.001 per
share, were outstanding, net of 5,626,398 shares of treasury stock.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the 1997 Annual Meeting of Shareholders, exclusive of
disclosures made pursuant to Regulation S-K, (S) 402 (i), (k) and (l).
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<PAGE>
HORACE MANN EDUCATORS CORPORATION
FORM 10-K
YEAR ENDED DECEMBER 31, 1996
INDEX
<TABLE>
<CAPTION>
ITEM
NUMBER PAGE
------ ----
PART I
<C> <S> <C>
1. Business......................................................... 1
2. Properties....................................................... 25
3. Legal Proceedings................................................ 25
4. Submission of Matters to a Vote of Security Holders.............. 25
PART II
5. Market for Registrant's Common Equity and Related Stockholder
Matters.......................................................... 25
6. Selected Financial Data.......................................... 26
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 26
8. Consolidated Financial Statements and Supplementary Data......... 26
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................. 26
PART III
10. Directors and Executive Officers of the Registrant............... 26
11. Executive Compensation........................................... 26
12. Security Ownership of Certain Beneficial Owners and Management... 27
13. Certain Relationships and Related Transactions................... 27
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. 27
SIGNATURES....................................................... 31
Index to Financial Information................................... F-1
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS
FORWARD-LOOKING INFORMATION
It is important to note that the Company's actual results could differ
materially from those projected in forward-looking statements. Additional
information concerning factors that could cause actual results to differ
materially from those in the forward-looking statements is contained in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
OVERVIEW
Horace Mann Educators Corporation (together with its subsidiaries, the
"Company" or "HMEC") is an insurance holding company incorporated in Delaware.
Through its subsidiaries, HMEC markets and underwrites personal lines of
property and casualty and life insurance and retirement annuities. HMEC's
principal insurance subsidiaries are Horace Mann Insurance Company ("HMIC"),
Teachers Insurance Company ("TIC") and Horace Mann Life Insurance Company
("HMLIC"), each of which is an Illinois corporation, and Allegiance Insurance
Company ("Allegiance"), a California domiciled personal lines property and
casualty insurance company.
The Company markets its products primarily to educators and other employees
of public schools and their families. Customers of the Company typically have
moderate annual incomes, with many belonging to two-income households. Their
financial planning tends to focus on security, savings and primary insurance
needs.
The Company sells and services its products through an exclusive sales force
of full-time agents employed by the Company. The Company's agents sell only
the Company's products. Many of the Company's agents are former educators who
utilize their contacts within, and knowledge of, the target market.
Compensation for sales agents includes an incentive element based upon the
profitability of the business they write.
The Company's insurance premiums written and contract deposits for the year
ended December 31, 1996 were $704.8 million and operating income (income from
continuing operations before realized investment gains and losses and debt
retirement costs) was $73.1 million. The Company's total assets were $3.9
billion at December 31, 1996. The property and casualty segment accounted for
60% of the Company's insurance premiums written and contract deposits for the
year ended December 31, 1996, while accounting for 64% of earnings from
continuing operations before interest and taxes for the period. The annuity
and life insurance segments together accounted for 40% of insurance premiums
written and contract deposits for the year ended December 31, 1996 (24% and
16%, respectively), and provided 41% (24% and 17%, respectively) of earnings
from continuing operations before interest and taxes for the period.
In December 1996, the Company announced its strategic decision to withdraw
from the group medical insurance business over the following two years. The
Company stopped writing new group medical insurance policies in January 1997
and intends to stop renewing group medical insurance policies in January 1998.
In the Company's financial statements and discussions of operating results,
group medical results are reported separately as discontinued operations.
In each of the last 10 years, the Company's combined loss and expense ratio
for its property and casualty product lines outperformed the total property
and casualty industry combined loss and expense ratio, as reported by A.M.
Best Company ("A.M. Best"), an independent insurance rating agency. During
this period, the Company's combined loss and expense ratio was better than the
total property and casualty insurance industry combined loss and expense ratio
by an average of approximately 11 percentage points per year. During the same
period of time, the Company's combined loss and expense ratio was better than
the personal lines insurance industry segment combined loss and expense ratio
by an average of approximately 9 percentage points per year.
1
<PAGE>
One of the reasons why the Company's property and casualty lines have
performed better than the industry is the Company's property and casualty
expense ratio, which has been consistently better than the industry ratio
since 1983. During the last 10 years, the Company's property and casualty
expense ratio has been better than the property and casualty industry personal
lines average expense ratio as reported by A.M. Best by an average of 4.7
percentage points per year. The Company's property and casualty expense ratio
for the year ended December 31, 1996 was 19.4%, well within the lowest 20% of
expense ratios of the 100 largest property and casualty groups, based on A.M.
Best's reports.
At December 31, 1996, the accumulated value of annuity contracts was $2.1
billion. For the year ended December 31, 1996, 94% of the accumulated cash
value of the Company's annuity business remained on deposit. All annuities
issued since 1982 and approximately 70% of all outstanding fixed annuity
accumulated cash values are subject in most cases to substantial early
withdrawal penalties, typically ranging from 5% to 13% of the amount
withdrawn. Withdrawals of outstanding variable annuities are limited to
amounts less than or equal to the then current market value of the annuity.
Tax-qualified annuities represented 95% of the Company's annuity policy
reserves at December 31, 1996, and, generally, a penalty is imposed under the
Internal Revenue Code of 1986, as amended, on amounts withdrawn from tax-
qualified annuities prior to age 59 1/2.
The investment portfolio of the Company, including variable annuity assets
under management of $685 million, had an aggregate market value of $3.5
billion at December 31, 1996. Investments other than variable annuity assets
consist principally of investment grade publicly traded fixed income
securities. At December 31, 1996, investments in non-investment grade
securities represented 5.1% of total investments excluding variable annuity
assets. There are no significant investments in mortgage loans and real estate
or privately placed securities.
HISTORY
The Company's business was founded in Springfield, Illinois in 1945 by two
Illinois teachers to sell automobile insurance to other teachers within the
State of Illinois.
In 1968, INA Corporation ("INA") acquired a 25% interest in HMEC, and
completed its acquisition of HMEC in 1975. In 1982, INA and Connecticut
General Corporation merged to form CIGNA. In August 1989 an investor group
directed by Gibbons, Green, van Amerongen, L.P. (subsequently Gibbons,
Goodwin, van Amerongen) ("GGvA") and certain members of the Company's senior
management acquired HMEC from CIGNA. In November 1991, HMEC completed an
initial public offering of its common stock (the "IPO") which is traded on the
New York Stock Exchange under the symbol "HMN."
Following the initial public offering, GGvA owned approximately 44% of the
outstanding shares of the common stock. Pursuant to an agreement with GGvA, in
May 1995 HMEC purchased approximately one-half of the shares of its common
stock owned by GGvA and in July 1995 completed a secondary public offering of
most of the remaining shares of its common stock owned by GGvA.
2
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following statement of operations and balance sheet data have been
derived from the consolidated financial statements of the Company. The
consolidated financial statements of the Company for each of the periods in
the five year period ended December 31, 1996 have been audited by KPMG Peat
Marwick LLP. The following selected historical consolidated financial data
should be read in conjunction with the consolidated financial statements of
HMEC and its subsidiaries and Management's Discussion and Analysis of
Financial Condition and Results of Operations.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Insurance premiums written
and contract deposits...... $ 704.8 $ 654.0 $ 637.3 $ 589.1 $ 573.5
Insurance premiums and
contract charges earned.... 502.7 485.4 472.4 437.9 423.4
Net investment income....... 198.6 198.4 185.3 184.2 194.2
Net investment income, after
tax........................ 132.4 132.2 124.9 123.2 130.2
Realized investment gains
(losses)................... 2.5 8.6 (0.9) 26.8 27.5
Total revenues.............. 703.8 692.4 656.8 648.9 645.1
Amortization of intangible
assets(1).................. 11.2 11.7 12.6 13.1 14.9
Interest expense............ 10.5 11.6 9.5 9.1 18.3
Income from continuing
operations before income
taxes...................... 100.6 103.6 86.2 112.8 94.2
Income from continuing
operations................. 73.8 75.2 64.6 76.8 72.4
Discontinued operations(2).. (9.2) (1.2) - 0.4 (0.6)
Income before extraordinary
item....................... 64.6 74.0 64.6 77.2 71.8
Extraordinary item(3)....... - - (1.7) - (13.7)
Net income.................. 64.6 74.0 62.9 77.2 58.1
Operating income(4)......... 73.1 70.9 65.2 59.4 54.3
Ratio of earnings to fixed
charges(5)................. 10.6x 9.9x 10.1x 13.4x 6.1x
PER SHARE DATA:
Assuming no dilution:
Operating income(4)........ $ 3.11 $ 2.83 $ 2.25 $ 2.05 $ 1.87
Realized investment gains
(losses), after tax....... 0.07 0.22 (0.02) 0.60 0.63
Income from continuing
operations................ 3.14 3.00 2.23 2.65 2.50
Discontinued operations(2). (0.39) (0.05) - 0.02 (0.02)
Income before extraordinary
item...................... 2.75 2.95 2.23 2.67 2.48
Net income................. 2.75 2.95 2.17 2.67 2.01
Assuming full dilution:
Operating income(4)........ $ 3.11 $ 2.64 $ 2.15 $ 1.97 $ 1.87
Realized investment gains
(losses), after tax....... 0.07 0.20 (0.02) 0.54 0.63
Income from continuing
operations................ 3.14 2.79 2.13 2.51 2.50
Discontinued operations(2). (0.39) (0.04) - 0.01 (0.02)
Income before extraordinary
item...................... 2.75 2.75 2.13 2.52 2.48
Net income................. 2.75 2.75 2.08 2.52 2.01
Shares of Common Stock--
weighted average:
Assuming no dilution....... 23.5 25.0 29.0 29.0 28.9
Assuming full dilution(6).. 23.5 28.3 32.1 32.2 28.9
Cash dividends.............. $ 0.44 $ 0.36 $ 0.29 $ 0.24 $ 0.20
BALANCE SHEET DATA, AT YEAR
END:
Total investments........... $2,784.3 $2,798.5 $2,533.4 $2,493.8 $2,359.7
Total assets................ 3,861.0 3,662.3 3,285.5 3,147.6 2,909.4
Short-term debt............. 34.0 75.0 - - 17.0
Long-term debt.............. 99.6 100.0 100.0 111.7 111.7
Total shareholders' equity.. 484.4 470.2 412.0 429.9 357.1
Book value per share(7)..... $ 20.50 $ 20.10 $ 14.23 $ 14.85 $ 12.34
SEGMENT INFORMATION:
Insurance premiums written
and contract deposits
Property and casualty...... $ 427.1 $ 405.8 $ 398.8 $ 366.0 $ 359.5
Annuity.................... 166.9 142.9 136.6 123.4 116.7
Life....................... 110.8 105.3 101.9 99.7 97.3
Total...................... 704.8 654.0 637.3 589.1 573.5
Operating income(4)
Property and casualty...... $ 54.0 $ 56.4 $ 52.6 $ 44.9 $ 36.3
Annuity.................... 16.3 14.8 14.2 11.7 9.8
Life....................... 12.1 10.4 7.7 9.6 14.0
Corporate and other,
including interest
expense................... (9.3) (10.7) (9.3) (6.8) (5.8)
Total...................... 73.1 70.9 65.2 59.4 54.3
</TABLE>
(continued on next page)
3
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA--(CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATUTORY OPERATING DATA(8):
Property and casualty:
Loss and loss adjustment
expense ratio.............. 74.1% 73.5% 73.8% 73.6% 77.3%
Expense ratio............... 19.4% 19.8% 19.8% 19.6% 19.6%
Combined loss and expense
ratio(9)................... 93.5% 93.3% 93.7% 93.3% 97.1%
Industry average combined
loss and expense ratio(10). 107.0% 106.4% 108.4% 106.9% 115.7%
Personal lines industry
segment average combined
loss and expense ratio(10). 105.5% 103.5% 104.5% 103.9% 112.5%
Annuity accumulated value on
deposit..................... $2,075.5 $1,866.0 $1,673.2 $1,584.5 $1,451.0
Life insurance in force...... $ 10,645 $ 10,235 $ 9,707 $ 9,281 $ 9,033
Adjusted capital and surplus
of insurance subsidiaries
(includes investment
reserves)(11)............... $ 404.6 $ 389.8 $ 358.3 $ 344.2 $ 301.4
</TABLE>
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(1) Amortization of intangible assets is comprised of amortization of goodwill
and amortization of acquired value of insurance in force and is the result
of purchase accounting adjustments related to the 1989 acquisition of the
Company and the 1994 acquisition of Allegiance. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Year Ended December 31, 1996 Compared with Year Ended December 31, 1995."
(2) In December 1996, the Company announced its strategic decision to withdraw
from the group medical insurance business. Group medical results net of
taxes are reported separately as discontinued operations and 1996 includes
an additional after tax charge of $3.9 million, or $0.17 per share, for
estimated losses during the phase-out period.
(3) The extraordinary items for the years ended December 31, 1994 and 1992 each
represent non-recurring losses from early retirement of debt and are net of
tax benefits.
(4) Income from continuing operations before realized investment gains and
losses, debt retirement costs, cost of the additional rights relating to
the 1995 share repurchase, discontinued operations, and extraordinary
items.
(5) For the purpose of determining the ratio of earnings to fixed charges,
"earnings" consist of income from continuing operations before income taxes
and interest expense (including amortization of debt issuance cost), and
"fixed charges" consist of interest expense (including amortization of debt
issuance cost).
(6) Earnings per share assuming full dilution is computed based on the weighted
average of the fully diluted number of shares. The convertible notes, which
were redeemed in February 1996, were considered potentially dilutive
securities and common stock equivalents relating to outstanding warrants
and common stock options are also included in the calculation of fully
diluted earnings per share, to the extent dilutive by 3% or more.
(7) Due to the adoption by the Company on January 1, 1994 of Financial
Accounting Standard No. 115 ("FAS 115"), total shareholders' equity
included an increase of $29.7 million and $76.2 million at December 31,
1996 and 1995, respectively, and a reduction of $70.9 million at December
31, 1994. Excluding the FAS 115 market value accounting for investments,
book value per share was $19.25, $16.84 and $16.68 at December 31, 1996,
1995 and 1994, respectively.
(8) Statutory data has been derived from the financial statements of the
Company prepared in accordance with statutory accounting practices and
filed with insurance regulatory authorities.
(9) Property and casualty combined loss and expense ratio includes policyholder
dividends.
(10) Source: Best's Aggregates and Averages (1993 through 1996 Eds.). The
industry averages for the year ended December 31, 1996 are from Best Week,
Property/Casualty Supplement, A Special Report, January 6, 1997, published
by A.M. Best.
(11) Investment reserves were the Asset Valuation Reserves.
GENERAL
The Company markets and underwrites personal lines of property and casualty
and life insurance and retirement annuities. The following table sets forth by
segment the amount of insurance premiums written and contract deposits for the
Company for the periods indicated.
INSURANCE PREMIUMS WRITTEN AND CONTRACT DEPOSITS
(Dollars in millions)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Property and casualty.............. $427.1 60.6% $405.8 62.0% $398.8 62.6%
Annuity............................ 166.9 23.7 142.9 21.9 136.6 21.4
Life............................... 110.8 15.7 105.3 16.1 101.9 16.0
------ ----- ------ ----- ------ -----
Total.......................... $704.8 100.0% $654.0 100.0% $637.3 100.0%
====== ===== ====== ===== ====== =====
</TABLE>
4
<PAGE>
CORPORATE STRATEGY AND MARKETING
The Company's target market consists of educators and other employees of
public schools and their families. It is estimated that there are approximately
3 million elementary and secondary public school teachers and administrators in
the United States. The Company also sells its products to other education-
related customers, including private school teachers, education support
personnel, and their families. In addition to changes in the number of teachers
that may result from growth in the general population and changes in the number
of school age children, the Company believes that turnover among the teacher
population increases the size of its target market. New teachers and
educational support personnel are solicited by the Company's agents and the
Company attempts to retain customers who have retired or left the teaching
profession. Customers of the Company typically have moderate annual incomes,
with many belonging to two-income households. Their financial planning tends to
focus on security, savings and primary insurance needs.
Exclusive Agency Force
A cornerstone of the Company's marketing strategy is its exclusive sales
force of full-time agents who are employees of the Company. As of December 31,
1996, the Company employed 1,022 full-time agents. Many of these agents were
previously teachers or other members of the education profession. The Company's
agents market and write the full range of the Company's products. They are
under contract to market and write only those products authorized by the
Company.
The Company's service commitment to its policyholders begins with personal
contact at the point of sale between the Company's agents and potential
policyholders. In addition, the Company's agents often have direct access to
school premises, placing them in a position to write and service individual
insurance business. Management believes that Horace Mann's name recognition and
policyholder loyalties lead to new customers and cross-selling of additional
insurance products.
The Company's agents pre-underwrite policy applicants. The Company structures
its agent compensation to provide incentives for agents to adhere to the
Company's underwriting standards and practices and business growth plans. Agent
compensation after an initial two-year period is comprised entirely of
commissions and incentive bonuses based on profitability of insurance written,
retention of customers and sales. In 1996, incentive bonuses represented 29% of
agent compensation with 78% of the bonuses based on profitability and the
remaining 22% based on sales. The profitability related portion of agent
compensation is based on loss ratios in the case of property and casualty
policies, where permitted by law, and persistency in the case of life policies.
Management believes that this compensation structure, which rewards the
individual agent's selection of profitable business, helps to produce more
profitable business than might result under other compensation arrangements.
Alternate Distribution Program
The Company has established an Alternate Distribution program to develop new
sales channels that supplement and complement the exclusive agency force. As of
December 31, 1996, the Company had established relationships with 34 educator
credit unions in 14 states. At some of those credit unions, a salaried
representative of the Company is available to meet with prospective customers
while other of those credit unions refer their members to the Company.
5
<PAGE>
Geographic Composition of Business
The Company's business is geographically diversified. Based on direct
insurance premiums earned and contract deposits for all continuing product
lines for the year ended December 31, 1996, the top five states and their
portion of total premium were North Carolina, 8.1%; Texas, 6.7%; Illinois,
5.5%; Minnesota, 5.4%; and California, 4.8%.
HMEC's property and casualty subsidiaries are licensed in 49 states, the
District of Columbia and Puerto Rico. The following table sets forth the
Company's top ten property and casualty states based on total direct premiums
in 1996:
PROPERTY AND CASUALTY SEGMENT TOP TEN STATES
(Dollars in millions)
<TABLE>
<CAPTION>
PROPERTY AND
CASUALTY
SEGMENT
-------------------
PERCENT
DIRECT OF
STATE PREMIUMS(1) TOTAL
----- ----------- -------
<S> <C> <C>
Texas.................................................... $ 30.9 7.6%
North Carolina........................................... 29.1 7.2
California............................................... 28.1 6.9
Minnesota................................................ 26.5 6.5
Pennsylvania............................................. 22.3 5.5
Massachusetts............................................ 20.4 5.0
South Carolina........................................... 18.9 4.6
Michigan................................................. 18.2 4.5
Florida.................................................. 16.3 4.0
Georgia.................................................. 15.5 3.8
------ -----
Total of top ten states.............................. 226.2 55.6
All other areas.......................................... 180.6 44.4
------ -----
Total direct premiums................................ $406.8 100.0%
====== =====
</TABLE>
- --------
(1) Defined as earned premiums before reinsurance and is determined under
statutory accounting practices.
HMEC's principal life insurance subsidiary is licensed in 48 states and the
District of Columbia. The following table sets forth the Company's top ten
combined life and annuity states based on total direct premiums and contract
deposits in 1996:
COMBINED LIFE AND ANNUITY SEGMENTS TOP TEN STATES
(Dollars in millions)
<TABLE>
<CAPTION>
DIRECT PREMIUMS PERCENT
AND CONTRACT OF
STATE DEPOSITS(1) TOTAL
----- ------------------- -------
<S> <C> <C>
North Carolina................................... $ 25.3 9.4%
Illinois......................................... 24.6 9.2
Virginia......................................... 14.6 5.4
Texas............................................ 14.6 5.4
Tennessee........................................ 14.2 5.3
Indiana.......................................... 11.7 4.4
Wisconsin........................................ 10.1 3.8
Minnesota........................................ 10.0 3.7
South Carolina................................... 8.1 3.0
Iowa............................................. 7.8 2.9
------ -----
Total of top ten states...................... 141.0 52.5
All other areas.................................. 127.0 47.5
------ -----
Total direct premiums........................ $268.0 100.0%
====== =====
</TABLE>
- --------
(1) Excludes discontinued group medical business and is determined under
statutory accounting practices.
6
<PAGE>
National, State and Local Education Associations
The Company estimates that less than half of its policyholders are members
of the National Education Association ("NEA"), the nation's largest
confederation of state and local teachers' associations. NEA has approximately
2.3 million members. Management estimates that in each of the Company's last
three fiscal years, less than one-half of its total revenue came from sales of
insurance products to NEA members and their families.
The Company has had a long relationship with NEA and many of the state and
local education associations affiliated with NEA. The Company maintains a
special advisory board, primarily composed of leaders of state education
associations, that meets with Company management on a regular basis. These
meetings provide management with the opportunity to better assess the present
and future needs of its target market and to cultivate better relations with
education association leaders. In certain states, where approved by the
applicable state insurance departments, state or local association members are
entitled to a discount on premiums for certain property and casualty insurance
products sold by the Company.
From 1984 to September 1993 and beginning again in September 1996, NEA
purchased from the Company educator professional liability insurance for its
members. Between September 1993 and September 1996, the Company did not write
this policy.
It is the practice of NEA and affiliated state and local education
associations to "sponsor" various insurance products and services, including
those of the Company and its competitors. "Sponsorship" is generally
determined independently by each of these organizations. Being "sponsored"
generally means that NEA and such state and local associations evaluate a
product, authorize the use of their names in connection with the marketing of
the product and, in some instances, recommend that their membership consider
buying the product. From time to time during the past 25 years, NEA has
sponsored various Company products and currently sponsors the Company's
homeowners policy, which was co-sponsored by 40 state associations as of
December 31, 1996. In each of the Company's last three fiscal years, the
Company's homeowners policy was the only product of the Company that was
sponsored by NEA (exclusive of the educator professional liability insurance
policy purchased by NEA in 1996). NEA-affiliated education associations in 35
states sponsor products of the Company other than homeowners. Education
associations in 42 states sponsor one or more of the Company's products. In
each of the last three fiscal years, premium revenues from those products of
the Company sold in states where such products were sponsored accounted for
approximately one-half of total revenues in each such year. Total premium
revenues from sales of products sponsored by NEA and by state and local
education associations were approximately $250 million for each of the three
years ended December 31, 1996. In many cases, associations that sponsor one of
the Company's products also sponsor competing products. The Company does not
pay NEA or any affiliated associations any consideration in exchange for
sponsorship of Company products. The Company does pay for advertising that
appears in NEA and state education association publications.
Some of the advantages of education association sponsorship include prestige
and enhanced brand awareness, increased opportunity for the Company's agents
to market products on school premises, and improved agent recruiting,
especially among former teachers. The Company's customers decide whether to
purchase the Company's products for a number of reasons, including pricing and
service of the product and the customer's relationship with the selling
agent--education association sponsorship may be one factor in such a decision.
PROPERTY AND CASUALTY
The primary property and casualty product offered by the Company is private
passenger automobile insurance, which in 1996 represented 79% of property and
casualty net written premiums. Homeowners insurance represented 19% of
property and casualty premiums and the educator professional liability
insurance represented the remaining 2% of the Company's property and casualty
premiums. As of December 31, 1996, the Company had approximately 556,000
voluntary automobile
7
<PAGE>
policies in force with annual premiums of approximately $366 million and
approximately 230,000 homeowners policies in force with annual premiums of
approximately $86 million. Voluntary automobile policies exclude those policies
described in "Business--Regulation--Mandatory Insurance Facilities" and
assigned risk policies. See "Business--Corporate Strategy and Marketing--
National, State and Local Education Associations."
The results of companies in the insurance industry have historically been
subject to significant fluctuations due to competition, economic conditions,
interest rates and other factors. In particular, the property and casualty
insurance industry has historically experienced pricing and profitability
cycles. With respect to these cycles, the factors most affecting current and
prospective results of operations are intense price competition and aggressive
marketing by property and casualty insurers, which have historically resulted
in higher combined loss and expense ratios. Periods characterized by higher
combined loss and expense ratios have typically been followed by withdrawal of
capacity in the property and casualty industry and a firming of prices,
resulting in lower combined loss and expense ratios. Because of the nature of
the property and casualty cycle, it is difficult to predict future trends in
the industry's overall combined loss and expense ratio. Management of the
Company believes that these factors will continue to produce pricing and
profitability cycles for the industry in the future. During the past ten years,
the personal lines segment of the property and casualty insurance market has
been less subject to the pricing and profitability cycles that have affected
the commercial lines segment and the overall industry. Because virtually all
the Company's property and casualty business is personal lines business,
management believes the Company's operations are less subject to pricing and
profitability cycles than the operations of many other insurers.
Results of property insurers are also subject to weather and other conditions
prevailing in an accident year. While one year may be relatively free of major
weather or other disasters, another year may have numerous such events causing
results for such a year to be materially worse than for other years.
Selected Historical Financial Information For Property and Casualty Segment
The following table sets forth certain financial information with respect to
the property and casualty segment for the periods indicated.
PROPERTY AND CASUALTY SEGMENT
SELECTED HISTORICAL FINANCIAL INFORMATION
(Dollars in millions)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Insurance premiums written........................ $427.1 $405.8 $398.8
Insurance premiums earned......................... 413.2 403.8 395.0
Net investment income............................. 46.4 48.8 44.9
Realized investment gains (losses)................ 0.2 2.9 (3.1)
Income before income taxes........................ 70.6 75.3 64.6
Net income before realized investment gains
(losses)......................................... 54.0 56.4 52.6
Net income........................................ 54.1 58.3 50.6
Net investment income, after tax.................. 33.5 35.0 33.7
Catastrophe losses, after tax..................... 13.6 9.0 11.1
STATUTORY OPERATING STATISTICS:
Loss and loss adjustment expense ratio............ 74.1% 73.5% 73.8%
Expense ratio..................................... 19.4% 19.8% 19.8%
Combined loss and expense ratio (including
policyholder dividends).......................... 93.5% 93.3% 93.7%
</TABLE>
(continued on next page)
8
<PAGE>
PROPERTY AND CASUALTY SEGMENT
SELECTED HISTORICAL FINANCIAL INFORMATION--(CONTINUED)
(Dollars in millions)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
GAAP OPERATING STATISTICS:
Loss and loss adjustment expense ratio............ 74.1% 73.6% 73.9%
Expense ratio..................................... 19.8% 20.1% 19.5%
Combined loss and expense ratio (including
policyholder dividends).......................... 93.9% 93.7% 93.4%
AUTOMOBILE AND HOMEOWNERS (VOLUNTARY):
Insurance premiums written........................ $400.0 $381.8 $372.7
Insurance premiums earned......................... 390.0 378.9 369.3
Policies in force (in thousands).................. 786 743 733
</TABLE>
Property and Casualty Ratios
In each of the last 10 years, the Company's combined loss and expense ratio
for its property and casualty product lines outperformed the total property and
casualty industry combined loss and expense ratio, as reported by A.M. Best.
During this period, the Company's combined loss and expense ratio was better
than the total property and casualty insurance industry combined loss and
expense ratio by an average of approximately 11 percentage points per year.
During the same period of time, the Company's combined loss and expense ratio
was better than the personal lines insurance industry segment combined loss and
expense ratio by an average of approximately 9 percentage points per year.
The table below compares the Company's combined loss and expense ratios with
published industry averages.
PROPERTY AND CASUALTY COMBINED LOSS AND EXPENSE RATIO(1)
<TABLE>
<CAPTION>
PERSONAL PROPERTY
LINES AND
THE INDUSTRY CASUALTY
COMPANY(2) SEGMENT(3) INDUSTRY(3)
---------- --------- ----------
<S> <C> <C> <C>
Year Ended December 31,
1996........................................ 93.5% 105.5% 107.0%
1995........................................ 93.3 103.5 106.4
1994........................................ 93.7 104.5 108.4
1993........................................ 93.3 103.9 106.9
1992........................................ 97.1 112.5 115.7
1991........................................ 98.4 107.1 108.8
1990........................................ 101.8 109.8 109.6
1989........................................ 106.9 109.9 109.2
1988........................................ 99.6 105.5 105.4
1987........................................ 98.6 104.2 104.6
</TABLE>
- --------
(1) Combined loss and expense ratio includes policyholder dividends and is
determined according to statutory accounting practices.
(2) The Company did not have any California property and casualty business
during each of the years from 1989 through 1993.
(3) Source: Best's Aggregates and Averages (1988 through 1996 Eds.). 1996 is an
estimate from Best Week, Property/Casualty Supplement, A Special Report,
January 6, 1997, published by A.M. Best.
9
<PAGE>
Catastrophe losses before federal income tax benefits for the Company and
the property and casualty industry for the eight years ended December 31, 1996
were as follows:
CATASTROPHE LOSSES
(Dollars in millions)
<TABLE>
<CAPTION>
THE PROPERTY AND CASUALTY
COMPANY(1) INDUSTRY(2)
---------- ---------------------
<S> <C> <C>
Year Ended December 31,
1996......................................... $20.9 $ 7,350.0
1995......................................... 13.9 7,425.0
1994......................................... 17.0 17,030.0
1993......................................... 8.5 5,705.0
1992......................................... 13.3 22,870.0
1991......................................... 10.3 4,698.0
1990......................................... 5.8 2,560.0
1989......................................... 12.2 7,371.0
</TABLE>
- --------
(1) Net of reinsurance and before federal income tax benefits. Includes
allocated loss adjustment expenses. The Company's individually significant
catastrophe losses net of reinsurance were as follows:
1996--$8.2 million, Hurricane Fran.
1995--$2.9 million, Texas wind/hail/tornadoes; $2.2 million Hurricane
Opal.
1994--$6.0 million, Northridge, California earthquake.
1993--$2.2 million, East Coast blizzard.
1992--$1.9 million, Hurricane Andrew.
1991--$1.0 million, Hurricane Bob.
1990--$2.8 million, Denver, Colorado hailstorm.
1989--$4.0 million, Hurricane Hugo.
(2) Source: Insurance Trends, Property-Casualty Edition, First Quarter 1997,
published by Conning & Company. These amounts are before reinsurance and
federal income tax benefits and exclude all loss adjustment expenses.
During the last 10 years, the Company's property and casualty expense ratio
has been better than the property and casualty industry personal lines average
expense ratio as reported by A.M. Best by an average of 4.7 percentage points
per year. The Company's property and casualty expense ratio for the year ended
December 31, 1996 was 19.4%, well within the lowest 20% of expense ratios of
the 100 largest property and casualty groups, based on A.M. Best's reports.
The table below compares the Company's expense ratios with published
industry averages.
PROPERTY AND CASUALTY EXPENSE RATIO(1)
<TABLE>
<CAPTION>
THE PERSONAL LINES PROPERTY AND CASUALTY
COMPANY(2) INDUSTRY SEGMENT(3) INDUSTRY(3)
---------- ------------------- ---------------------
<S> <C> <C> <C>
Year ended December 31,
1996..................... 19.4% 23.6% 26.2%
1995..................... 19.8 23.7 26.1
1994..................... 19.8 23.5 26.0
1993..................... 19.6 23.9 26.2
1992..................... 19.6 24.4 26.6
1991..................... 19.8 24.7 26.4
1990..................... 19.1 24.3 26.0
1989..................... 19.0 24.5 26.0
1988..................... 18.7 24.4 25.7
1987..................... 19.8 24.5 25.3
</TABLE>
- --------
(1) Determined according to statutory accounting practices.
(2) The Company did not have any California property and casualty business
during each of the years from 1989 through 1993.
(3) Source: Best's Aggregates and Averages (1988 through 1996 Eds.). 1996
amounts are estimates from A.M. Best.
10
<PAGE>
Property and Casualty Reserves
In the last ten consecutive years the Company's property and casualty
reserves have developed cumulative redundancies. Reserves for losses and loss
adjustment expenses ("LAE") are carried at the full value of estimated
liabilities and are not discounted for interest expected to be earned on
reserves. The Company's reserves for losses and LAE represent the estimated
indemnity cost and loss adjustment expenses necessary to cover the ultimate
net cost of investigating and settling claims. Such estimates are based upon
individual case estimates for reported claims, estimates from state insurance
facilities for reinsurance assumed and actuarial estimates for losses which
have been incurred but not yet reported. These estimates are adjusted in the
aggregate for ultimate loss expectations based upon historical experience
patterns and current economic trends and experience, with any change in
probable ultimate liabilities being reflected in results of operations
currently. Expected inflation rates, along with other factors, are considered
in estimating future claims costs and related reserves. As additional
information becomes available and is reviewed, the estimates and judgments
reflected in earlier reserves may be revised, which may result in adjustment
to reserves for insured events of prior years. The Company has no exposure to
claims for toxic waste cleanup, other environmental remediation or asbestos-
related illnesses.
Due to the inherent uncertainty in estimating reserves for losses and LAE,
there can be no assurance that ultimate liabilities will not exceed amounts
reserved, with a resulting adverse effect on the Company. Management believes
that the Company's overall reserve levels at December 31, 1996 are adequate to
meet its future obligations.
The following table sets forth an analysis of loss reserves and LAE for the
Company's property and casualty lines and provides a reconciliation of
beginning and ending reserves for the periods indicated.
RECONCILIATION OF PROPERTY AND CASUALTY LOSS AND LAE RESERVES
(Dollars in millions)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Reserves at beginning of year...................... $369.7 $388.1 $373.5
Less reinsurance recoverables.................... 23.8 18.5 21.6
------ ------ ------
Net reserves at beginning of year.................. 345.9 369.6 351.9
------ ------ ------
Increase in reserves due to purchase of Allegiance
Insurance Company................................. - - 30.0
------ ------ ------
Losses and LAE incurred:
Claims occurring in the current period........... 368.6 352.5 346.0
Decrease in reserves for losses and LAE for
claims occurring in prior periods(1):
Policies written by the Company................ (56.4) (49.8) (47.2)
Business assumed from state reinsurance
facilities.................................... (6.1) (5.8) (7.1)
------ ------ ------
(62.5) (55.6) (54.3)
------ ------ ------
Losses and LAE incurred........................ 306.1 296.9 291.7
------ ------ ------
Losses and LAE payments for claims occurring
during:
Current year..................................... 206.4 179.8 170.6
Prior years...................................... 139.3 140.8 133.4
------ ------ ------
Losses and LAE payments........................ 345.7 320.6 304.0
------ ------ ------
Net reserves at end of period...................... 306.3 345.9 369.6
Plus reinsurance recoverables(2)................. 34.1 23.8 18.5
------ ------ ------
Reserves at end of period(3)....................... $340.4 $369.7 $388.1
====== ====== ======
</TABLE>
- --------
(1) Shows the amounts by which the Company decreased its reserves in each of
the periods indicated for claims occurring in previous periods to reflect
subsequent information on such claims
(continued on next page)
11
<PAGE>
RECONCILIATION OF PROPERTY AND CASUALTY LOSS AND LAE RESERVES--(CONTINUED)
- --------
and changes in their projected final settlement costs. Favorable reserve
development generally occurs as a result of subsequent adjustment of
reserves to reflect additional information.
(2) Generally accepted accounting principles ("GAAP") require that insurance
liabilities on the balance sheet be reported without reduction for
anticipated recoverables under reinsurance contracts. These anticipated
recoverables on unpaid losses and loss adjustment expenses are reported as
assets on the balance sheet. Statutory accounting practices continue to
permit reporting on a net basis.
(3) Unpaid claims and claim expenses as reported in the consolidated balance
sheets also include life, annuity, and group accident and health reserves
of $18.4 million, $15.4 million and $17.6 million at December 31, 1996,
1995 and 1994, respectively, in addition to property and casualty
reserves.
The provision for losses and LAE for insured events in prior years decreased
by $62.5 million, $55.6 million and $54.3 million for the years ended December
31, 1996, 1995 and 1994, respectively. The favorable loss development results
primarily from improving trends in the frequency and severity of voluntary
automobile claims.
Analysis of Loss and LAE Reserves
The following table reflects the development of losses and LAE for the
periods indicated at the end of that year and each subsequent year. The first
line shows the reserves, net of reinsurance recoverables, as originally
reported at the end of the stated year. Each calendar year-end reserve
includes the estimated unpaid liabilities for that accident year and for all
prior accident years. The section under the caption "Cumulative Amount Paid as
of" shows the cumulative amounts paid of that reserve as of the end of each
subsequent year. The section under the caption "Reserves Reestimated as of"
shows the original recorded reserve as adjusted as of the end of each
subsequent year to reflect the cumulative amounts paid and all other facts and
circumstances discovered during each such year. The line "Cumulative
Redundancy" reflects the difference between the latest reestimated reserve
amount and the reserve amount as originally established.
12
<PAGE>
In evaluating the information in the table below, it should be noted that
each amount includes the effects of all changes in amounts of prior periods.
For example, if a loss determined in 1995 to be $150 thousand was first
reserved in 1986 at $100 thousand, the $50 thousand deficiency (actual loss
minus original estimate) would be included in the cumulative deficiency in
each of the years 1986-1994 shown below. This table presents development data
by calendar year and does not relate the data to the year in which the
accident actually occurred. Conditions and trends that have affected the
development of these reserves in the past will not necessarily recur in the
future. It may not be appropriate to use this cumulative history in the
projection of future performance.
ANALYSIS OF PROPERTY AND CASUALTY
LOSSES AND LAE RESERVES DEVELOPMENT
(Dollars in millions)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserves for Losses and
LAE.................... $306.3 $345.9 $369.6 $351.9 $340.5 $316.7 $298.5 $274.0 $277.8 $242.6 $199.2
Increase in reserves due
to purchase of
Allegiance Insurance
Company................ - - 30.0 - - - - - - -
Cumulative Amount Paid
as of:
One year later......... 139.3 140.8 133.4 117.6 116.1 111.3 115.0 120.2 115.6 93.4
Two years later........ 194.5 190.5 169.6 170.0 167.4 163.9 175.9 163.5 136.9
Three years later...... 218.4 197.8 197.2 197.1 192.6 204.3 194.3 159.3
Four years later....... 213.6 212.1 212.9 208.2 220.1 208.3 174.1
Five years later....... 220.5 220.7 216.4 227.7 215.6 179.7
Six years later........ 225.3 219.3 232.2 218.9 183.2
Seven years later...... 221.7 234.0 220.8 185.1
Eight years later...... 235.5 221.6 186.4
Nine years later....... 222.4 186.7
Ten years later........ 187.0
Reserves Reestimated as
of:
One year later......... 283.4 314.0 327.6 306.1 297.3 279.9 265.9 275.6 244.1 196.6
Two years later........ 269.2 281.9 267.7 272.1 266.7 254.5 269.2 243.1 197.8
Three years later...... 258.1 246.4 246.8 246.7 239.4 259.0 243.3 196.0
Four years later....... 233.3 235.2 236.5 233.2 243.0 235.4 196.4
Five years later....... 229.8 232.4 227.8 239.7 226.0 192.6
Six years later........ 230.8 225.4 239.3 224.7 188.1
Seven years later...... 224.9 237.4 225.0 188.2
Eight years later...... 237.5 224.1 188.5
Nine years later....... 224.0 188.1
Ten years later........ 188.2
Cumulative Redundancy... $ 62.5 $100.4 $123.8 $107.2 $ 86.9 $ 67.7 $ 49.1 $ 40.3 $ 18.6 $ 11.0
</TABLE>
Property and Casualty Reinsurance
All reinsurance is obtained through contracts which generally are renewed
each calendar year. Although reinsurance does not legally discharge the
Company from primary liability for the full amount of its policies, it does
make the assuming reinsurer liable to the extent of the reinsurance ceded.
Historically, the Company's losses from uncollectible reinsurance recoverables
have been insignificant. Past due reinsurance recoverables as of December 31,
1996 were also insignificant.
The Company is a national underwriter and therefore has exposure to
catastrophic losses in certain coastal states and other regions throughout the
United States. Catastrophes can be caused by various events including
hurricanes, windstorms, earthquakes, hail, severe winter weather and fires,
and the frequency and severity of catastrophes are inherently unpredictable.
The financial impact from catastrophic losses results from both the total
amount of insured exposure in the area affected by the
13
<PAGE>
catastrophe as well as the severity of the event. The Company seeks to reduce
its exposure to catastrophe losses through the geographic diversification of
its insurance coverage, the purchase of catastrophe reinsurance, and the
purchase in 1997 of a catastrophe-linked equity put option.
The Company maintains an excess and catastrophe treaty reinsurance program.
In 1996, the Company reinsured 95% of catastrophe losses above a retention of
$5.5 million per occurrence up to $54 million per occurrence with an aggregate
annual deductible of $2.0 million. With regard to liability coverages in 1996,
the Company reinsured each loss up to $10 million above a retention of
$500,000. The Company reinsured each property loss above a retention of
$500,000 up to $1.0 million in 1996.
In 1997, the Company reinsures 95% of catastrophe losses above a retention
of $7.5 million per occurrence up to $65 million per occurrence. In 1997, the
Company's catastrophe reinsurance program will be augmented by a $100 million
equity put. This equity put provides for an option to sell shares of the
Company's convertible preferred stock at a pre-negotiated floating rate in the
event of losses from a catastrophe, individually or in the aggregate, which
exceed $65 million. For liability coverages, including the educator
professional liability policy, the Company reinsures each loss up to $20
million above a retention of $500,000. The Company reinsures each property
loss up to $1.5 million above a retention of $500,000.
The following table identifies the Company's most significant reinsurers
under the traditional reinsurance program, their percentage participation in
the Company's aggregate reinsured risk based on premiums paid by the Company
and their rating by A.M. Best. No other single reinsurer's percentage
participation in 1997 or 1996 exceeds 5%.
PROPERTY AND CASUALTY REINSURANCE PARTICIPANTS IN EXCESS OF 5%
<TABLE>
<CAPTION>
PARTICIPATION
A.M. BEST --------------
RATING REINSURER PARENT 1997 1996
--------- --------- ------ ------ ------
<C> <S> <C> <C> <C>
NR Lloyd's of London 10% *
A+ PMA Reinsurance Pennsylvania Manufacturers
Corporation Corporation 8% 0%
A Signet Star Reinsurance W.R. Berkley Corporation
Company 8% 5%
A+ St. Paul Fire and Marine The St. Paul Companies,
Insurance Company Inc. 7% 9%
A+ Motors Insurance General Motors Corporation
Corporation 7% 7%
NR G.I.O. Australia
Holdings, Ltd. 7% 7%
A+ St. Paul Reinsurance The St. Paul Companies, Inc.
Company, Ltd. 5% 0%
A Kemper Reinsurance Lumbermens Mutual Casualty
Company Company * 5%
A NAC Reinsurance NAC Re Corporation
Corporation * 5%
A- LaSalle Reinsurance Ltd. 0% 9%
A+ Transatlantic American International Group,
Reinsurance Company Inc. (AIG) 0% 5%
</TABLE>
- --------
NR--These foreign reinsurers are not rated by A.M. Best.
* Less than 5%.
For 1997, all of the Company's property and casualty reinsurers that were
rated by A.M. Best were rated "A- (Excellent)" or above. The Company has
placed 37% of its reinsurance coverage with foreign reinsurers that are not
rated by A.M. Best.
ANNUITIES
Educators in the Company's target market, as public school employees,
benefit from the provisions of Section 403(b) of the Internal Revenue Code.
This section of the Code allows public school employees to reduce their pretax
income by making periodic contributions to an individual
14
<PAGE>
qualified retirement plan. The Company has offered tax-qualified annuities to
its marketplace, designed to allow contractholders to benefit from these tax
provisions, since 1961, the year Congress created this option for educators.
The Company sells fixed and variable tax-qualified annuities. Under the
fixed annuities, both the principal and a rate of return are guaranteed.
Variable annuity contract deposits are invested as designated by the
contractholder in mutual funds managed by the Company--a common stock fund, a
bond fund, a combination bond and stock fund, and a short-term fund; and
beginning in 1997--a small cap growth fund, an international equity fund, and
a "socially responsible" fund. Total accumulated fixed and variable annuity
cash value on deposit at December 31, 1996 of $2,075.5 million increased
$209.5 million, or 11.2%, compared to December 31, 1995. This increase
resulted from a net increase in funds on deposit of 10.0% plus net increases
in market value of underlying mutual funds of $26.7 million. The liability for
all annuity contracts issued by the Company on a generally accepted accounting
principles ("GAAP") basis is established at the contract's accumulated cash
value before reduction for surrender charges.
For the year ended December 31, 1996, 94% of the accumulated cash value of
the Company's annuity business remained on deposit, compared to average
retention of 90% for stock life insurance companies for 1995, as reported by
A.M. Best. All annuities issued since 1982 and approximately 70% of all
outstanding fixed annuity accumulated cash values are subject in most cases to
substantial early withdrawal penalties, typically ranging from 5% to 13% of
the amount withdrawn. Withdrawals of outstanding variable annuities are
limited to amounts less than or equal to the then current market value of the
annuity. Tax-qualified annuities represented 95% of the Company's annuity
policy reserves at December 31, 1996, and, generally, a penalty is imposed
under the Internal Revenue Code of 1986, as amended, on amounts withdrawn from
tax-qualified annuities prior to age 59 1/2.
15
<PAGE>
Selected Historical Financial Information For Annuity Segment
The following table sets forth certain information with respect to the
Company's annuity products for the periods indicated.
ANNUITY SEGMENT
SELECTED HISTORICAL FINANCIAL INFORMATION
(Dollars in millions, unless otherwise indicated)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Contract deposits.............................. $ 166.9 $ 142.9 $ 136.6
Contract charges earned........................ 9.2 6.8 5.4
Net investment income.......................... 111.4 110.3 105.0
Net interest margin (without realized gains)... 34.7 35.8 35.3
Net margin (includes contract charges earned).. 43.9 42.6 40.7
Realized investment gains...................... 1.6 4.3 1.7
Income before income taxes..................... 26.5 27.1 23.6
Net income before realized investment gains.... 16.3 14.8 14.2
Net income..................................... 17.4 17.6 15.3
OPERATING STATISTICS:
Fixed annuity:
Accumulated value............................ $1,390.6 $1,378.4 $1,339.1
Accumulated value persistency................ 93.9% 94.5% 94.8%
Variable annuity accumulated value............. $ 684.9 $ 487.6 $ 334.1
Number of contracts in force................... 106,476 101,641 98,379
Average accumulated cash value (in dollars).... $ 19,493 $ 18,358 $ 17,008
Average annual deposit by policyholders (in
dollars)...................................... $ 2,382 $ 2,350 $ 2,300
Maturity schedule for all annuity contracts:
Matured...................................... $ 184.4 $ 176.8 $ 170.6
5 years or less.............................. 397.9 371.7 354.5
After 5 years through 10 years............... 408.9 351.5 300.9
After 10 years through 20 years.............. 732.8 664.9 596.2
After 20 years............................... 351.5 301.1 251.0
Total accumulated cash value............... $2,075.5 $1,866.0 $1,673.2
Annuity contracts terminated due to surrender,
death, maturity or other:
Number of contracts.......................... 5,977 5,645 5,345
Amount....................................... $ 90.9 $ 90.0 $ 82.4
Accumulated fixed annuity value grouped by
applicable surrender charge:
0%........................................... $ 344.6 $ 364.9 $ 384.3
5% and greater but less than 10%............. 827.5 804.6 772.5
10% and greater.............................. 141.2 138.2 116.5
Supplementary contracts with life
contingencies not subject to discretionary
withdrawal.................................. 77.3 70.7 65.8
Total accumulated fixed annuity value...... $1,390.6 $1,378.4 $1,339.1
</TABLE>
LIFE
The Company entered the individual life insurance business in 1949 with
traditional term and whole life insurance products. In 1984, the Company
introduced "Experience Life," a flexible life insurance contract which allows
the customer to combine elements of term life insurance, interest-sensitive
whole life insurance and an interest-bearing account. At December 31, 1996
this business consisted of approximately 99,000 Experience Life policies
representing approximately $6.6 billion of life insurance in force with annual
insurance premiums and contract deposits of approximately $69.6 million. The
Company's traditional term, whole life and group life business in force
consists of
16
<PAGE>
approximately 156,000 policies, representing approximately $4.0 billion of life
insurance in force with annual insurance premiums and contract deposits of
approximately $26.3 million as of December 31, 1996. In 1997, the Company
introduced a new series of five limited duration term life insurance products.
The Company does not charge any penalty for withdrawal of life insurance cash
values. The life segment also includes the Company's group life and group
disability income business which represented approximately 2% of all insurance
premiums written and contract deposits of the Company.
During 1996, the average face amount of ordinary life insurance policies
issued by the Company was $102,196 and the average face amount of all ordinary
life insurance policies it has in force was $48,650. A.M. Best reported that
during 1995, for stock life insurance companies, the average face amount of
ordinary life insurance policies issued was $70,056 and the average face amount
of all ordinary life insurance policies in force was $46,852. The maximum life
insurance risk retained by the Company is $200,000 combined for group and
individual coverages on any individual life. Any risk in excess of $200,000 is
reinsured. All of the Company's life reinsurers are rated "A (Excellent)" or
above by A.M. Best.
The life insurance and annuity industry, while it has not generally been
subject to the factors that produce cyclicality in the property and casualty
insurance industry, is nonetheless subject to competitive pressures and
interest rate fluctuations. As a result, the life insurance and annuity
industry has developed new products designed to shift investment and credit
risk to policy or contract holders while still providing death benefits. This
trend has generally caused profit margins to shrink on new products relative to
older life insurance and annuity products and has provided more competitive
returns to the holders of the new products than those available under other
investment alternatives. Management cannot predict whether these trends will
continue in the future.
17
<PAGE>
Selected Historical Financial Information For Life Segment
The following table sets forth certain information with respect to the
Company's life products for the periods indicated.
LIFE SEGMENT
SELECTED HISTORICAL FINANCIAL INFORMATION
(Dollars in millions, unless otherwise indicated)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Insurance premiums and contract deposits....... $ 110.8 $ 105.3 $ 101.9
Insurance premiums and contract charges earned. 80.3 74.8 72.0
Net investment income.......................... 41.7 39.8 36.0
Realized investment gains...................... 0.7 1.4 0.5
Income before income taxes..................... 19.1 17.4 12.3
Net income before realized investment gains.... 12.1 10.4 7.7
Net income..................................... 12.5 11.2 8.0
OPERATING STATISTICS:
Life insurance in force:
Ordinary life................................ $ 9,682 $ 9,304 $ 8,857
Group life................................... 963 931 850
Total...................................... 10,645 10,235 9,707
Number of policies in force:
Ordinary life................................ 199,031 198,541 197,131
Group life................................... 55,525 53,225 49,551
Total...................................... 254,556 251,766 246,682
Average face amount in force (in dollars):
Ordinary life................................ $ 48,650 $ 46,900 $ 44,900
Group life................................... 17,350 17,500 17,150
Total...................................... 41,800 40,650 39,350
Persistency rate (ordinary life insurance in
force)........................................ 92.0% 92.2% 92.1%
Lapse ratio (ordinary life insurance in force). 8.0% 7.8% 7.9%
Ordinary life insurance terminated due to
death, surrender, lapse or other:
Face amount of insurance surrendered or
lapsed...................................... $ 862.1 $ 808.1 $ 780.5
Number of policies......................... 9,660 9,380 9,888
Amount of death claims....................... $ 22.4 $ 19.3 $ 19.6
Number of death claims..................... 1,305 1,166 1,211
</TABLE>
Acquired Immune Deficiency Syndrome ("AIDS") is expected to affect mortality
adversely for the life insurance industry although the extent of the impact
cannot be predicted at this time. Where permitted by law, the Company has
responded by considering AIDS information in underwriting and pricing
decisions. From 1992 through 1996, the Company has paid $3.6 million in death
benefits under 95 individual life policies due to known AIDS-related deaths,
representing 4% of total death benefits paid during this period.
INVESTMENTS
The Company's investments are selected to balance the objectives of
minimizing interest rate exposure, providing a high current yield and
protecting principal. These objectives are implemented through a portfolio
that emphasizes high quality investment grade, publicly traded bonds. When
impairment of the value of an investment is considered other than temporary,
the decrease in value is recorded as an adjustment to the valuation reserve
and a new cost basis is established. At December 31, 1996, investments in non-
investment grade securities represented 5.1% of total investments. There are
no significant investments in mortgage loans and real estate or privately
placed securities.
18
<PAGE>
The Company's investments are managed by outside managers and advisors which
follow investment guidelines established by the Company. The Company has
separate investment strategies and guidelines for its property and casualty
assets and for its life and annuity assets, which recognize different
characteristics of the associated insurance liabilities, as well as different
tax and regulatory environments. The Company manages interest rate exposure
for its portfolios through asset/liability management techniques that attempt
to match the duration of the assets with the duration of the liabilities under
insurance policies. Duration of assets and liabilities will generally differ
only because of opportunities to significantly increase yields or because
policy values are not interest-sensitive, as in the property and casualty
segment.
The investments of each insurance subsidiary must comply with the insurance
laws of such insurance subsidiary's domiciliary state. These laws prescribe
the type and amount of investments that may be made by insurance companies. In
general, these laws permit investments, within specified limits and subject to
certain qualifications, in federal, state and municipal obligations, corporate
bonds, preferred stocks, common stocks, real estate mortgages and real estate.
The following table sets forth the carrying and market values of the
Company's investment portfolio as of December 31, 1996:
INVESTMENT PORTFOLIO
(Dollars in millions)
<TABLE>
<CAPTION>
PERCENTAGE CARRYING VALUE
OF TOTAL ------------------------------
CARRYING LIFE AND PROPERTY AND AMORTIZED
VALUE TOTAL ANNUITY CASUALTY COST
---------- -------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C>
PUBLICLY TRADED FIXED
MATURITY SECURITIES AND
CASH EQUIVALENTS:
U.S. government and
agency obligations(1):
Mortgage-backed
securities........... 23.5% $ 654.0 $ 503.9 $150.1 $ 644.2
Other................. 9.3% 259.5 227.0 32.5 257.5
Investment grade
corporate and public
utility bonds.......... 37.3% 1,039.4 880.0 159.4 1,020.5
Municipal bonds......... 8.3% 230.1 20.4 209.7 221.9
Other mortgage-backed
securities............. 10.3% 285.7 232.0 53.7 282.6
Non-investment grade
corporate and public
utility bonds(2)....... 5.0% 140.6 105.2 35.4 134.8
Foreign government
bonds.................. 1.3% 36.0 36.0 - 34.7
Short-term
investments(3)......... 1.3% 36.9 12.8 24.1 36.9
----- -------- -------- ------ --------
Total publicly
traded securities.. 96.3% 2,682.2 2,017.3 664.9 2,633.1
----- -------- -------- ------ --------
OTHER INVESTMENTS:
Investment grade private
placements(4).......... 0.4% 11.5 11.1 0.4 10.8
Non-investment grade
private
placements(2)(4)....... 0.1% 1.7 1.5 0.2 2.1
Mortgage loans and real
estate(5).............. 1.6% 43.0 43.0 - 43.0
Policy loans and other.. 1.6% 45.9 44.1 1.8 45.9
----- -------- -------- ------ --------
Total other
investments........ 3.7% 102.1 99.7 2.4 101.8
----- -------- -------- ------ --------
Total
investments(6)..... 100.0% $2,784.3 $2,117.0 $667.3 $2,734.9
===== ======== ======== ====== ========
</TABLE>
- --------
(1) Includes $468.2 million market value of investments guaranteed by the full
faith and credit of the United States government and $445.3 million market
value of federally sponsored agency securities.
(continued on next page)
19
<PAGE>
INVESTMENT PORTFOLIO--(CONTINUED)
- --------
(2) A non-investment grade rating is assigned to a security when it is
acquired, primarily on the basis of the Standard & Poor's Corporation
("S&P") rating for such security, or if there is no S&P rating, the
Moody's Investors Service, Inc. ("Moody's") rating for such security, or
if there is no S&P or Moody's rating, the National Association of
Insurance Commissioners (the "NAIC") rating for such security.
(3) Short-term investments mature within one year of being acquired and are
carried at cost, which approximates market value. Short-term investments
include $27.8 million in a money market fund rated "AAA" (S&P or its
equivalent), $4.2 million in a Federal National Mortgage Association Note,
$2.5 million in a Federal Home Loan Mortgage Corporation Note, $2.3
million in a Federal Home Loan Bank Discount Note and $0.1 million in
certificates of deposit.
(4) Market values for private placements are estimated by the Company with the
assistance of its investment advisors.
(5) Mortgage loans are carried at amortized cost or unpaid principal balance
less valuation reserves and real estate acquired in the settlement of debt
is carried at the lower of cost or market. Carrying value is net of a $2.6
million valuation reserve for anticipated losses.
(6) Approximately 5% of the Company's investment portfolio, having a carrying
value of $145.4 million as of December 31, 1996, consisted of securities
with some form of credit support, such as insurance. All of these
securities have the highest investment grade rating.
Fixed Maturity Securities
The following table sets forth the composition of the Company's fixed
maturity securities portfolio by rating as of December 31, 1996:
RATING OF FIXED MATURITY SECURITIES(1)
(Dollars in millions)
<TABLE>
<CAPTION>
PERCENT
OF TOTAL
CARRYING CARRYING AMORTIZED
VALUE VALUE COST
-------- -------- ---------
<S> <C> <C> <C>
AAA.............................................. 46.4% $1,233.0 $1,215.9
AA............................................... 9.4 251.0 244.2
A................................................ 22.3 593.2 579.8
BBB.............................................. 16.4 435.8 429.1
BB............................................... 1.4 36.4 37.3
B................................................ 3.7 97.6 91.4
CCC or lower..................................... - 0.6 0.6
Not rated(2)..................................... 0.4 10.9 10.8
----- -------- --------
Total.......................................... 100.0% $2,658.5 $2,609.1
===== ======== ========
</TABLE>
- --------
(1) Ratings are as assigned primarily by S&P when available, with remaining
ratings as assigned on an equivalent basis by Moody's. Ratings for
publicly traded securities are determined when the securities are acquired
and are updated monthly to reflect any changes in ratings.
(2) This category is comprised primarily of private placement securities not
rated by either S&P or Moody's. The NAIC has rated 71.4% of these private
placements as investment grade. $0.9 million of the remaining $1.7 million
of private placements were rated as investment grade by the NAIC in 1995
and are under review for the assignment of a current rating.
At December 31, 1996, 34.4% of the Company's fixed maturity securities
portfolio was scheduled to mature within the next 5 years. Mortgage-backed
securities, including mortgage-backed securities of United States governmental
agencies, represented 33.8% of the total investment portfolio at December 31,
1996. These securities typically have effective maturities shorter than their
scheduled maturities due to unscheduled prepayments on the underlying
mortgages. Mortgages are prepaid for a variety of reasons, including sales of
existing homes, interest rate changes over time that encourage homeowners to
refinance their mortgages and defaults by homeowners on mortgages that are
then paid by guarantors.
20
<PAGE>
For financial reporting purposes, the Company has classified the entire
fixed maturity portfolio as "available for sale". Fixed maturities to be held
for indefinite periods of time and not intended to be held to maturity are
classified as available for sale and carried at market value. Fixed maturities
held for indefinite periods of time include securities that management intends
to use as part of its asset/liability management strategy and that may be sold
in response to changes in interest rates, resultant prepayment risk and other
factors related to interest rate and resultant prepayment risk.
CASH FLOW
As a holding company, HMEC conducts its principal operations through its
subsidiaries. Payment by HMEC of principal and interest with respect to HMEC's
indebtedness, and payment by HMEC of dividends to its shareholders, are
dependent upon the ability of its insurance subsidiaries to pay cash dividends
or make other cash payments to HMEC, including tax payments pursuant to tax
sharing agreements. Restrictions on the subsidiaries' ability to pay dividends
or to make other cash payments to HMEC may materially affect HMEC's ability to
pay principal and interest on its indebtedness and dividends on its common
stock.
The ability of the insurance subsidiaries to pay cash dividends to HMEC is
subject to state insurance department regulations which generally permit
dividends to be paid for any 12 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 dividend in
excess of these levels requires the prior approval of the Director or
Commissioner of the state insurance department of the state in which the
dividend paying insurance subsidiary is domiciled. The aggregate amount of
dividends that may be paid in 1997 from all of HMEC's insurance subsidiaries
without prior regulatory approval is approximately $89 million.
Notwithstanding the foregoing, if insurance regulators otherwise determine
that payment of a dividend or any other payment to an affiliate would be
detrimental to an insurance subsidiary's policyholders or creditors, because
of the financial condition of the insurance subsidiary or otherwise, the
regulators may block dividends or other payments to affiliates that would
otherwise be permitted without prior approval.
The insurance subsidiaries' sources of funds consist primarily of premiums
and contract fees, investment income and proceeds from sales and redemption of
investments. Such funds are applied primarily to payment of claims, insurance
operating expenses, income taxes and the purchase of investments, as well as
dividends and other payments to HMEC.
COMPETITION
The Company operates in a highly competitive environment. There are numerous
insurance companies that compete with the Company, although management
believes that the Company is one of the few multi-line insurance companies to
target teachers as its primary business nationally. In some specific instances
and geographic locations competitors have specifically targeted the teacher
marketplace with specialized products and programs. The Company competes in
its target market with a number of national providers of personal automobile
and homeowners insurance and life insurance.
For annuity business, the marketplace has begun to see a competitive impact
from new entrants such as mutual funds and banks into the tax deferred annuity
products market. Among the major national providers of annuities to educators,
Variable Annuity Life Insurance Company, a subsidiary of American General
Corporation, and Nationwide are among the Company's major tax-qualified
annuity competitors.
The Company competes with a number of national providers of automobile and
homeowners insurance, such as State Farm, Allstate and Nationwide, and several
regional companies. The Company also competes for automobile business with
certain direct marketing companies, such as 20th Century, American
International Group (AIG) and GEICO.
21
<PAGE>
The insurance industry consists of a large number of insurance companies,
some of which have substantially greater financial resources, more diversified
product lines, and lower cost marketing approaches, such as direct marketing,
mail and telemarketing, compared to the Company. The Company believes that the
principal competitive factors in the sale of property and casualty insurance
products are price, service and name recognition. The Company believes that the
principal competitive factors in the sale of life insurance and annuity
products are product features, perceived stability of the insurer, service,
name recognition and price.
INSURANCE FINANCIAL RATINGS
The Company believes that the ratings assigned to its principal insurance
subsidiaries by Standard & Poor's, A.M. Best and Duff & Phelps Credit Rating
Co. ("Duff & Phelps") contribute to the Company's competitiveness.
Each of HMEC's principal insurance subsidiaries is rated "AA- (Excellent)"
for claims-paying ability by Standard & Poor's. The S&P claims-paying ability
ratings definitions from Standard & Poor's Internet Website, February 1997, are
as follows. A Standard & Poor's insurance claims-paying ability rating is an
opinion of an operating insurance company's financial capacity to meet the
obligations of its insurance policies in accordance with their terms. This
opinion is not specific to any particular insurance policy or contract, nor
does it address the suitability of a particular insurance policy or contract
for a specific purpose or purchaser. Furthermore, the opinion does not take
into account deductibles, surrender or cancellation penalties, the timeliness
of payment, or the likelihood of the use of a defense such as fraud to deny
claims. Claims-paying ability ratings do not refer to an insurer's ability to
meet nonpolicy obligations (i.e., debt contracts). The claims-paying ability
ratings are based on current information furnished by the insurance company or
obtained by S&P from other sources it considers reliable. S&P does not perform
an audit in connection with any rating and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information or based on other
circumstances. Claims-paying ability ratings are divided into two broad
classifications. Rating categories from "AAA" to "BBB" are classified as
"secure" claims-paying ability ratings and are used to indicate insurers whose
financial capacity to meet policyholder obligations is viewed, on balance, as
sound. Among factors considered in placing insurers within the spectrum of
"secure" rating categories is the time frame within which policyholder security
could be damaged by adverse economic and underwriting conditions. That time
frame grows shorter as ratings move down the "secure" rating scale. Rating
categories from "BB" to "CCC" are classified as "vulnerable" claims-paying
ability ratings and are used to indicate insurers whose financial capacity to
meet policyholder obligations is viewed as vulnerable to adverse economic and
underwriting conditions. Claims-paying ability ratings are assigned at the
request of the insurers and based on extensive quantitative and qualitative
analysis including consideration of ownership and support factors, if
applicable. The rating process includes meetings with insurers' management.
Plus (+) and minus (-) signs show relative standing within a category; they do
not suggest likely upgrades or downgrades. Insurers rated "AAA" offer superior
financial security on an absolute and relative basis. Capacity to meet
policyholder obligations is overwhelming under a variety of economic and
underwriting conditions. Insurers rated "AA" offer excellent financial
security. Capacity to meet policyholder obligations is strong under a variety
of economic and underwriting conditions.
HMIC, TIC and Allegiance are rated "A+ (Superior)" and HMLIC is rated "A
(Excellent)" by A.M. Best. Ratings for the industry range from "A++ (Superior)"
to "F (In Liquidation)", and some companies are not rated. Publications of A.M.
Best indicate that the "A++ and A+ (Superior)" ratings are assigned to those
companies that in A.M. Best's opinion have demonstrated superior overall
performance when compared to the standards established by A.M. Best and have a
very strong ability to meet their obligations to policyholders over a long
period of time. The "A and A- (Excellent)" ratings are assigned to those
companies that in A.M. Best's opinion have demonstrated excellent overall
performance when compared to the standards established by A.M. Best and have a
strong ability to meet their obligations to policyholders over a long period of
time. In evaluating a company's financial and operating
22
<PAGE>
performance, A.M. Best reviews the company's profitability, leverage and
liquidity as well as the company's spread of risk, the quality and
appropriateness of its reinsurance, the quality and diversification of its
assets, the adequacy of its policy or loss reserves, the adequacy of its
surplus, its capital structure, the experience and objectives of its
management, and market presence. A.M. Best's ratings are based on factors
relevant to policyholders, agents, insurance brokers and intermediaries and
are not directed to the protection of investors.
HMLIC is rated "AA" for claims paying ability by Duff & Phelps. Duff &
Phelps' life insurance company Claims Paying Ability ("CPA") ratings provide
analytical insight into the ability of a company to meet its policyholder
obligations in a timely manner. According to Duff & Phelps "Claims Paying
Ability Rating Methodology for Life Insurers," 1995, the approach used to
analyze an insurance company's claims paying ability is prospective in nature.
The long duration of liabilities of the typical life insurance company
requires a forward-looking analysis of the risks the company faces. The
analytical process stresses not only the current financial position of the
company, but puts considerable weight on the company's future direction and
expected financial performance. A key part of the overall CPA rating process
is an annual meeting with the senior executives who set the future direction
of the company. Regular contact with company representatives throughout the
year supplements this process. The process used to determine a CPA rating is
comprehensive and combines quantitative and qualitative analysis of both
public and non-public information. The CPA ratings use a scale of "AAA
(Highest claims paying ability--the risk factors are negligible)" through "DD
(Company is under an order of liquidation)." The CPA rating of "AA" is
assigned for very high claims paying ability. The protection factors are
strong; risk is modest, but may vary slightly over time due to economic and/or
underwriting conditions. A CPA rating only indicates an insurance company's
ability to make timely payment of policyholder obligations. It does not refer
to the ability of either the rated company or its affiliates to meet
nonpolicyholder obligations, such as debt repayment or payment of preferred
dividends. The most important factors considered in the qualitative analysis
are: economic fundamentals of the company's principal insurance lines, the
company's competitive position, management's capability, the relationship of
the rated entity to either parent, affiliate, or subsidiary, asset/liability
and liquidity management practices and investment quality and management.
REGULATION
General Regulation at State Level
As an insurance holding company, HMEC is subject to regulation by the states
in which its insurance subsidiaries are domiciled or transact business. Most
states have enacted legislation that requires each insurance company in a
holding company system to register with the insurance regulatory authority of
its state of domicile and furnish to it financial and other information
concerning the operations of companies within the holding company system that
may materially affect the operations, management or financial condition of the
insurers within the system. All transactions within a holding company system
affecting insurers must be fair and equitable and the insurer's policyholder
surplus following any transaction must be both reasonable in relation to its
outstanding liabilities and adequate for its needs. Notice to applicable
regulators is required prior to the consummation of certain transactions
affecting insurance subsidiaries of the holding company system.
In addition, the laws of the various states establish regulatory agencies
with broad administrative powers to grant and revoke licenses to transact
business, regulate trade practices, license agents, require statutory
financial statements, and prescribe the type and amount of investments
permitted. See "Business--Investments" for discussion of investment
restrictions or limitations imposed upon the Company under applicable
insurance laws and regulations.
The NAIC annually calculates financial ratios to assist state insurance
regulators in monitoring the financial condition of insurance companies. A
"usual range" of results for each ratio is used as a benchmark. Separate
ratios are established for property and casualty and life insurance companies.
Departure from the usual range in any of the ratios could lead to inquiries
from individual state
23
<PAGE>
regulators, and further investigation or other actions may result. In 1995, no
unusual ratios were reported by the principal insurance subsidiaries of HMEC.
As part of their regulatory oversight process, state insurance departments
routinely conduct detailed financial examinations (generally not more
frequently than once every three years) of the books, records and accounts of
insurance companies domiciled in their states. Typically, such examinations
are conducted concurrently by two or three states under guidelines promulgated
by the NAIC. The last financial examinations for the Company's principal
insurance subsidiaries, HMLIC, HMIC and TIC, occurred during 1993 for the
period ended December 31, 1992. A financial examination of Allegiance was
completed for the period ended December 31, 1994. Management believes that
HMEC and its subsidiaries are in compliance in all material respects with all
applicable regulatory requirements.
The NAIC has adopted risk-based capital guidelines to evaluate the adequacy
of statutory capital and surplus in relation to an insurance company's risks.
State insurance regulations prohibit insurance companies from making any
public statements or representations with regard to their risk-based capital
levels. Based on current guidelines, the risk-based capital statutory
requirements will have no negative regulatory impact on the Company's
insurance subsidiaries.
Assessments Against Insurers
Under insurance insolvency or guaranty laws in most states in which the
Company operates, insurers doing business therein can be assessed for
policyholder losses related to insurance company insolvencies. The amount and
timing of any future assessments on the Company under these laws cannot be
reasonably estimated and are beyond the control of the Company. Most of these
laws do provide, however, that an assessment may be excused or deferred if it
would threaten an insurer's financial strength, and most assessments paid by
the Company pursuant to these laws may be used as credits for a portion of the
Company's premium taxes. The Company paid $0.8 million, $0.9 million and $1.2
million in connection with insurer insolvency proceedings for the years ended
December 31, 1996, 1995 and 1994, respectively, of which $0.6 million, $0.9
million and $1.2 million for the same periods, respectively, is recoverable as
premium tax credits in future periods.
Mandatory Insurance Facilities
The Company is required to participate in various mandatory insurance
facilities in amounts related to the amount of the Company's direct writings
in the applicable state. In 1996, the Company reflected a net loss from
participation in such mandatory pools and underwriting associations of $1.0
million before federal income taxes.
California Earthquake Authority
The California Earthquake Authority ("CEA") was formed by the California
Legislature to encourage companies to write residential property insurance in
California and began operating in December 1996. All companies which write
residential property insurance in California are also required to offer
earthquake coverage. The CEA will operate as an insurance company providing
residential property earthquake coverage under policies sold by companies
which have chosen to participate in the CEA. The participating companies will
fund the CEA and share in earthquake losses covered by the CEA in proportion
to their market share.
The Company has not joined the CEA. The Company's exposure to losses from
earthquakes is managed through its underwriting standards, its earthquake
policy coverage limits and deductible levels, and the geographic distribution
of its business, as well as its reinsurance program. After reviewing the
exposure to earthquake losses from its own policies and from participation in
the CEA, management believes it is in the Company's best economic interest to
offer earthquake coverage directly to its homeowners policyholders. See
"Property and Casualty--Property and Casualty Reinsurance."
24
<PAGE>
Regulation at Federal Level
Although the federal government generally does not directly regulate the
insurance business, federal initiatives often impact the insurance business.
Current and proposed federal measures which may significantly affect the
insurance business include employee benefits regulation, controls on the costs
of medical care, medical entitlement programs such as Medicare, changes to the
insurance industry anti-trust exemption, minimum solvency requirements and
allowing national banks to engage in the insurance, annuity and mutual fund
businesses.
Federal income taxation of the build-up of cash value within a life insurance
policy or an annuity contract could have a material adverse impact on the
Company's ability to market and sell such products. Various legislation to this
effect has been proposed in the past, but has not been enacted. Although no
such legislative proposals are known to exist at this time, such proposals may
be made again in the future.
The variable annuities underwritten by HMLIC and the mutual funds used as
investment vehicles for those products are regulated by the Securities and
Exchange Commission (the "Commission"). Horace Mann Investors, Inc., the
broker-dealer subsidiary of HMEC, performs certain management functions for the
mutual funds and also is regulated by the Commission and the National
Association of Securities Dealers.
EMPLOYEES
At December 31, 1996, the Company had approximately 2,700 employees,
including 1,022 full-time agents. The Company has no collective bargaining
agreement with any employees.
ITEM 2. PROPERTIES
HMEC's home office property at 1 Horace Mann Plaza in Springfield, Illinois
consists of an office building totaling approximately 230,000 square feet. HMEC
also owns buildings with an aggregate of approximately 209,000 square feet at
other locations in Springfield. These properties are adequate and suitable for
the Company's current and anticipated future needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently party to any material pending legal proceedings
other than ordinary routine litigation incidental to its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
HMEC's common stock began trading on the New York Stock Exchange ("NYSE") in
November 1991 under the symbol of HMN at a price of $18 per share. The
following table sets forth the high and low sales prices of the common stock on
the NYSE Composite Tape and the cash dividends paid per share of common stock
during the periods indicated.
<TABLE>
<CAPTION>
MARKET PRICE
--------------- DIVIDEND
FISCAL PERIOD HIGH LOW PAID
------------- ------- ------- --------
<S> <C> <C> <C>
1996:
Fourth Quarter.................................... $40 3/4 $31 1/2 $0.11
Third Quarter..................................... 35 7/8 29 1/8 0.11
Second Quarter.................................... 33 1/2 28 0.11
First Quarter..................................... 35 3/4 29 1/4 0.11
1995:
Fourth Quarter.................................... $31 1/4 $25 3/4 $0.09
Third Quarter..................................... 29 1/4 22 5/8 0.09
Second Quarter.................................... 24 1/2 20 1/8 0.09
First Quarter..................................... 24 21 1/4 0.09
</TABLE>
25
<PAGE>
As of March 1, 1997, the approximate number of holders of common stock was
4,500.
In February 1997, the Board of Directors authorized the fifth consecutive
annual increase in the Company's dividend. The regular quarterly dividend
increased by 23% to $0.135 per share. The payment of dividends in the future is
subject to the discretion of the Board of Directors and will depend upon
general business conditions, legal restrictions and other factors the Board of
Directors of HMEC may deem to be relevant.
In February 1997, the Company's Board of Directors adopted a repurchase
program for shares of the Company's common stock of up to $100 million. Based
on the market price of the Company's common shares at the time the Board
adopted this program, $100 million would represent approximately 9% of the
Company's outstanding shares. Shares of common stock may be purchased from time
to time through open market and private purchases, as available. The repurchase
program will be financed through use of cash and, if needed, the existing bank
line of credit.
As an insurance holding company, HMEC depends on dividends and other
permitted payments from its insurance subsidiaries to pay cash dividends to
shareholders of HMEC. The payment of dividends and such other payments to HMEC
by its insurance subsidiaries is restricted by the laws of each subsidiary's
state of domicile, and insurance regulators have authority in certain
circumstances to block payments of dividends and other amounts by the insurance
subsidiaries that would otherwise be permitted without regulatory approval. See
"Business--Cash Flow" and "Business--Regulation."
ITEM 6. SELECTED FINANCIAL DATA
The information required by Item 301 of Regulation S-K is contained in the
table in Item 1--"Business--Selected Historical Consolidated Financial Data."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by Item 303 of Regulation S-K is contained in the
Index to Financial Information on page F-1 herein.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements, the report of its
independent accountants and the selected quarterly financial data required by
Item 302 of Regulation S-K are contained in the Index to Financial Information
on page F-1 herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Items 401 and 405 of Regulation S-K is
incorporated by reference to the Company's Proxy Statement for the 1997 Annual
Meeting of Shareholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 402 of Regulation S-K is incorporated by
reference to the Company's Proxy Statement for the 1997 Annual Meeting of
Shareholders.
26
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 403 of Regulation S-K is incorporated by
reference to the Company's Proxy Statement for the 1997 Annual Meeting of
Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 404 of Regulation S-K is incorporated by
reference to the Company's Proxy Statement for the 1997 Annual Meeting of
Shareholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) The following consolidated financial statements of the Company listed
below are contained in the Index to Financial Information on Page F-1 herein:
Consolidated Balance Sheets as of December 31, 1996, 1995 and 1994.
Consolidated Statements of Operations for the Years Ended December 31,
1996, 1995 and 1994.
Consolidated Statements of Changes in Shareholders' Equity for the Years
Ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the Years Ended December 31,
1996, 1995 and 1994.
(a)(2) The following consolidated financial statement schedules of the
Company listed below are contained in the Index to Financial Information on
page F-1 herein:
Schedule I--Summary of Investments--Other than Investments in Related
Parties.
Schedule II--Condensed Financial Information of Registrant.
Schedules III and VI Combined--Supplementary Insurance Information and
Supplemental Information Concerning Property and Casualty Insurance
Operations.
Schedule IV--Reinsurance.
(a)(3) The following items are filed as Exhibits. Management contracts and
compensatory plans are indicated by an asterisk (*).
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
(3) Articles of incorporation and bylaws:
<S> <C>
3.1 Restated Certificate of Incorporation of HMEC, filed with the Delaware
Secretary of State on October 6, 1989, incorporated by reference to Exhibit
3.1 to HMEC's Quarterly Report on Form 10-Q for the quarter ended September
30, 1996, filed with the Securities and Exchange Commission on November 14,
1996.
3.2 Certificate of Amendment to Restated Certificate of Incorporation of HMEC,
filed with the Delaware Secretary of State on October 18, 1991, incorporated
by reference to Exhibit 3.2 to HMEC's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996, filed with the Securities and Exchange
Commission on November 14, 1996.
3.3 Certificate of Amendment to Restated Certificate of Incorporation of HMEC,
filed with the Delaware Secretary of State on August 23, 1995, incorporated
by reference to Exhibit 3.3 to HMEC's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996, filed with the Securities and Exchange
Commission on November 14, 1996.
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
3.4 Certificate of Amendment to Restated Certificate of Incorporation of HMEC,
filed with the Delaware Secretary of State on September 23, 1996,
incorporated by reference to Exhibit 3.4 to HMEC's Quarterly Report on Form
10-Q for the quarter ended September 30, 1996, filed with the Securities and
Exchange Commission on November 14, 1996.
3.5 Form of Certificate for shares of Common Stock, $0.001 par value per share,
of HMEC, incorporated by reference to Exhibit 4.5 to HMEC's Registration
Statement on Form S-3 (Registration No. 33-53118) filed with the Securities
and Exchange Commission on October 9, 1992.
3.6 Bylaws of HMEC, incorporated by reference to Exhibit 4.6 to HMEC's
Registration Statement on Form S-3 (Registration No. 33-80059) filed with
the Securities and Exchange Commission on December 6, 1995.
(4) Instruments defining the rights of security holders, including indentures:
4.1 Warrant Agreement dated as of August 29, 1989 (the "Warrant Agreement"),
between HMEC (as successor to HME Acquisition Corporation) and Bankers Trust
Company, as warrant agent (the "Warrant Agent"), with regard to Warrants to
Purchase Common Stock, incorporated by reference to Exhibit 4.6 to HMEC's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1989 (the
"September 1989 Form 10-Q").
4.2 Supplemental Warrant Agreement dated as of August 29, 1989 to the Warrant
Agreement, between HMEC and the Warrant Agent, incorporated by reference to
Exhibit 4.7 to the September 1989 Form 10-Q.
4.3 Form of Warrant (included in Exhibit 4.1).
4.4 Indenture dated as of January 17, 1996, between HMEC and U.S. Trust Company
of California, N.A. as trustee, with regard to HMEC's 6 5/8% Senior Notes
Due 2006, incorporated by reference to Exhibit 4.4 to HMEC's Annual Report
on Form 10-K for the year ended December 31, 1995, filed with the Securities
and Exchange Commission on March 13, 1996.
4.5 Form of 6 5/8% Senior Notes Due 2006 (included in Exhibit 4.4).
4.6 Certificate of Designations for HMEC Series A Cumulative Preferred Stock
(included in Exhibit 10.12).
(10) Material contracts:
10.1 Credit Agreement dated as of December 31, 1996 (the "Bank Credit Facility")
among HMEC, certain banks named therein and Bank of America National Trust
and Savings Association, as administrative agent (the "Agent").
10.2* Stock Subscription Agreement among HMEC (as successor to HME Holdings,
Inc.), The Fulcrum III Limited Partnership, The Second Fulcrum III Limited
Partnership and each of the Management Investors, incorporated by reference
to Exhibit 10.17 to HMEC's Annual Report on Form 10-K for the year ended
December 31, 1989, filed with the Securities and Exchange Commission on
April 2, 1990.
10.3* Horace Mann Educators Corporation Deferred Equity Compensation Plan for
Directors, incorporated by reference to Exhibit 10.1 to HMEC's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1996, filed with the
Securities and Exchange Commission on November 14, 1996.
10.4* Horace Mann Educators Corporation 1991 Stock Incentive Plan, incorporated by
reference to Exhibit 10.4 to HMEC's Annual Report on Form 10-K for the year
ended December 31, 1991, filed with the Securities and Exchange Commission
on March 27, 1992.
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
10.4(a)* Specimen Employee Stock Option Agreement under the Horace Mann Educators
Corporation 1991 Stock Incentive Plan, incorporated by reference to Exhibit
10.5 to HMEC's Annual Report on Form 10-K for the year ended December 31,
1991, filed with the Securities and Exchange Commission on March 27, 1992.
10.4(b)* Specimen Director Stock Option Agreement under the Horace Mann Educators
Corporation 1991 Stock Incentive Plan, incorporated by reference to Exhibit
10.6 to HMEC's Annual Report on Form 10-K for the year ended December 31,
1991, filed with the Securities and Exchange Commission on March 27, 1992.
10.4(c)* Amendment to Horace Mann Educators Corporation 1991 Stock Incentive Plan,
dated September 11, 1996, incorporated by reference to Exhibit 10.2(c) to
HMEC's Quarterly Report on Form 10-Q for the quarter ended September 30,
1996, filed with the Securities and Exchange Commission on November 14,
1996.
10.5* Severance Agreements between HMEC and certain officers of HMEC, incorporated
by reference to Exhibit 10.9 to HMEC's Annual Report on Form 10-K for the
year ended December 31, 1993, filed with the Securities and Exchange
Commission on March 31, 1994.
10.6* Specimen Continuation of Employment Agreement between HMEC and certain
officers, incorporated by reference to Exhibit 10.21(a) to HMEC's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1994, filed with the
Securities and Exchange Commission on November 14, 1994.
10.6(a)* Schedule of Continuation of Employment Agreements between HMEC and certain
officers, incorporated by reference to Exhibit 10.21(b) to HMEC's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1994, filed with the
Securities and Exchange Commission on November 14, 1994.
10.7* Horace Mann Incentive Compensation Program.
10.8* Horace Mann Supplemental Employee Retirement Plan, incorporated by reference
to Exhibit 10.19(a) to HMEC's Annual Report on Form 10-K for the year ended
December 31, 1992, filed with the Securities and Exchange Commission on
March 22, 1993.
10.9* Form of Horace Mann Executive Supplemental Employee Retirement Plan,
incorporated by reference to Exhibit 10.12 to HMEC's Annual Report on Form
10-K for the year ended December 31, 1993, filed with the Securities and
Exchange Commission on March 31, 1994.
10.10* Agreement entered by and between HMEC and Richard Stilwell as of December
22, 1995, incorporated by reference to Exhibit 10.11 to HMEC's Annual Report
on Form 10-K for the year ended December 31, 1995, filed with the Securities
and Exchange Commission on March 13, 1996.
10.11* Agreement entered by and between HMEC and Paul J. Kardos as of August 1,
1996, incorporated by reference to Exhibit 10.1 to HMEC's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1996, filed with the Securities
and Exchange Commission on August 13, 1996.
10.12 Catastrophe Equity Securities Issuance Option Agreement entered by and
between HMEC and Centre Reinsurance, dated February 15, 1997 and related
letter from Centre Reinsurance.
</TABLE>
(11) Statement re computation of per share earnings.
(12) Statement regarding computation of ratios.
(21) Subsidiaries of HMEC.
(23) Consent of KPMG Peat Marwick LLP.
29
<PAGE>
(27) Financial Data Schedule.
(28) Information from reports furnished to state insurance regulatory
authorities:
<TABLE>
<S> <C>
28.1(p) 1996 Combined Annual Statement of HMEC's property and casualty subsidiaries,
Schedule P, Analysis of Losses and Loss Expenses, filed with the Securities
and Exchange Commission in paper format under cover of Form SE on March 19,
1997.
</TABLE>
(b) No Reports on Form 8-K were filed by HMEC during the fourth quarter of
1996.
(c) See list of exhibits in this Item 14.
(d) See list of financial statement schedules in this Item 14.
Copies of Exhibits may be obtained by writing to Investor Relations, Horace
Mann Educators Corporation, 1 Horace Mann Plaza, Springfield, Illinois 62715-
0001. Persons requesting copies will be charged a reasonable fee to cover
reproduction and mailing expenses.
30
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Horace Mann Educators Corporation has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
HORACE MANN EDUCATORS CORPORATION
/s/ Paul J. Kardos
By: _________________________________
Paul J. Kardos
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of Horace Mann
Educators Corporation and in the capacities and on the date(s) indicated.
<TABLE>
<CAPTION>
Principal Executive Officer: Directors:
<S> <C>
/s/ Paul J. Kardos /s/ Ralph S. Saul
___________________________________________ ___________________________________________
Paul J. Kardos Ralph S. Saul, Chairman of the Board of
President, Chief Executive Officer Directors
and a Director /s/ William W. Abbott
___________________________________________
Principal Financial Officer: William W. Abbott, Director
/s/ Leonard I. Green
/s/ Larry K. Becker ___________________________________________
___________________________________________ Leonard I. Green, Director
Larry K. Becker /s/ Donald G. Heth
Executive Vice President and ___________________________________________
Chief Financial Officer Donald G. Heth, Director
/s/ Dr. Emita B. Hill
Principal Accounting Officer: ___________________________________________
Dr. Emita B. Hill, Director
/s/ Roger W. Fisher /s/ Jeffrey L. Morby
___________________________________________ ___________________________________________
Roger W. Fisher Jeffrey L. Morby, Director
Vice President and Controller /s/ Shaun F. O'Malley
___________________________________________
Shaun F. O'Malley, Director
/s/ William J. Schoen
___________________________________________
William J. Schoen, Director
</TABLE>
Dated: March 25, 1997.
31
<PAGE>
HORACE MANN EDUCATORS CORPORATION
INDEX TO FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... F-2
Report of Management Responsibility for Financial Statements.............. F-13
Independent Auditors' Report.............................................. F-14
Consolidated Balance Sheets............................................... F-15
Consolidated Statements of Operations..................................... F-16
Consolidated Statements of Changes in Shareholders' Equity................ F-17
Consolidated Statements of Cash Flows..................................... F-18
Notes to Consolidated Financial Statements................................ F-19
Financial Statement Schedules............................................. F-44
</TABLE>
F-1
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING INFORMATION
Statements made in the following discussion that state the Company's or
management's intentions, hopes, beliefs, expectations or predictions of the
future are forward-looking statements. It is important to note that the
Company's actual results could differ materially from those projected in such
forward-looking statements due to, among other risks and uncertainties
inherent in the Company's business, the following important factors:
. Changes in the composition of the Company's assets and liabilities
through acquisitions or divestitures.
. Prevailing interest rate levels, including the impact of interest rates
on (i) unrealized gains and losses on the Company's investment portfolio
and the related after-tax effect on the Company's shareholders' equity
and total capital and (ii) the book yield of the Company's investment
portfolio.
. The impact of fluctuations in the capital markets on the Company's
ability to refinance outstanding indebtedness or repurchase shares of the
Company's outstanding common stock.
. The frequency and severity of catastrophes such as hurricanes,
earthquakes and storms, and the ability of the Company to maintain a
favorable catastrophe reinsurance program.
. The Company's ability to develop and expand its agency force and its
direct product distribution systems, as well as the Company's ability to
maintain and secure product sponsorships by local, state and national
education associations.
. The competitive impact of new entrants such as mutual funds and banks
into the tax deferred annuity products markets, and the Company's ability
to profitably expand its property and casualty business in highly
competitive environments.
. Changes in insurance regulations, including (i) those effecting the
ability of the Company's insurance subsidiaries to distribute cash to the
holding company and (ii) those impacting the Company's ability to
profitably write property and casualty insurance policies in one or more
states.
. Changes in federal income tax laws and changes resulting from federal tax
audits effecting corporate tax rates or taxable income, and regulations
changing the relative tax advantages of the Company's life and annuity
products to customers.
. The Company's ability to maintain favorable claims-paying ability
ratings.
. Adverse changes in policyholder mortality and morbidity rates.
DISCONTINUED OPERATIONS
On December 9, 1996, the Company announced its strategic decision to
withdraw from the group medical insurance business over the following two
years. The Company stopped writing new group medical insurance policies in
January 1997 and intends to stop renewing group medical insurance policies in
January 1998. In the following discussions of results of operations, group
medical results are reported separately as discontinued operations for all
years.
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
Insurance Premiums and Contract Charges Earned
Insurance premiums and contract charges earned, which excludes annuity and
life contract deposits, increased 3.6% for the year ended December 31, 1996,
compared to 1995.
Insurance premiums written and contract deposits of $704.8 million for the
year ended December 31, 1996 increased 7.8%, compared to $654.0 million for
1995, driven principally by 16.8% growth in annuity deposits. The first annual
premium, of approximately $7 million, for Horace Mann's three year
F-2
<PAGE>
contract to provide professional liability insurance for the 2.3 million
members of the National Education Association is included in the Company's
total insurance premiums written and contract deposits for the year ended
December 31, 1996. No such premium was written in 1995. Insurance premiums
written and contract deposits in the Company's primary product lines,
automobile (excluding involuntary), property, annuity and life, increased 7.6%
to $677.7 million for the year ended December 31, 1996, compared to $630.0
million for 1995. Involuntary automobile business includes allocations of
business from state mandatory automobile insurance facilities and assigned risk
business. Involuntary automobile premiums written for the year ended December
31, 1996 decreased 6.3% compared to 1995.
Automobile (excluding involuntary) and homeowners earned premiums increased
2.9% to $390.0 million for the year ended December 31, 1996, compared to $378.9
million for 1995, primarily as a result of a 5.8% increase in automobile
(excluding involuntary) and homeowners policies in force, partially offset by a
0.7% decrease in average premium earned per automobile policy. The 786,000
automobile (excluding involuntary) and homeowners policies in force at December
31, 1996 represented an increase of 43,000 policies since December 31, 1995.
Automobile (excluding involuntary) and homeowners premiums written increased
4.8% to $400.0 million for the year ended December 31, 1996, compared to $381.8
million for 1995. Fourth quarter 1996 premium growth reflected an 8.8% increase
compared to the same period in 1995 reflecting growth in the number of policies
in force including new policies from the Florida state homeowners insurance
pool. For the year ended December 31, 1996, new direct premiums written of
$46.9 million increased 26.4% compared to $37.1 million for last year. Renewal
direct premiums written of $357.0 million for the year ended December 31, 1996
increased 2.2% compared to $349.3 million for 1995.
For the year ended December 31, 1996, life insurance premiums and contract
charges earned were $80.3 million, compared to $74.8 million for 1995,
representing an increase of 7.4%. Life insurance in force on December 31, 1996
increased 4.0% compared to a year earlier. The lapse rate of 8.0% for the year
ended December 31, 1996 increased slightly compared to 7.8% for 1995.
Annuity contract charges earned increased 35.3% to $9.2 million for the year
ended December 31, 1996, compared to $6.8 million for 1995, due to a 40%
increase in variable annuity cash value on deposit. Total annuity deposits
received during the year ended December 31, 1996 increased 16.8% to $166.9
million, compared to $142.9 million for 1995, reflecting a $7.1 million, or
6.2%, increase in scheduled deposits for retirement annuities and a $16.9
million, or 58.6%, increase in single premiums and rollover deposits from other
companies. For the fourth quarter of 1996, annuity deposits received of $44.7
million were 10.9% greater than the same period in 1995 reflecting growth in
single premiums and rollover deposits from other companies which was somewhat
lower than the full year growth rate.
Net Investment Income
Net investment income of $198.6 million for the year ended December 31, 1996
was comparable to 1995. Investments (at amortized cost) increased 2.0%, or
$52.4 million, from December 31, 1995. The pretax yield on average investments
was 7.4% (4.9% after tax) for the year ended December 31, 1996 compared to a
pretax yield of 7.5% (5.0% after tax) for 1995.
Realized Investment Gains and Losses
Realized investment gains were $2.5 million for the year ended December 31,
1996, compared to $8.6 million for 1995.
Benefits, Claims and Settlement Expenses
Total benefits, claims and settlement expenses increased 3.3% to $346.7
million for the year ended December 31, 1996, compared to $335.7 million for
1995.
F-3
<PAGE>
Property and casualty claims and settlement expenses were $306.1 million for
the year ended December 31, 1996, compared to $297.1 million for 1995. The
property and casualty loss ratio was 74.1% for the year ended December 31,
1996, compared to 73.5% for 1995. For 1996, higher first quarter losses from
severe winter weather and third quarter losses from hurricanes were partially
offset by continued favorable trends in losses on voluntary automobile
insurance for the year. The provision for losses and loss adjustment expenses
for insured events in prior years decreased by $62.5 million and $55.6 million
for the years ended December 31, 1996 and 1995, respectively. The favorable
loss development results primarily from improving trends in the frequency and
severity of voluntary automobile claims. Catastrophe losses after reinsurance
but before federal income tax benefits for the year ended December 31, 1996
were $20.9 million, compared to catastrophe losses of $13.9 million for 1995.
Hurricane Fran, which occurred during the third quarter of 1996, represented
$8.2 million in losses.
The Company increased its catastrophe reinsurance coverage for 1997. The 1997
reinsurance program covers 95% of catastrophe losses in excess of $7.5 million
up to $65 million for each catastrophe. The Company's catastrophe reinsurance
program will be augmented by a $100 million equity put. This equity put
provides for an option to sell shares of the Company's convertible preferred
stock at a pre-negotiated floating rate in the event of losses from a
catastrophe, individually or in the aggregate, which exceed $65 million.
Life benefits were $40.6 million for the year ended December 31, 1996,
reflecting a 5.2% increase, compared to $38.6 million for 1995. The increase in
life benefits was comparable to the 7.4% increase in life earned premiums.
Interest Credited to Policyholders
Interest credited to policyholders was $95.3 million for the year ended
December 31, 1996, 4.8% more than the $90.9 million interest credited for 1995.
Interest credited to fixed annuity contracts increased 3.0% to $76.7 million
for the year ended December 31, 1996, from $74.5 million for 1995. The increase
reflects a slightly higher average annual interest rate credited of 5.7% for
the year ended December 31, 1996, compared to 5.6% for 1995, and a growth of
fixed rate annuity accumulated deposits of 0.9%.
Life insurance interest credited increased $2.2 million, or 13.4%, to $18.6
million for the year ended December 31, 1996, compared to 1995, primarily as a
result of continued growth in the interest-sensitive whole life insurance
reserves and account balances.
Policy Acquisition and Operating Expenses
Policy acquisition and operating expenses represent the Company's insurance
underwriting expenses. For the year ended December 31, 1996, policy acquisition
and operating expenses of $138.2 million increased $0.6 million, or 0.4%,
compared to $137.6 million for 1995. The 1996 property and casualty expense
ratio improved to 19.4%, four tenths of a percentage point lower than 19.8% for
1995.
Amortization of Intangible Assets
Amortization of intangible assets decreased by $0.5 million to $11.2 million
for the year ended December 31, 1996, compared to $11.7 million for 1995, as a
result of a scheduled decrease in the non-cash amortization of the value of
acquired insurance in force related to the 1989 acquisition of the Company.
Interest Expense
The Company's interest expense of $10.5 million for the year ended December
31, 1996 was $1.1 million, or 9.5%, less than in 1995 as a result of repayments
of borrowings related to the repurchase
F-4
<PAGE>
of shares of its common stock during the second quarter of 1995. Interest
expense of $2.5 million for the fourth quarter of 1996 was $0.7 million less
than the $3.2 million reported for the same period in 1995 as the debt to
capital ratio was reduced to 21.6%, within the Company's target operating range
of 20% to 25%.
Income Tax Expense
The 1996 effective income tax rate was 27%, equal to the 1995 effective
income tax rate. Income from investments in tax-advantaged securities reduced
the effective income tax rate 3 percentage points and acquisition related tax
benefits reduced the effective rate 6 percentage points in both 1996 and 1995.
The 1995 effective income tax rate also reflected the charge to income for
additional rights relating to the repurchase of shares of the Company's common
stock in 1995 that was not deductible for federal income tax purposes.
Operating Income
Operating income (income from continuing operations before realized
investment gains and losses, 1996 debt retirement costs and the 1995 cost of
additional rights related to the share repurchase) was $73.1 million for the
year ended December 31, 1996, compared to $70.9 million for 1995. Operating
income in 1996 reflected excellent voluntary automobile insurance results and
an increase in annuity segment earnings, partially offset by high first quarter
severe winter storm losses and high third quarter hurricane losses.
Included in the Company's operating income are non-cash charges for the
amortization of the value of acquired insurance in force and goodwill related
to the 1989 acquisition of the Company. Excluding these non-cash charges for
the amortization of intangible assets, operating income was $80.4 million for
the year ended December 31, 1996 compared to $78.5 million for 1995.
Property and casualty segment operating income was $54.0 million for the year
ended December 31, 1996, compared to $56.4 million for 1995. Higher first
quarter 1996 losses from severe winter weather and after tax catastrophe losses
of $5.5 million from hurricanes in the third quarter of 1996 were partially
offset by continued favorable trends in voluntary automobile losses. For the
year, after tax catastrophe losses were $13.6 million in 1996, compared to $9.0
million for 1995. The property and casualty combined loss and expense ratio for
the year ended December 31, 1996 was 93.5%, compared to the 93.3% reported for
1995.
Life insurance segment operating income of $12.1 million for the year ended
December 31, 1996 increased 16.3% compared to the $10.4 million reported for
1995. The 1996 life results reflect growth in business volume and lower
dividends to life policyholders, more than offsetting higher mortality
experience, compared to 1995.
Annuity segment operating income of $16.3 million for the year ended December
31, 1996 increased 10.1%, compared to 1995, resulting primarily from an
increase in cash value on deposit. Total accumulated fixed and variable annuity
cash value on deposit of $2,075.5 million increased $209.5 million, or 11.2%,
compared to December 31, 1995. This increase resulted from a net increase in
funds on deposit of 10.0% plus net increases in market value of underlying
mutual funds of $26.7 million.
Income from Continuing Operations
Income from continuing operations, which includes realized investment gains,
for the year ended December 31, 1996 was $73.8 million, or $3.14 per share,
reflecting a 1.9% decrease in income and a 12.5% increase in income per share
on a fully diluted basis compared to 1995. The share repurchase completed in
May 1995 and the redemption of the convertible notes in February 1996 resulted
in decreases in shares and equivalent shares outstanding, increasing income per
share from continuing
F-5
<PAGE>
operations. Realized investment gains after tax were $1.6 million for the year
ended December 31, 1996, compared to $5.6 million for 1995. Income from
continuing operations for the year ended December 31, 1996 reflects a reduction
of $0.9 million, or $0.04 per share, for the costs of the early redemption of
$100 million of convertible notes. Income from continuing operations for the
year ended December 31, 1995 included a reduction of $1.3 million, or $0.05 per
share, for the cost of the additional rights granted in connection with the
share repurchase.
Net Income
Net income, which includes discontinued operations, was $64.6 million for the
year ended December 31, 1996 compared to $74.0 million for 1995, representing
$2.75 per share for both periods.
The discontinued group medical business operating loss was $5.3 million for
the year ended December 31, 1996, compared to an operating loss of $1.2 million
for 1995. The discontinued group medical combined loss and expense ratio
increased to 118.1% for the year ended December 31, 1996, compared to 106.4%
for 1995, primarily due to an increase in claims. The Company's net income for
the fourth quarter and year ended December 31, 1996 also included an after tax
charge of $3.9 million for anticipated losses during the two year phase-out
period for the discontinued group medical insurance business.
YEAR ENDED DECEMBER 31, 1995 COMPARED WITH YEAR ENDED DECEMBER 31, 1994
Insurance Premiums and Contract Charges Earned
Insurance premiums and contract charges earned increased 2.8% for the year
ended December 31, 1995 compared to 1994. Insurance premiums written and
contract deposits in the Company's primary product lines, automobile (excluding
involuntary), property, annuity and life, reflected growth of 3.1%, increasing
to $630.0 million for the year ended December 31, 1995, compared to $611.2
million for 1994. For all product lines, insurance premiums written and
contract deposits of $654.0 million for the year ended December 31, 1995
increased 2.6%, compared to $637.3 million for 1994. This increase was less
than the growth in insurance premiums written and contract deposits for the
Company's primary product lines primarily due to reduced allocation of business
from state mandatory automobile insurance facilities. Involuntary automobile
business includes assigned risk business as well as state mandatory insurance
facilities.
Automobile (excluding involuntary) and homeowners earned premiums increased
2.6% to $378.9 million for the year ended December 31, 1995, compared to $369.3
million for 1994, primarily as a result of a 1% increase in average premium
earned per automobile policy and a 1% increase in automobile (excluding
involuntary) and homeowners policies in force. The 743,000 automobile
(excluding involuntary) and homeowners policies in force at December 31, 1995
represented an increase of 10,000 policies since December 31, 1994.
Automobile (excluding involuntary) and homeowners premiums written increased
2.4% to $381.8 million for the year ended December 31, 1995 compared to $372.7
million for 1994. For the year ended December 31, 1995, new direct premiums
written of $37.1 million were equal to 1994. Renewal premiums written of $349.3
million for the year ended December 31, 1995 increased 2.4% compared to 1994.
Partially offsetting this growth was an 8.0% decrease in involuntary automobile
and other property and casualty premiums written to $24.0 million for 1995,
compared to $26.1 million for 1994.
For the year ended December 31, 1995, life insurance premiums and contract
charges earned were $74.8 million compared to $72.0 million for 1994,
representing an increase of 3.9%. Life insurance in force increased 5.4%
compared to December 31, 1994. These results reflect a lapse rate of 7.8% for
the year ended December 31, 1995, compared to 7.9% for 1994.
Annuity contract charges earned increased 25.9% to $6.8 million for the year
ended December 31, 1995, compared to $5.4 million for 1994, primarily due to a
46% increase in variable annuity cash
F-6
<PAGE>
value on deposit. Total annuity deposits received during the year ended
December 31, 1995 increased 4.6% to $142.9 million, compared to $136.6 million
for 1994, reflecting a 6.5% increase in scheduled deposits for retirement
annuities offset by a decline in rollover deposits from other companies and
single premiums. Annuity deposits received in the second half of 1995 were
11.9% greater than the amounts received during the same period in 1994. This
increase in the second half of 1995 contrasts to a decrease of 1.9% for the
first six months of 1995 compared to the first six months of 1994.
Net Investment Income
Net investment income of $198.4 million for the year ended December 31, 1995
increased 7.1% compared to the prior year. Investments (at amortized cost)
increased 1.5%, or $38.7 million, from December 31, 1994. The pretax yield on
average investments increased to 7.5% for the year ended December 31, 1995 from
7.2% for 1994. After tax investment income increased 5.8% to $132.2 million for
the year ended December 31, 1995, the result of a 5.0% after tax yield,
compared to $124.9 million and a 4.8% after tax yield for 1994.
Realized Investment Gains and Losses
Realized investment gains were $8.6 million for the year ended December 31,
1995 compared to realized investment losses of $0.9 million for 1994.
Benefits, Claims and Settlement Expenses
Total benefits, claims and settlement expenses increased 1.3% to $335.7
million for the year ended December 31, 1995, compared to $331.5 million for
1994, reflecting lower losses from catastrophes in 1995 and no increase in life
benefits.
Property and casualty claims and settlement expenses increased 1.8% to $297.1
million for the year ended December 31, 1995 from $291.9 million for 1994.
Reflecting continued strong underwriting results in the automobile and
homeowners lines, the property and casualty loss ratio, including catastrophe
losses, was 73.5% for the year ended December 31, 1995, compared to 73.8% for
1994. Catastrophe losses after reinsurance but before federal income tax
benefits were $13.9 million for 1995 compared to $17.0 million reported in
1994. For 1995, the Company's catastrophe losses included hailstorms in Texas
during May, Hurricane Opal in October and a number of smaller weather-related
events. The Company's 1994 catastrophe losses consisted of $6.0 million of
losses from the Northridge, California earthquake and $11.0 million due to
severe winter weather and a series of tornadoes and wind storms.
Life benefits were $38.6 million for the year ended December 31, 1995,
compared to $39.6 million for 1994. The decrease was attributable to no
increase in individual life benefits and a lower volume of business for group
life and group disability income compared to 1994.
Interest Credited to Policyholders
Interest credited to policyholders was $90.9 million for the year ended
December 31, 1995, 8.2% more than the $84.0 million interest credited for 1994.
Interest credited to annuity contracts increased 6.9% to $74.5 million for the
year ended December 31, 1995 from $69.7 million for 1994. The increase reflects
a higher average annual interest rate credited of 5.6% for the year ended
December 31, 1995, compared to 5.4% for 1994, and a growth of fixed accumulated
deposits of 2.9%.
Life insurance interest credited increased $2.1 million, or 14.7%, to $16.4
million for the year ended December 31, 1995, compared to 1994, primarily as a
result of growth in the interest-sensitive whole life insurance reserves and
account balances.
F-7
<PAGE>
Policy Acquisition and Operating Expenses
Policy acquisition and operating expenses represent the Company's insurance
underwriting expenses. For the year ended December 31, 1995, policy acquisition
and operating expenses increased 3.5%, or $4.6 million, to $137.6 million,
compared to $133.0 million for 1994, primarily due to business growth and
inflation. For the year ended December 31, 1995, the property and casualty
expense ratio of 19.8% was equal to 1994.
Amortization of Intangible Assets
Amortization of intangible assets decreased by $0.9 million to $11.7 million
for the year ended December 31, 1995, compared to $12.6 million for 1994. The
lower amortization was due to the scheduled decrease in the amortization of the
value of acquired insurance in force related to the 1989 acquisition of the
Company.
Interest Expense
As a result of borrowings on the Bank Credit Facility related to the
repurchase of shares of its common stock during the second quarter of 1995, the
Company's interest expense of $11.6 million for the year ended December 31,
1995 was $2.1 million, or 22.1%, greater than in 1994.
Income Tax Expense
The 1995 effective income tax rate of 27% was higher than the 1994 effective
income tax rate of 25% due to a decrease in tax-advantaged securities and the
earnings charge for additional rights relating to the repurchase of shares of
the Company's common stock in 1995 that is not deductible for federal income
tax purposes. Income from investments in tax-advantaged securities reduced the
1995 effective income tax rate 4 percentage points compared to a reduction of 5
percentage points in 1994. Acquisition related tax benefits reduced the
effective income tax rate 6 percentage points in 1995 and 5 percentage points
in 1994.
Operating Income
Operating income (income from continuing operations before realized
investment gains and losses, the 1995 cost of additional rights related to the
share repurchase, and the extraordinary item in 1994) increased 8.7% to $70.9
million for the year ended December 31, 1995 compared to $65.2 million for
1994, primarily due to growth in property and casualty operating income
(including a reduction in catastrophe losses) and improvement in operating
earnings of the life and annuity segments. Costs of the share repurchase
completed in 1995 reduced operating income as a result of increased interest
expense and reductions to net investment income. Excluding the share
repurchase, operating income for 1995 would have been $76.2 million, which
would have represented a 16.9% increase compared to 1994.
Property and casualty segment operating income increased 7.2% to $56.4
million for the year ended December 31, 1995, compared to $52.6 million for
1994, due to strong underwriting results and a decrease in catastrophe losses
of $2.1 million after tax. Strong property and casualty underwriting results
were reflected in the combined loss and expense ratio, excluding catastrophe
losses, for the year ended December 31, 1995 of 89.9%, compared to the 89.5%
reported for 1994, with the increase primarily attributable to higher levels of
losses from involuntary state insurance pools. Including catastrophe losses,
the property and casualty combined loss and expense ratio was 93.3% for the
year ended December 31, 1995 compared to 93.7% for 1994.
Life insurance segment operating income increased $2.7 million for the year
ended December 31, 1995 to $10.4 million, compared to $7.7 million for 1994,
due primarily to higher net investment income and a 2.5% decrease in benefits
compared to a 3.9% increase in premiums and contract charges earned.
F-8
<PAGE>
The Company maintained strong annuity net margins in 1995 although the net
margin percentage declined slightly compared to 1994. Annuity segment operating
income of $14.8 million for the year ended December 31, 1995 increased 4.2%
compared to 1994 resulting from an increase in cash value on deposit. Total
accumulated fixed and variable annuity cash value on deposit of $1,866.0
million increased $192.8 million, or 11.5%, compared to December 31, 1994. This
increase resulted from a net increase in funds on deposit of 7.3% plus net
increases in market value of underlying mutual funds of $68.1 million.
Income from Continuing Operations
Income from continuing operations, which includes realized investment gains
and losses, for the year ended December 31, 1995 was $75.2 million, or $2.79
per share on a fully diluted basis, reflecting a 16.4% increase in income and a
31.0% increase in income per share compared to 1994. The share repurchase
completed in 1995 contributed to the increase in income per share from
continuing operations. Excluding the share repurchase, income per share from
continuing operations would have been $2.66, which would have represented a
24.9% increase compared to 1994. Income from continuing operations for the year
ended December 31, 1994 was reduced by $11.1 million, or $0.34 per share, due
to claims from the Northridge, California earthquake, severe winter weather and
a series of tornadoes and wind storms; by comparison, catastrophe claims in
1995 reduced the Company's income from continuing operations by $9.0 million,
or $0.32 per share. Realized investment gains after tax were $0.20 per share
for the year ended December 31, 1995, compared to realized investment losses
after tax of $0.02 per share for 1994. Income from continuing operations for
the year ended December 31, 1995 also included a reduction of $1.3 million, or
$0.05 per share, for the cost of the additional rights granted in connection
with the share repurchase.
Net Income
Net income, which includes discontinued operations and extraordinary charges,
was $74.0 million, or $2.75 per share on a fully diluted basis, for the year
ended December 31, 1995 compared to $62.9 million, or $2.08 per share, for
1994.
The discontinued group medical business reported an operating loss of $1.2
million for 1995 compared to break-even results for the year ended December 31,
1994. The combined loss and expense ratio for the discontinued group medical
business increased to 106.4% for the year ended December 31, 1995, compared to
101.6% for 1994.
Net income for the year ended December 31, 1994 reflected an extraordinary
charge of $1.7 million after tax, or $0.05 per share, as a result of the early
redemption of $47.1 million of subordinated debentures.
LIQUIDITY AND FINANCIAL RESOURCES
Investments
The Company's investment strategy emphasizes high quality investment grade,
publicly traded fixed income securities. At December 31, 1996, fixed income
securities comprised 95.5% of total investments. Of the fixed income investment
portfolio, 94.4% was investment grade and 99.5% was publicly traded. The
average quality of the total fixed income portfolio was AA- at December 31,
1996.
The duration of the investment portfolio is managed to provide cash flow to
satisfy policyholder liabilities as they become due. The average option
adjusted duration of total investments was 4.4 years at December 31, 1996, 1995
and 1994. The Company has included in its annuity products substantial
surrender penalties to reduce the likelihood of unexpected increases in policy
or contract surrenders. All annuities issued since 1982 and approximately 70%
of all outstanding fixed annuity accumulated cash values are subject in most
cases to substantial early withdrawal penalties.
F-9
<PAGE>
Cash Flow
The short-term liquidity requirements of the Company, within a 12-month
operating cycle, are for the timely payment of claims and benefits to
policyholders, operating expenses, interest payments and federal income taxes.
Cash flow in excess of these amounts has been used to pay dividends to
shareholders and retire short-term debt. Long-term liquidity requirements,
beyond one year, are principally for the payment of future insurance policy
claims and benefits and retirement of long-term notes.
Operating Activities
As a holding company, HMEC conducts its principal operations in the personal
lines segment of the property and casualty and life insurance industries
through its subsidiaries. HMEC's insurance subsidiaries generate cash flow from
premium and investment income, generally well in excess of their immediate
needs for policy obligations, operating expenses and other cash requirements.
Net cash provided by operating activities was $139.2 million for the year ended
December 31, 1996 compared to $153.3 million for 1995. In both years, cash
provided by operating activities primarily reflected net cash generated by the
insurance subsidiaries.
Payment of principal and interest on long-term debt, dividends to
shareholders and parent company operating expenses, as well as the share
repurchase program, are dependent upon the ability of the insurance
subsidiaries to pay cash dividends or make other cash payments to HMEC,
including tax payments pursuant to tax sharing agreements. These payments from
insurance subsidiaries, net of federal income taxes paid by HMEC, were $60.2
million in 1996 compared to $95.0 million in 1995 with the decrease due
primarily to the timing of tax sharing payments.
The insurance subsidiaries are subject to various regulatory restrictions
which limit the amount of annual dividends or other distributions, including
loans or cash advances, available to HMEC without prior approval of the
insurance regulatory authorities. Dividends which may be paid by the insurance
subsidiaries to HMEC during 1997 without prior approval are approximately $89
million. Although regulatory restrictions exist, dividend availability from
subsidiaries has been, and is expected to be, more than adequate for parent
Company capital needs.
Investing Activities
HMEC's insurance subsidiaries maintain significant investments in fixed
maturity securities to meet future contractual obligations to policyholders. In
conjunction with its management of liquidity and other asset/liability
management objectives, the Company, from time to time, will sell fixed maturity
securities prior to maturity and reinvest the proceeds in other investments
with different interest rates, maturities or credit characteristics.
Accordingly, the Company has classified the entire fixed maturities portfolio
as available for sale. During 1996, net cash used in investing activities was
$32.7 million. This net amount reflects $989.0 million in purchases of fixed
maturity investments, funded by investment sales or maturities of $956.3
million and net cash provided by operating activities.
Financing Activities
Financing activities include the receipt and withdrawal of funds by annuity
policyholders, payment of scheduled dividends, transactions related to the
Company's common stock and borrowings and repayments under the Company's debt
facilities. Shareholder dividends paid for the year ended December 31, 1996
were $10.3 million.
For the year ended December 31, 1996, receipts from annuity contracts of
$166.9 million were greater than contract maturities and withdrawals of $135.2
million. Net transfers to variable annuity assets were $86.1 million during
1996 compared to $50.4 million during 1995. Interest-sensitive life account
balances increased $1.5 million during 1996.
F-10
<PAGE>
In January 1996, the Company issued $100.0 million face amount of 6 5/8%
Senior Notes ("Senior Notes"), which will mature on January 15, 2006, at a
discount of 0.5%. The net proceeds from the sale of the Senior Notes were used
to finance most of the cost of the full redemption of the $100.0 million of
outstanding convertible notes at an aggregate cost of $102.9 million. The
redemption of the convertible notes extended the maturity of the Company's
long-term debt and eliminated the potential dilutive impact of these
securities.
Interest on the Senior Notes is payable semi-annually at a rate of 6 5/8%.
The Senior Notes are redeemable in whole or in part, at any time at the
Company's option, at a redemption price equal to the greater of (i) 100% of
their principal amount and (ii) the sum of the present values of the remaining
scheduled payments of principal and interest thereon discounted, on a semi-
annual basis, at the Treasury yield (as defined in the indenture) plus 15
basis points, together with accrued interest to the date of redemption. The
Senior Notes have an investment grade rating from both Standard & Poor's
Corporation ("S&P") (A-) and Moody's Investors Service, Inc. ("Moody's")
(Baa2) and are traded on the New York Stock Exchange (HMN 6 5/8).
In May 1995, the Company repurchased 6.5 million shares of its common stock
at an aggregate price of $174.9 million, financed by cash provided by
operating activities and $140.0 million borrowed under an existing bank line
of credit. Short-term borrowings under the bank line of credit were
subsequently reduced to $34 million and $75 million as of December 31, 1996
and 1995, respectively.
Capital Resources
The total capital of the Company was $618.6 million at December 31, 1996,
including $99.6 million of long-term debt and $34.0 million of short-term
debt. Long-term debt as a percentage of total shareholders' equity was 20.6%
as of December 31, 1996, compared to 21.3% as of December 31, 1995.
Shareholders' equity was $484.4 million at December 31, 1996, including an
unrealized gain in the Company's investment portfolio of $29.7 million after
taxes and the related impact on deferred policy acquisition costs. The market
value of the Company's common stock and the market value per share were $953.9
million and $40 3/8, respectively, at December 31, 1996. Book value per share
was $20.50 at December 31, 1996, $19.25 excluding investment market value
adjustments.
As of December 31, 1996, the Company had short-term debt comprised of $34.0
million outstanding under the Bank Credit Facility. The Bank Credit Facility,
as amended in December 1996, allows unsecured borrowings of up to $65.0
million at Interbank Offering Rates plus 0.3% to 0.5% or Bank of America
National Trust and Savings Association reference rates. The rate on the
borrowings under the Bank Credit Facility was Interbank Offering Rate plus
0.3%, or 5.9%, as of December 31, 1996. The commitment for the Bank Credit
Facility terminates on December 31, 2001.
The Company's ratio of earnings to fixed charges for 1996 was 10.6x compared
to 9.9x for 1995.
Total shareholder dividends were $10.3 million for the year ended December
31, 1996. In February 1997, the Board of Directors authorized the fifth
consecutive annual increase in the Company's dividend. The regular quarterly
dividend increased by 23% to $0.135 per share.
In February 1997, the Company's Board of Directors adopted a repurchase
program for shares of the Company's common stock of up to $100 million. Based
on the market price of the Company's common shares at the time the Board
adopted this program, $100 million would represent approximately 9% of the
Company's outstanding shares. Shares of common stock may be purchased from
time to time through open market and private purchases, as available. The
repurchase program will be financed through use of cash and, if needed, the
Bank Credit Facility.
In 1997, the Company's catastrophe reinsurance program will be augmented by
a $100 million equity put. This equity put provides for an option to sell
shares of the Company's convertible preferred
F-11
<PAGE>
stock at a pre-negotiated floating rate in the event of losses from a
catastrophe, individually or in the aggregate, which exceed $65 million.
EFFECTS OF INFLATION AND CHANGES IN INTEREST RATES
The Company's operating results are affected significantly in at least three
ways by changes in interest rates and inflation. First, inflation directly
affects property and casualty claims costs. Second, the investment income
earned on the Company's investment portfolio and the market value of the
investment portfolio are related to the yields available in the fixed-income
markets. An increase in interest rates will decrease the market value of the
investment portfolio, but will increase investment income as investments mature
and proceeds are reinvested at higher rates. Third, as interest rates increase,
competitors will typically increase crediting rates on annuity and interest-
sensitive life products, and may lower premium rates on property and casualty
lines to reflect the higher yields available in the market. The risk of
interest rate fluctuation is controlled through asset/liability management
techniques, including cash flow analysis.
EFFECTS OF RECESSION
The Company markets its products primarily to educators and other employees
of public schools and their families located throughout the United States.
Although this market is affected by school budgetary constraints, as well as
general economic downturns that result in decreased purchases of new
automobiles and homes and reductions in individual savings, management believes
that this market historically has continued to purchase insurance even in
periods of recession. Historically, despite changing economic conditions, sales
of insurance products to the Company's market have remained stable or
increased, suggesting continuation of this historical trend.
F-12
<PAGE>
REPORT OF MANAGEMENT RESPONSIBILITY FOR FINANCIAL STATEMENTS
HORACE MANN EDUCATORS CORPORATION
The consolidated balance sheets of Horace Mann Educators Corporation and
subsidiaries as of December 31, 1996, 1995 and 1994, and the related
consolidated statements of operations, cash flows and shareholders' equity for
the years ended December 31, 1996, 1995 and 1994 have been prepared by
management, which is responsible for their integrity and objectivity. The
statements have been prepared in accordance with generally accepted accounting
principles and include some amounts that are based upon management's best
estimates and judgements. The financial information contained elsewhere in
this annual report on Form 10-K is consistent with that contained in the
financial statements.
Management is responsible for establishing and maintaining a system of
internal control designed to provide reasonable assurance as to the integrity
and reliability of financial reporting. The concept of reasonable assurance is
based on the recognition that there are inherent limitations in all systems of
internal control, and that the cost of such systems should not exceed the
benefits derived therefrom. A professional staff of internal auditors reviews
on an ongoing basis the related internal control system design, the accounting
policies and procedures supporting this system and compliance therewith.
Management believes this system of internal control effectively meets its
objective of reliable financial reporting.
In connection with their annual audits, independent certified public
accountants perform an examination, in accordance with generally accepted
auditing standards, which includes the consideration of the system of internal
control to the extent necessary to form an independent opinion on the fairness
of presentation of the financial statements prepared by management.
The Board of Directors, through its Audit Committee composed solely of
directors who are not employees of the Company, is responsible for overseeing
the integrity and reliability of the Company's accounting and financial
reporting practices and the effectiveness of its system of internal controls.
The independent certified public accountants and internal auditors meet
regularly with, and have access to, this committee, with and without
management present, to discuss the results of their audit work.
F-13
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Horace Mann Educators Corporation:
We have audited the accompanying consolidated balance sheets of Horace Mann
Educators Corporation and subsidiaries (the Company) as of December 31, 1996,
1995 and 1994, and the related consolidated statements of operations, changes
in shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1996. In connection with our audits of the
consolidated financial statements, we also have audited the financial statement
schedules, as listed in the accompanying index. These consolidated financial
statements and financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Horace Mann
Educators Corporation and subsidiaries as of December 31, 1996, 1995 and 1994,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1996, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly, in all material
respects, the information set forth therein.
LOGO
KPMG PEAT MARWICK LLP
Chicago, Illinois
January 27, 1997
F-14
<PAGE>
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996, 1995 AND 1994
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
ASSETS
<S> <C> <C> <C>
Investments
Fixed maturities, available for sale, at
market (amortized cost 1996, $2,609,077;
1995, $2,527,032; 1994, $2,449,440)..... $2,658,512 $2,643,060 $2,339,118
Short-term and other investments......... 125,824 155,489 194,323
---------- ---------- ----------
Total investments...................... 2,784,336 2,798,549 2,533,441
Cash....................................... 13,704 9,518 5,997
Accrued investment income and premiums
receivable................................ 107,682 94,359 83,954
Value of acquired insurance in force and
goodwill.................................. 118,638 129,843 141,509
Other assets............................... 151,830 142,442 186,487
Variable annuity assets.................... 684,836 487,543 334,145
---------- ---------- ----------
Total assets........................... $3,861,026 $3,662,254 $3,285,533
========== ========== ==========
LIABILITIES, REDEEMABLE SECURITIES AND SHAREHOLDERS' EQUITY
Policy liabilities
Annuity contract liabilities............. $1,286,110 $1,275,117 $1,235,550
Interest-sensitive life contract
liabilities............................. 326,955 289,310 253,393
Unpaid claims and claim expenses......... 358,853 385,064 405,602
Future policy benefits................... 182,336 185,449 184,515
Unearned premiums........................ 155,776 141,105 138,380
---------- ---------- ----------
Total policy liabilities............... 2,310,030 2,276,045 2,217,440
Other policyholder funds................... 118,549 119,070 119,565
Other liabilities.......................... 129,075 133,855 101,843
Short-term debt............................ 34,000 75,000 -
Long-term debt............................. 99,564 100,000 100,000
Variable annuity liabilities............... 684,836 487,543 334,145
---------- ---------- ----------
Total liabilities...................... 3,376,054 3,191,513 2,872,993
---------- ---------- ----------
Warrants, subject to redemption............ 577 577 577
---------- ---------- ----------
Preferred stock, $0.001 par value,
authorized 1,000,000 shares; none issued
in 1996................................... - - -
Common stock, $0.001 par value, authorized
75,000,000 shares; issued, 1996,
29,213,398; 1995, 28,977,429; 1994,
28,958,229................................ 29 29 29
Additional paid-in capital................. 330,263 323,920 323,517
Net unrealized gains (losses) on fixed
maturities and equity securities.......... 29,736 76,151 (70,861)
Retained earnings.......................... 278,669 224,366 159,278
Treasury stock, at cost, 5,588,098 shares.. (154,302) (154,302) -
---------- ---------- ----------
Total shareholders' equity............. 484,395 470,164 411,963
---------- ---------- ----------
Total liabilities, redeemable
securities and shareholders' equity... $3,861,026 $3,662,254 $3,285,533
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-15
<PAGE>
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Insurance premiums written and contract
deposits.................................. $ 704,832 $ 653,970 $ 637,347
========== ========== ==========
Revenues
Insurance premiums and contract charges
earned.................................. $ 502,699 $ 485,444 $ 472,417
Net investment income.................... 198,607 198,370 185,309
Realized investment gains (losses)....... 2,451 8,604 (917)
---------- ---------- ----------
Total revenues....................... 703,757 692,418 656,809
---------- ---------- ----------
Benefits, losses and expenses
Benefits, claims and settlement expenses. 346,691 335,705 331,511
Interest credited........................ 95,322 90,911 83,959
Policy acquisition expenses amortized.... 41,063 40,018 38,696
Operating expenses....................... 97,021 97,609 94,292
Amortization of intangible assets........ 11,205 11,666 12,630
Interest expense......................... 10,517 11,589 9,483
Debt retirement costs (See note 4)....... 1,319 - -
Additional rights relating to share
repurchase
(See note 5)............................ - 1,347 -
---------- ---------- ----------
Total benefits, losses and expenses.. 603,138 588,845 570,571
---------- ---------- ----------
Income from continuing operations before
income taxes, discontinued operations and
extraordinary item........................ 100,619 103,573 86,238
Income tax expense......................... 26,817 28,463 21,618
---------- ---------- ----------
Income from continuing operations.......... 73,802 75,110 64,620
Discontinued operations (See note 2):
Loss from operations, net of applicable
income tax benefits of 1996, $2,764;
1995, $647; 1994, $34................... (5,280) (1,184) (61)
Loss on discontinuation, representing
provision of $5,974 for operating losses
during phase-out period, net of
applicable income tax benefits of
$2,091.................................. (3,883) - -
---------- ---------- ----------
Income before extraordinary item........... 64,639 73,926 64,559
Loss from early retirement of debt, net of
taxes..................................... - - (1,704)
---------- ---------- ----------
Net income................................. $ 64,639 $ 73,926 $ 62,855
========== ========== ==========
Earnings (loss) per share
Assuming no dilution
Income from continuing operations...... $ 3.14 $ 3.00 $ 2.23
Discontinued operations:
Loss from operations................. (0.22) (0.05) -
Loss on discontinuation.............. (0.17) - -
---------- ---------- ----------
Income before extraordinary item....... 2.75 2.95 2.23
Loss from early retirement of debt, net
of taxes.............................. - - (0.06)
---------- ---------- ----------
Net income........................... $ 2.75 $ 2.95 $ 2.17
========== ========== ==========
Assuming full dilution
Income from continuing operations...... $ 3.14 $ 2.79 $ 2.13
Discontinued operations:
Loss from operations................. (0.22) (0.04) -
Loss on discontinuation.............. (0.17) - -
---------- ---------- ----------
Income before extraordinary item....... 2.75 2.75 2.13
Loss from early retirement of debt, net
of taxes.............................. - - (0.05)
---------- ---------- ----------
Net income........................... $ 2.75 $ 2.75 $ 2.08
========== ========== ==========
Weighted average number of shares and
equivalent shares
Assuming no dilution..................... 23,478,921 25,038,530 28,958,229
Assuming full dilution................... 23,478,921 28,330,833 32,123,779
</TABLE>
See accompanying notes to consolidated financial statements.
F-16
<PAGE>
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Common stock
Beginning balance............................. $ 29 $ 29 $ 29
Options exercised, 1996, 235,969 shares; 1995,
19,200 shares................................ - - -
-------- -------- --------
Ending balance................................ 29 29 29
-------- -------- --------
Additional paid-in capital
Beginning balance............................. 323,920 323,517 323,517
Options exercised............................. 6,343 403 -
-------- -------- --------
Ending balance................................ 330,263 323,920 323,517
-------- -------- --------
Net unrealized gains (losses) on fixed
maturities and equity securities
Beginning balance............................. 76,151 (70,861) 1,575
Effect of change in accounting principle (See
note 1)...................................... - - 72,838
Increase (decrease) for the period............ (46,415) 147,012 (145,274)
-------- -------- --------
Ending balance................................ 29,736 76,151 (70,861)
-------- -------- --------
Retained earnings
Beginning balance............................. 224,366 159,278 104,821
Net income.................................... 64,639 73,926 62,855
Cash dividends, 1996, $0.44 per share; 1995,
$0.36 per share;
1994, $0.29 per share........................ (10,336) (8,838) (8,398)
-------- -------- --------
Ending balance................................ 278,669 224,366 159,278
-------- -------- --------
Treasury stock, at cost
Beginning balance............................. (154,302) - -
Purchase of 6,500,000 shares (See note 5)..... - (174,870) -
Issuance of 911,902 shares (See note 5)....... - 20,568 -
-------- -------- --------
Ending balance................................ (154,302) (154,302) -
-------- -------- --------
Shareholders' equity at end of period........... $484,395 $470,164 $411,963
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-17
<PAGE>
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1995 1994
-------- -------- ----------
<S> <C> <C> <C>
Cash flows from operating activities
Premiums collected........................... $575,601 $550,596 $ 549,422
Policyholder benefits paid................... (453,687) (414,399) (399,301)
Policy acquisition and other operating
expenses paid............................... (159,635) (155,336) (153,402)
Federal income taxes paid.................... (10,651) (17,065) (10,534)
Investment income collected.................. 200,201 198,415 184,528
Interest expense paid........................ (8,653) (11,180) (9,853)
Other........................................ (3,962) 2,313 (2,553)
-------- -------- ----------
Net cash provided by operating
activities.............................. 139,214 153,344 158,307
-------- -------- ----------
Cash flows from investing activities
Fixed maturities
Purchases.................................. (989,009) (983,067) (1,129,394)
Sales...................................... 720,175 732,501 741,919
Maturities................................. 205,380 173,711 209,889
Net cash received from short-term and other
investments................................. 30,728 41,341 84,611
-------- -------- ----------
Net cash used in investing activities.... (32,726) (35,514) (92,975)
-------- -------- ----------
Cash flows from financing activities
Dividends paid to shareholders............... (10,336) (8,838) (8,398)
Proceeds from issuance of Senior Notes....... 98,530 - -
Proceeds from issuance of common stock....... - 20,568 -
Principal borrowings (payments) on Bank
Credit Facility............................. (41,000) 75,000 -
Retirement of Convertible Notes.............. (102,890) - -
Purchase of treasury stock................... - (174,870) -
Exercise of stock options.................... 6,343 403 -
Acquisition of Allegiance Insurance Company
Issuance of long-term debt at fair value... - - 40,115
Acquisition consideration.................. - - (42,323)
Retirement of Debentures..................... - - (50,603)
Annuity contracts, variable and fixed
Deposits................................... 166,871 142,885 136,648
Maturities and withdrawals................. (135,212) (121,582) (107,867)
Net transfer to variable annuity assets.... (86,097) (50,358) (58,960)
Net increase in interest-sensitive life
account balances............................ 1,489 2,483 3,320
-------- -------- ----------
Net cash used in financing activities.... (102,302) (114,309) (88,068)
-------- -------- ----------
Net increase (decrease) in cash................ 4,186 3,521 (22,736)
Cash at beginning of period.................... 9,518 5,997 28,733
-------- -------- ----------
Cash at end of period.......................... $ 13,704 $ 9,518 $ 5,997
======== ======== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-18
<PAGE>
HORACE MANN EDUCATORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements are prepared on the basis
of generally accepted accounting principles ("GAAP"). The preparation of
financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The consolidated financial statements include the accounts of Horace Mann
Educators Corporation and its wholly-owned subsidiaries ("HMEC"; and together
with its subsidiaries, the "Company"). All significant intercompany balances
and transactions have been eliminated in consolidation.
The subsidiaries of HMEC sell and underwrite tax-qualified retirement
annuities and private passenger automobile, homeowners, and life insurance
products, primarily to educators and other employees of public schools and
their families. In 1996, the Company discontinued its group medical business.
The Company's principal operating subsidiaries are Horace Mann Life Insurance
Company, Horace Mann Insurance Company, Teachers Insurance Company and
Allegiance Insurance Company.
Investments
The Company invests primarily in fixed maturity investments. Effective
January 1, 1994, the Company adopted Financial Accounting Standards Board
("FASB") Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," and
classified the fixed maturity investment securities as available for sale. The
carrying value of fixed maturity securities, which had previously been carried
at the lower of aggregate amortized cost or market value, was changed to market
value. The net adjustment for unrealized gains and losses on securities
available for sale, carried at market, is recorded as a separate component of
shareholders' equity, net of applicable deferred tax asset or liability.
Short-term and other investments are comprised of mortgage loans, carried at
unpaid principal less a valuation allowance for estimated uncollectible
amounts; policy loans, carried at unpaid principal balances; short-term fixed
interest securities, carried at cost which approximates market value; real
estate acquired in the settlement of debt, carried at the lower of cost or
market; and equity securities, carried at market.
Interest income is recognized as earned. Investment income reflects
amortization of premiums and accrual of discounts on an effective-yield basis.
Realized gains and losses arising from the sale of securities are determined
based upon specific identification of securities sold.
Deferred Policy Acquisition Costs
Deferred policy acquisition costs net of accumulated amortization are
included in other assets in the consolidated balance sheets and were $75,071,
$66,866 and $59,095 as of December 31, 1996, 1995 and 1994, respectively.
F-19
<PAGE>
HORACE MANN EDUCATORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Acquisition costs, consisting of commissions, premium taxes and other costs,
which vary with and are primarily related to the production of insurance
business, are capitalized and amortized as follows. Capitalized acquisition
costs for interest-sensitive life contracts are amortized over 20 years in
proportion to estimated gross profits. For other individual life contracts,
acquisition costs are amortized in proportion to anticipated premiums over the
terms of the insurance policies (10 and 15 years). For investment (annuity)
contracts, acquisition costs are amortized in proportion to estimated gross
profits over 20 years. For property and casualty policies, acquisition costs
are amortized over the terms of the insurance policies (six and twelve months).
Deferred policy acquisition costs for interest-sensitive life and investment
contracts are adjusted for the impact on estimated future gross profits as if
net unrealized investment gains and losses had been realized at the balance
sheet date. The impact of this adjustment is included in net unrealized gains
and losses within shareholders' equity.
Deferred acquisition costs are reviewed for recoverability from future
income, including investment income, and costs which are deemed unrecoverable
are expensed in the period in which the determination is made. No such costs
have been deemed unrecoverable during the periods reported.
When the Company was acquired in 1989, deferred acquisition costs were
reduced to zero in connection with establishing the value of acquired insurance
in force in the application of purchase accounting.
Property and Equipment
Property and equipment are carried at cost less accumulated depreciation and
are included in other assets in the consolidated balance sheets. Depreciation
and amortization are calculated on the straight-line method based on the
estimated useful lives of the assets.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Property and equipment.............................. $44,562 $42,203 $40,331
Less: accumulated depreciation...................... 20,956 17,953 13,851
------- ------- -------
Total........................................... $23,606 $24,250 $26,480
======= ======= =======
</TABLE>
Value of Acquired Insurance In Force and Goodwill
When the Company was acquired in 1989, intangible assets were recorded in the
application of purchase accounting to recognize the value of acquired insurance
in force and goodwill. In addition, goodwill of $22,003 was recorded in January
1994 related to the purchase of Allegiance Insurance Company.
F-20
<PAGE>
HORACE MANN EDUCATORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
The value of acquired insurance in force by operating segment and goodwill,
net of amortization, were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Value of acquired insurance in force
Property and casualty.......................... $ 2,783 $ 3,815 $ 4,847
Life........................................... 21,253 23,902 26,774
Annuity........................................ 39,116 45,022 51,166
-------- -------- --------
Subtotal..................................... 63,152 72,739 82,787
Goodwill......................................... 55,486 57,104 58,722
-------- -------- --------
Total........................................ $118,638 $129,843 $141,509
======== ======== ========
</TABLE>
The value of acquired insurance in force is being amortized over the
following periods utilizing the indicated methods for property and casualty,
life and annuity, respectively, as follows: 10 years, double declining
balance; 20 years, in proportion to coverage provided; 20 years, in proportion
to projected future gross profits at the date of the acquisition of the
Company. Goodwill is amortized over 40 years on a straight-line basis.
The Company reviews the value of acquired insurance in force and goodwill
for impairment under the standards established by SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of." Any impairment is recognized in the period in which the
determination is made. There have been no adjustments to the carrying value of
the value of acquired insurance in force and goodwill.
Scheduled amortization of the December 31, 1996 balances of value of
acquired insurance in force by segment and goodwill over the next five years
is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1998 1999 2000 2001
------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Scheduled amortization of:
Value of acquired insurance in force
Property and casualty.............. $ 1,052 $ 1,038 $ 693 $ - $ -
Life............................... 2,449 2,275 2,120 1,975 1,839
Annuity............................ 5,563 5,274 5,013 4,692 4,220
------- ------- ------ ------ ------
Subtotal......................... 9,064 8,587 7,826 6,667 6,059
Goodwill............................. 1,618 1,618 1,618 1,618 1,618
------- ------- ------ ------ ------
Total............................ $10,682 $10,205 $9,444 $8,285 $7,677
======= ======= ====== ====== ======
</TABLE>
The accumulated amortization of intangibles as of December 31, 1996, 1995
and 1994 was $114,034, $102,829 and $91,163, respectively.
F-21
<PAGE>
HORACE MANN EDUCATORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Variable Annuity Assets and Liabilities
Variable annuity assets, carried at market value, and liabilities represent
tax-qualified variable annuity funds invested in the Horace Mann mutual funds.
Variable annuity assets were invested in the Horace Mann mutual funds as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Horace Mann Growth Fund.......................... $372,824 $248,320 $163,569
Horace Mann Balanced Fund........................ 299,977 227,705 160,242
Horace Mann Income Fund.......................... 10,857 10,513 9,250
Horace Mann Short-Term Fund...................... 1,178 1,005 1,084
-------- -------- --------
Total variable annuity assets.................. $684,836 $487,543 $334,145
======== ======== ========
</TABLE>
The investment income, gains and losses of these accounts accrue directly to
the policyholders and are not included in the operations of the Company.
Future Policy Benefits, Interest-sensitive Life Contract Liabilities and
Annuity Contract Liabilities
Liabilities for future benefits on life and annuity policies are established
in amounts adequate to meet the estimated future obligations on policies in
force. Liabilities for future policy benefits on certain life insurance
policies are computed using the net level premium method and are based upon
assumptions as to future investment yield, mortality and withdrawals.
Estimated liabilities are established for policies that contain experience
rating provisions. As a result of the application of purchase accounting,
future policy benefits for direct individual life insurance policies issued
through August 29, 1989 were revalued using interest rates of 9% graded to 8%
over 10 years. For policies issued from August 30, 1989 through December 31,
1992, future policy benefits are computed using an interest rate of 6.5%. An
interest rate of 5.5% is used to compute future policy benefits for policies
issued after December 31, 1992. Mortality and withdrawal assumptions for all
policies have been based on various actuarial tables which are consistent with
the Company's own experience. Liabilities for future benefits on annuity
contracts and certain long-duration life insurance contracts are carried at
accumulated policyholder values without reduction for potential surrender or
withdrawal charges. The liability also includes provisions for the unearned
portion of certain policy charges.
Unpaid Claims and Claim Expenses
Liabilities for property and casualty unpaid claims and claim expenses
include provisions for payments to be made on reported losses, losses incurred
but not reported and associated settlement expenses; are carried at the full
value of estimated liabilities; and are not discounted for interest expected
to be earned on reserves. Estimated amounts of salvage and subrogation on
unpaid property and casualty losses are deducted from the liability for unpaid
claims.
The process by which liabilities are established for insured events requires
reliance upon estimates based on experience and available data. As information
develops which varies from experience, provides additional data or, in some
cases, augments data which previously were not considered sufficient for use
in determining liabilities, adjustments may be required. The effects of
F-22
<PAGE>
HORACE MANN EDUCATORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
these adjustments are charged or credited to income for the period in which
the adjustments are made. No unusual adjustments were made in the
determination of the liabilities during the periods covered by these financial
statements. The Company has no exposure to claims for toxic waste cleanup,
other environmental remediation or asbestos-related illnesses. Management
believes that, based on data currently available, it has reasonably estimated
the Company's ultimate losses.
The following table sets forth an analysis of property and casualty unpaid
claims and claim expenses and provides a reconciliation of beginning and
ending reserves for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Reserves at beginning of year................ $369,653 $388,038 $373,541
Less reinsurance recoverables.............. 23,764 18,475 21,613
-------- -------- --------
Net reserves at beginning of year............ 345,889 369,563 351,928
-------- -------- --------
Increase in reserves due to purchase of
Allegiance Insurance Company................ - - 30,017
-------- -------- --------
Losses and LAE incurred:
Claims occurring in the current period..... 368,648 352,513 346,025
Decrease in reserves for losses and LAE for
claims occurring in prior periods(1):
Policies written by the Company.......... (56,446) (49,830) (47,271)
Business assumed from state reinsurance
facilities.............................. (6,100) (5,800) (7,100)
-------- -------- --------
(62,546) (55,630) (54,371)
-------- -------- --------
Losses and LAE incurred.................. 306,102 296,883 291,654
-------- -------- --------
Losses and LAE payments for claims occurring
during:
Current year............................... 206,370 179,747 170,621
Prior years................................ 139,272 140,810 133,415
-------- -------- --------
Losses and LAE payments.................. 345,642 320,557 304,036
-------- -------- --------
Net reserves at end of period................ 306,349 345,889 369,563
Plus reinsurance recoverables.............. 34,062 23,764 18,475
-------- -------- --------
Reserves at end of period(2)................. $340,411 $369,653 $388,038
======== ======== ========
</TABLE>
- --------
(1) Shows the amounts by which the Company decreased its reserves in each of
the periods indicated for claims occurring in previous periods to reflect
subsequent information on such claims and changes in their projected final
settlement costs. Favorable reserve development generally occurs as a
result of subsequent adjustment of reserves to reflect additional
information.
(2) Unpaid claims and claims expenses as reported in the consolidated balance
sheets also include life, annuity, and group accident and health reserves
of $18,442, $15,411 and $17,564 at December 31, 1996, 1995 and 1994,
respectively, in addition to property and casualty reserves.
The provision for losses and LAE for insured events in prior years decreased
by $62,546, $55,630 and $54,371 for the years ended December 31, 1996, 1995
and 1994, respectively. The favorable loss
F-23
<PAGE>
HORACE MANN EDUCATORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
development results primarily from improving trends in the frequency and
severity of voluntary automobile claims.
Insurance Premiums and Contract Charges Earned
Property and casualty insurance premiums are recognized as revenue ratably
over the related contract periods in proportion to the risks insured. The
unexpired portions of these property and casualty premiums are recorded as
unearned premiums, using the monthly pro rata method.
Premiums and contract charges for interest-sensitive life and annuity
contracts consist of charges for the cost of insurance, policy administration
and withdrawals. Premiums for long-term traditional life policies are
recognized as revenues when due over the premium-paying period. Annuity and
interest-sensitive life contract deposits represent funds deposited by
policyholders and are not included in the Company's premiums or contract
charges.
Stock Based Compensation
The Company grants stock options for a fixed number of shares to employees
with an exercise price which has generally been equal to the fair market value
of the shares on the date of grant. The Company accounts for stock option
grants in accordance with Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and accordingly, recognizes no
compensation expense for the stock option grants.
Income Taxes
The Company uses the liability method for calculating deferred federal income
taxes. Income tax provisions are generally based on income reported for
financial statement purposes. The provisions for federal income taxes for the
years ended December 31, 1996, 1995 and 1994 include amounts currently payable
and deferred income taxes resulting from the cumulative differences in the
Company's assets and liabilities, determined on a tax return and financial
statement basis.
Deferred tax assets and liabilities include provisions for unrealized
investment gains and losses with the change for each period included in net
unrealized gains and losses in shareholders' equity.
Earnings Per Share
Earnings per share assuming no dilution is computed based on the weighted
average number of shares outstanding. Prior to their early retirement in
February 1996, convertible notes described in Note 4 were considered
potentially dilutive securities for purposes of calculating earnings per share
assuming full dilution. Common stock equivalents relating to outstanding
warrants and common stock options are also included in the calculation of
earnings per share, to the extent dilutive.
Statements of Cash Flows
For purposes of the statements of cash flows, cash constitutes cash on
deposit at banks.
F-24
<PAGE>
HORACE MANN EDUCATORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Reclassification
The Company has reclassified the presentation of certain prior period
information to conform with the 1996 presentation including the presentation
of discontinued operations for all periods (also see Note 2).
NOTE 2--DISCONTINUED OPERATIONS
On December 9, 1996, the Company announced its strategic decision to
withdraw from the group medical insurance business over the following two
years. The Company stopped writing new group medical insurance policies in
January 1997 and intends to stop renewing group medical insurance policies in
January 1998. The Company's results of operations for the year ended December
31, 1996 include an accrual of $5,974 for anticipated losses during the phase-
out period and a related income tax recoverable of $2,091.
The consolidated statements of operations and related disclosures for all
years have been restated to separately report discontinued operations.
Premiums written from the discontinued group medical business were $47,382,
$47,512 and $55,447 for the years ended December 31, 1996, 1995 and 1994,
respectively. The losses from operations from the discontinued group medical
business were $5,280, $1,184 and $61 for the years ended December 31, 1996,
1995 and 1994, respectively, exclusive of the accrual for anticipated losses
during the phase-out period recorded in 1996.
At December 31, 1996, the following were attributable to the discontinued
operations: $12,490 of investments, $4,090 of premiums receivable, $2,030 of
ceded policy liabilities (classified as Other Assets in the Consolidated
Balance Sheet), $143 of other assets, $12,533 of policy liabilities and $6,220
of other liabilities, including the provision for operating losses during the
phase-out period.
NOTE 3--INVESTMENTS
Net Investment Income
The components of net investment income for the following periods were:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Fixed maturities................................ $190,836 $183,845 $170,375
Short-term and other investments................ 11,931 18,101 18,965
-------- -------- --------
Total investment income....................... 202,767 201,946 189,340
Less investment expenses........................ 4,160 3,576 4,031
-------- -------- --------
Net investment income......................... $198,607 $198,370 $185,309
======== ======== ========
Realized Investment Gains (Losses)
Realized investment gains (losses) for the following periods were:
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Fixed maturities................................ $ 1,052 $ 6,961 $ (1,007)
Short-term and other investments................ 1,399 1,643 90
-------- -------- --------
Realized investment gains (losses)............ $ 2,451 $ 8,604 $ (917)
======== ======== ========
</TABLE>
F-25
<PAGE>
HORACE MANN EDUCATORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 3--INVESTMENTS--(CONTINUED)
Fixed Maturity Securities
The amortized cost, unrealized investment gains and losses, and market values
of investments in debt securities as of December 31, 1996, 1995 and 1994 were
as follows:
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
AS OF DECEMBER 31, 1996
U.S. government and agency
obligations
Mortgage-backed securities..... $ 644,197 $ 13,008 $ 3,217 $ 653,988
Other.......................... 257,498 2,436 431 259,503
Municipal bonds.................. 221,851 8,660 378 230,133
Foreign government bonds......... 34,684 1,340 1 36,023
Corporate bonds.................. 1,163,631 37,510 12,221 1,188,920
Other mortgage-backed securities. 287,216 4,600 1,871 289,945
---------- -------- -------- ----------
Totals....................... $2,609,077 $ 67,554 $ 18,119 $2,658,512
========== ======== ======== ==========
AS OF DECEMBER 31, 1995
U.S. government and agency
obligations
Mortgage-backed securities..... $ 659,380 $ 23,205 $ 451 $ 682,134
Other.......................... 260,314 11,355 181 271,488
Municipal bonds.................. 218,776 9,766 240 228,302
Foreign government bonds......... 39,065 3,334 - 42,399
Corporate bonds.................. 1,105,760 68,946 6,930 1,167,776
Other mortgage-backed securities. 243,737 8,760 1,536 250,961
---------- -------- -------- ----------
Totals....................... $2,527,032 $125,366 $ 9,338 $2,643,060
========== ======== ======== ==========
AS OF DECEMBER 31, 1994
U.S. government and agency
obligations
Mortgage-backed securities..... $ 677,545 $ 480 $ 35,432 $ 642,593
Other.......................... 316,102 206 12,524 303,784
Municipal bonds.................. 228,926 2,168 10,489 220,605
Foreign government bonds......... 46,527 64 1,803 44,788
Corporate bonds.................. 994,325 4,571 50,156 948,740
Other mortgage-backed securities. 186,015 560 7,967 178,608
---------- -------- -------- ----------
Totals....................... $2,449,440 $ 8,049 $118,371 $2,339,118
========== ======== ======== ==========
</TABLE>
The Company's investment portfolio includes no derivative financial
instruments (futures, forwards, swaps, option contracts or other financial
instruments with similar characteristics).
F-26
<PAGE>
HORACE MANN EDUCATORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 3--INVESTMENTS--(CONTINUED)
Maturity/Sales Of Investments
The market value and amortized cost of fixed maturity securities at December
31, 1996, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
PERCENT
OF
TOTAL
MARKET MARKET AMORTIZED
VALUE VALUE COST
------- ---------- ----------
<S> <C> <C> <C>
Due in 1 year or less......................... 5.7% $ 151,847 $ 151,502
Due after 1 year through 5 years.............. 28.7% 761,990 751,964
Due after 5 years through 10 years............ 32.9% 874,562 855,112
Due after 10 years through 20 years........... 18.9% 503,649 493,750
Due after 20 years............................ 13.8% 366,464 356,749
----- ---------- ----------
Total................................... 100.0% $2,658,512 $2,609,077
===== ========== ==========
</TABLE>
Proceeds from sales/maturities of fixed maturities and gross gains and gross
losses realized for each year were:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Proceeds....................................... $925,555 $906,212 $951,808
Gross gains realized........................... 11,378 16,820 15,657
Gross losses realized.......................... (10,326) (9,859) (16,768)
</TABLE>
Unrealized Gains (Losses) on Fixed Maturities
Net unrealized gains (losses) are computed as the difference between market
and amortized cost for fixed maturities. A summary of the net increase
(decrease) in unrealized investment gains (losses) on fixed maturities, less
applicable income taxes, is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1995 1994
-------- --------- ---------
<S> <C> <C> <C>
Unrealized gains (losses) on fixed
maturities
Beginning of period....................... $116,028 $(110,322) $ 111,599
End of period............................. 49,435 116,028 (110,322)
-------- --------- ---------
Increase (decrease) for the period...... (66,593) 226,350 (221,921)
Income taxes (benefit)...................... (23,308) 79,223 (77,672)
-------- --------- ---------
Increase (decrease) in net unrealized gains
(losses) on fixed maturities before the
valuation impact on deferred policy
acquisition costs.......................... $(43,285) $ 147,127 $(144,249)
======== ========= =========
</TABLE>
Investment in Entities Exceeding 10% of Shareholders' Equity
At December 31, 1996, the Company's investment portfolio included $51,972 of
fixed maturity securities issued by Ford Motor Company and its affiliates.
There were no other investments which exceeded 10% of total shareholders'
equity in entities other than obligations of the United States Government and
government agencies and authorities at December 31, 1996 and there were no such
investments at December 31, 1995 and 1994.
F-27
<PAGE>
HORACE MANN EDUCATORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 3--INVESTMENTS--(CONTINUED)
Deposits
At December 31, 1996, securities with a carrying value of $13,019 were on
deposit with governmental agencies as required by law in various states in
which the insurance subsidiaries of HMEC conduct business.
NOTE 4--DEBT AND WARRANTS
Indebtedness and scheduled maturities at December 31, 1996, 1995 and 1994
consisted of the following:
<TABLE>
<CAPTION>
EFFECTIVE DECEMBER 31,
INTEREST FINAL --------------------------
RATES MATURITY 1996 1995 1994
--------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Short-term debt:
Bank Credit Facility........... Variable 2001 $ 34,000 $ 75,000 $ -
Long-term debt:
6 5/8% Senior Notes, Face
amount less unaccrued discount
of $436....................... 6.7% 2006 99,564 - -
4%/6 1/2% Convertible Notes,
redeemed February 1996........ 5.7% 1999 - 100,000 100,000
-------- -------- --------
Total........................ $133,564 $175,000 $100,000
======== ======== ========
</TABLE>
Issuance of 6 5/8% Senior Notes ("Senior Notes") and Redemption of
Convertible Notes
On January 17, 1996, the Company issued $100,000 face amount of Senior Notes
at an effective yield of 6.7%, which will mature on January 15, 2006. The net
proceeds from the sale of the Senior Notes were used to finance the redemption
of the Convertible Notes. Interest on the Senior Notes is payable semi-
annually at a rate of 6 5/8%. The Senior Notes are redeemable in whole or in
part, at any time, at the Company's option, at a redemption price equal to the
greater of (i) 100% of their principal amount and (ii) the sum of the present
values of the remaining scheduled payments of principal and interest thereon
discounted, on a semi-annual basis, at the Treasury yield (as defined in the
indenture) plus 15 basis points, together with accrued interest to the date of
redemption.
Bank Credit Facility
The Bank Credit Facility, as amended in December 1996, provides for
unsecured borrowings of up to $65,000. Interest accrues at varying spreads
relative to corporate or eurodollar base rates and is payable monthly or
quarterly depending on the applicable base rate (Interbank Offering Rate plus
0.325% at December 31, 1996). The unused portion of the Bank Credit Facility
is subject to a variable commitment fee which was 0.1% on an annual basis at
December 31, 1996. The commitment for the Bank Credit Facility terminates on
December 31, 2001. The Company's obligations under the Bank Credit Facility
are unsecured.
4%/6 1/2% Convertible Notes ("Convertible Notes")
All of the outstanding Convertible Notes were redeemed on February 6, 1996
at an aggregate cost of $102,890. The early redemption of the Convertible
Notes resulted in a charge to 1996 income of $1,319 ($857 net of tax
benefits).
F-28
<PAGE>
HORACE MANN EDUCATORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 4--DEBT AND WARRANTS--(CONTINUED)
15.00% Subordinated Debentures ("Debentures")
In August 1994, all of the outstanding Debentures, in the aggregate
principal amount of $47,073, were redeemed at an aggregate cost to HMEC of
$50,603. The early redemption of the Debentures resulted in an extraordinary
charge to income in 1994 of $1,704 net of tax benefits.
Warrants
At December 31, 1996, 1995 and 1994, warrants to purchase 140,625 shares of
the Company's common stock at $5.40 per share were outstanding.
Covenants
The Company is in compliance with all of the covenants contained in the
Senior Notes indenture and the Bank Credit Facility Agreement.
NOTE 5--SHAREHOLDERS' EQUITY AND STOCK OPTIONS
Share Repurchase Program
In February 1997, the Company's Board of Directors adopted a repurchase
program for shares of the Company's common stock of up to $100,000. Based on
the market price of the Company's common shares at the time the Board adopted
this program, $100,000 would represent approximately 9% of the Company's
outstanding shares. Shares of common stock may be purchased from time to time
through open market and private purchases, as available. The repurchase
program will be financed through use of cash and, if needed, the Bank Credit
Facility.
Authorization of Preferred Stock
In September 1996, the shareholders of HMEC approved authorization of
1,000,000 shares of $0.001 par value preferred stock. The Board of Directors
is authorized to (i) direct the issuance of the preferred stock in one or more
series, (ii) fix the dividend rate, conversion or exchange rights, redemption
price and liquidation preference, of any series of the preferred stock, (iii)
fix the number of shares for any series and (iv) increase or decrease the
number of shares of any series. No shares of preferred stock were outstanding
at December 31, 1996.
In 1997, the Company's catastrophe reinsurance program will be augmented by
a $100,000 equity put. This equity put provides for an option to sell shares
of the Company's convertible preferred stock at a pre-negotiated floating rate
in the event of losses from a catastrophe, individually or in the aggregate,
which exceed $65,000.
In connection with the equity put described in the preceding paragraph, the
Board of Directors has designated a series of preferred stock to be available
for use in the put. The Series so designated is Series A Cumulative
Convertible Preferred Stock (the "Series A Stock") and 100,000 shares have
been assigned to this series. None are currently issued or outstanding. The
Series A Stock is dividend paying, at a floating rate which varies with
movements in the London Interbank Offered Rate and with changes in the risk
rating of the Series A Stock as determined by Standard & Poor's. The Series A
F-29
<PAGE>
HORACE MANN EDUCATORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 5--SHAREHOLDERS' EQUITY AND STOCK OPTIONS--(CONTINUED)
Stock does not require any sinking fund or similar mechanism regarding payment
of such dividends. The Series A Stock is redeemable by the Company beginning
one year after its issuance at rates declining from an initial rate of 102% of
the purchase price of the Series A Stock and accumulated unpaid dividends to
100% of such sum (beginning three years after issuance). The Series A Stock
must be redeemed by the Company if there is a change in control of the Company
and the holders of that stock request redemption. Beginning on the fourth
anniversary of the issuance of Series A Stock, the holders thereof have the
right to demand conversion of the Series A Stock into common stock of the
Company at a conversion rate based on then prevailing market prices for the
common stock; however, upon receipt of a conversion demand, the Company has
the right to redeem the Series A Stock prior to such conversion. The Series A
Stock has liquidation rights which place the Series A Stock ahead of the
common stock in priority. The Series A Stock has no voting rights other than
the requirement that the Series A Stock approve any changes in the Series A
Stock, the creation of any other class of stock on a par with or superior to
the Series A Stock and certain extraordinary transactions such as certain
mergers involving the Company.
Director Stock Plan
In September 1996, the shareholders of HMEC approved the Deferred Equity
Compensation Plan ("Director Stock Plan") for directors of the Company and
reserved 300,000 shares for issuance pursuant to the Director Stock Plan.
Shares of the Company's common stock issued under the Director Stock Plan may
be either authorized and unissued shares or shares that have been reacquired
by the Company. As of December 31, 1996, 9,197 units had been awarded under
this plan representing an equal number of common shares to be issued in the
future.
1995 Purchase of the Company's Common Stock
On May 3, 1995, the Company repurchased 6.5 million shares of common stock.
The shares were purchased at a price of $169,000, before a contingent payment
and expenses of the transaction. The Company borrowed $140,000 of the purchase
price under its existing Bank Credit Facility and the balance was paid from
cash on hand. In July 1995, the Company sold 911,902 shares in a secondary
public offering, the $20,568 net proceeds of which were used to reduce
borrowings under the Bank Credit Facility.
Stock Options
In 1991, HMEC adopted and the shareholders approved the 1991 Stock Incentive
Plan (the "1991 Plan") and reserved 2 million shares of common stock for
issuance under the 1991 Plan. Under the 1991 Plan, options to purchase shares
of HMEC common stock may be granted to executive officers, other employees and
certain directors. The options are exercisable in installments beginning in
the first year from the date of grant and expiring 10 years from the date of
grant. No options were granted during 1996 and 20,000 options were granted
during 1995.
The Company accounts for the 1991 Plan in accordance with APB Opinion No.
25, under which no compensation cost has been recognized. Had compensation
cost been recognized under SFAS No. 123 "Accounting for Stock-Based
Compensation," the Company has determined the effects on 1996 and 1995 net
income to be immaterial.
F-30
<PAGE>
HORACE MANN EDUCATORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 5--SHAREHOLDERS' EQUITY AND STOCK OPTIONS--(CONTINUED)
Changes in outstanding options and shares available for grant were as
follows:
<TABLE>
<CAPTION>
OPTIONS
WEIGHTED AVERAGE RANGE OF ---------------------------------
OPTION PRICE OPTION PRICES VESTED AND AVAILABLE
PER SHARE PER SHARE OUTSTANDING EXERCISABLE FOR GRANT
---------------- ------------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
At December 31, 1993.... $22.39 $18.00-$30.30 1,128,222 653,847 859,000
--------- --------- -------
Granted............... $24.06 10,000 2,500 (10,000)
Vested................ $18.00-$30.30 - 274,375 -
--------- --------- -------
At December 31, 1994.... $22.40 $18.00-$30.30 1,138,222 930,722 849,000
--------- --------- -------
Granted............... $22.24 20,000 5,000 (20,000)
Vested................ $23.38-$30.30 - 104,375 -
Exercised............. $18.00 (19,200) (19,200) -
--------- --------- -------
At December 31, 1995.... $22.47 $18.00-$30.30 1,139,022 1,020,897 829,000
--------- --------- -------
Vested................ $22.24-$30.30 - 105,625 -
Exercised............. $22.07 $18.00-$30.30 (235,969) (235,969) -
--------- --------- -------
At December 31, 1996.... $22.58 $18.00-$30.30 903,053 890,553 829,000
========= ========= =======
</TABLE>
As of December 31, 1996, the weighted average life of vested and exercisable
options was 5.5 years and the weighted average price of such options was
$22.58 per option. The weighted average prices of vested and exercisable
options as of December 31, 1995 and 1994 were $21.72 and $20.72, respectively.
NOTE 6--INCOME TAXES
The federal income tax liabilities and recoverables included in other
liabilities and other assets, respectively, in the consolidated balance sheets
as of December 31, 1996, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995 1994
------- ------- --------
<S> <C> <C> <C>
Current liability................................... $27,995 $15,174 $ 19,961
Deferred liability (asset).......................... 7,193 32,870 (61,769)
</TABLE>
F-31
<PAGE>
HORACE MANN EDUCATORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 6--INCOME TAXES--(CONTINUED)
Deferred tax assets and liabilities are recognized for all future tax
consequences attributable to "temporary differences" between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. The "temporary differences" that give rise to the
deferred tax balances at December 31, 1996, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995 1994
------- ------- --------
<S> <C> <C> <C>
Deferred tax assets
Discounting of unpaid loss and loss expense tax
reserves....................................... $ 8,066 $13,172 $ 16,898
Life insurance future policy benefit reserve
revaluation.................................... 22,436 16,198 18,531
Unearned premium reserve reduction.............. 10,528 9,521 9,411
Postretirement benefits other than pension...... 8,003 7,715 7,374
Investment valuation reserves................... 907 924 1,288
Unrealized losses on securities................. - - 38,156
Other, net...................................... - - 5,789
------- ------- --------
Total gross deferred tax assets............... 49,940 47,530 97,447
------- ------- --------
Deferred tax liabilities
Unrealized gains on securities.................. 16,010 41,004 -
Amortization of intangible assets............... 20,074 20,508 21,431
Deferred policy acquisition costs............... 19,982 16,211 14,247
Other, net...................................... 1,067 2,677 -
------- ------- --------
Total gross deferred tax liabilities.......... 57,133 80,400 35,678
------- ------- --------
Net deferred tax liability (asset).......... $ 7,193 $32,870 $(61,769)
======= ======= ========
</TABLE>
Based on the Company's historical earnings, future expectations of adjusted
taxable income, as well as reversing gross deferred tax liabilities, the
Company believes it is more likely than not that gross deferred tax assets
will be fully realized and that a valuation allowance with respect to the
realization of the total gross deferred tax assets is not necessary.
The components of federal income tax expense (benefit) were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Current........................................... $27,502 $12,982 $28,266
Deferred.......................................... (685) 15,481 (6,648)
------- ------- -------
Tax expense on income from continuing
operations..................................... 26,817 28,463 21,618
Tax benefit on extraordinary item................. - - (917)
------- ------- -------
Total tax expense before discontinued
operations..................................... $26,817 $28,463 $20,701
======= ======= =======
</TABLE>
F-32
<PAGE>
HORACE MANN EDUCATORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 6--INCOME TAXES--(CONTINUED)
Income tax expense for the following periods differed from the expected tax
computed by applying the federal corporate tax rate of 35% to income before
income taxes as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Expected federal tax on income from continuing
operations...................................... $35,217 $36,257 $30,184
Add (deduct) tax effects of:
Tax-exempt interest............................ (3,322) (3,293) (4,427)
Goodwill....................................... 566 566 558
Cost of additional rights relating to share
repurchase.................................... - 471 -
Acquisition related benefits and other, net.... (5,644) (5,538) (4,697)
------- ------- -------
Income tax expense provided on income from
continuing operations........................... $26,817 $28,463 $21,618
======= ======= =======
</TABLE>
NOTE 7--FAIR VALUE OF FINANCIAL INSTRUMENTS
Generally accepted accounting principles require that the Company disclose
estimated fair values for certain financial instruments. Fair values of the
Company's insurance contracts other than annuity contracts are not required to
be disclosed. However, the fair values of liabilities under all insurance
contracts are taken into consideration in the Company's overall management of
interest rate risk through the matching of investment maturities with amounts
due under insurance contracts. The following methods and assumptions were used
to estimate the fair value of financial instruments.
Investments--For fixed maturities and short-term and other investments, fair
value equals quoted market price, if available. If a quoted market price is
not available, fair value is estimated using quoted market prices for similar
securities, adjusted for differences between the quoted securities and the
securities being valued. The fair value of mortgage loans is estimated by
discounting the future cash flows using the current rates at which similar
loans would be made to borrowers with similar credit ratings and the same
remaining maturities. The fair value of policy loans is based on estimates
using discounted cash flow analysis and current interest rates being offered
for new loans. The carrying value of real estate is an estimate of fair value
based on discounted cash flows from operations.
Annuity Contract Liabilities and Policyholder Account Balances on Interest-
sensitive Life Contracts--The fair values of annuity contract liabilities and
policyholder account balances on interest-sensitive life contracts are equal to
the discounted estimated future cash flows (using the Company's current interest
rates earned on its investments) including an adjustment for risk that the
timing or amount of cash flows will vary from management's estimate.
Other Policyholder Funds--Other policyholder funds are supplementary
contract reserves and dividend accumulations which represent deposits that do
not have defined maturities. The carrying value of these funds is used as a
reasonable estimate of fair value.
Long-term Debt--The fair value of long-term debt is estimated based on
quoted market prices of publicly traded issues.
F-33
<PAGE>
HORACE MANN EDUCATORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 7--FAIR VALUE OF FINANCIAL INSTRUMENTS--(CONTINUED)
The carrying amounts and fair values of financial instruments at December 31,
1996, 1995 and 1994 consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------
1996 1995 1994
--------------------- --------------------- ---------------------
CARRYING CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Financial Assets
Investments
Fixed maturities..... $2,658,512 $2,658,512 $2,643,060 $2,643,060 $2,339,118 $2,339,118
Short-term and other
investments......... 125,824 124,571 155,489 155,646 194,323 195,111
---------- ---------- ---------- ---------- ---------- ----------
Total investments.. 2,784,336 2,783,083 2,798,549 2,798,706 2,533,441 2,534,229
Cash................... 13,704 13,704 9,518 9,518 5,997 5,997
Financial Liabilities
Policyholder account
balances on interest-
sensitive life
contracts............. 89,987 79,702 88,141 82,494 85,219 73,970
Annuity contract
liabilities........... 1,286,110 1,136,494 1,275,117 1,132,742 1,235,550 1,105,817
Other policyholder
funds................. 118,549 118,549 119,070 119,070 119,565 119,565
Short-term debt........ 34,000 34,000 75,000 75,000 - -
Long-term debt......... 99,564 96,500 100,000 102,890 100,000 92,000
</TABLE>
Fair value estimates shown above are dependent upon subjective assumptions
and involve significant uncertainties resulting in variability in estimates
with changes in assumptions. Fair value assumptions are based upon subjective
estimates of market conditions and perceived risks of financial instruments at
a certain point in time. The disclosed fair values do not reflect any premium
or discount that could result from offering for sale at one time an entire
holding of a particular financial instrument. In addition, potential taxes and
other expenses that would be incurred in an actual sale or settlement are not
reflected in amounts disclosed.
NOTE 8--STATUTORY SURPLUS AND SUBSIDIARY DIVIDEND RESTRICTIONS
The insurance departments of various states in which the insurance
subsidiaries of HMEC are domiciled recognize as net income and surplus those
amounts determined in conformity with statutory accounting practices prescribed
or permitted by the insurance departments, which differ in certain respects
from generally accepted accounting principles.
F-34
<PAGE>
HORACE MANN EDUCATORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 8--STATUTORY SURPLUS AND SUBSIDIARY DIVIDEND RESTRICTIONS--(CONTINUED)
Reconciliations of statutory capital and surplus and net income, as
determined using statutory accounting practices, to the amounts included in the
accompanying financial statements are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Statutory capital and surplus of insurance
subsidiaries................................. $377,337 $361,775 $331,601
Shareholders' equity of non-insurance
subsidiaries................................. 1,612 1,315 1,399
-------- -------- --------
Combined statutory capital and surplus........ 378,949 363,090 333,000
Increase (decrease):
Deferred policy acquisition costs........... 75,071 66,866 59,095
Difference in policyholder reserves......... (4,054) 12,180 12,031
Goodwill.................................... 55,486 57,104 58,722
Value of acquired insurance in force........ 63,152 72,739 82,787
Liability for postretirement benefits, other
than pensions.............................. (22,877) (22,043) (21,039)
Investment market value adjustments on fixed
maturities................................. 49,435 116,028 (110,322)
Difference in investment reserves........... 36,967 37,440 29,873
Federal income tax (liability) asset........ (3,599) (51,242) 54,573
Liability for discontinued operations, net
of tax benefits............................ (3,883) - -
Non-admitted assets and other, net.......... (6,688) (6,998) 13,243
Parent company short-term and long-term
debt....................................... (133,564) (175,000) (100,000)
-------- -------- --------
Shareholders' equity as reported herein... $484,395 $470,164 $411,963
======== ======== ========
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Statutory net income of insurance
subsidiaries................................. $ 72,924 $ 90,981 $ 88,199
Net loss of non-insurance companies........... (2,417) (2,473) (3,264)
Interest expense.............................. (10,517) (11,589) (9,483)
Tax benefit of interest expense and other
parent company current tax adjustments....... 5,372 3,598 (14,554)
Extraordinary item, net of tax................ - - (1,704)
-------- -------- --------
Combined net income........................... 65,362 80,517 59,194
Increase (decrease):
Deferred policy acquisition costs........... 11,973 7,771 11,004
Policyholder benefits....................... 826 2,080 739
Federal income tax expense (benefit)........ 2,137 (9,131) 6,648
Amortization of intangible assets........... (11,205) (11,666) (12,681)
Investment reserves......................... 366 6,191 (2,076)
Loss on discontinuation of group medical
business, net of tax benefits.............. (3,883) - -
Other adjustments, net...................... (937) (1,836) 27
-------- -------- --------
Net income as reported herein............. $ 64,639 $ 73,926 $ 62,855
======== ======== ========
</TABLE>
F-35
<PAGE>
HORACE MANN EDUCATORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 8--STATUTORY SURPLUS AND SUBSIDIARY DIVIDEND RESTRICTIONS--(CONTINUED)
The Company has principal insurance subsidiaries domiciled in Illinois and
California. The statutory financial statements of these subsidiaries are
prepared in accordance with accounting practices prescribed or permitted by the
Illinois Department of Insurance and the California Department of Insurance as
applicable. Prescribed statutory accounting practices include a variety of
publications of the National Association of Insurance Commissioners ("NAIC"),
as well as state laws, regulations and general administrative rules. Permitted
statutory accounting practices encompass all accounting practices not so
prescribed.
The insurance subsidiaries are subject to various regulatory restrictions
which limit the amount of annual dividends or other distributions, including
loans or cash advances, available to HMEC without prior approval of the
insurance regulatory authorities. The maximum dividend which may be paid by the
insurance subsidiaries to HMEC during 1997 without prior approval is
approximately $89 million.
The NAIC has adopted risk-based capital guidelines that establish minimum
adequate levels of statutory capital and surplus based on risk assumed in
investments, reserving policies, and volume and types of insurance business
written. State insurance regulations prohibit insurance companies from making
any public statements or representations with regard to their risk-based
capital levels. Based on current guidelines, the risk-based capital statutory
requirements will have no negative regulatory impact on the Company's insurance
subsidiaries.
NOTE 9--PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
All employees of the Company are covered under a defined benefit plan and a
defined contribution plan, and certain employees participate in supplemental
retirement plans.
Benefits under the defined benefit and supplemental retirement plans are
based on employees' years of service and compensation for the highest 36
consecutive months of earnings under the plan. Under the defined contribution
plan, contributions are made to employees' accounts based on a percentage of
compensation that is determined by the employees' years of service. Retirement
benefits to employees are paid first from their accumulated accounts under the
defined contribution plan with the balance funded by the defined benefit and
supplemental retirement plans.
The Company's policy with respect to funding the defined benefit plan is to
contribute amounts which are actuarially determined to provide the plan with
sufficient assets to meet future benefit payments consistent with the funding
requirements of federal laws and regulations.
Employees of the Company are also eligible to participate in the Supplemental
Retirement and Savings Plan, a 401(k) plan, and may generally contribute up to
10% of eligible compensation on a before tax basis. The Company contributes an
amount equal to 50% of the first 6% of eligible compensation contributed each
month by participating employees.
Total pension expense was $7,855, $7,768 and $8,064 for the years ended
December 31, 1996, 1995 and 1994, respectively.
F-36
<PAGE>
HORACE MANN EDUCATORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 9--PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS--(CONTINUED)
Defined Contribution Plan
Pension benefits under the defined contribution plan were fully funded.
Contributions to employees' accounts under the defined contribution plan,
which were expensed in the Company's statements of operations, and total plan
assets were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Contributions to employees accounts................. $ 5,199 $ 4,859 $ 4,460
Total assets at the end of the year................. 62,113 55,050 48,752
</TABLE>
Defined Benefit Plan and Supplemental Retirement Plans
The following table summarizes the funding status of the defined benefit and
supplemental retirement pension plans at the end of each year and identifies
the assumptions used to determine the projected benefit obligation.
<TABLE>
<CAPTION>
SUPPLEMENTAL
DEFINED BENEFIT PLAN RETIREMENT PLANS
------------------------- -------------------------
DECEMBER 31, DECEMBER 31,
------------------------- -------------------------
1996 1995 1994 1996 1995 1994
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Actuarial present value
of benefit obligations
Vested benefit
obligation............ $32,941 $32,808 $25,359 $ 4,083 $ 3,262 $ 2,581
Nonvested benefit
obligation............ 2,916 2,692 2,137 294 147 96
------- ------- ------- ------- ------- -------
Accumulated benefit
obligation.............. 35,857 35,500 27,496 4,377 3,409 2,677
Effect of projecting
future salary increases
on past service......... 3,508 5,086 5,442 411 1,167 1,962
------- ------- ------- ------- ------- -------
Projected benefit
obligation.............. 39,365 40,586 32,938 4,788 4,576 4,639
Plan assets at market
value................... 42,262 41,137 34,569 - - -
------- ------- ------- ------- ------- -------
Plan assets in excess of
(less than) projected
benefit obligation...... $ 2,897 $ 551 $ 1,631 $(4,788) $(4,576) $(4,639)
======= ======= ======= ======= ======= =======
Assumptions:
Discount rate.......... 7.50% 7.00% 8.50% 7.50% 7.00% 8.50%
Expected return on
assets................ 8.75% 8.75% 8.75% 8.75% 8.75% 8.75%
Rate of salary
increases............. 4.00% 4.00% 5.00% 4.00% 4.00% 5.00%
</TABLE>
The defined benefit plan is fully funded and investments have been set aside
in a trust fund. The supplemental retirement plans are non-qualified, unfunded
plans.
F-37
<PAGE>
HORACE MANN EDUCATORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 9--PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS--(CONTINUED)
Components of net pension cost for the defined benefit plan and supplemental
retirement plans for the following periods are:
<TABLE>
<CAPTION>
SUPPLEMENTAL
DEFINED BENEFIT PLAN RETIREMENT PLANS
------------------------- -------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
------------------------- -------------------------
1996 1995 1994 1996 1995 1994
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Service cost-benefits
earned during the year.. $ 1,686 $ 1,447 $ 1,735 $ 192 $ 142 $ 209
Interest accrued on
projected benefit
obligation.............. 2,779 2,715 2,584 320 324 319
Actual return on assets.. (3,688) (7,888) (16) - - -
Net amortization and
deferral................ (449) 4,368 (3,322) 235 197 264
------- ------- ------- ------- ------- -------
Net periodic pension
cost.................. $ 328 $ 642 $ 981 $ 747 $ 663 $ 792
======= ======= ======= ======= ======= =======
The pension liabilities of the defined benefit plan and supplemental
retirement plans were as follows:
<CAPTION>
SUPPLEMENTAL
DEFINED BENEFIT PLAN RETIREMENT PLANS
------------------------- -------------------------
DECEMBER 31, DECEMBER 31,
------------------------- -------------------------
1996 1995 1994 1996 1995 1994
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Plan assets in excess of
(less than) projected
benefit obligation...... $ 2,897 $ 551 $ 1,631 $(4,788) $(4,576) $(4,639)
Unrecognized prior
service (asset) cost.... (5,645) (6,255) (6,865) 3,209 3,522 3,805
Unrecognized net (gain)
loss from past
experience different
from that assumed....... 1,358 4,642 4,814 (1,342) (1,159) (731)
------- ------- ------- ------- ------- -------
Pension liability
included in the
consolidated balance
sheets.................. (1,390) (1,062) (420) (2,921) (2,213) (1,565)
Additional liability to
recognize unfunded
accumulated benefit
obligation.............. - - - (1,474) (1,321) (1,259)
------- ------- ------- ------- ------- -------
Pension liability........ $(1,390) $(1,062) $ (420) $(4,395) $(3,534) $(2,824)
======= ======= ======= ======= ======= =======
</TABLE>
Postretirement Benefits Other than Pensions
In addition to providing pension benefits, the Company also provides certain
health care and life insurance benefits to retired employees and eligible
dependents. Employees with ten years of service are eligible to receive these
benefits upon retirement. Postretirement benefits other than pensions of
active and retired employees are accrued as expense over the employees'
service years.
F-38
<PAGE>
HORACE MANN EDUCATORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 9--PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS--(CONTINUED)
The following table presents the funded status of postretirement benefits
other than pensions of active and retired employees (including employees on
disability more than 2 years) as of December 31, 1996, 1995 and 1994
reconciled with amounts recognized in the Company's statement of financial
position:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Accumulated postretirement benefit obligation:
Retirees........................................ $12,830 $10,534 $ 8,753
Fully eligible active plan participants......... 2,049 1,488 1,217
Other active plan participants.................. 10,274 11,028 7,422
------- ------- -------
Total unfunded accumulated postretirement benefit
obligation....................................... 25,153 23,050 17,392
Unrecognized net gain (loss) from past experience
different from that assumed...................... (2,276) (1,007) 3,647
------- ------- -------
Accrued postretirement benefit cost............. $22,877 $22,043 $21,039
======= ======= =======
Components of the cost of postretirement benefits other than pensions for the
following periods were:
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Service cost-benefits earned during the year...... $ 801 $ 600 $ 718
Interest accrued on accumulated benefit
obligation....................................... 1,845 1,330 1,319
------- ------- -------
Net expense..................................... $ 2,646 $ 1,930 $ 2,037
======= ======= =======
</TABLE>
The assumed annual rates of increase in the per capita cost of covered
benefits for participants in the plan who retired prior to January 1, 1994
were 7.8%, 8.1% and 8.3% as of December 31, 1996, 1995 and 1994, respectively.
For those participants retiring after December 31, 1993, benefits are provided
at a level amount of $10.00 per month per year of employment. The weighted
average discount rate used in determining the accumulated postretirement
benefit obligation was 7.50%, 7.00% and 8.50% at December 31, 1996, 1995 and
1994, respectively.
A one percentage point increase in the assumed health care cost trend rate
for each year would increase the accumulated postretirement benefit obligation
at December 31, 1996 by approximately $1,733 and the sum of the service and
interest cost components of the net periodic postretirement expense for the
year ended December 31, 1996 would increase by approximately $122.
NOTE 10--REINSURANCE
In the normal course of business, the insurance subsidiaries assume and cede
reinsurance with other insurers. Reinsurance is ceded primarily to limit
losses from large exposures and to permit recovery of a portion of direct
losses; however, such a transfer does not relieve the originating insurance
company of contingent liability.
F-39
<PAGE>
HORACE MANN EDUCATORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 10--REINSURANCE--(CONTINUED)
The Company is a national underwriter and therefore has exposure to
catastrophic losses in certain coastal states and other regions throughout the
United States. Catastrophes can be caused by various events including
hurricanes, windstorms, earthquakes, hail, severe winter weather, and fires,
and the frequency and severity of catastrophes are inherently unpredictable.
The financial impact from catastrophic losses results from both the total
amount of insured exposure in the area affected by the catastrophe as well as
the severity of the event. The Company seeks to reduce its exposure to
catastrophe losses through the geographic diversification of its insurance
coverage, the purchase of catastrophe reinsurance, and the purchase in 1997 of
a catastrophe-linked equity put option (also see Note 5).
The total amounts of reinsurance recoverable on unpaid losses classified as
assets and reported in other assets in the balance sheets were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Reinsurance Recoverables on Unpaid Losses
Life and health................................... $ 2,863 $ 1,369 $ 1,715
Property and casualty
State insurance facilities...................... 24,445 19,903 16,111
Other insurance companies....................... 9,617 3,861 2,364
------- ------- -------
Total......................................... $36,925 $25,133 $20,190
======= ======= =======
</TABLE>
The Company recognizes the cost of reinsurance premiums over the contract
periods for such premiums in proportion to the insurance protection provided.
Amounts recoverable from reinsurers for unpaid claims and claim settlement
expenses, including estimated amounts for unsettled claims, claims incurred
but not reported and policy benefits are estimated in a manner consistent with
the insurance liability associated with the policy. The effect of reinsurance
on premiums written, premiums earned, and benefits, claims and settlement
expenses were as follows:
<TABLE>
<CAPTION>
CEDED TO ASSUMED
GROSS OTHER FROM STATE
AMOUNT COMPANIES FACILITIES NET
-------- --------- ---------- --------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Premiums written................... $699,701 $23,214 $28,345 $704,832
Premiums earned.................... 497,705 23,887 28,881 502,699
Benefits, claims and settlement
expenses.......................... 347,352 32,159 31,498 346,691
YEAR ENDED DECEMBER 31, 1995
Premiums written................... 647,390 22,656 29,236 653,970
Premiums earned.................... 481,192 20,499 24,751 485,444
Benefits, claims and settlement
expenses.......................... 341,538 27,669 21,836 335,705
YEAR ENDED DECEMBER 31, 1994
Premiums written................... 638,376 21,495 20,466 637,347
Premiums earned.................... 473,195 21,834 21,056 472,417
Benefits, claims and settlement
expenses.......................... 341,429 20,569 10,651 331,511
</TABLE>
F-40
<PAGE>
HORACE MANN EDUCATORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 10--REINSURANCE--(CONTINUED)
There were no losses from uncollectible reinsurance recoverables in the
three years ended December 31, 1996. Past due reinsurance recoverables as of
December 31, 1996 were not material.
NOTE 11--CONTINGENCIES
Lawsuits and Legal Proceedings
There are various lawsuits and other legal proceedings against the Company.
Management and legal counsel are of the opinion that the ultimate disposition
of such litigation will have no material adverse effect on the Company's
financial position or results of operations.
Assessments for Insolvencies of Unaffiliated Insurance Companies
The Company is also contingently liable for possible assessments under
regulatory requirements pertaining to potential insolvencies of unaffiliated
insurance companies. Liabilities, which are established based upon regulatory
guidance, have been insignificant.
NOTE 12--SUPPLEMENTARY DATA ON CASH FLOWS
A reconciliation of net income to net cash provided by operating activities
as presented in the consolidated statements of cash flows is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities
Net income................................. $ 64,639 $ 73,926 $ 62,855
Adjustments to reconcile net income to net
cash provided by operating activities:
Realized investment (gains) losses....... (2,451) (8,604) 917
Depreciation and amortization............ 13,050 15,595 19,690
Increase in insurance liabilities........ 74,621 79,739 87,755
Increase in premium receivables.......... (14,397) (9,651) (566)
Increase in deferred policy acquisition
costs................................... (11,973) (7,771) (11,004)
Increase (decrease) in accrued interest
expense................................. 1,769 731 (451)
(Increase) decrease in reinsurance
recoverable............................. (2,030) 52 (2,376)
Increase in federal income tax
liabilities............................. 12,136 10,693 4,624
Accrued loss on discontinued operations.. 5,974 - -
Loss from early retirement of debt....... 1,319 - 2,621
Other.................................... (3,443) (1,366) (5,758)
-------- -------- --------
Total adjustments...................... 74,575 79,418 95,452
-------- -------- --------
Net cash provided by operating
activities............................ $139,214 $153,344 $158,307
======== ======== ========
</TABLE>
The Company's early retirement of debt in 1996 and 1994 resulted in noncash
financing (benefits) and charges of ($1,571) and $1,742, respectively.
F-41
<PAGE>
HORACE MANN EDUCATORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 13--SEGMENT INFORMATION
The Company's operations include the following segments: property and
casualty, annuity and life insurance.
The property and casualty insurance segment includes primarily personal
lines automobile and homeowners products. The annuity segment includes both
fixed and variable tax-qualified annuity products. The life insurance segment
includes primarily interest-sensitive life and traditional life products.
Summarized financial information for these segments is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1996 1995 % CHANGE 1994 % CHANGE
---------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C>
Revenues
Property and casualty.. $ 459,783 $ 455,578 0.9% $ 436,863 4.3%
Annuity................ 122,251 121,375 0.7% 112,074 8.3%
Life................... 122,667 115,932 5.8% 108,444 6.9%
Other.................. (944) (467) (572)
---------- ---------- ----------
Total................ $ 703,757 $ 692,418 1.6% $ 656,809 5.4%
========== ========== ==========
Realized investment
gains (losses)
Property and casualty. $ 201 $ 2,940 $ (3,057)
Annuity............... 1,584 4,367 1,683
Life.................. 666 1,297 457
---------- ---------- ----------
Total................ $ 2,451 $ 8,604 $ (917)
========== ========== ==========
Income (loss) from
continuing operations
before income taxes,
discontinued operations
and extraordinary item
Property and casualty. $ 70,522 $ 75,261 -6.3% $ 64,544 16.6%
Annuity............... 26,546 27,117 -2.1% 23,619 14.8%
Life.................. 19,129 17,428 9.8% 12,371 40.9%
Interest expense and
other................ (15,578) (16,233) (14,296)
---------- ---------- ----------
Total............... $ 100,619 $ 103,573 -2.9% $ 86,238 20.1%
========== ========== ==========
Amortization of
intangible assets
Value of acquired
insurance in force
Property and casualty. $ 1,032 $ 1,032 - $ 1,208 -14.6%
Annuity............... 5,906 6,144 -3.9% 6,280 -2.2%
Life.................. 2,649 2,872 -7.8% 3,547 -19.0%
---------- ---------- ----------
Subtotal............. 9,587 10,048 -4.6% 11,035 -8.9%
Goodwill............... 1,618 1,618 - 1,595 1.4%
---------- ---------- ----------
Total amortization of
intangible assets... $ 11,205 $ 11,666 -4.0% $ 12,630 -7.6%
========== ========== ==========
Assets
Property and casualty.. $ 712,419 $ 712,979 -0.1% $ 676,692 5.4%
Annuity and Life....... 3,011,538 2,851,543 5.6% 2,464,130 15.7%
Other.................. 137,069 97,732 40.2% 144,711 -32.5%
---------- ---------- ----------
Total................ $3,861,026 $3,662,254 5.4% $3,285,533 11.5%
========== ========== ==========
</TABLE>
Revenues include insurance premiums and contract charges earned, net
investment income and realized investment gains and losses. Total assets are
not allocated among the annuity and life segments. Capital expenditures and
depreciation expense were not material.
F-42
<PAGE>
HORACE MANN EDUCATORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996, 1995 AND 1994
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 14--UNAUDITED INTERIM INFORMATION
Summary quarterly financial data is presented below. All periods have been
restated to reflect group medical results as discontinued operations (also see
Note 2).
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
------------ ------------- -------- ---------
1996
- ----
<S> <C> <C> <C> <C>
Insurance premiums written and
contract deposits.............. $183,938 $180,551 $176,395 $163,948
Total revenues.................. 180,026 175,475 174,407 173,849
Income from continuing
operations..................... 21,387 17,892 18,097 16,426
Discontinued operations, after
tax............................ (5,586) (1,568) (1,016) (993)
Net income...................... 15,801 16,324 17,081 15,433
Per share information
Assuming no dilution
Realized investment gains
(losses), after tax......... $ (0.01) - $ 0.02 $ 0.06
Income from continuing
operations.................. 0.90 $ 0.77 0.77 0.70
Net income................... 0.67 0.69 0.73 0.66
Assuming full dilution
Realized investment gains
(losses), after tax......... (0.01) - 0.02 0.06
Income from continuing
operations.................. 0.90 0.77 0.77 0.70
Net income................... 0.67 0.69 0.73 0.66
<CAPTION>
1995
- ----
<S> <C> <C> <C> <C>
Insurance premiums written and
contract deposits.............. $171,440 $163,417 $161,869 $157,244
Total revenues.................. 176,540 171,894 174,022 169,962
Income from continuing
operations..................... 22,012 19,674 16,238 17,186
Discontinued operations, after
tax............................ (589) (517) (8) (70)
Net income...................... 21,423 19,157 16,230 17,116
Per share information
Assuming no dilution
Realized investment gains,
after tax................... $ 0.08 $ 0.04 $ 0.10 $ -
Income from continuing
operations.................. 0.94 0.85 0.66 0.59
Net income................... 0.92 0.83 0.66 0.59
Assuming full dilution
Realized investment gains,
after tax................... 0.07 0.03 0.10 0.01
Income from continuing
operations.................. 0.86 0.78 0.62 0.57
Net income................... 0.84 0.76 0.62 0.57
<CAPTION>
1994
- ----
<S> <C> <C> <C> <C>
Insurance premiums written and
contract deposits.............. $162,507 $155,141 $161,692 $158,007
Total revenues.................. 162,873 165,609 162,334 165,993
Income from continuing
operations..................... 17,145 19,514 16,166 11,795
Discontinued operations, after
tax............................ 119 (217) (239) 276
Income before extraordinary
item........................... 17,264 19,297 15,927 12,071
Net income...................... 17,264 17,593 15,927 12,071
Per share information
Assuming no dilution
Realized investment gains
(losses), after tax......... $ (0.07) $ 0.04 $ (0.07) $ 0.08
Income from continuing
operations.................. 0.59 0.67 0.56 0.41
Income before extraordinary
item........................ 0.60 0.66 0.55 0.42
Net income................... 0.60 0.60 0.55 0.42
Assuming full dilution
Realized investment gains
(losses), after tax......... (0.06) 0.03 (0.06) 0.07
Income from continuing
operations.................. 0.57 0.64 0.53 0.41
Income before extraordinary
item........................ 0.57 0.63 0.52 0.41
Net income................... 0.57 0.58 0.52 0.41
</TABLE>
F-43
<PAGE>
SCHEDULE I
HORACE MANN EDUCATORS CORPORATION
SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1996
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
AMOUNT
SHOWN IN
MARKET BALANCE
TYPE OF INVESTMENTS COST(1) VALUE SHEET
------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Fixed maturities:
U.S. Government and U.S. Government agencies
and authorities............................ $ 463,034 $ 469,527 $ 469,527
Foreign government bonds.................... 34,684 36,023 36,023
States, municipalities and political
subdivisions............................... 659,651 673,237 673,237
Public utilities............................ 43,152 43,394 43,394
Other corporate bonds....................... 1,408,556 1,436,331 1,436,331
---------- ---------- ----------
Total fixed maturity securities........... 2,609,077 $2,658,512 2,658,512
==========
Mortgage loans and real estate................ 43,008 xxx 43,008
Short-term investments........................ 36,900 xxx 36,897
Policy loans and other........................ 45,919 xxx 45,919
---------- ----------
Total investments......................... $2,734,904 xxx $2,784,336
========== ==========
</TABLE>
- --------
(1) Bonds at original cost reduced by repayments and adjusted for amortization
of premiums or accrual of discounts and impairment in value of
specifically identified investments.
See accompanying Independent Auditors' Report.
F-44
<PAGE>
SCHEDULE II
HORACE MANN EDUCATORS CORPORATION
(PARENT COMPANY ONLY)
CONDENSED FINANCIAL INFORMATION
BALANCE SHEETS
AS OF DECEMBER 31, 1996, 1995 AND 1994
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- --------
ASSETS
<S> <C> <C> <C>
Investments.................................... $ 9,014 $ 4,309 $ 9,629
Cash........................................... 4,325 3,757 1,825
Investment in subsidiaries..................... 654,959 701,725 538,248
Other assets................................... 36,013 35,993 45,386
--------- --------- --------
Total assets............................... $ 704,311 $ 745,784 $595,088
========= ========= ========
LIABILITIES, REDEEMABLE SECURITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses.......... $ 18,616 $ 36,134 $ 19,894
Other liabilities.............................. 56,325 52,958 51,598
Mortgage loan payable to subsidiary............ 10,834 10,951 11,056
Short-term debt................................ 34,000 75,000 -
Long-term debt................................. 99,564 100,000 100,000
--------- --------- --------
Total liabilities.......................... 219,339 275,043 182,548
--------- --------- --------
Warrants, subject to redemption................ 577 577 577
--------- --------- --------
Preferred stock, $0.001 par value, authorized
1,000,000 shares; none issued in 1996......... - - -
Common stock, $0.001 par value, authorized
75,000,000 shares; issued, 1996, 29,213,398;
1995, 28,977,429; 1994, 28,958,229............ 29 29 29
Additional paid-in capital..................... 330,263 323,920 323,517
Net unrealized gains (losses) on fixed
maturities and equity securities.............. 29,736 76,151 (70,861)
Retained earnings.............................. 278,669 224,366 159,278
Treasury stock, at cost, 5,588,098 shares...... (154,302) (154,302) -
--------- --------- --------
Total shareholders' equity................. 484,395 470,164 411,963
--------- --------- --------
Total liabilities, redeemable securities
and shareholders' equity.................. $ 704,311 $ 745,784 $595,088
========= ========= ========
</TABLE>
See accompanying note to condensed financial statements.
See accompanying Independent Auditors' Report.
F-45
<PAGE>
SCHEDULE II
HORACE MANN EDUCATORS CORPORATION
(PARENT COMPANY ONLY)
CONDENSED FINANCIAL INFORMATION
STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Revenues
Service fees...................................... $ - $ - $ 57
Net investment income............................. 165 659 544
Interest on note receivable from subsidiary....... - - 23,897
------- ------- -------
Total revenues.................................. 165 659 24,498
------- ------- -------
Expenses
Interest.......................................... 10,517 11,589 9,483
Amortization of goodwill.......................... 1,618 1,618 1,595
Other............................................. 2,566 2,532 4,426
Debt retirement costs............................. 1,319 - -
Cost of additional rights relating to share
repurchase....................................... - 1,347 -
------- ------- -------
Total expenses.................................. 16,020 17,086 15,504
------- ------- -------
Income (loss) from continuing operations before
income taxes and equity in net earnings of
subsidiaries....................................... (15,855) (16,427) 8,994
Income tax expense (benefit)........................ (4,519) (4,241) 3,221
------- ------- -------
Income (loss) from continuing operations before
equity in net earnings of subsidiaries............. (11,336) (12,186) 5,773
Equity in net earnings of subsidiaries.............. 85,138 87,296 58,847
------- ------- -------
Income from continuing operations................... 73,802 75,110 64,620
Discontinued operations:
Loss from operations, net of applicable income tax
benefits of 1996, $2,764; 1995, $647; 1994, $34.. (5,280) (1,184) (61)
Loss on discontinuation, representing provision of
$5,974 for operating losses during phase-out
period, net of applicable income tax benefits of
$2,091........................................... (3,883) - -
------- ------- -------
Income before extraordinary item.................... 64,639 73,926 64,559
Loss from early retirement of debt, net of taxes.... - - (1,704)
------- ------- -------
Net income.......................................... $64,639 $73,926 $62,855
======= ======= =======
</TABLE>
See accompanying note to condensed financial statements.
See accompanying Independent Auditors' Report.
F-46
<PAGE>
SCHEDULE II
HORACE MANN EDUCATORS CORPORATION
(PARENT COMPANY ONLY)
CONDENSED FINANCIAL INFORMATION
STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities
Interest expense paid....................... $ (8,653) $ (11,180) $ (9,853)
Surplus note interest received.............. - - 30,616
Federal income taxes recovered (paid)....... (10,154) 21,509 (4,460)
Cash dividends received from subsidiaries... 72,700 75,471 44,700
Other, net.................................. 3,342 324 7,204
--------- --------- ---------
Net cash provided by operating activities. 57,235 86,124 68,207
--------- --------- ---------
Cash flows from investing activities
Repayment of surplus note receivable from
subsidiary................................. - - 245,000
Increase investment in subsidiary........... - - (245,000)
Net (increase) decrease in short-term
investments................................ (3,052) 5,699 (581)
Net increase in long-term investments....... (1,081) (378) -
Net increase in other investments........... (572) - -
Capital expenditures for property and
equipment.................................. (2,609) (1,776) (5,935)
--------- --------- ---------
Net cash provided by (used in) investing
activities............................... (7,314) 3,545 (6,516)
--------- --------- ---------
Cash flows from financing activities
Dividends paid to shareholders.............. (10,336) (8,838) (8,398)
Proceeds from issuance of Senior Notes...... 98,530 - -
Proceeds from issuance of common stock...... - 20,568 -
Principal borrowings (payments) on Bank
Credit Facility............................ (41,000) 75,000 -
Retirement of Convertible Notes............. (102,890) - -
Purchase of treasury stock.................. - (174,870) -
Exercise of stock options................... 6,343 403 -
Acquisition of Allegiance Insurance Company
Issuance of long-term debt at fair value... - - 40,115
Acquisition consideration.................. - - (42,323)
Retirement of Debentures.................... - - (50,603)
--------- --------- ---------
Net cash used in financing activities..... (49,353) (87,737) (61,209)
--------- --------- ---------
Net increase in cash.......................... 568 1,932 482
Cash at beginning of period................... 3,757 1,825 1,343
--------- --------- ---------
Cash at end of period......................... $ 4,325 $ 3,757 $ 1,825
========= ========= =========
</TABLE>
See accompanying note to condensed financial statements.
See accompanying Independent Auditors' Report.
F-47
<PAGE>
SCHEDULE II
HORACE MANN EDUCATORS CORPORATION
(PARENT COMPANY ONLY)
CONDENSED FINANCIAL INFORMATION
NOTE TO CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
The accompanying condensed financial statements should be read in conjunction
with the Consolidated Financial Statements and the accompanying notes thereto.
See accompanying Independent Auditors' Report.
F-48
<PAGE>
SCHEDULE III & VI (COMBINED)
HORACE MANN EDUCATORS CORPORATION
SUPPLEMENTARY INSURANCE INFORMATION
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
FUTURE
POLICY OTHER CLAIMS AND CLAIM
BENEFITS, DISCOUNT, POLICY BENEFITS, ADJUSTMENT EXPENSES
DEFERRED LOSSES, IF ANY, CLAIMS PREMIUM CLAIMS, INCURRED RELATED TO
POLICY CLAIMS AND DEDUCTED IN AND REVENUE/ NET LOSSES AND -------------------
ACQUISITION LOSS PREVIOUS UNEARNED BENEFITS PREMIUM INVESTMENT SETTLEMENT CURRENT PRIOR
SEGMENT COSTS EXPENSES COLUMN PREMIUMS PAYABLE EARNED INCOME EXPENSES YEAR YEARS
------- ----------- ---------- ----------- -------- -------- -------- ---------- ---------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Property and
casualty........ $13,855 $ 340,411 $ 0 $150,368 $ 305 $413,219 $ 46,363 $306,102 $ 368,648 $ (62,546)
Annuity........... 14,230 1,287,815 xxx - 102,681 9,191 111,476 76,762 xxx xxx
Life.............. 46,986 526,028 xxx 5,408 15,563 80,289 41,712 59,149 xxx xxx
Other............. N/A N/A xxx N/A N/A N/A (944) N/A xxx xxx
------- ---------- -------- -------- -------- -------- --------
Total........... $75,071 $2,154,254 xxx $155,776 $118,549 $502,699 $198,607 $442,013 xxx xxx
======= ========== ======== ======== ======== ======== ========
YEAR ENDED DECEMBER 31, 1995
Property and
casualty........ $12,515 $ 369,653 $ 0 $136,441 $ 305 $403,796 $ 48,842 $297,078 $ 352,513 $ (55,630)
Annuity........... 12,497 1,276,227 xxx - 101,943 6,798 110,210 74,424 xxx xxx
Life.............. 41,854 489,060 xxx 4,664 16,822 74,850 39,785 55,114 xxx xxx
Other............. N/A N/A xxx N/A N/A N/A (467) N/A xxx xxx
------- ---------- -------- -------- -------- -------- --------
Total........... $66,866 $2,134,940 xxx $141,105 $119,070 $485,444 $198,370 $426,616 xxx xxx
======= ========== ======== ======== ======== ======== ========
YEAR ENDED DECEMBER 31, 1994
Property and
casualty........ $13,356 $ 388,038 $ 0 $134,443 $ 305 $394,985 $ 44,935 $291,923 $ 346,025 $ (54,371)
Annuity........... 9,908 1,237,007 xxx - 102,001 5,442 104,949 69,656 xxx xxx
Life.............. 35,831 454,015 xxx 3,937 17,259 71,990 35,997 53,891 xxx xxx
Other............. N/A N/A xxx N/A N/A N/A (572) N/A xxx xxx
------- ---------- -------- -------- -------- -------- --------
Total........... $59,095 $2,079,060 xxx $138,380 $119,565 $472,417 $185,309 $415,470 xxx xxx
======= ========== ======== ======== ======== ======== ========
<CAPTION>
AMORTIZATION PAID
OF DEFERRED CLAIMS
POLICY OTHER AND CLAIM
ACQUISITION OPERATING ADJUSTMENT PREMIUMS
SEGMENT...... COSTS EXPENSES EXPENSES WRITTEN
-------...... ------------ --------- ---------- --------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Property and
casualty........ $36,652 $ 46,507 $345,642 $427,146
Annuity........... 1,300 17,643 xxx xxx
Life.............. 3,111 41,278 xxx xxx
Other............. N/A 13,315 xxx xxx
------------ ---------
Total........... $41,063 $118,743 xxx xxx
============ =========
YEAR ENDED DECEMBER 31, 1995
Property and
casualty........ $36,405 $ 46,834 $320,557 $405,795
Annuity........... 71 19,763 xxx xxx
Life.............. 3,542 39,848 xxx xxx
Other............. N/A 14,419 xxx xxx
------------ ---------
Total........... $40,018 $120,864 xxx xxx
============ =========
YEAR ENDED DECEMBER 31, 1994
Property and
casualty........ $36,053 $ 44,343 $304,036 $398,770
Annuity........... 7 18,792 xxx xxx
Life.............. 2,636 39,546 xxx xxx
Other............. N/A 13,724 xxx xxx
------------ ---------
Total........... $38,696 $116,405 xxx xxx
============ =========
</TABLE>
- -----
N/A Not applicable.
See accompanying Independent Auditors' Report.
F-49
<PAGE>
SCHEDULE IV
HORACE MANN EDUCATORS CORPORATION
REINSURANCE
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
CEDED TO ASSUMED PERCENTAGE
GROSS OTHER FROM STATE OF AMOUNT
AMOUNT COMPANIES FACILITIES NET ASSUMED
----------- --------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31,
1996
Life insurance in
force................ $10,645,393 $222,611 $ - $10,422,782 -
Premiums
Property and
casualty........... $ 406,778 $ 22,440 $28,881 $ 413,219 7.0%
Annuity............. 9,191 - - 9,191 -
Life................ 81,736 1,447 - 80,289 -
----------- -------- ------- -----------
Total premiums.... $ 497,705 $ 23,887 $28,881 $ 502,699 5.7%
=========== ======== ======= ===========
YEAR ENDED DECEMBER 31,
1995
Life insurance in
force................ $10,234,655 $174,002 $ - $10,060,653 -
Premiums
Property and
casualty........... $ 398,639 $ 19,594 $24,751 $ 403,796 6.1%
Annuity............. 6,798 - - 6,798 -
Life................ 75,755 905 - 74,850 -
----------- -------- ------- -----------
Total premiums.... $ 481,192 $ 20,499 $24,751 $ 485,444 5.1%
=========== ======== ======= ===========
YEAR ENDED DECEMBER 31,
1994
Life insurance in
force................ $ 9,707,332 $160,082 $ - $ 9,547,250 -
Premiums
Property and
casualty........... $ 394,902 $ 20,973 $21,056 $ 394,985 5.3%
Annuity............. 5,442 - - 5,442 -
Life................ 72,851 861 - 71,990 -
----------- -------- ------- -----------
Total premiums.... $ 473,195 $ 21,834 $21,056 $ 472,417 4.5%
=========== ======== ======= ===========
</TABLE>
- --------
NOTE: Premiums above include insurance premiums earned and contract charges
earned.
See accompanying Independent Auditors' Report.
F-50
<PAGE>
LOGO
HA-C00302
<PAGE>
Exhibit 10.1
CREDIT AGREEMENT
dated as of December 31, 1996
among
HORACE MANN EDUCATORS CORPORATION
as the Borrower,
VARIOUS FINANCIAL INSTITUTIONS,
as the Lenders,
and
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
as Administrative Agent
<PAGE>
TABLE OF CONTENTS
-----------------
ARTICLE I
<TABLE>
<CAPTION>
<S> <C>
DEFINITIONS............................. 1
SECTION 1.1 Definitions..................................... 1
SECTION 1.2 Use of Defined Terms............................ 15
SECTION 1.3 Cross References; Headings...................... 15
SECTION 1.4 Other Definitional Provisions................... 16
</TABLE>
ARTICLE II
<TABLE>
<CAPTION>
<S> <C>
AMOUNT AND TERMS OF COMMITMENT.............. 16
SECTION 2.1 Revolving Loan Commitment....................... 16
2.1.1 Voluntary Reduction of Commitment Amount......... 16
SECTION 2.2 Types of Loans.................................. 17
SECTION 2.3 Borrowing Request............................... 17
SECTION 2.4 Funding of Borrowing............................ 17
</TABLE>
ARTICLE III
<TABLE>
<CAPTION>
<S> <C>
NOTE; RECORDKEEPING, PAYMENTS; SETOFF............. 18
SECTION 3.1 Note............................................ 18
SECTION 3.2 Recordkeeping................................... 18
SECTION 3.3 Payment of the Loans............................ 18
3.3.1 Required Payments................................ 18
3.3.2 Voluntary Payments............................... 18
3.3.3 Conditions Applicable to all Payments............ 18
SECTION 3.4 Making of Payments.............................. 19
SECTION 3.5 Due Date Extension.............................. 19
SECTION 3.6 Set-off......................................... 19
</TABLE>
ARTICLE IV
<TABLE>
<CAPTION>
<S> <C>
INTEREST; CONVERSION; EURODOLLAR LOANS............. 20
SECTION 4.1 Interest Rates.................................. 20
SECTION 4.2 Interest Payment Dates.......................... 20
SECTION 4.3 Setting of Rates................................ 21
SECTION 4.4 Computation of Interest and Fees................ 21
SECTION 4.5 Continuation and Conversion Elections........... 21
SECTION 4.6 Funding......................................... 22
SECTION 4.7 Eurodollar Rate Lending Unlawful................ 22
SECTION 4.8 Eurodollar Deposits Unavailable................. 22
</TABLE>
ARTICLE V
<TABLE>
<CAPTION>
<S> <C>
FEES............................ 23
SECTION 5.1 Payment of Fees................................. 23
SECTION 5.2 Non-Use Fee..................................... 23
SECTION 5.3 Compensation of Administrative Agent............ 23
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ARTICLE VI
<S> <C>
INCREASED COSTS AND OTHER SPECIAL PROVISIONS......... 24
SECTION 6.1 Increased Costs................................. 24
SECTION 6.2 Payment for Credits............................. 24
SECTION 6.3 Certificate Requirements........................ 24
SECTION 6.4 General Funding Losses.......................... 25
SECTION 6.5 Discretion of Lender as to Manner of
Funding................................................ 25
SECTION 6.6 Conclusiveness of Statements: Survival of
Provisions............................................. 25
ARTICLE VII
REPRESENTATIONS AND WARRANTIES................... 26
SECTION 7.1 Due Organization, Authorization, etc............ 26
SECTION 7.2 Statutory Financial Statements.................. 27
SECTION 7.3 GAAP Financial Statements....................... 28
SECTION 7.4 Litigation and Contingent Liabilities........... 29
SECTION 7.5 Investment Company Act.......................... 29
SECTION 7.6 Regulations G, T, U and X....................... 29
SECTION 7.7 Proceeds........................................ 30
SECTION 7.8 Insurance....................................... 30
SECTION 7.9 Accuracy of Information......................... 30
SECTION 7.10 Subsidiaries................................... 30
SECTION 7.11 Insurance Licenses............................. 30
SECTION 7.12 Taxes.......................................... 30
SECTION 7.13 Compliance with Laws........................... 31
ARTICLE VIII
COVENANTS................. 31
SECTION 8.1 Affirmative Covenants........................... 31
8.1.1 Reports, Certificates and Other
Information.................................... 32
(a) GAAP Financial Statements..................... 32
(b) Tax Returns................................... 33
(c) SAP Financial Statements...................... 33
(d) Notice of Default, etc........................ 34
(e) Other Information............................. 34
(f) Compliance Certificates....................... 36
(g) Reports to SEC and to Shareholders............ 36
(h) Notice of Litigation, License and ERISA
Matters....................................... 36
(i) Other Information............................. 37
8.1.2 Corporate Existence; Foreign Qualification....... 37
8.1.3 Books, Records and Inspections................... 37
8.1.4 Insurance........................................ 37
8.1.5 Taxes and Liabilities............................ 38
8.1.6 Compliance with Laws............................. 38
8.1.7 Conduct of Business.............................. 38
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
SECTION 8.2 Negative Covenants.............................. 38
8.2.1 Consolidated Debt to Total Capitalization........ 38
8.2.2 Risk Based Capital............................... 38
8.2.3 Statutory EBT to Future Interest Expense Ratio... 39
8.2.4 Mergers, Consolidations and Sales................ 39
8.2.5 Regulations G, T, U and X........................ 39
8.2.6 Other Agreements................................. 39
8.2.7 Transactions with Affiliates..................... 39
8.2.8 Liens............................................ 40
</TABLE>
ARTICLE IX
<TABLE>
<CAPTION>
<S> <C>
CONDITIONS............................. 40
SECTION 9.1 Conditions to Occurrence of the Effective
Date.................................................... 40
9.1.1 This Agreement and Certain Related Documents..... 41
9.1.2 Resolutions...................................... 41
9.1.3 Incumbency and Signatures........................ 41
9.1.4 Opinion of Counsel............................... 41
9.1.5 Charter and By-Laws of the Borrower.............. 41
9.1.6 Insurance Proceedings............................ 41
9.1.7 Material Adverse Change Certificate.............. 41
9.1.8 Payment of Existing Credit Agreement............. 41
9.1.9 Other............................................ 42
SECTION 9.2 Conditions to All Borrowings.................... 42
9.2.1 No Default....................................... 42
9.2.2 Warranties and Representations................... 42
9.2.3 Litigation....................................... 42
9.2.4 Fees............................................. 43
9.2.5 Borrowing Request................................ 43
</TABLE>
ARTICLE X
<TABLE>
<CAPTION>
<S> <C>
EVENTS OF DEFAULT AND THEIR EFFECT................. 43
SECTION 10.1 Events of Default.............................. 43
10.1.1 Non-Payment of Loan............................... 43
10.1.2 Non-Payment of Interest, Fees, etc................ 43
10.1.3 Non-Payment of Other Debt......................... 43
10.1.4 Other Material Obligations........................ 43
10.1.5 Bankruptcy, Insolvency, etc....................... 44
10.1.6 Non-compliance With Certain Provisions............ 45
10.1.7 Non-compliance With Other Provisions.............. 45
10.1.8 Warranties and Representations.................... 45
10.1.9 Employee Benefit Plans............................ 46
10.1.10 Change in Control................................ 46
10.1.11 Litigation....................................... 46
10.1.12 Change in Law.................................... 47
SECTION 10.2 Effect of Event of Default..................... 47
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ARTICLE XI
<S> <C>
THE AGENTS............................. 47
SECTION 11.1 Authorization.................................. 47
SECTION 11.2 Liability of the Administrative Agent......... 48
SECTION 11.3 Indemnification............................... 48
SECTION 11.4 Administrative Agent.......................... 49
SECTION 11.5 Credit Investigation.......................... 49
SECTION 11.6 Non-Receipt of Funds by the
Administrative Agent.................................... 49
SECTION 11.7 Successor Agents............................... 50
</TABLE>
ARTICLE XII
<TABLE>
<CAPTION>
<S> <C>
ASSIGNMENTS AND PARTICIPATIONS.................. 50
SECTION 12.1 Assignments.................................... 50
SECTION 12.2 Participations................................. 52
</TABLE>
ARTICLE XIII
<TABLE>
<CAPTION>
<S> <C>
GENERAL.............................. 53
SECTION 13.1 Waiver; Amendments............................. 53
SECTION 13.2 Confirmations.................................. 54
SECTION 13.3 Notices........................................ 54
SECTION 13.4 Costs, Expenses and Taxes...................... 54
SECTION 13.5 Indemnification................................ 55
SECTION 13.6 SUBMISSION TO JURISDICTION AND FORUM
SELECTION............................................... 56
SECTION 13.7 GOVERNING LAW.................................. 57
SECTION 13.8 JURY TRIAL..................................... 57
SECTION 13.9 Successors and Assigns......................... 57
</TABLE>
<PAGE>
SCHEDULES AND EXHIBITS
<TABLE>
<CAPTION>
<S> <C>
SCHEDULE 2.1 Commitments
SCHEDULE 7.1 Jurisdictions
SCHEDULE 7.2(a) SAP Exceptions
SCHEDULE 7.2(e) Adverse Changes and Dividends
SCHEDULE 7.4 Litigation
SCHEDULE 7.10 Subsidiaries
SCHEDULE 7.11 Insurance Licenses
SCHEDULE 7.12 Taxes
SCHEDULE 13.3 Addresses
EXHIBIT A Borrowing Request ((S)2.3)
EXHIBIT B Note ((S)3.1)
EXHIBIT C Continuation/Conversion Notice ((S)4.5)
EXHIBIT D Compliance Certificate ((S)8.1.1(f))
EXHIBIT E Opinion of Counsel ((S)9.1.4)
EXHIBIT F Assignment Agreement ((S)12.1.1)
</TABLE>
<PAGE>
CREDIT AGREEMENT
----------------
THIS CREDIT AGREEMENT, dated as of December 31, 1996, is entered into by
and among HORACE MANN EDUCATORS CORPORATION, a Delaware corporation (the
"Borrower"), various financial institutions which are parties hereto (the
"Lenders"), and BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as
administrative agent for the Lenders (in such capacity, the "Administrative
Agent").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Lenders have agreed to make available to the Borrower a
revolving credit facility upon the terms and conditions set forth in this
Agreement;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
hereinafter contained, and other good and valuable consideration the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
ARTICLE I
DEFINITIONS
SECTION 1.1 Definitions. When used herein the following terms shall
have the following meanings:
Administrative Agent shall mean (a) Bank of America National Trust and
Savings Association, in its capacity as administrative agent for the Lenders,
and (b) each other Person as shall have subsequently been appointed as the
successor Administrative Agent pursuant to Section 11.7.
Affiliate of any Person shall mean any other Person which, directly or
indirectly, controls or is controlled by or is under common control with such
Person (excluding any trustee under, or any committee with responsibility for
administering, any Plan). A Person shall be deemed to be:
(a) "controlled by" any other Person if such other Person possesses,
directly or indirectly, power:
(i) to vote 10% or more of the securities having at the time of
any determination hereunder voting power for the election of directors
of such Person; or
<PAGE>
(ii) to direct or cause the direction of the management and
policies of such Person whether by contract or otherwise; or
(b) "controlled by" or "under common control with" such other Person
if such other Person is the executor, administrator, or other personal
representative of such Person.
Agent-Related Persons shall mean BofA and any successor Administrative
Agent arising under Section 11.7, together with its Affiliates, and the
officers, directors, employees, agents and attorneys-in-fact of such Persons and
Affiliates.
Agreement shall mean this Credit Agreement as from time to time
amended, modified, supplemented, restated, refunded or renewed and in effect.
Alternate Reference Rate shall mean, for any day, a fluctuating rate
per annum equal to the greater of (a) the Reference Rate in effect on such day
or (b) a rate per annum equal to the sum of 0.50% plus the Federal Funds Rate in
effect with respect to such day.
Alternate Reference Rate Loan shall mean any Loan which bears interest
at or by reference to the Alternate Reference Rate.
Annual Statement shall mean the annual financial statement of any
Insurance Subsidiary as required to be filed with the insurance commissioner (or
similar authority) of such Insurance Subsidiary's state of domicile, together
with all exhibits or schedules filed therewith, prepared in conformity with SAP.
References to amounts on particular exhibits, schedules, lines, pages and
columns of the Annual Statement are based on the format promulgated by the NAIC
for 1995 Annual Statements. If such format is changed in future years so that
different information is contained in such items or they no longer exist, it is
understood that the reference is to information consistent with that reported in
the referenced item in the 1995 Annual Statement of such Insurance Subsidiary.
Applicable Eurodollar Interest Rate Margin shall mean at any time,
subject to Section 4.1(c), the applicable percentage per annum determined
pursuant to the following table by reference to the higher public rating, if
any, assigned to the Borrower's
2
<PAGE>
senior, unsecured long-term debt by Standard & Poor's Rating Group ("S&P") or
Moody's Investor Service Inc. ("Moody's"), as the case may be:
<TABLE>
<CAPTION>
S&P/Moody's Rating Interest Rate Margin
------------------------------------------
<S> <C>
A/A2 or above 0.250
A-/A3 0.325
BBB+/Baa1 0.400
BBB/Baa2 or lower
(or no rating) 0.500
------------------------------------------
</TABLE>
Applicable Non-Use Fee Rate shall mean at any time, the applicable
percentage per annum determined pursuant to the following table by reference to
the higher public rating, if any, assigned to the Borrower's senior, unsecured
long-term debt by Standard & Poor's Rating Group ("S&P") or Moody's Investor
Service Inc. ("Moody's"), as the case may be:
<TABLE>
<CAPTION>
S&P/Moody's Rating Non-Use Fee Rate
--------------------------------------
<S> <C>
A/A2 or above 0.1000
A-/A3 0.1250
BBB+/Baa1 0.1500
BBB/Baa2 or lower
(or no rating) 0.1875
--------------------------------------
</TABLE>
Assignment Agreement is defined in Section 12.1.1.
Authorized Officers shall mean those officers of the Borrower whose
signatures and incumbency shall have been certified to the Administrative Agent
pursuant to Section 9.1.3.
BofA shall mean Bank of America National Trust and Savings
Association.
Borrower is defined in the Preamble.
Borrowing shall mean the Loans of a single Type and Interest Period
made by the Lenders on any single specified day in accordance with Section 2.1.
Borrowing Date shall mean any Business Day on which a Borrowing is
made.
3
<PAGE>
Borrowing Request shall mean a loan request and certificate duly
executed by two Authorized Officers of the Borrower substantially in the form of
Exhibit A.
Business Day shall mean any day other than a Saturday, Sunday or other
day on which commercial banks in New York City or Chicago are authorized or
required by law to close and, if the applicable Business Day relates to any
Eurodollar Loan, shall mean such a day on which dealings are carried on in the
applicable offshore dollar interbank market.
Capitalized Lease shall mean, as to any Person, any lease which is or
should be capitalized on the balance sheet in accordance with GAAP, together
with any other lease which is in substance a financing lease, including, without
limitation, any lease under which (a) such Person has or will have an option to
purchase the property subject thereto at a nominal amount or an amount less than
a reasonable estimate of the fair market value of such property as of the date
the lease is entered into or (b) the term of the lease approximates or exceeds
the expected useful life of the property leased thereunder.
Change in Control shall be deemed to have occurred if (a) there shall
be consummated (i) any consolidation or merger of the Borrower in which the
Borrower is not the continuing or surviving corporation, or pursuant to which
shares of the Borrower's common stock would be converted into cash, securities
or other property, other than a merger of the Borrower in which no Borrower
shareholder's ownership percentage in the surviving corporation immediately
after the merger is less than such shareholder's ownership percentage in the
Borrower immediately prior to such merger by ten percent (10%) or more, or (ii)
any sale, lease, exchange or other transfer (in one transaction or a series of
related transactions) of all, or substantially all, of the assets of the
Borrower; (b) the shareholders of the Borrower approve any plan or proposal for
the liquidation or dissolution of the Borrower which is a part of a similar
transaction; (c) any "person" as such term is used in Sections 13(d) and 14(d)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is or
becomes, directly or indirectly, the "beneficial owner," as defined in Rule 13d-
3 under the Exchange Act, of securities of the Borrower that represent 51% or
more of the combined voting power of the Borrower's then outstanding securities;
or (d) a majority of the members of the Borrower's Board of Directors are
persons who are then serving on the Board of Directors without having been
elected by the Board of Directors or having been nominated by the Borrower for
election by its shareholders.
Closing shall mean the execution and delivery of this Agreement by the
parties hereto.
4
<PAGE>
Code shall mean the Internal Revenue Code of 1986, as amended and any
successor statute of similar import, together with the regulations thereunder,
as amended, reformed or otherwise modified and in effect from time to time.
References to sections of the Code shall be construed to also refer to successor
sections.
Combined shall mean with reference to any group of two or more Persons
and to any financial item (e.g., Statutory EBT, etc.), the amount obtained by
aggregating the respective amounts of such financial item for all such Persons,
without duplication.
Commitment is defined in Section 2.1.
Commitment Amount shall mean, on any date, the aggregate amount shown
on Schedule 2.1 for all Lenders, as such amount may be reduced pursuant to
Section 2.1.1 or 10.2.
Commitment Termination Date shall mean the earliest to occur of
December 31, 2001 or the date on which any Commitment Termination Event
occurs./1/
Commitment Termination Event shall mean (a) the occurrence of a
Default described in Section 10.1.5 or (b) the occurrence and continuance of any
other Event of Default and either (i) the Loans are declared to be due and
payable pursuant to Section 10.2, or (ii) in the absence of such declaration,
the Administrative Agent, acting at the direction of the Required Lenders, gives
notice to the Borrower that the Commitments have been terminated.
Compliance Certificate shall mean a certificate substantially in the
form of Exhibit D but with such changes as the Administrative Agent may from
time to time request for purposes of monitoring the Borrower's compliance
herewith.
Consolidated Debt shall mean the consolidated Debt of the Borrower and
its consolidated Subsidiaries, including without limitation the principal amount
of the Loans.
Contingent Liability shall mean any agreement, undertaking or
arrangement by which any Person (outside the ordinary course of business)
guarantees, endorses, acts as surety for or otherwise becomes or is contingently
liable for (by direct or indirect agreement, contingent or otherwise, to provide
funds for payment by, to supply funds to, or otherwise to invest in, a debtor,
or otherwise to assure a creditor against loss) the debt, obligation or other
liability of any other Person (other than by
- ------------------------
/1/ Five years from Closing.
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endorsements of instruments in the course of collection), or for the payment of
dividends or other distributions upon the shares of any other Person or
undertakes or agrees (contingently or otherwise) to purchase, repurchase, or
otherwise acquire or become responsible for any Debt, obligation or liability or
any security therefor, or to provide funds for the payment or discharge thereof
(whether in the form of loans, advances, stock purchases, capital contributions
or otherwise), or to maintain solvency, assets, level of income, or other
financial condition of any other Person, or to make payment or transfer property
to any other Person other than for fair value received; provided, however, that
obligations of each of the Insurance Subsidiaries under insurance policies,
annuities, or surety contracts issued by it or to which it is a party,
reinsurance treaties, certificates or other agreements of each of the Insurance
Subsidiaries which are entered into in the ordinary course of business
(including security posted by each of the Insurance Subsidiaries in the ordinary
course of its business to secure obligations thereunder) shall not be deemed to
be Contingent Liabilities of such Insurance Subsidiary or the Borrower for the
purposes of this Agreement. The amount of any Person's obligation under any
Contingent Liability shall (subject to any limitation set forth therein) be
deemed to be the outstanding principal amount (or maximum permitted principal
amount, if larger) of the debt, obligation or other liability guaranteed or
supported thereby.
Continuation/Conversion Notice shall mean a notice of continuation or
conversion duly executed by two Authorized Officers substantially in the form of
Exhibit C.
Contractual Obligation shall mean, relative to any Person, any
obligation, commitment or undertaking under any agreement or other instrument to
which such Person is a party or by which it or any of its property is bound or
subject.
Controlled Group shall mean the Borrower and any corporation, trade or
business that is, along with the Borrower, 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 Code or in section 4001 of
ERISA.
Debt shall mean, with respect to any Person, at any date, without
duplication, (a) all obligations of such Person for borrowed money or in respect
of loans or advances; (b) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments; (c) all obligations in respect
of letters of credit which have been drawn but not reimbursed by the Person for
whose account such letter of credit was issued, and bankers' acceptances issued
for the account of such Person; (d) all obligations in respect of Capitalized
Leases of such
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Person; (e) all Hedging Obligations of such Person; (f) whether or not so
included as liabilities in accordance with GAAP, all obligations of such Person
to pay the deferred purchase price of property or services; (g) Debt of such
Person secured by a Lien on property owned or being purchased by such Person
(including Debt arising under conditional sales or other title retention
agreements) whether or not such Debt is limited in recourse; (h) any Debt of
another Person secured by a Lien on any assets of such first Person, whether or
not such Debt is assumed by such first Person; (i) any Debt of a partnership in
which such Person is a general partner; and (j) all Contingent Liabilities of
such Person whether or not in connection with the foregoing.
Default shall mean any Event of Default or any Unmatured Event of
Default.
Default Rate is defined in Section 4.1(c).
Department is defined in Section 7.2(a).
Dollar(s) and the sign "$" shall mean lawful money of the United
States of America.
Effective Date shall mean the first date when all of the conditions
set forth in Article IX shall have been satisfied.
Eligible Assignee shall mean any bank, pension fund, mutual fund,
investment fund, other financial institution or non-financial Person (other than
an insurance company or any Affiliate of an insurance company except those to
which the Borrower consents).
ERISA shall mean the Employee Retirement Income Security Act of 1974,
as amended, and any successor statute of similar import, together with the
regulations promulgated thereunder and under the Code, in each case as in effect
from time to time. References to sections of ERISA also refer to successor
sections.
Eurodollar Loan(s) shall mean any Loan bearing interest at a rate
determined with reference to the Offshore Rate.
Event of Default shall mean any of the events described in Section
10.1.
Executive Officer shall mean, as to any Person, the president, the
chief financial officer, the chief executive officer, the general counsel, the
treasurer or the secretary.
Federal Funds Rate means, for any day, the rate set forth in the
weekly statistical release designated as H.15(519),
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or any successor publication, published by the Federal Reserve Bank of New York
(including any such successor, "H.15(519)") on the preceding Business Day
opposite the caption "Federal Funds (Effective)"; or, if for any relevant day
such rate is not so published on any such preceding Business Day, the rate for
such day will be the arithmetic mean as determined by the Agent of the rates for
the last transaction in overnight Federal funds arranged prior to 9:00 a.m. (New
York City time) on that day by each of three leading brokers of Federal funds
transactions in New York City selected by the Agent.
Fiscal Quarter shall mean any quarter of a Fiscal Year.
Fiscal Year shall mean any period of twelve consecutive calendar
months ending on the last day of December.
F.R.S. Board shall mean the Board of Governors of the Federal Reserve
System (or any successor thereto).
Funding Percentage shall mean for any Lender, the percentage set forth
opposite the name of such Lender in Schedule 2.1.
Future Interest Expense shall mean at any time the sum of (a) the
consolidated projected interest expense on Consolidated Debt. For purposes of
this definition, the projected interest expense with respect to any Debt shall
be calculated by multiplying the outstanding principal amount of such Debt at
the date of calculation by the annualized interest rate then applicable to such
principal amount and subtracting therefrom, for each mandatory reduction of such
principal that is scheduled to occur within such four Fiscal Quarters, the
corresponding portion of such interest.
GAAP shall mean generally accepted accounting principles in the United
States of America as in effect from time to time.
Governmental Authority shall mean any nation or government, any state
or other political subdivision thereof, and any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government.
Hedging Obligations shall mean, with respect to any Person, the net
liability of such Person under interest rate swap agreements and interest rate
collar agreements, and all other agreements or arrangements designed to protect
such Person against fluctuations in interest rates or currency exchange rates.
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Included Taxes shall mean all taxes, duties or other similar charges
imposed on a Lender including any interest or penalties thereon, except for any
taxes, duties or similar charges imposed on the net income of such Lender by the
jurisdiction under the laws of which such Lender is constituted, by the
jurisdiction in which such Lender booked the Loans made pursuant to this
Agreement, or by the jurisdiction in which such Lender's principal office is
located, but including taxes, duties or similar charges including any interest
or penalties thereon imposed by the United States by means of withholding at the
source on payments of principal and interest on the Loans.
Indemnified Obligations is defined in Section 13.5.
Indemnified Parties is defined in Section 13.5.
Insurance Code shall mean, with respect to any Insurance Subsidiary,
the Insurance Code of such Insurance Subsidiary's state of domicile and any
successor statute of similar import, together with the regulations thereunder,
as amended or otherwise modified and in effect from time to time. References to
sections of the Insurance Code shall be construed to also refer to successor
sections.
Insurance Policies shall mean policies purchased from insurance
companies by any of the Borrower or its Subsidiaries, for its own account to
insure against its own liability and property loss (including, without
limitation, casualty, liability and workers' compensation insurance), other than
Reinsurance Agreements and Surplus Relief Reinsurance Agreements.
Insurance Subsidiary shall mean any Life Subsidiary or any P/C
Subsidiary.
Interest Period shall mean, relative to any Eurodollar Loan, the
period which begins on (and includes) the date on which such Eurodollar Loan is
made or continued as, or converted into, a Eurodollar Loan pursuant to Section
4.5 and, unless the maturity of such a Eurodollar Loan is accelerated, ends on
(but excludes) the day which numerically corresponds to such date one, two,
three or six months thereafter, as the Borrower may select in its relevant
Borrowing Request or Continuation/Conversion Notice; provided, that:
(a) if there exists no numerically corresponding day in such month,
such Interest Period shall end on the last Business Day of such month;
(b) if such Interest Period would otherwise end on a day which is not
a Business Day, such Interest Period shall end on the next following
Business Day
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(unless such next following Business Day is the first Business Day of a
calendar month, in which case such Interest Period shall end on the
Business Day next preceding such numerically corresponding day); and
(c) the Borrower shall not be permitted to select, and there shall not
be applicable, any Interest Period that would end later than the maturity
of the Loans.
Lease Obligations shall mean, at any date, the rental commitments of
any person under leases for real and/or personal property (including taxes,
insurance, maintenance and similar expenses which any Person is obligated to pay
under the terms of said leases) on such date, whether or not such obligations
are reflected as liabilities or commitments on a balance sheet of such Person or
in the notes thereto, excluding, however, obligations under Capitalized Leases.
Lenders is defined in the Preamble.
License(s) is defined in Section 7.13.
Lien shall mean, when used with respect to any Person, any interest in
any real or personal property, asset or other right held, owned or being
purchased or acquired by such Person for its own use, consumption or enjoyment
which secures payment or performance of any obligation and shall include any
mortgage, lien, pledge, encumbrance, charge, retained title of a conditional
vendor or lessor, or other security agreement, mortgage, deed of trust, chattel
mortgage, assignment, pledge, retention of title, financing or similar statement
or notice, or other encumbrance arising as a matter of law, judicial process or
otherwise.
Life Subsidiary shall mean any Subsidiary of the Borrower that is
engaged in the business of providing life insurance and/or annuities, and
related services.
Loan(s) is defined in Section 2.1.
Loan Documents shall mean this Agreement, the Note, and all other
agreements, instruments, certificates, documents, schedules or other written
indicia relating to or delivered by the Borrower or any of its Subsidiaries in
connection with any of the foregoing.
Material Adverse Effect shall mean, relative to any occurrence of
whatever nature (including any adverse determination in any litigation,
arbitration, or governmental investigation or proceeding), a materially adverse
effect on:
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(a) the assets, business, financial condition, operations or prospects
of the Borrower or any Subsidiary; or
(b) the ability of the Borrower or any Subsidiary to perform any of
its payment or other material obligations under any of the Loan Documents.
Multiemployer Plan shall mean a "multiemployer plan" as defined in
section 4001(a)(3) of ERISA, and to which the Borrower or any of the
Subsidiaries is making, or is obligated to make, contributions, or has made, or
has been obligated to make, contributions.
NAIC shall mean the National Association of Insurance Commissioners,
or any successor thereto.
Net Worth means the consolidated net worth, calculated in accordance
with GAAP, of the Borrower and its consolidated Subsidiaries, excluding
unrealized gains and losses as calculated in accordance with FASB 115.
1995 Annual Statement is defined in Section 7.2(b).
1996 Quarterly Statement is defined in Section 7.2(b).
Note is defined in Section 3.1.
Obligations shall mean all obligations and liabilities of the Borrower
and its Subsidiaries to the Administrative Agent or any of the Lenders,
howsoever created, arising or evidenced, whether direct or indirect, absolute or
contingent, primary or secondary, joint or several, recourse or nonrecourse or
now or hereafter existing or due or to become due, whether for principal,
interest, fees, expenses, lease obligations, claims, indemnities or otherwise,
under or in connection with this Agreement or any other Loan Document and
including any Hedging Obligations to the Administrative Agent or any of the
Lenders.
Offshore Rate means, for any Interest Period, with respect to
Eurodollar Loans comprising part of the same Borrowing, the rate of interest per
annum (rounded upward to the next 1/100th of 1%) determined by the
Administrative Agent as follows:
Offshore Rate = IBOR
------------------------------------
1.00 - Eurodollar Reserve Percentage
Where,
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"Eurodollar Reserve Percentage" means for any day for any Interest
Period the maximum reserve percentage (expressed as a decimal, rounded
upward to the next 1/100th of 1%) in effect on such day (whether or not
applicable to any Lender) under regulations issued from time to time by the
F.R.S. Board for determining the maximum reserve requirement (including any
emergency, supplemental or other marginal reserve requirement) with respect
to Eurocurrency funding (currently referred to as "Eurocurrency
liabilities"); and
"IBOR" means the rate of interest per annum determined by the
Administrative Agent as the rate at which dollar deposits in the
approximate amount of Bank of America National Trust and Savings
Association' Eurodollar Loan for such Interest Period would be offered by
BofA's Grand Cayman Branch, Grand Cayman B.W.I. (or such other office as
may be designated for such purpose by BofA), to major banks in the offshore
dollar interbank market at their request at approximately 10:00 a.m.
(Chicago time) two Business Days prior to the commencement of such Interest
Period.
The Offshore Rate shall be adjusted automatically as to all Eurodollar
Loans then outstanding as of the effective date of any change in the
Eurodollar Reserve Percentage.
Ordinary Course Litigation is defined in Section 7.4.
Participants is defined in Section 12.2.1.
Participations is defined in Section 12.2.1.
Payment Date shall mean (a) with respect to any Eurodollar Loan, the
last day of each Interest Period with respect thereto and, if such Interest
Period is in excess of three months, the day three months after the commencement
of such Interest Period, and (b) with respect to any Alternate Reference Rate
Loan, the last Business Day of each month.
Payor is defined in Section 11.6.
PBGC shall mean the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions.
P/C Subsidiary shall mean any Subsidiary of the Borrower that is
engaged in the business of providing property and casualty insurance and related
services.
Person shall mean any natural person, corporation, partnership, firm,
trust, association, government, governmental
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agency or other entity, whether acting in an individual, fiduciary or other
capacity.
Plan shall mean any "employee pension benefit plan," as such term is
defined in ERISA, which is subject to Title IV of ERISA (other than a
"Multiemployer Plan"), and as to which any entity in the Controlled Group has or
may have any liability, including any liability by reason of having been a
substantial employer within the meaning of section 4063 of ERISA for any time
within the preceding five years or by reason of being deemed to be a
contributing sponsor under section 4069 of ERISA.
Reference Rate shall mean, at any time, the rate of interest then most
recently announced by the Administrative Agent at Chicago, Illinois as its
reference rate. (The Reference Rate is a rate set by BofA based upon various
factors including BofA's costs and desired return, general economic conditions
and other factors, and is used as a reference point for pricing some loans,
which may be priced at, above, or below such announced rate.)
Any change in the Reference Rate announced by BofA shall take effect
at the opening of business on the day specified in the public announcement of
such change.
Regulatory Change shall mean, relative to any Lender:
(a) any change in (or the adoption, implementation, phase-in or
commencement of effectiveness of) any
(i) United States federal or state law or foreign law applicable
to such Lender;
(ii) regulation, interpretation, directive, requirement or
request applicable to such Lender of any court or governmental
authority charged with the interpretation or administration of any law
referred to in clause (a)(i) or of any fiscal, monetary or other
authority having jurisdiction over such Lender; or
(b) any change in the application to such Lender of any existing law,
regulation, interpretation, directive, requirement or request referred to
in clause (a)(i) or (a)(ii) above;
in either case, occurring after the date hereof.
Reinsurance Agreements shall mean any agreement, contract, treaty,
certificate or other arrangement (other than a
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Surplus Relief Reinsurance Agreement) whereby any Insurance Subsidiary agrees to
transfer or cede to another insurer all or part of the liability assumed by such
Insurance Subsidiary under a policy or policies of insurance reinsured by such
Insurance Subsidiary.
Required Lenders shall mean, at any time, Lenders having, in the
aggregate, a Voting Percentage of 66-2/3% or more at such time.
Required Payment is defined in Section 11.6.
Requirement of Law for any Person shall mean the corporate charter and
by-laws or other organizational or governing documents of such Person, and any
law, treaty, rule, ordinance or regulation or determination of an arbitrator or
a court or other governmental authority, in each case applicable to or binding
upon such Person or any of its property or to which such Person or any of its
property is subject.
SAP shall mean, as to each Insurance Subsidiary, the statutory
accounting practices prescribed or permitted by the insurance commissioner (or
other similar authority) in such Insurance Subsidiary's state of domicile for
the preparation of Annual Statements and other financial reports by insurance
corporations of the same type as such Insurance Subsidiary.
Statutory Carrying Value shall mean, as to any investment of any
Insurance Subsidiary, the value of such investment as determined in accordance
with SAP consistently applied.
Statutory EBT shall mean, as of any date, with respect to (a) any Life
Subsidiary, the amount reported on page 4, line 29, column 1 of its Annual
Statement, and (b) any P/C Subsidiary, the amount reported on page 4, line 14B,
column 1 of its Annual Statement; or an amount determined in a consistent manner
for any date other than one as of which an Annual Statement is prepared.
Statutory EBT to Future Interest Expense Ratio is defined in Section
8.2.3.
Statutory Financial Statements is defined in Section 7.2.
Statutory Liabilities shall mean, as to any Person, as of any date,
with respect to (a) any Life Subsidiary, the amount reported on page 3, line 28,
column 1 of its Annual Statement, and (b) any P/C Subsidiary, the amount
reported on page 3, line 21, column 1 of its Annual Statement; or an amount
determined in
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a consistent manner for any date other than one as of which an Annual Statement
is prepared.
Subsidiary shall mean a corporation of which the indicated Person
and/or its other Subsidiaries, individually or in the aggregate, own, directly
or indirectly, such number of outstanding shares as have at the time of any
determination hereunder more than 50% of the ordinary voting power. Unless
otherwise specified, "Subsidiary" shall mean a Subsidiary of the Borrower.
Surplus Relief Reinsurance Agreements shall mean any agreement whereby
any Insurance Subsidiary assumes or cedes business under a reinsurance agreement
that would be considered a "financing-type" reinsurance agreement and (a) with
respect to any P/C Subsidiary, which is entered into solely for the purpose of
affecting the income statement of such P/C Subsidiary as the same may be amended
from time to time, and (b) with respect to any Life Subsidiary, as determined in
the Fourth Edition of the AICPA Audit Guide for Stock Life Insurance Companies
on pp. 91-92 thereof as the same may be amended from time to time.
Types of Loan -- see Section 2.2. The Types of Loans under this
Agreement are as follows: Alternate Reference Rate Loans and Eurodollar Loans.
Unmatured Event of Default shall mean any condition or event, which,
after notice or lapse of time or both, would constitute an Event of Default.
Voting Percentage shall mean at any time, with respect to any Lender,
the percentage calculated by dividing the aggregate principal amount of such
Lender's Loans by the aggregate principal amount of all Lenders' Loans then
outstanding or, if no Loans are outstanding, the Funding Percentage.
Welfare Plan shall mean any "employee welfare benefit plan" as such
term is defined in ERISA, as to which the Borrower has any liability.
SECTION 1.2 Use of Defined Terms. Unless otherwise defined or the
context otherwise requires, terms for which meanings are provided in this
Agreement shall have such meanings when used in the Schedules hereto, the Loan
Documents, the Exhibits and any other communications delivered from time to time
in connection with this Agreement.
SECTION 1.3 Cross References; Headings. The words "hereof," "herein"
and "hereunder" and words of similar import when used in this Agreement or in
any of the Loan Documents shall refer to this Agreement or such Loan Document as
a whole and not
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to any particular provision of this Agreement or such Loan Document. Section,
Schedule and Exhibit references contained in this Agreement are references to
Sections, Schedules and Exhibits in or to this Agreement unless otherwise
specified. Any reference in any Section or definition to any clause is, unless
otherwise specified, to such clause of such Section or definition. The various
headings in this Agreement and the Loan Documents are inserted for convenience
only and shall not affect the meaning or interpretation of this Agreement or
such Loan Document or any provision hereof or thereof.
SECTION 1.4 Other Definitional Provisions. Unless otherwise defined or
the context otherwise requires, all financial and accounting terms used herein
or in any of the Loan Documents or any certificate or other document made or
delivered pursuant hereto shall be defined in accordance with GAAP or SAP, as
the context may require. When used in this Agreement, the term "financial
statements" shall include the notes and schedules thereto. In addition, when
used herein, the terms "best knowledge of" or "to the best knowledge of" any
Person shall mean matters within the actual knowledge of such Person (or an
Executive Officer or general partner of such Person) or which should have been
known by such Person after reasonable inquiry.
ARTICLE II
AMOUNT AND TERMS OF COMMITMENT
SECTION 2.1 Revolving Loan Commitment. Upon and subject to the terms
and conditions hereof, each of the Lenders severally and for itself agrees to
make revolving loans (collectively called the "Loans" and individually called a
"Loan") from time to time on any Business Day occurring prior to the Commitment
Termination Date, in such Lender's Funding Percentage of the aggregate amount of
the Borrowing requested by the Borrower to be made on such date; provided, that
(i) the aggregate unpaid principal amount of all Loans from any single Lender
shall not exceed the amount set forth opposite the name of such Lender on
Schedule 2.1 and (ii) the aggregate unpaid principal amount of all Loans from
all Lenders outstanding at any time shall not exceed the Commitment Amount. The
Commitment of each Lender to make the Loans pursuant to this Section 2.1 is
herein referred to as its "Commitment."
2.1.1 Voluntary Reduction of Commitment Amount. The Borrower may, from
time to time on any Business Day, voluntarily reduce the unused amount of
the Commitment Amount in whole or in part; provided, however, that (i) each
such voluntary reduction shall require at least two (2) Business Days'
prior written notice to the Administrative Agent and shall be permanent,
and (ii) each such voluntary
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reduction shall be in an aggregate minimum amount of $1,000,000 and an
integral multiple of $100,000 (or, if less, the entire unused amount of the
Commitment Amount).
SECTION 2.2 Types of Loans. The Loans shall be denominated as
Alternate Reference Rate Loans or Eurodollar Loans (each being herein called a
"Type" of Loan), as the Borrower shall specify in the related Borrowing Request
pursuant to Section 2.3 or Continuation/Conversion Notice pursuant to Section
4.5. Alternate Reference Rate Loans and Eurodollar Loans may be outstanding at
the same time, provided that (a) in the case of Eurodollar Loans, not more than
three (3) different Interest Periods shall be outstanding at any one time for
all such Loans, and (b) the Borrower shall specify Types of Loans and Interest
Periods such that no payment or prepayment of any principal on any Eurodollar
Loan shall result in an interruption of any Interest Period. In the absence of
instructions to the contrary in any Borrowing Request and in the absence of the
delivery of any Continuation/Conversion Notice, the Borrower shall be deemed to
have requested that any affected Loan be made or converted to an Alternate
Reference Rate Loan.
SECTION 2.3 Borrowing Request. By delivering to the Agent a Borrowing
Request at or before 9:00 a.m., Chicago time, on a Business Day, the Borrower
may from time to time irrevocably request, on not less than two (2) Business
Days' notice, that a Borrowing be made in an amount equal to all or any portion
of the unused Commitment Amount (i.e., the Commitment Amount minus the aggregate
amount of all outstanding Loans).
SECTION 2.4 Funding of Borrowing. On each Borrowing Date, each Lender
shall deposit with the Administrative Agent same day funds, at or before 10:00
a.m., Chicago time, in an amount equal to its Funding Percentage of the
requested Borrowing. Such deposit shall be made to such account as the
Administrative Agent shall specify. After timely receipt of such funds, the
Administrative Agent shall, at or before 1:00 p.m., Chicago time, on the
Borrowing Date, make such funds available to the Borrower by wire transfer in
same day funds to such accounts of the Borrower as the Borrower shall have
specified in writing. No Lender's obligation to make any portion of the Loans
shall be affected by any other Lender's failure to make any portion of the
Loans.
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ARTICLE III
NOTE; RECORDKEEPING, PAYMENTS; SETOFF
SECTION 3.1 Note. The Loans shall be evidenced by a promissory note
(herein, as from time to time supplemented, extended, amended, modified or
replaced, called the "Note") substantially in the form set forth in Exhibit B,
with appropriate insertions, dated the date hereof, payable to the order of the
Administrative Agent for the benefit of the Lenders in the maximum principal
amount of the Loans.
SECTION 3.2 Recordkeeping. The Administrative Agent shall record in
its records, or at its option on the schedule attached to the Note, the
principal amount of the Loans, the date such Loans were made, the amount of the
Loans which are Alternate Reference Rate and Eurodollar Loans, each repayment
thereof and the other information provided for thereon. The aggregate unpaid
principal amount so recorded shall be rebuttable presumptive evidence of the
principal amount owing and unpaid on the Note. The failure so to record any such
information or any error in such recording of any information shall not,
however, limit or otherwise affect the actual obligations of the Borrower
hereunder or under the Note to repay the principal amount of the Loans together
with all interest accruing thereon.
SECTION 3.3 Payment of the Loans.
3.3.1 Required Payments.
(a) If at any time the aggregate outstanding principal amount of the
Loans shall exceed the Commitment Amount in effect at such time, the
Borrower shall make a principal repayment of the Loans in an amount equal
to such excess.
(b) The Borrower shall, immediately upon any acceleration of the
maturity date of the Loans pursuant to Section 11.2, repay the Loans.
3.3.2 Voluntary Payments. The Borrower may, from time to time on any
Business Day, make a voluntary payment, in whole or in part, of the
outstanding principal amount of any Loans, subject to Section 3.3.3.
3.3.3 Conditions Applicable to all Payments.
(a) Each payment of a portion of the Loans shall be made pro rata
among Loans of the same Type and, if applicable, having the same Interest
Period of all Lenders.
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(b) No payment of any Eurodollar Loan may be made on any day other
than the last day of the Interest Period for such Loan.
(c) All voluntary payments shall require at least three but no more
than five Business Days' prior written notice to the Administrative Agent.
(d) All voluntary partial payments shall be in an aggregate minimum
amount of $1,000,000 and an integral multiple of $100,000.
(e) All payments of principal of the Loans (in whole or in part)
shall be accompanied by the payment of interest accrued on the principal
amount being prepaid.
SECTION 3.4 Making of Payments. All payments of principal of, or
interest on, the Note and of all fees and other Obligations to be made by the
Borrower pursuant to this Agreement shall be made by the Borrower to the
Administrative Agent for the Administrative Agent's account or for the benefit
of the Lenders, as applicable, in immediately available Dollars. All such
payments shall be deposited to the Borrower's Account No. 74-50915 at Bank of
America Illinois (or such other account as the Administrative Agent may from
time to time specify), not later than 10:00 am., Chicago time, on the date due.
The Administrative Agent shall have the authority to debit such account for the
amount of any payments due in order to effect each such payment. Funds received
after 11:30 a.m., Chicago time, shall be deemed to have been received by the
Administrative Agent on the next following Business Day (unless such failure to
receive funds in a timely fashion is due to the Administrative Agent's failure
to debit the Borrower's account).
SECTION 3.5 Due Date Extension. If any payment of principal or
interest with respect to the Loans falls due on a day which is not a Business
Day, then such due date shall be extended to the next following Business Day,
and additional interest shall accrue and be payable for the period of such
extension.
SECTION 3.6 Set-off. The Borrower agrees that each of the Lenders, the
Administrative Agent and any Participant shall have all rights of set-off
provided by applicable law, and in addition thereto, the Borrower agrees that at
any time (a) any payment or amount owing by the Borrower under or in connection
with this Agreement or the Loan Documents is then due or (b) any Unmatured Event
of Default pursuant to Section 10.1.5 or Event of Default exists, each Lender,
the Administrative Agent or any Participant may apply to the payment of such
payment or other amount any and all balances, credits, deposits, accounts or
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moneys of the Borrower then or thereafter with such Lender, the Administrative
Agent or any Participant; provided, that, any proceeds or recoveries obtained by
any such Lender, the Administrative Agent or any Participant from any such
appropriation and application in excess of such entity's pro rata share of such
payments or amounts shall be shared with the other Lenders, the Administrative
Agent and the participants on a pro rata basis; provided, further however, no
such set-off shall be undertaken by any Lender or Participant domiciled in or
with respect to property located in California without the written consent of
the Administrative Agent.
ARTICLE IV
INTEREST; CONVERSION; EURODOLLAR LOANS
SECTION 4.1 Interest Rates. The Borrower shall pay interest on the
unpaid principal amount of the Loans for the period commencing on the date of
each such Loan until such Loan is paid in full, at the rates per annum specified
below:
(a) On the outstanding principal amount of the Loans maintained from
time to time as Alternate Reference Rate Loans, interest shall accrue at
the Alternate Reference Rate from time to time in effect; and
(b) On the outstanding principal amount of each Loan maintained from
time to time as a Eurodollar Loan, interest shall accrue at a rate per
annum equal to the Offshore Rate from time to time in effect for the
related Interest Period plus the Applicable Eurodollar Interest Rate Margin
in effect from time to time; and
(c) Notwithstanding the foregoing, (i) any amount past due shall bear
interest at a rate per annum (the "Default Rate") equal to the Alternate
Reference Rate from time to time in effect (but not less than the Alternate
Reference Rate as in effect at such occurrence date) plus 3.5% per annum,
and (ii) upon the occurrence and during the continuation of any Event of
Default, and after notice by the Administrative Agent to the Borrower of
the Required Lenders' intent to apply the Default Rate of interest the
outstanding principal amount of the Loans and any other monetary
Obligations shall bear interest at the Default Rate.
SECTION 4.2 Interest Payment Dates. Accrued interest on the Loans
shall be paid on each Payment Date, commencing with the first such date
following the Effective Date. After
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maturity, accrued interest on the Loans shall be payable on demand.
SECTION 4.3 Setting of Rates. Interest rates hereunder shall be
calculated from time to time by the Administrative Agent and each such
calculation of an interest rate shall be conclusive and binding on the Borrower
in the absence of manifest error. Any change in the Applicable Eurodollar Rate
Margin resulting from a change in the Borrower's public ratings shall be
effective on the date such public rating change is announced.
SECTION 4.4 Computation of Interest and Fees. Interest on Eurodollar
Loans and fees shall be computed on the basis of actual days elapsed and a year
consisting of 360 days. Interest on Reference Rate Loans shall be computed on
the basis of actual days elapsed and a year consisting of 365 or 366 days, as
applicable.
SECTION 4.5 Continuation and Conversion Elections. At the election of
the Borrower pursuant to a Continuation/Conversion Notice delivered to the
Administrative Agent at or before 10:00 a.m., Chicago time, the Borrower may
elect, from time to time on not less than three (3) Business Days' notice:
(a) that all, or any portion, in an aggregate minimum amount of
$1,000,000 and an integral multiple of $100,000, of the Loans be converted
from Alternate Reference Rate Loans into Eurodollar Loans; and
(b) on the expiration of the Interest Period applicable to any
Eurodollar Loans, that all, or any portion, in an aggregate minimum amount
of $1,000,000 and an integral multiple of $100,000, of such Loans be
continued as Eurodollar Loans or converted into Alternate Reference Rate
Loans;
provided, however, that:
(i) no portion of the outstanding principal amount of any Loan
may be continued as, or be converted into, a Eurodollar Loan when any
Default has occurred and is continuing; and
(ii) no portion of the outstanding principal amount of any Loan
may be made or continued as, or be converted into, a Eurodollar Loan
if, after giving effect to such action, the Interest Period applicable
thereto shall extend beyond the date of any mandatory payment of such
Loan unless a sufficient principal amount of the Loans is being
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maintained as Alternate Reference Rate Loans or as Eurodollar Loans
having Interest Periods ending on or prior to the date of any such
mandatory prepayment to permit such repayment to be applied in full to
Alternate Reference Rate Loans.
SECTION 4.6 Funding. In the event the Borrower elects to obtain any
portion of the Loans as Eurodollar Loans, or elects to convert any portion of
the principal amount of any Alternate Reference Rate Loan into a Eurodollar
Loan, each Lender may, if it so elects, fulfill its obligation to make or
continue any portion of the principal amount of the Loans as, or to convert any
portion of the principal amount of any Loan into, a Eurodollar Loan in
accordance with any election made by the Borrower by causing a foreign branch or
Affiliate of such Lender or an international banking facility created by such
Lender to make such Eurodollar Loan; provided, however, that in such event such
Eurodollar Loan shall be deemed to have been made by such Lender for the purpose
of all provisions of this Agreement, and the obligation of the Borrower to repay
such Eurodollar Loan shall nevertheless be to such Lender and shall be deemed to
be held by it, to the extent of such Eurodollar Loan, for the account of such
foreign branch, Affiliate or international banking facility.
SECTION 4.7 Eurodollar Rate Lending Unlawful. If as the result of any
Regulatory Change, any Lender shall determine (which determination shall be
conclusive and binding on the Borrower) that it is unlawful for such Lender to
make, continue, or maintain any Loan as, or to convert any Loan into, a
Eurodollar Loan, the obligations of all Lenders to make, continue or maintain
any portion of the principal amount of any Loan as, or to convert any Loan into,
a Eurodollar Loan shall be, upon such determination (and telephonic notice
thereof, confirmed in writing, to the Administrative Agent and the Borrower),
forthwith suspended until such Lender shall notify the Administrative Agent that
the circumstances causing such suspension no longer exist, and all Eurodollar
Loans shall automatically convert into Alternate Reference Rate Loans; provided,
however, that each Lender shall take any reasonable actions available to it
(including the designation of its lending office) consistent with legal and
regulatory restrictions that will avoid the need for such suspension and will
not, in the reasonable judgment of such Lender, be otherwise materially
disadvantageous to the Lender.
SECTION 4.8 Eurodollar Deposits Unavailable. If prior to the date on
which all or any portion of the principal amount of any Loan is to be made or
continued as, or be converted into, a Eurodollar Loan, the Administrative Agent
shall have determined (and telephonic notice thereof, confirmed in writing,
shall have been given to the Borrower and the Lenders) that:
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(a) Dollar deposits in the relevant amount and for the relevant
Interest Period are not available to the Administrative Agent or any Lender
in the interbank eurodollar market; or
(b) by reason of circumstances affecting the interbank eurodollar
market in Dollars, adequate means do not exist for ascertaining the
interest rate applicable hereunder to such Eurodollar Loan;
then, the obligations of all Lenders to make or continue any portion of the
principal amount of any Loan as, or to convert any portion of any Loan into,
Eurodollar Loans shall forthwith be suspended until the Administrative Agent
shall notify the Borrower and the Lenders that the circumstances causing such
suspension no longer exist; provided, however, that each Lender shall take any
reasonable actions available to it (including the designation of its lending
office) consistent with legal and regulatory restrictions that will avoid the
need for such suspension and will not, in the reasonable judgment of such
Lender, be otherwise materially disadvantageous to the Lender.
ARTICLE V
FEES
SECTION 5.1 Payment of Fees. The Borrower agrees to pay the fees set
forth in this Article V. Where such fees are paid to the Administrative Agent
for the benefit of the Lenders, the Administrative Agent shall, upon receipt of
any such fees, promptly transmit to each Lender such Lender's ratable portion of
such fees.
SECTION 5.2 Non-Use Fee. The Borrower agrees to pay to the
Administrative Agent for the ratable benefit of the Lenders a fee for the period
commencing on the Effective Date and ending on the Commitment Termination Date,
equal to the Applicable Non-Use Fee Rate in effect from time to time in each
case applied to the daily average unused portion of the Commitment Amount from
time to time. Accrued non-use fees shall be payable in arrears on the last day
of each Fiscal Quarter of Borrower and on the Commitment Termination Date.
SECTION 5.3 Compensation of Administrative Agent. The Borrower shall
pay to the Administrative Agent such fees and other amounts as each shall agree
to in writing with the Borrower from time to time.
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ARTICLE VI
INCREASED COSTS AND OTHER SPECIAL PROVISIONS
SECTION 6.1 Increased Costs. If, after the date hereof, any Regulatory
Change, or compliance by the Administrative Agent or any Lender with any request
or directive (whether or not having the force of law) of any Governmental
Authority, shall subject the Administrative Agent or any Lender to any Included
Tax or capital adequacy requirement with respect to, or shall otherwise increase
the effective cost of the Loans or such Lender's obligation to make, issue or
maintain the Loans (except for taxes, duties or similar charges including any
interest or penalties thereon which do not constitute Included Taxes), or shall
impose on a Lender any other condition, except with respect to taxes, duties or
similar charges including any interest or penalties thereon which do not
constitute Included Taxes, affecting the Loan, or such Lender's obligation to
make the Loans and the result of any of the foregoing is to increase the cost to
any Lender of making, issuing or maintaining the Loans, or to reduce the amount
of, or any rate of return on, any sum received or receivable by such Lender
under this Agreement or under the Note with respect thereto, then upon written
notice of such occurrence to the Borrower by such Lender (which notice shall
contain a statement setting forth a description of such occurrence and shall be
signed by an authorized officer of such Lender), the Borrower shall pay directly
to such Lender such additional amount or amounts as will compensate such Lender
for such increased cost or such reduction; provided, however, that each Lender
shall take any reasonable actions available to it (including the designation of
a different lending office) consistent with legal and regulatory restrictions
that will avoid the need for, or reduce the amount of, such compensation and
will not, in the reasonable judgment of such Lender, be otherwise materially
disadvantageous to such Lender.
SECTION 6.2 Payment for Credits. If the Borrower is required pursuant
to Section 6.1 to pay and pays a Lender for any increased costs or any reduction
of any rate of return, and if such Lender, in good faith, determines that it has
received or been granted a credit against or relief or remission for or
repayment of any tax paid or payable by it, it shall, to the extent that it
could do so without prejudice to the retention of the amount of such credit,
relief, remission or repayment, pay to the Borrower such amount as such Lender
shall, in good faith, have determined to be attributable to such payment by the
Borrower.
SECTION 6.3 Certificate Requirements. Each Lender that is not an
entity organized under the laws of the United States shall deliver to the
Borrower (with a copy to the
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Administrative Agent) an accurate and complete original signed copy of an
Internal Revenue Service Form 1001 or 4224 properly claiming complete exemption
from withholding, within thirty days of the signing of this Agreement, and shall
promptly deliver such additional or supplemental forms thereafter as may be
required in order to maintain the effectiveness and accuracy of such forms. In
addition, each Lender shall deliver to the Borrower such other forms or
documentation as the Borrower may reasonably request in order to comply with the
United States tax laws.
SECTION 6.4 General Funding Losses. The Borrower hereby agrees that
upon demand by the Administrative Agent (which demand shall be accompanied by a
statement signed by an authorized officer of the Administrative Agent setting
forth the basis for the calculations of the amount being claimed) the Borrower
will indemnify such Lender against any loss or expense which each Lender may
sustain or incur as reasonably determined by such Lender in accordance with the
provisions of this Section 6.4, as a result of any failure of the Borrower to
borrow, continue, convert or repay any Loan on a date specified therefor in a
notice (whether written or oral) of borrowing continuation, conversion or
repayment pursuant to this Agreement. For the purposes of this Section 6.4 such
loss or expense for each Lender shall include an amount equal to the excess, if
any, of (a) its cost of obtaining in the interbank eurodollar market the funds
for the Loans being repaid or not borrowed for the period from the date of such
prepayment or failure to borrow to the last day of the then current Interest
Period for such Loans (or, in the case of a failure to borrow, the Interest
Period for such Loans that would have commenced on the date of such failure)
over (b) the amount of interest that such Lender would have earned had it
invested the entire amount of funds so prepaid or the entire amount of funds
acquired to effect, fund or maintain the Loans not borrowed, at the Federal
Funds Rate. For this purpose, all notices to a Lender or the Administrative
Agent pursuant to this Agreement shall be deemed to be irrevocable.
SECTION 6.5 Discretion of Lender as to Manner of Funding.
Notwithstanding any provision of this Agreement to the contrary, each Lender
shall be entitled to fund and maintain its funding of all or its portion of the
Loans in any manner it sees fit; provided, however, that each Lender shall take
any reasonable actions available to it (including the designation of its lending
office) consistent with legal and regulatory restrictions that will avoid
increased cost to the Borrower and will not, in the reasonable judgment of such
Lender, be otherwise materially disadvantageous to the Lender.
SECTION 6.6 Conclusiveness of Statements: Survival of Provisions. In
making the determinations contemplated by this Article VI, the Administrative
Agent or the Lenders may make such
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reasonable estimates, assumptions, allocations and the like that the
Administrative Agent or the Lenders in good faith determine to be appropriate.
Upon making any determination pursuant to this Article VI, the Administrative
Agent shall provide the Borrower with a certificate signed by an authorized
officer of the Administrative Agent setting forth any estimates, assumptions,
allocations or other similar calculations made by the Administrative Agent in
connection with such determination. Subject to the foregoing, determinations and
statements of the Administrative Agent and the Lenders pursuant to this Article
VI and any certificates delivered in connection therewith shall be conclusive
absent manifest error. The provisions of this Article VI shall survive
termination of this Agreement.
ARTICLE VII
REPRESENTATIONS AND WARRANTIES
To induce the Lenders to enter into this Agreement and to make Loans
hereunder, the Borrower represents and warrants to each Lender that:
SECTION 7.1 Due Organization, Authorization, etc. Each of the Borrower
and each Subsidiary (a) is a corporation duly organized, validly existing and in
good standing under the laws of its state of incorporation, (b) is duly
qualified to do business and in good standing in each jurisdiction where,
because of the nature of its activities or properties, such qualification is
required, which jurisdictions are set forth with respect to the Borrower and
each Subsidiary on Schedule 7.1, (c) has the requisite corporate power and
authority and the right to own and operate its properties, to lease the property
it operates under lease, and to conduct its business as now and proposed to be
conducted, and (d) has obtained all material licenses, permits, consents or
approvals from or by, and has made all filings with, and given all notices to,
all Governmental Authorities having jurisdiction, to the extent required for
such ownership, operation and conduct (including, without limitation, the
consummation of the transactions contemplated by this Agreement) as to each of
the foregoing except where the failure to do so would not have a Material
Adverse Effect on the Borrower, or on the Borrower and its Subsidiaries taken as
a whole. The execution, delivery and performance by the Borrower of this
Agreement and the consummation of the transactions contemplated hereby and
thereby are within its corporate powers and have been duly authorized by all
necessary corporate action (including, without limitation, shareholder approval,
if required). Each of the Borrower and its Subsidiaries has received all
material governmental and other consents and approvals (if any shall be
required) necessary for such execution, delivery and performance,
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and such execution, delivery and performance do not and will not contravene or
conflict with, or create a Lien or right of termination or acceleration under,
any Requirement of Law or Contractual Obligation binding upon the Borrower or
such Subsidiaries. This Agreement and each of the Loan Documents is (or when
executed and delivered will be) the legal, valid, and binding obligation of the
Borrower enforceable against the Borrower in accordance with its respective
terms; provided that the Borrower assumes for purposes of this Section 7.1 that
this Agreement and the other Loan Documents have been validly executed and
delivered by each of the parties thereto other than the Borrower.
SECTION 7.2 Statutory Financial Statements. (a) The Annual Statement
of each of the Insurance Subsidiaries (including, without limitation, the
provisions made therein for investments and the valuation thereof, reserves,
policy and contract claims and Statutory Liabilities) as filed with the
appropriate Governmental Authority of its state of domicile (the "Department")
and delivered to each Lender prior to the execution and delivery of this
Agreement, as of and for the 1991, 1992, 1993, 1994 and 1995 Fiscal Years, and
as of and for the Fiscal Quarters ended March 31, June 30 and September 30, 1996
(collectively, the "Statutory Financial Statements"), have been prepared in
accordance with SAP applied on a consistent basis (except as noted therein).
Each such Statutory Financial Statement was in material compliance with
applicable law when filed. The Statutory Financial Statements fairly present the
financial position, the results of operations, changes in equity and changes in
financial position of each such Insurance Subsidiary as of and for the
respective dates and periods indicated therein in accordance with SAP applied on
a consistent basis, except as set forth in the notes thereto or on Schedule
7.2(a). Except for liabilities and obligations, including, without limitation,
reserves, policy and contract claims and Statutory Liabilities (all of which
have been computed in accordance with SAP), disclosed or provided for in the
Statutory Financial Statements, the Insurance Subsidiaries did not have, as of
the respective dates of each of such financial statements, any material
liabilities or obligations (whether absolute or contingent and whether due or to
become due) which, in conformity with SAP, applied on a consistent basis, would
have been required to be or should be disclosed or provided for in such
financial statements. All books of account of each of the Insurance Subsidiaries
fully and fairly disclose all of the transactions, properties, assets,
investments, liabilities and obligations of such Insurance Subsidiary and all of
such books of account are in the possession of each such Insurance Subsidiary
and are true, correct and complete in all material respects.
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(b) The investments of Insurance Subsidiaries reflected in the Annual
Statements filed with the respective Departments with respect to the 1995 Fiscal
Year (the "1995 Annual Statement") and the March 31, June 30 and September 30,
1996 Quarterly Statements (collectively, the "1996 Quarterly Statements") comply
in all material respects with all applicable requirements of the Department with
respect to each such Insurance Subsidiary as well as those of any other
applicable jurisdiction relating to investments in respect of which it may
invest its funds.
(c) The provisions made by each Insurance Subsidiary in its 1995
Annual Statement and in its 1996 Quarterly Statements for reserves, policy and
contract claims and Statutory Liabilities are in compliance in all material
respects with the requirements of the applicable Department as well as those of
any other applicable jurisdiction, and have been computed in accordance with
SAP.
(d) Marketable securities and short term investments reflected in the
1995 Annual Statement and in the 1996 Quarterly Statements of each Insurance
Subsidiary are valued at cost, amortized cost or market value, as required by
applicable law.
(e) Except as set forth on Schedule 7.2(e), there has been no material
adverse change in the business, assets, operations or financial condition of the
Borrower or any Subsidiary which has had or could reasonably be expected to have
a Material Adverse Effect on the Borrower, or on the Borrower and its
Subsidiaries taken as a whole since September 30, 1996.
SECTION 7.3 GAAP Financial Statements. (a) The Borrower has furnished
to the Administrative Agent and each of the Lenders (i) a copy of the unaudited
consolidated balance sheets of the Borrower and its Subsidiaries, and the
balance sheet of the Borrower on an unconsolidated basis as of the close of such
Fiscal Quarter and the related consolidated statements of income and cash flows
for that portion of the Fiscal Year ending as of the close of such a Fiscal
Quarter and (ii) a copy of the unaudited consolidated statement of Income of the
Borrower and its Subsidiaries, and the statement of income of the Borrower on an
unconsolidated basis, for such Fiscal Quarter, all prepared in accordance with
GAAP (subject to normal year-end adjustments and except that footnote and
schedule disclosures are abbreviated) which financial statements are complete
and correct and present fairly in accordance with GAAP (subject to normal year-
end adjustments) consolidated or unconsolidated, as the case may be results of
operations and cash flows of the Borrower as of the end of such Fiscal Quarter
and the period then ended.
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(b) With respect to any representation and warranty which is deemed to
be made after the date hereof by the Borrower, the balance sheet and statements
of operations, of shareholders' equity and of cash flow, which as of such date
shall most recently have been furnished by or on behalf of the Borrower to each
Lender for the purposes of or in connection with this Agreement or any
transaction contemplated hereby, shall have been prepared in accordance with
GAAP consistently applied (except as disclosed therein), and shall present
fairly the consolidated financial condition of the corporations covered thereby
as at the dates thereof for the periods then ended, subject, in the case of
quarterly financial statements, to normal year-end audit adjustments.
SECTION 7.4 Litigation and Contingent Liabilities. (a) Except as set
forth (including estimates of the dollar amounts involved) in Schedule 7.4
hereto and (b) except for claims which are covered by Insurance Policies,
coverage for which has not been denied in writing, or which relate to insurance
policies or surety contracts issued by the Borrower or to which it is a party,
reinsurance treaties, reinsurance certificates, or any other such agreements
entered into by the Borrower in the ordinary course of business (referred to
herein as "Ordinary Course Litigation"), no claim, litigation (including,
without limitation, derivative actions), arbitration, governmental investigation
or proceeding or inquiry is pending or threatened against the Borrower or any of
its Subsidiaries (i) which would, if adversely determined, have a Material
Adverse Effect on the Borrower, or on the Borrower and its Subsidiaries taken as
a whole or (ii) which relates to any of the transactions contemplated hereby,
and there is no basis known to the Borrower for any of the foregoing. Other than
any liability incident to such claims, litigation or proceedings, the Borrower
has no material Contingent Liabilities not provided for or referred to in the
financial statements delivered pursuant to Section 7.3.
SECTION 7.5 Investment Company Act. Other than Horace Mann Investors,
Inc., neither the Borrower nor any of its Subsidiaries is an "investment
company" or a company "controlled by an investment company," within the meaning
of the Investment Company Act of 1940, as amended.
SECTION 7.6 Regulations G, T, U and X. Neither the Borrower nor any
of its Subsidiaries is engaged principally, or as one of its important
activities, in the business of extending credit for the purpose of purchasing or
carrying margin stock. None of the Borrower, any of its Subsidiaries or any
Person acting on their behalf has taken or will take action to cause the
execution, delivery or performance of this Agreement or the Note, the making or
existence of the Loans or the use of proceeds of
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the Loans to violate Regulations G, T, U or X of the F.R.S. Board.
SECTION 7.7 Proceeds. The proceeds of the Loans will be used (a) to
repay existing Debt of the Borrower and (b) for other general corporate
purposes. None of such proceeds will be used in violation of applicable law,
and none of such proceeds will be used, directly or indirectly, for the purpose,
whether immediate, incidental or ultimate, of buying or carrying any margin
stock as defined in Regulation U of the F.R.S. Board.
SECTION 7.8 Insurance. The Borrower and its Subsidiaries maintain
Insurance Policies to such extent and against such hazards and liabilities as is
required by law or customarily maintained by prudent companies similarly
situated.
SECTION 7.9 Accuracy of Information. All factual written information
furnished heretofore or contemporaneously herewith by or on behalf of the
Borrower or any of its Subsidiaries to the Administrative Agent or the Lenders
for purposes of or in connection with this Agreement or any of the transactions
contemplated hereby, as supplemented to the date hereof, is and all other such
factual written information hereafter furnished by or on behalf of the Borrower
or any of its Subsidiaries to the Administrative Agent or the Lenders will be,
true and accurate in every material respect on the date as of which such
information is dated or certified and not incomplete by omitting to state any
material fact necessary to make such information not misleading.
SECTION 7.10 Subsidiaries. Schedule 7.10 contains a complete list of
the Borrower's Subsidiaries.
SECTION 7.11 Insurance Licenses. Except as set forth on Schedule
7.11, to the best of the Borrower's knowledge, no license (including, without
limitation, licenses or certificates of authority from applicable insurance
departments), permits or authorizations to transact insurance and reinsurance
business (collectively, the "Licenses") is the subject of a proceeding for
suspension or revocation or any similar proceedings, there is no sustainable
basis for such a suspension or revocation, and no such suspension or revocation
is threatened by any state insurance department.
SECTION 7.12 Taxes. The Borrower and each of its Subsidiaries has
filed all material tax returns that are required to be filed by it, and has paid
or provided adequate reserves for the payment of all material taxes, including,
without limitation, all payroll taxes and federal and state withholding taxes,
and all assessments payable by it that have become due, other than those that
are not yet delinquent or that are disclosed on
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Schedule 7.12 and are being contested in good faith by appropriate proceedings
and with respect to which reserves have been established, and are being
maintained, in accordance with GAAP. Except as set forth in Schedule 7.12,
there is no ongoing audit or, to the Borrower's knowledge, other governmental
investigation of the tax liability of the Borrower or any of its Subsidiaries
and there is no unresolved claim by a taxing authority concerning the Borrower's
or any such Subsidiary's tax liability, for any period for which returns have
been filed or were due. As used in this Section 7.12, the term "taxes" includes
all taxes of any nature whatsoever and however denominated, including, without
limitation, excise, import, governmental fees, duties and all other charges, as
well as additions to tax, penalties and interest thereon, imposed by any
government or instrumentality, whether federal, state, local, foreign or other.
SECTION 7.13 Compliance with Laws. Neither the Borrower nor any of
its Subsidiaries is in violation of any law, ordinance, rule, regulation, order,
policy, guideline or other requirement of any Governmental Authority, if the
effect of such violation could reasonably be expected to have a Material Adverse
Effect on the Borrower, or on the Borrower and its Subsidiaries taken as a whole
and, to the best of the Borrower's knowledge, no such violation has been alleged
and each of the Borrower and its Subsidiaries (a) has filed in a timely manner
all reports, documents and other materials required to be filed by it with any
Governmental Authority, if such failure to so file could reasonably be expected
to have a Material Adverse Effect on the Borrower, or on the Borrower and its
Subsidiaries taken as a whole; and the information contained in each of such
filings is true, correct and complete in all material respects and (b) has
retained all records and documents required to be retained by it pursuant to any
law, ordinance, rule, regulation, order, policy, guideline or other requirement
of any Governmental Authority, if the failure to so retain such records and
documents could reasonably be expected to have a Material Adverse Effect on the
Borrower, or on the Borrower and its Subsidiaries taken as a whole.
ARTICLE VIII
COVENANTS
Until the Loans and all other Obligations are paid in full, and until
the Commitment Termination Date, the Borrower agrees that, unless at any time
the Required Lenders shall otherwise expressly consent in writing, it will:
SECTION 8.1 Affirmative Covenants.
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8.1.1 Reports, Certificates and Other Information. Furnish or cause
to be furnished to the Administrative Agent and the Lenders:
(a) GAAP Financial Statements:
(i) Within 53 days after the close of each of the first three
Fiscal Quarters of each Fiscal Year of the Borrower, (A) a copy of the
unaudited consolidated balance sheets of the Borrower and its
Subsidiaries, and the balance sheet of the Borrower on an
unconsolidated basis, as of the close of such quarter and the related
consolidated statements of income and cash flows for that portion of
the Fiscal Year ending as of the close of such Fiscal Quarter, and (B)
a copy of the unaudited consolidated statement of income of the
Borrower and its Subsidiaries, and the statement of income of the
Borrower on an unconsolidated basis, for such Fiscal Quarter, all
prepared in accordance with GAAP (subject to normal year-end
adjustments and except that footnote and schedule disclosure may be
abbreviated) and accompanied by the certification of the chief
executive officer, chief financial officer or treasurer of the
Borrower that all such financial statements are complete and correct
and present fairly in accordance with GAAP (subject to normal year-end
adjustments) the consolidated, or unconsolidated, as the case may be,
results of operations and cash flows of the Borrower as at the end of
such Fiscal Quarter and for the period then ended.
(ii) Within 98 days after the close of each Fiscal Year, a copy
of the annual audited consolidated financial statements of the
Borrower and its Subsidiaries, consisting of consolidated balance
sheets and consolidated statements of income and retained earnings and
cash flows, setting forth in comparative form in each case the
consolidated figures for the previous Fiscal Year, which financial
statements shall be prepared in accordance with GAAP, certified
without material qualification by the independent certified public
accountants regularly retained by the Borrower, or any other firm of
independent certified public
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accountants of recognized national standing selected by the Borrower
and reasonably acceptable to the Required Lenders that all such
financial statements are complete and correct and present fairly in
accordance with GAAP the consolidated financial position and the
consolidated results of operations and cash flows of the Borrower and
its Subsidiaries as at the end of such year and for the period then
ended.
(b) Tax Returns. If requested by the Administrative Agent, copies of
all federal, state, local and foreign tax returns and reports in respect of
income, franchise or other taxes on or measured by income (excluding sales,
use or like taxes) filed by the Borrower or any of its Subsidiaries.
(c) SAP Financial Statements:
(i) Within 8 days after the applicable regulatory filing date
for each of its Fiscal Quarters, but in any event within 53 days after
the end of each of the first three Fiscal Quarters of each Fiscal Year
of each Insurance Subsidiary a copy of the Quarterly Statement of such
Insurance Subsidiary for such Fiscal Quarter, all prepared in
accordance with SAP and accompanied by the certification of the chief
financial officer or chief executive officer of each Insurance
Subsidiary that all such financial statements are complete and correct
and present fairly in accordance with SAP the financial position of
such Insurance Subsidiary for the periods then ended.
(ii) Within 5 days after the applicable regulatory filing date
for each of its Fiscal Years, but in any event within 65 days after
the end of each Fiscal Year of each Insurance Subsidiary a copy of the
Annual Statement of each Insurance Subsidiary for such Fiscal Year
prepared in accordance with SAP and accompanied by the certification
of the chief financial officer or chief executive officer of each
Insurance Subsidiary that such financial statement is complete and
correct and presents fairly in accordance with SAP the financial
position of such Insurance Subsidiary for the period then ended.
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(iii) Within 8 days after the applicable regulatory filing date
for each of its Fiscal Years, but in any event within 98 days after
the close of each Fiscal Year of each Insurance Subsidiary a copy of
each Insurance Subsidiary's "Statement of Actuarial Opinion" which is
provided to the applicable Department (or equivalent information
should the Department no longer require such a statement) as to the
adequacy of loss reserves of such Insurance Subsidiary. Such opinion
shall be in the format prescribed by the applicable Insurance Code.
(d) Notice of Default, etc. Immediately after an Executive Officer
of the Borrower knows or has reason to know of the existence of any
Default, or any development or other information which would have a
Material Adverse Effect on the Borrower, or on the Borrower and its
Subsidiaries taken as a whole, telephonic notice specifying the nature of
such Default or development or information, including the anticipated
effect thereof, which notice shall be promptly confirmed in writing within
two (2) Business Days.
(e) Other Information. The following certificates and other
information related to the Borrower:
(i) Promptly after completion of each such item but in no event
later than the first day of April of each Fiscal Year of the Borrower,
a copy of the Borrower's (A) operating budget, (B) new business plans,
if any, and (C) estimated quarterly Statutory EBT of the Insurance
Subsidiaries for such Fiscal Year which, in the case of each of clause
(A) and (B), are in the form approved by the Board of Directors of the
Borrower.
(ii) Within five (5) Business Days of receipt, a copy of any
financial examination reports by a Governmental Authority with respect
to the Insurance Subsidiaries relating to the insurance business of
the Insurance Subsidiaries (when, and if, prepared); provided, the
Borrower shall only be required to deliver any interim report
hereunder at such time as Borrower has
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knowledge that a final report will not be issued and delivered to the
Administrative Agent within 90 days of any such interim report.
(iii) Copies of all Insurance Holding Company System Act filings
with Governmental Authorities by the Borrower or any Subsidiary not
later than five (5) Business Days after such filings are made,
including, without limitation, filings which seek approval of
Governmental Authorities with respect to transactions between the
Borrower or such Subsidiary and its Affiliates.
(iv) Within five (5) Business Days of such notice, notice of
actual suspension, termination or revocation of any material License
of the Insurance Subsidiaries by any Governmental Authority or of
receipt of notice from any Governmental Authority notifying the
Borrower of a hearing (which is not withdrawn within ten (10) days)
relating to such a suspension, termination or revocation, including
any request by a Governmental Authority which commits the Borrower to
take, or refrain from taking, any action or which otherwise materially
and adversely affects the authority of the Borrower to conduct its
business.
(v) Within five (5) Business Days of such notice, notice of any
pending or threatened investigation or regulatory proceeding (other
than routine periodic investigations or reviews) by any Governmental
Authority concerning the business, practices or operations of the
Borrower, including any agent or managing general agent thereof.
(vi) Promptly, such additional financial and other information
as the Administrative Agent may from time to time reasonably request.
(vii) Promptly, notice of any actual or, to the best of the
Borrower's knowledge, proposed material changes in the Insurance Code
governing the investment or dividend practices of any Insurance
Subsidiary.
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(f) Compliance Certificates. Concurrently with the later to occur of
delivery to the Administrative Agent of the GAAP financial statements and
delivery to the Administrative Agent of the SAP financial statements under
Sections 8.1.1(a) and 8.1.1(c), for each Fiscal Quarter and Fiscal Year of
the Borrower, and at any other time no later than thirty (30) Business Days
following a written request of the Administrative Agent, a duly completed
Compliance Certificate, signed by the chief financial officer or treasurer
of the Borrower, containing, among other things, a computation of, and
showing compliance with, each of the applicable financial ratios and
restrictions contained in Sections 8.2.1 through 8.2.3, and to the effect
that, to the best of such officer's knowledge, as of such date no Default
has occurred and is continuing.
(g) Reports to SEC and to Shareholders. Promptly upon the filing or
making thereof (i) copies of each filing and report made by the Borrower or
any of its Subsidiaries with or to any securities exchange or the
Securities and Exchange Commission and (ii) of each communication from the
Borrower to shareholders generally; provided that only those items
described in clauses (i) and (ii) of this Section 8.1.1(g) which are
material to the interest of the Lenders hereunder shall be provided to the
Administrative Agent and the Lenders hereunder.
(h) Notice of Litigation, License and ERISA Matters. Upon learning
of the occurrence of any of the following, written notice thereof,
describing the same and the steps being taken by the Borrower with respect
thereto: (i) the institution of, or any adverse determination in, any
litigation, arbitration proceeding or governmental proceeding (including
any Internal Revenue Service or Department of Labor proceeding with respect
to any Plan or Welfare Plan) which could, if adversely determined, be
reasonably expected to have a Material Adverse Effect on the Borrower, or
on the Borrower and its Subsidiaries taken as a whole and which is not
Ordinary Course Litigation, (ii) the failure of any Person in the
Controlled Group to make a required contribution to any Plan if such
failure is sufficient to give rise to a Lien under section 302(f)(1) of
ERISA, (iii) the institution of any steps by any entity in the Controlled
Group to withdraw from, or the institution of any steps by the Borrower or
any other Person to terminate under a distress termination, any Plan or the
taking of any
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action with respect to a Plan which could result in the requirement that
the Borrower or any of its Subsidiaries furnish a bond or other security to
such Plan, or the occurrence of any event with respect to any Plan which
could result in the incurrence by the Borrower or any of its Subsidiaries
of any material liability (other than a liability for contributions or
premiums), fine or penalty, (iv) the commencement of any dispute which
might lead to the modification, transfer, revocation, suspension or
termination of this Agreement or any Loan Document or (v) any event which
could be reasonably expected to have a Material Adverse Effect on the
Borrower, or on the Borrower and its Subsidiaries taken as a whole.
(i) Other Information. From time to time such other information
concerning the Borrower or any Subsidiary as the Administrative Agent may
reasonably request.
8.1.2 Corporate Existence; Foreign Qualification. Do and cause to be
done at all times all things necessary to (a) maintain and preserve the
corporate existence of the Borrower, (b) be, and ensure that each
Subsidiary of the Borrower is, duly qualified to do business and be in good
standing as a foreign corporation in each jurisdiction where the nature of
its business makes such qualification necessary, and (c) do or cause to be
done all things necessary to preserve and keep in full force and effect the
Borrower's corporate existence.
8.1.3 Books, Records and Inspections. (a) Maintain, and cause each
of its Subsidiaries to maintain, materially complete and accurate books and
records, (b) permit, and cause each of its Subsidiaries to permit, access
at reasonable times by the Administrative Agent to its books and records,
(c) permit, and cause each of its Subsidiaries to permit, the
Administrative Agent or its designated representative to inspect at
reasonable times its properties and operations, and (d) permit, and cause
each of its Subsidiaries to permit, the Administrative Agent to discuss its
business, operations and financial condition with its officers.
8.1.4 Insurance. Maintain, and cause each of its Subsidiaries to
maintain, Insurance Policies to such extent and against such hazards and
liabilities as is required by law or customarily maintained by prudent
companies similarly situated.
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8.1.5 Taxes and Liabilities. Pay, and cause each of its Subsidiaries
to pay, when due all material taxes, assessments and other material
liabilities except as contested in good faith and by appropriate
proceedings with respect to which reserves have been established, and are
being maintained, in accordance with GAAP if and so long as such contest
could not reasonably be expected to have a Material Adverse Effect on the
Borrower, or on the Borrower and its Subsidiaries taken as a whole.
8.1.6 Compliance with Laws. Comply, and cause each of its
Subsidiaries to comply, (a) with all federal, state and local laws, rules
and regulations related to its businesses (including, without limitation,
the establishment of all insurance reserves required to be established
under SAP and applicable laws restricting the investments of the Borrower),
and (b) with all Contractual Obligations binding upon such entity, except
where failure so to comply would not in the aggregate have a Material
Adverse Effect on the Borrower, or on the Borrower and its Subsidiaries
taken as a whole.
8.1.7 Conduct of Business. Engage on a consolidated basis with its
Subsidiaries primarily in the same business in which the Borrower and its
Subsidiaries are engaged on the date hereof.
SECTION 8.2 Negative Covenants. From and after the Effective Date.
8.2.1 Consolidated Debt to Total Capitalization. Not permit the
principal amount of Consolidated Debt to exceed forty percent (40%) of the
sum of Net Worth plus Consolidated Debt plus warrants of the Borrower
subject to redemption as reflected in the balance sheets delivered pursuant
to Section 8.1.1(a).
8.2.2 Risk Based Capital. Not permit (a) the adjusted surplus (as
defined by the applicable Department's risk based capital guidelines) of
each of Horace Mann Life Insurance Company, Horace Mann Insurance Company
and Teachers Insurance Company to be less than 150% of such Insurance
Subsidiary's respective Company Action Level (as defined by the applicable
Department's risk based capital guidelines) as of the end of each Fiscal
Year and (b) the adjusted surplus (as defined by the applicable
Department's risk based capital guidelines) of any other Insurance
Subsidiary to be less than 125% of such Insurance Subsidiary's Company
Action Level (as defined by the applicable Department's risk based capital
guidelines) as of the end of each Fiscal Year.
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8.2.3 Statutory EBT to Future Interest Expense Ratio. Not permit the
Statutory EBT to Future Interest Expense Ratio at any time to be less than
3.0. "Statutory EBT to Future Interest Expense Ratio" at any time shall
mean the amount obtained by dividing (x) the Combined Statutory EBT of the
Insurance Subsidiaries for the four Fiscal Quarters then most recently
ended by (y) the aggregate Future Interest Expense of the Borrower and its
Subsidiaries for the next four Fiscal Quarters.
8.2.4 Mergers, Consolidations and Sales. Not, and not permit any of
its Subsidiaries to, (a) merge or consolidate, or purchase or otherwise
acquire all or substantially all of the assets or stock of any class of, or
any partnership or joint venture interest in, any other Person, other than
(i) the acquisition by Borrower of all or a portion of the capital stock of
Horace Mann Life Insurance Company from Allegiance Life Insurance Company,
(ii) mergers or acquisitions where the corporate existence of the Borrower
is not affected by such merger or acquisition and, subsequent to such
merger or acquisition, the Borrower is in compliance with all the
provisions of this Agreement and no Default shall exist, or (b) sell,
transfer, convey or lease all or any substantial part of its assets or sell
or assign with or without recourse any receivables, other than any sale,
transfer, conveyance or lease in the ordinary course of business.
8.2.5 Regulations G, T, U and X. Not, and not permit any of its
Subsidiaries to, use or permit any proceeds of the Loans to be used, either
directly or indirectly, for the purpose, whether immediate, incidental or
ultimate, of purchasing or carrying margin stock, as defined in Regulation
U of the F.R.S. Board.
8.2.6 Other Agreements. Not, and not permit any of its Subsidiaries
to, enter into any agreement containing any provision which would be
violated or breached by the performance of obligations hereunder or under
any instrument or document delivered or to be delivered by it hereunder or
in connection herewith.
8.2.7 Transactions with Affiliates. Not, and not permit any
Subsidiary to, enter into, or cause, suffer or permit to exist, directly or
indirectly, any arrangement, transaction or contract with any of its
Affiliates unless such arrangement, transaction or contract is in the
ordinary course of business, reasonably intended to satisfy the reasonable
business requirements of the Borrower or such Subsidiary, and on terms and
conditions at least as favorable to the Borrower or such Subsidiary as the
terms
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and conditions which would apply in a similar arrangement, transaction or
contract with a Person or entity not an Affiliate; provided that
transactions between the Borrower and any wholly-owned Subsidiary of the
Borrower or between any wholly-owned Subsidiaries of the Borrower shall be
excluded from the restrictions set forth in this Section 8.2.7.
8.2.8 Liens. Not, and not permit any of its Subsidiaries to, create
or permit to exist any Lien with respect to any assets now or hereafter
existing or acquired, except the following: (a) Liens for current taxes not
delinquent or for taxes being contested in good faith and by appropriate
proceedings and with respect to which adequate reserves have been
established, and are being maintained, in accordance with GAAP, (b) Liens
arising in the ordinary course of business or by operation of law for sums
being contested in good faith and by appropriate proceedings and with
respect to which adequate reserves have been established, and are being
maintained, in accordance with GAAP, or for sums not due, and in either
case not involving any deposits or advances for borrowed money or the
deferred purchase price of property or services, (c) Liens in connection
with the acquisition of fixed assets after the date hereof and attaching
only to the property being acquired, (d) Liens incurred in the ordinary
course of business in connection with workers' compensation, unemployment
insurance or other forms of governmental insurance or benefits, (e)
mechanics', workers', materialmen's and other like Liens arising in the
ordinary course of business in respect of obligations which are not
delinquent or which are being contested in good faith and by appropriate
proceedings and with respect to which adequate reserves have been
established, and are being maintained, in accordance with GAAP, and (f)
other Liens securing Debt which Debt does not in the aggregate exceed
$10,000,000; provided, however, that, no Lien shall be permitted to exist
on the shares of stock of any of its Subsidiaries.
ARTICLE IX
CONDITIONS
SECTION 9.1 Conditions to Occurrence of the Effective Date. The
occurrence of the Effective Date shall be subject to receipt by the
Administrative Agent of all of the following, each duly executed and dated the
Effective Date (or such earlier date as shall be satisfactory to the
Administrative Agent), each in form and substance satisfactory to the
Administrative Agent (with sufficient copies for each Lender):
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9.1.1 This Agreement and Certain Related Documents. This Agreement,
the Note and such other Loan Documents as are required to be delivered by
the terms of this Agreement.
9.1.2 Resolutions. Certified copies of resolutions of the Board of
Directors of the Borrower authorizing the execution, delivery and
performance, respectively, of those documents and matters required of it
with respect to this Agreement or the other Loan Documents.
9.1.3 Incumbency and Signatures. A certificate of an Authorized
Officer certifying the names of the individual or individuals authorized to
sign this Agreement and the other Loan Documents, together with a sample of
the true signature of each such individual. (The Lenders may conclusively
rely on each such certificate until formally advised by a like certificate
of any changes therein.)
9.1.4 Opinion of Counsel. The opinion of the general counsel of the
Borrower, addressed to the Administrative Agent and the Lenders, in the
form of Exhibit E.
9.1.5 Charter and By-Laws of the Borrower. Copies of the corporate
charter and by-laws of the Borrower certified by the Secretary of the
Borrower.
9.1.6 Insurance Proceedings. Certificate of an Authorized Officer
that there are no material insurance regulatory proceedings pending or
threatened against the Borrower in any state.
9.1.7 Material Adverse Change Certificate. An officer's certificate,
signed by an Authorized Officer, certifying that to such officer's best
knowledge, since September 30, 1996, no event has occurred which
individually or in the aggregate could reasonably be expected to have a
Material Adverse Effect on the Borrower, or on the Borrower and its
Subsidiaries taken as a whole.
9.1.8 Payment of Existing Credit Agreement. Evidence satisfactory to
the Administrative Agent that prior to or simultaneously with the initial
Borrowing under this Agreement all obligations of the Borrower under that
certain Second Amended and Restated Credit Agreement dated as of January 8,
1996 among the Borrower, various financial
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institutions and Bank of America Illinois, as administrative agent, have
been paid in full.
9.1.9 Other. Such other documents as the Administrative Agent may
reasonably request.
SECTION 9.2 Conditions to All Borrowings. The obligation of the
Lenders to make all Loans shall be subject to the prior or concurrent
satisfaction (in form and substance satisfactory to the Administrative Agent) of
each of the conditions precedent set forth below:
9.2.1 No Default. No Default shall have occurred and be continuing
or will result from the making of the Loans.
9.2.2 Warranties and Representations. (a) All warranties and
representations contained in this Agreement (other than Section 7.4 except
in the case of the initial Borrowing) shall be true and correct in all
material respects as of the date of any Loan, with the same effect as
though made on the date of and concurrently with the making of such Loan
(except where such representation speaks as of specified date) and (b) all
covenants contained herein and in such documents to be performed by each of
the parties thereto (other than the Administrative Agent or the Lenders)
prior to the date of any Loan shall have been performed.
9.2.3 Litigation. (a) No litigation (including, without limitation,
derivative actions), arbitration, governmental investigation or proceeding
or inquiry shall be, on the date of any Loan, pending, or to the knowledge
of the Borrower, threatened which seeks to enjoin or otherwise prevent the
consummation of, or to recover any damages or to obtain material relief as
a result of, the transactions contemplated hereunder or, in the reasonable
opinion of the Required Lenders, could be reasonably expected to be
materially adverse to any of the parties to this Agreement and which is not
Ordinary Course Litigation, and (b) in the reasonable opinion of the
Required Lenders, no material adverse development shall have occurred in
any litigation (including, without limitation, derivative actions),
arbitration, government investigation or proceeding or inquiry disclosed in
Schedule 7.4 which is likely to have a Material Adverse Effect on the
Borrower, or on the Borrower and its Subsidiaries taken as a whole.
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9.2.4 Fees. The fees referred to in Article V which are due and
payable on or prior to the Effective Date or the date of any Loan shall
have been paid to the Administrative Agent, where applicable, for the
benefit of the Lenders.
9.2.5 Borrowing Request. The Administrative Agent shall have
received a Borrowing Request in form and substance acceptable to the
Administrative Agent.
ARTICLE X
EVENTS OF DEFAULT AND THEIR EFFECT
SECTION 10.1 Events of Default. Each of the following shall
constitute an Event of Default under this Agreement:
10.1.1 Non-Payment of Loan. Default in the payment when due of any
principal on the Loans.
10.1.2 Non-Payment of Interest, Fees, etc. Default, and continuance
thereof for three (3) Business Days, in the payment when due of interest on
the Loans or of any other amount payable hereunder or under the Loan
Documents.
10.1.3 Non-Payment of Other Debt. (a) Default in the payment when due
(subject to any applicable grace period), whether by acceleration or
otherwise, of any other Debt of, or guaranteed by, the Borrower or any of
its Subsidiaries if the aggregate amount of Debt of the Borrower and/or any
of its Subsidiaries which is accelerated or due and payable, or which may
be accelerated or otherwise become due and payable, by reason of such
default or defaults is $10,000,000 or more, or (b) default in the
performance or observance of any obligation or condition with respect to
any such other Debt of, or guaranteed by, the Borrower and/or any of its
Subsidiaries if the effect of such default or defaults is to accelerate the
maturity of any such Debt of $10,000,000 or more in the aggregate or to
permit the holder or holders of such Debt of $10,000,000 or more in the
aggregate, or any trustee or agent for such holders, to cause such Debt to
become due and payable prior to its expressed maturity.
10.1.4 Other Material Obligations. Except for obligations covered
under other provisions of this Article X, default in the payment when due,
or in the performance or observance of, any material obligation of, or
material condition agreed to by, the Borrower or
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any of its Subsidiaries with respect to any material purchase or Lease
Obligation (except only to the extent that the existence of any such
default is being contested by the Borrower in good faith and by appropriate
proceedings and the Borrower has established, and is maintaining, adequate
reserves therefor in accordance with GAAP) which default continues for a
period of 30 days.
10.1.5 Bankruptcy, Insolvency, etc. (a) (i) The Borrower becomes
insolvent or generally fails to pay, or admits in writing its inability to
pay, debts as they become due; or (ii) the Borrower applies for, consents
to, or acquiesces in the appointment of, a trustee, receiver or other
custodian or similar Person for the Borrower or any property of any
thereof, or makes a general assignment for the benefit of creditors; or
(iii) in the absence of such application, consent or acquiescence, a
trustee, receiver or other custodian or similar Person is appointed for the
Borrower or for a substantial part of the property of any thereof, unless
(A) the Borrower institutes appropriate proceedings to contest or discharge
such appointment within 30 days and thereafter continuously and diligently
prosecutes such proceedings and (B) such appointment is in fact discharged
within 60 days of such appointment; or (iv) 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 Borrower, unless (A) such case or proceeding is not
commenced by the Borrower, (B) such case or proceeding is not consented to
or acquiesced in by the Borrower, (C) the Borrower institutes appropriate
proceedings to dismiss such case or proceeding within 30 days and
thereafter continuously and diligently prosecutes such proceedings, and (D)
such case or proceeding is in fact dismissed within 60 days after the
commencement thereof; or (E) the Borrower takes any action to authorize, or
in furtherance of, any of the foregoing; or (b) (i) there shall be
commenced against Horace Mann Life Insurance Company, Horace Mann Insurance
Company or Teachers Insurance Company any case, proceeding or other action
(A) under any existing or future law of any jurisdiction, domestic or
foreign, relating to bankruptcy, insolvency, supervision, conservatorship,
liquidation, 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,
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rehabilitation, conservation, supervision, arrangement, adjustment,
winding-up, liquidation, dissolution, composition or other relief with
respect to it or its debts, obligations or liabilities, or (B) seeking
appointment of a receiver, trustee, custodian, rehabilitator, conservator,
supervisor, liquidator or other similar official for it or for all or any
substantial part of its assets, in each case which (1) results in the entry
of an order for relief or any such adjudication or appointment or (2)
remains undismissed, undischarged or unbonded for a period of 60 days; or
(ii) there shall be commenced against any of such Subsidiaries 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 60 days from the entry thereof; or (iii) any of such
Subsidiaries 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(b)(i) or (ii) above; or (iv) any Governmental Authority shall issue
any order of conservation, supervision or any other order of like effect
relating to any of such Subsidiaries.
10.1.6 Non-compliance With Certain Provisions. Failure of the
Borrower to comply with the provisions of each of Sections 8.1.1(d),
8.1.1(h), 8.2.1 through 8.2.4, 8.2.7 or 8.2.8.
10.1.7 Non-compliance With Other Provisions. Failure by the Borrower
to comply with or to perform any provision of this Agreement or the other
Loan Documents (and not constituting an Event of Default under any of the
other provisions of this Article X) and continuance of such failure for 30
days after notice thereof from the Administrative Agent to the Borrower.
10.1.8 Warranties and Representations. Any warranty or representation
made by or on behalf of the Borrower or any Subsidiary herein is inaccurate
or incorrect or is breached or false or misleading in any material respect
as of the date such warranty or representation is made; or any schedule,
certificate, financial statement, report, notice, or other instrument
furnished by or on behalf of Borrower or any Subsidiary to the
Administrative Agent or the Lenders is false or misleading in any material
respect on the
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date as of which the facts therein set forth are stated or certified.
10.1.9 Employee Benefit Plans. A contribution failure occurs with
respect to any Plan sufficient to give rise to a Lien against the Borrower
or any of its Subsidiaries under section 302(f)(1) of ERISA (as in effect
on the Effective Date); or withdrawal by one or more companies in the
Controlled Group from one or more Multiemployer Plans to which it or they
have an obligation to contribute and the withdrawal liability (without
unaccrued interest) to multiemployer plans as a result of such withdrawal
or withdrawals (including any outstanding withdrawal liability that the
Controlled Group has incurred on the date of such withdrawal) is material.
10.1.10 Change in Control. A Change in Control occurs.
10.1.11 Litigation. (a) There shall be entered against the Borrower
one or more judgments, awards or decrees, or orders of attachment,
garnishment or any other writ, which exceed ten percent (10%) of Net Worth
at any one time outstanding, excluding judgments, awards, decrees, orders
or writs (i) for which there is insurance, but only to the extent there is
actual insurance coverage, (ii) for which there is indemnification (upon
terms and from creditworthy indemnitors which are satisfactory to
Administrative Agent), but only to the extent there is actual
indemnification, (iii) which have been in force for less than the
applicable period for filing an appeal so long as execution is not levied
thereunder (or in respect of which the Borrower or its appropriate
Subsidiary shall at the time in good faith be prosecuting an appeal or
proceeding for review and in respect of which a stay of execution or
appropriate appeal bond shall have been obtained pending such appeal or
review), (iv) which constitute Ordinary Course Litigation, or (v) which are
reserved for, to the actual extent of reserves or (b) there has been a
final judgment or final judgments for the payment of money exceeding, in
the aggregate, ten percent (10%) of Net Worth rendered against the Borrower
or any of its Subsidiaries by a court of competent jurisdiction and such
judgment(s) remain undischarged for a period (during which execution shall
not be effectively stayed) of 60 days after such judgment(s) become final
and nonappealable.
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10.1.12 Change in Law. Any change is made in the Insurance Code which
affects the dividend practices of any Insurance Subsidiary and which is
reasonably likely to have a Material Adverse Effect on the ability of the
Borrower to perform its obligations under the Agreement and such
circumstances shall continue for 120 days.
SECTION 10.2 Effect of Event of Default. If any Event of Default
described in Section 10.1.5 shall occur, the Loans and the Note and all other
Obligations shall become immediately due and payable, all without notice of any
kind; and, in the case of any other Event of Default, the Administrative Agent
may, and upon the written request of the Required Lenders shall, terminate the
Commitments hereunder and declare all or any portion of the Loans and all or
such portion of the Note and all other Obligations to be due and payable,
whereupon the Commitment shall terminate and all or such portion of the Loans
and all or such portion of the Note and all other Obligations shall become
immediately due and payable, all without further notice of any kind. The
Administrative Agent shall promptly advise the Borrower of any such declaration
but failure to do so shall not impair the effect of such declaration.
Notwithstanding the foregoing, the effect as an Event of Default of any event
described in Section 10.1.1 may not be waived except by consent of all of the
Lenders in writing.
ARTICLE XI
THE AGENTS
SECTION 11.1 Authorization. Each Lender authorizes the
Administrative Agent to act on behalf of such Lender as Administrative Agent on
its behalf and to exercise such powers to the extent provided herein or in any
document or instrument delivered hereunder or in connection herewith, and to
take such other action as may be reasonably incidental thereto. As to matters
not expressly provided for by this Agreement (including, without limitation,
enforcement or collection of this Agreement or any other Loan Document) the
Administrative Agent shall not be required to exercise any discretion, but shall
be required to act or to refrain from acting (and shall be fully protected in so
acting or refraining from acting) upon the instructions of the Required Lenders
and such instructions shall be binding upon all Lenders and Holders. Under no
circumstances shall the Administrative Agent have any fiduciary duties to any
Lender or be required to take any action which exposes the Administrative Agent
to personal liability or which is contrary to this Agreement or to the Loan
Documents or applicable law. Upon receipt by the Administrative Agent of any
written notice, report or financial statement delivered by the Borrower as
required
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pursuant to this Agreement, the Administrative Agent shall forward a copy
thereof to each Lender.
SECTION 11.2 Liability of the Administrative Agent. None of the
Agent-Related Persons nor any of their directors, officers, agents or employees
shall be liable for any action taken or omitted to be taken by it or them under
or in connection with this Agreement and the Loan Documents, except for its or
their own gross negligence or willful misconduct. Without limiting the
generality of the foregoing, the Administrative Agent (a) may treat a Lender as
such until the Administrative Agent receives an executed Assignment Agreement
entered into between a Lender and an Eligible Assignee pursuant to Section 12.1
hereof; (b) may consult with legal counsel (including counsel for the Borrower),
independent public accountants and other experts or consultants selected by it;
(c) shall not be liable for any action taken or omitted to be taken in good
faith by the Administrative Agent in accordance with the advice of counsel,
accountants, consultants or experts; (d) make no warranty or representation to
any Lender and shall not be responsible to any Lender for any recitals,
statements, warranties or representations, whether written or oral, made in or
in connection with this Agreement or the Loan Documents; (e) shall not have any
duty to ascertain or to inquire as to the performance or observance of any of
the terms, obligations, covenants or conditions of this Agreement on the part of
the Borrower or to inspect the property (including, without limitation, any
books and records) of the Borrower; (f) shall not be responsible to any Lender
for the due execution, legality, validity, enforceability, genuineness,
sufficiency or value of this Agreement, any Loan Document or any other document
furnished in connection with any of the foregoing; and (g) shall incur no
liability under or in respect of this Agreement or any Loan Document by action
upon any written notice, statement, certificate, order, telephone message,
facsimile or other document which the Administrative Agent believes in good
faith to be genuine and correct and to have been signed, sent or made by the
proper person.
SECTION 11.3 Indemnification. Each Lender agrees to, ratably in
accordance with its Voting Percentage, indemnify the Agent-Related Persons (to
the extent not reimbursed by the Borrower) against any cost, expense (including
fees and out-of-pocket expenses of counsel), claim, demand, action, loss or
liability (except as to the Agent-Related Persons such as result from the gross
negligence or willful misconduct of the Agent-Related Persons) that the Agent-
Related Persons may suffer or incur in connection with this Agreement, the Note,
the Loan Documents and any documents or certificates delivered in connection
therewith or any action taken or omitted by the Agent-Related Persons hereunder
or thereunder.
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SECTION 11.4 Administrative Agent. With respect to the Loans made by
it, any Agent-Related Person shall have the same rights and powers under this
Agreement and the other Loan Documents as any other Lender and may exercise the
same as though its Affiliate were not the Administrative Agent; and the term
"Lender" or "Lenders" shall, unless otherwise expressly indicated, include such
financial institutions in their individual capacities. Each Lender and its
Affiliates may accept deposits from, lend money to, act as trustee under
indentures of, and generally engage in any kind of business with, the Borrower
and any of its Subsidiaries and any Person who may do business with or own
securities of the Borrower or any such Subsidiary, all as if such Lender or its
Affiliate were not the Administrative Agent and without any duty to account
therefor to the Lenders.
SECTION 11.5 Credit Investigation. Each Lender acknowledges that it
(i) has made such inquiries and taken such care on its own behalf as would have
been the case had the Loan been made directly by such Lender to the Borrower
without the intervention of any Agent-Related Person, and (ii) will,
independently and without reliance upon any Agent-Related Person and based on
such documents and information as it shall deem appropriate at the time,
continue to make its own credit decisions in taking or not taking action under
this Agreement. Each Lender agrees and acknowledges that no Agent-Related
Person makes any representations or warranties about the creditworthiness of the
Borrower or with respect to the legality, validity, sufficiency or
enforceability of this Agreement, the Note, the Loan Documents or security
therefor.
SECTION 11.6 Non-Receipt of Funds by the Administrative Agent.
Unless Administrative Agent shall have been notified by a Lender or the Borrower
(any such party being herein called the "Payor") prior to the date on which such
Payor is to make payment to the Administrative Agent of the proceeds of the Loan
to be made by it hereunder (in the case of a Lender) or such Payor is to make a
payment hereunder or under the Note to the Administrative Agent for the account
of the Lenders (in the case of the Borrower), as the case may be (such payment
being herein called the "Required Payment"), which notice shall be effective
upon receipt, that the Payor does not intend to make the Required Payment to the
Administrative Agent, the Administrative Agent may assume that the Required
Payment has been made and may, in reliance upon such assumption (but shall not
be required to), make the amount thereof available to the intended recipient on
such date and, if the Payor has not in fact made the Required Payment to the
Administrative Agent, the recipient of such payment (and, if such recipient is
the Borrower and the Lender which is the Payor fails to pay the amount thereof
to the Administrative Agent forthwith upon such demand, the
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Borrower) shall, on demand, repay to the Administrative Agent the amount made
available to it, together with interest thereon in respect of each day during
the period commencing on the date such amount was so made available by the
Administrative Agent until the date the Administrative Agent recovers such
amount, at a rate per annum equal to (a) in the case of the Borrower, the
Default Rate, provided, if the Borrower has to repay such amount through no
fault of its own, the Borrower shall pay the Reference Rate and (b) in the case
of a Lender, for the first 3 Business Days the rate set by interbank custom and
practice for the correction of errors among banks and for every day thereafter,
the Default Rate.
SECTION 11.7 Successor Agents. The Administrative Agent may resign
at any time by giving written notice thereof to the Lenders and may be removed
at any time with cause by the Required Lenders. Upon any such resignation or
removal, the Required Lenders shall have the right to appoint a successor
Administrative Agent. If no successor Administrative Agent shall have been so
appointed by the Required Lenders, and shall have accepted such appointment
within thirty (30) days after the retiring Administrative Agent's giving of
notice of resignation or the Required Lenders' removal of the retiring
Administrative Agent, then the retiring Administrative Agent may, on behalf of
the Lenders, appoint a successor Administrative Agent which shall be a
commercial bank having a combined capital and surplus of at least $250,000,000.
Upon the acceptance of any appointment as Administrative Agent hereunder by a
successor Administrative Agent, such successor Administrative Agent shall
thereupon succeed to and become vested with all the rights, powers, privileges
and duties of the retiring Administrative Agent, and the retiring Administrative
Agent shall be discharged from its duties and obligations in its capacity as
Administrative Agent under this Agreement. After any retiring Administrative
Agent's resignation or removal hereunder as Administrative Agent, the provisions
of this Article XI shall inure to its benefit as to any actions taken or omitted
to be taken by it while it was Administrative Agent under this Agreement.
ARTICLE XII
ASSIGNMENTS AND PARTICIPATIONS
SECTION 12.1 Assignments.
12.1.1 Each Lender shall have the right at any time to assign to any
Eligible Assignee, subject (except in the case of an Eligible Assignee (i)
that is controlled by the same bank holding company as the assigning Lender
and (ii) which has combined capital and surplus of at least $100,000,000)
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to the written approval of the Borrower and Administrative Agent which
approval will not be unreasonably withheld (it being understood that among
the criteria to be considered would be the financial condition of the
Eligible Assignee), all or any part of such Lender's rights and obligations
under this Agreement and each Loan Document including its rights in respect
of its Loans and the Note; provided that the aggregate number of bank
holding companies represented by all Lenders hereunder shall not exceed
twelve (12) at any time. Any such assignment shall be pursuant to an
assignment agreement, substantially in the form of Exhibit F (an
"Assignment Agreement"), duly executed by such Lender and the Eligible
Assignee, and acknowledged by the Administrative Agent. Although its
failure to do so will not affect any of the rights or obligations provided
for therein or herein, the Borrower agrees to duly acknowledge any
Assignment Agreement executed by any assigning Lender promptly after its
receipt of the same.
12.1.2 Each assignment shall be pro rata with respect to all rights
and obligations of the assigning Lender including the Loans and the Note.
Each assignment, if to a Person other than a Lender, shall be in an amount
equal to or in excess of $5,000,000. No assignment shall require the
Borrower to file a registration statement with the Securities and Exchange
Commission or apply to qualify any of the Loans or the Note, or any
interest in any thereof, under the "blue sky" or other securities law of
any jurisdiction. In the case of any such assignment (upon the fulfillment
of the conditions in Section 12.1.3), this Agreement shall be deemed to be
amended to the extent, and only to the extent, necessary to reflect the
addition of such Eligible Assignee, and the Eligible Assignee shall for all
purposes be a Lender party hereto and shall have, to the extent of such
assignment, the same rights and obligations as a Lender hereunder.
12.1.3 An assignment shall become effective hereunder when all of the
following shall have occurred: (a) the Assignment Agreement shall have
been executed by the parties thereto, (b) the Assignment Agreement shall
have been acknowledged by the Administrative Agent and, to the extent
required by Section 12.1.1, by the Borrower, (c) either the assigning
Lender or the Eligible Assignee shall have paid a processing fee of
$3,000.00 to the Administrative Agent for its own account, and (d) the
assigning Lender and the Administrative Agent shall have agreed upon a date
upon which the Assignment shall become effective. Upon the Assignment
becoming effective, the Administrative Agent shall forward all payments of
interest, principal, fees and other amounts that would have been made to
the assigning
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Lender, in proportion to the percentage of the assigning Lender's rights
transferred, to the Eligible Assignee.
12.1.4 Upon the effectiveness of any assignment, the assigning Lender
shall be relieved from its obligations hereunder to the extent of the
obligations so assigned (except to the extent, if any, that the Borrower,
any other Lender or the Administrative Agent has rights against such
assigning Lender as a result of any default by such Lender under this
Agreement). Promptly following the consummation of each assignment, the
Administrative Agent shall furnish to the Borrower and each Lender a
revised Schedule 2.1 and Schedule 13.3, revised to reflect such assignment.
Notwithstanding anything to the contrary contained herein, any Lender
may at any time assign all or any portion of its rights under this
Agreement including its Loans to a Federal Reserve Bank. No such
assignment shall release the transferor Lender from its obligations
hereunder.
SECTION 12.2 Participations.
12.2.1 Each Lender may grant participations (the "Participations") in
all or any part of its Loans and the Note to any commercial bank or other
financial institution (other than insurance companies and Affiliates
thereof) (the "Participants"). A Participant shall not have any rights
under this Agreement or any other document delivered in connection herewith
(the Participant's rights against such Lender in respect of such
Participation to be those set forth in the agreement executed by such
Lender in favor of the Participant relating thereto, which agreement with
respect to such Participation shall not restrict such Lender's ability to
make any modification, amendment or waiver to this Agreement without the
consent of the Participant except that the consent of such Participant may
be required in connection with any extension of the stated maturity date of
the Loans, or any scheduled mandatory reduction of the Commitment Amount,
reduction of the interest rate, fees or commissions on, any Loans in which
such Participation was sold or forgiveness of any principal of or interest,
fees or commissions payable on any Loans in which such Participation was
sold. Notwithstanding the foregoing, each Participant shall have the
rights of a Lender pursuant to Section 3.6. All amounts payable by the
Borrower under this Agreement shall be determined as if the Lender had not
sold such Participation. In the event of any such sale by a Lender of
participating interests to a Participant, such Lender's obligations under
this Agreement shall remain unchanged, such Lender shall remain solely
responsible for the performance thereof, such Lender shall
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remain the holder of any obligation for all purposes under this Agreement,
and the Borrower and the Administrative Agent shall continue to deal solely
and directly with such Lender in connection with such Lender's rights and
obligations under this Agreement.
12.2.2 Limitation of Rights of any Participant. Notwithstanding
anything in the foregoing to the contrary, (a) no Participant shall have
any direct rights hereunder, (b) the Borrower, the Administrative Agent,
and the Lenders, other than the assigning or selling Lender, shall deal
solely with the assigning or selling Lender and shall not be obligated to
extend any rights or make any payment to, or seek any consent of, the
Participant, (c) no Participation shall relieve the assigning or selling
Lender of any of its other obligations hereunder and such Lender shall
remain solely responsible for the performance thereof, and (d) no
Participant, other than an affiliate of the assigning or selling Lender,
shall be entitled to require such Lender to take or omit to take any action
hereunder, except that such Lender may agree with such Participant that
such Lender will not, without Participant's consent, take any action which
would, affect any principal, interest or fee in which the Participant has
an ownership or beneficial interest.
12.2.3 Any Lender may, in connection with any Assignment or
Participation or proposed Assignment or Participation pursuant to Sections
12.1 and 12.2, and disclose to the Assignee or Participant or proposed
Assignee or Participant any information relating to the Borrower furnished
to such Lender by or on behalf of the Borrower; provided, that prior to any
such disclosure, the Assignee or Participant or proposed Assignee or
Participant shall agree to preserve the confidentiality of any confidential
information relating to the Borrower received by it from such Lender to the
same extent as the Lenders hereunder.
ARTICLE XIII
GENERAL
SECTION 13.1 Waiver; Amendments. No delay on the part of the
Administrative Agent or any Lender or any holder of a Note or other Obligation
in the exercise of any right, power or remedy shall operate as a waiver thereof,
nor shall any single or partial exercise by any of them of any right, power or
remedy preclude other or further exercise thereof, or the exercise of any other
right, power or remedy. No amendment, modification or waiver of, or consent
with respect to, any provision of this
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Agreement or the Note or any Loan Document shall in any event be effective
unless the same shall be in writing and signed and delivered by the Borrower and
the Required Lenders and acknowledged by the Administrative Agent and then any
such amendment, modification, waiver or consent shall be effective only in the
specific instance and for the specific purpose for which given. Notwithstanding
the foregoing, no amendment, modification, waiver or consent which would do any
of the following shall be effective unless in writing and signed by the Borrower
and each of the Lenders and acknowledged by the Administrative Agent: (a)
extend the due date for, or reduce the amount of, any payment or prepayment of
principal of or interest on any Loan (or reduce the principal amount of or rate
of interest on any Loan) or any fees; (b) change the definition of Required
Lenders or subject any Lender to any additional obligations including, without
limitation, any increase in the Commitment Amount; (c) waive any of the
conditions precedent set forth in Article IX (other than Sections 9.1.5, 9.1.6,
9.1.7, and 9.1.8), or (d) amend this Section 13.1, Section 10.2 with regard to
the waiver of an Event of Default under Section 10.1.1 or 13.9. Notwithstanding
the foregoing, no provisions of Article XI shall be amended, modified or waived
without the written consent the Administrative Agent.
SECTION 13.2 Confirmations. The Borrower and the Administrative
Agent (or any holder of a Note) agree from time to time, upon written request
received by it from the other, to confirm to the other in writing the aggregate
unpaid principal amount of the Loan then outstanding under such Note.
SECTION 13.3 Notices. (a) Notices forwarded by mail shall be deemed
to have been given five days after the date sent if sent by registered or
certified mail, postage paid to the address set forth for each party hereto on
Schedule 13.3, and (b) notices given by telegram or telex shall be deemed to
have been given when sent if addressed to the party to whom sent, at its address
as aforesaid, and (c) notices sent by facsimile or overnight courier shall be
deemed to have been given one (1) Business Day after sent. The Administrative
Agent shall be entitled to rely upon all facsimiles and the Borrower shall
indemnify and hold Administrative Agent harmless from any loss, cost or expense
ensuing from any such reliance, which indemnification shall survive any
termination of this Agreement.
SECTION 13.4 Costs, Expenses and Taxes. The Borrower agrees to pay
on demand all out-of-pocket costs and expenses of the Administrative Agent
(including the reasonable fees and out-of-pocket expenses of outside counsel
and, without duplication, the allocated costs of internal legal counsel for the
Administrative Agent), in its individual capacity and on behalf of the Lenders,
in connection with the preparation, execution,
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delivery and administration of this Agreement, the Loan Documents and all other
instruments or documents provided for herein or delivered or to be delivered
hereunder or in connection herewith. The Borrower further agrees to pay all
out-of-pocket costs and expenses (including attorneys' fees and legal expenses
and, without duplication, the allocated costs of internal legal counsel)
incurred by the Administrative Agent (and any Lender after the occurrence of any
Default) in connection with the enforcement, waiver or amendment of this
Agreement, the Loan Documents and any such other instruments or documents. All
obligations provided for in this Section 13.4 shall survive any termination of
this Agreement.
SECTION 13.5 Indemnification. (a) In consideration of the Lenders'
execution and delivery of this Agreement and the Lenders' extension of the
Loans, the Borrower hereby agrees to indemnify, exonerate and hold each Lender
and each Lender's respective officers, directors, employees, Persons controlling
or controlled by any of them and their respective agents, consultants, attorneys
and advisors (including, without limitation, each Agent-Related Person, herein
collectively called for purposes of this Section 13.5 "Indemnified Parties" and
individually called an "Indemnified Party") free and harmless from and against
any and all claims, demands, actions, causes of action, suits, losses, costs
(including, without limitation, all documentary, recording, filing, mortgage or
other stamp taxes or duties), charges, liabilities, claims and damages, and
expenses in connection therewith (irrespective of whether such Indemnified Party
is a party to the action for which indemnification hereunder is sought), and
including, without limitation, legal fees, disbursements and any out-of-pocket
expenses (called in this clause (a) the "Indemnified Obligations"), to which any
of the Indemnified Parties may become subject, whether directly or indirectly,
that result or arise from, or relate to (i) any transaction financed or to be
financed in whole or in part, directly or indirectly, with the proceeds of any
Loan or involving any Loan, (ii) the Indemnified Parties' furnishing of funds to
the Borrower or (iii) any other matter related thereto, except for any such
Indemnified Obligations arising on account of the relevant Indemnified Party's
gross negligence or willful misconduct and, to the extent that the foregoing
undertaking may be unenforceable for any reason except for the gross negligence
or willful misconduct of the Indemnified Parties, the Borrower agrees to make
the maximum contribution to the payment and satisfaction of each of the
Indemnified Obligations which is permissible under applicable law.
(b) Without limiting the generality of the indemnities set out in the
preceding clause (a) the Borrower hereby further agrees to indemnify, exonerate
and hold each Lender and all Indemnified Parties free and harmless from and
against any
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claims, demands, actions, causes of action, suits, losses, costs, charges,
liabilities and damages, and expenses in connection therewith, including,
without limitation, counsel fees (called in this clause (b) the "Indemnified
Obligations") under federal or state securities laws or otherwise (i) arising
out of or based upon any untrue statement or alleged untrue statement of a
material fact contained in any registration statement, prospectus or offering
memorandum or in any preliminary prospectus or preliminary offering memorandum
or any amendment or supplement to any thereof or in any other writing prepared
in connection with the offer, sale or resale of any securities of the Borrower
or any of its respective Subsidiaries, or (ii) arising out of or based upon any
omission or alleged omission to state therein a material fact required to be
stated or necessary to make the statements therein not misleading. If and to the
extent that the foregoing undertakings in this paragraph may be unenforceable
for any reason, the Borrower agrees to make the maximum contribution to the
payment and satisfaction of each of the Indemnified Obligations which is
permissible under applicable law.
(c) All obligations provided for in this Section 13.5 shall survive
any termination of this Agreement and shall not be reduced or impaired by any
investigation made by or on behalf of any Lender or any Indemnified Party.
SECTION 13.6 SUBMISSION TO JURISDICTION AND FORUM SELECTION. ANY CLAIM
ARISING OUT OF THIS AGREEMENT, ANY LOAN DOCUMENT OR ANY AMENDMENT, INSTRUMENT,
DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN
CONNECTION HEREWITH, OR ARISING FROM OR RELATED TO ANY CREDIT RELATIONSHIP
EXISTING IN CONNECTION WITH THIS AGREEMENT MAY BE ENFORCED BY THE ADMINISTRATIVE
AGENT AND THE LENDERS IN ANY STATE OR FEDERAL COURT HAVING SUBJECT MATTER
JURISDICTION AND LOCATED IN CHICAGO, ILLINOIS. FOR THE PURPOSE OF ANY ACTION OR
PROCEEDING INSTITUTED WITH RESPECT TO ANY SUCH CLAIM, THE BORROWER HEREBY
IRREVOCABLY SUBMITS TO THE JURISDICTION AND EXCLUSIVE VENUE OF SUCH COURTS. THE
BORROWER FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OUT OF SAID
COURTS BY MAILING A COPY THEREOF, BY REGISTERED MAIL, POSTAGE PREPAID, TO THE
BORROWER AND AGREES THAT SUCH SERVICE, TO THE FULLEST EXTENT PERMITTED BY LAW,
(i) SHALL BE DEEMED IN EVERY RESPECT EFFECTIVE SERVICE OF PROCESS UPON IT IN ANY
SUCH SUIT, ACTION OR PROCEEDING AND (ii) SHALL BE TAKEN AND HELD TO BE VALID
PERSONAL SERVICE UPON AND PERSONAL DELIVERY TO IT. NOTHING HEREIN CONTAINED
SHALL AFFECT THE RIGHT OF THE ADMINISTRATIVE AGENT AND THE LENDERS TO SERVE
PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR PRECLUDE THE ADMINISTRATIVE
AGENT, IN ITS SOLE DISCRETION, FROM BRINGING AN ACTION OR PROCEEDING IN RESPECT
HEREOF IN ANY OTHER COUNTRY, STATE OR PLACE HAVING JURISDICTION OVER SUCH
ACTION. THE BORROWER IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW,
ANY OBJECTION WHICH IT MAY HAVE OR HEREAFTER HAVE TO THE LAYING OR MAINTENANCE
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OF THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT
LOCATED IN CHICAGO, ILLINOIS AND ANY CLAIM THAT ANY SUCH SUIT, ACTION OR
PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.
SECTION 13.7 GOVERNING LAW. THIS AGREEMENT, THE LOAN DOCUMENTS AND THE
NOTE SHALL BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE
STATE OF ILLINOIS WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES. WHENEVER
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 APPLICABLE LAW, SUCH PROVISION
SHALL BE INEFFECTIVE 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 BORROWER AND RIGHTS OF ANY LENDER EXPRESSED
HEREIN OR IN THE LOAN DOCUMENTS SHALL BE IN ADDITION TO AND NOT IN LIMITATION OF
THOSE PROVIDED BY APPLICABLE LAW OR IN ANY OTHER WRITTEN INSTRUMENT OR AGREEMENT
RELATING TO ANY OF THE OBLIGATIONS.
SECTION 13.8 JURY TRIAL. EACH PARTY HEREBY EXPRESSLY WAIVES ANY RIGHT
TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS
UNDER THIS AGREEMENT OR ANY OF THE LOAN DOCUMENTS TO WHICH IT IS A PARTY, OR
UNDER ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN
THE FUTURE BE DELIVERED IN CONNECTION THEREWITH OR ARISING FROM ANY RELATIONSHIP
EXISTING IN CONNECTION WITH THIS AGREEMENT OR ANY LOAN DOCUMENTS, AND AGREES
THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE
A JURY.
SECTION 13.9 Successors and Assigns. This Agreement shall be binding
upon Borrower, the Administrative Agent, the Lenders and their respective
successors and assigns, and shall inure to the benefit of the Borrower, the
Administrative Agent, the Lenders and their respective successors and assigns;
provided, however, that the Borrower shall have no right to assign its rights or
delegate its duties under this Agreement. This Agreement and the Loan Documents
contain the entire agreement of the parties hereto with respect to the matters
covered hereby.
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Delivered at Chicago, Illinois, as of the day and year first above written.
HORACE MANN EDUCATORS CORPORATION
By: /s/ Larry K. Becker
----------------------------
Title: Chief Financial Officer
----------------------------
By: /s/ George J. Zock
----------------------------
Title: Treasurer
----------------------------
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BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION, as Administrative Agent
By: /s/ Michael T. Ernst
----------------------------
Title: Vice President
--------------------------
BANK OF AMERICA ILLINOIS, as Lender
By: /s/ Michael T. Ernst
----------------------------
Title: Vice President
--------------------------
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EXHIBIT 10.7
HORACE MANN INCENTIVE PLAN
SHORT TERM INCENTIVE PLAN
LONG TERM INCENTIVE PLAN
ANNUAL STOCK OPTION PLAN
<PAGE>
HORACE MANN EDUCATORS CORPORATION
SHORT TERM INCENTIVE PLAN
PURPOSE
This Short Term Incentive Plan (the "Plan") is designed to reward all officers
(the "Officers") of Horace Mann Educators Corporation (the "Company") for
achieving corporate and operating unit or operating division short term
performance objectives. The Plan is intended to provide an incentive for
superior work and to motivate Officers toward even higher achievement and
business results, to tie their goals and interests to those of the Company and
its shareholders and to enable the Company to attract and retain highly
qualified employees. The Plan is also intended to secure the full deductibility
of annual incentive compensation payable to the Company's Chief Executive
Officer and the other four highest compensated executive officers (collectively
the "Covered Employees") whose compensation is required to be reported in the
Company's proxy statement and all compensation payable hereunder to such persons
is intended to qualify as "performance-based compensation" as described in
Section 162(m)(4)(C) of the Internal Revenue Code of 1986, as amended (the
"Code").
1. ELIGIBILITY AND PARTICIPATION
1.1 All Officers of the Company are eligible for and shall participate in the
Plan. Prior to or at the time performance objectives are established for a
"Performance Period," as defined below, the Committee designated under Section
6.1 (the "Committee") of the Company's Board of Directors (the "Board") will
designate in writing certain Officers of the Company that are participants for
such Performance Period.
2. PLAN YEAR, PERFORMANCE PERIODS AND PERFORMANCE OBJECTIVES
2.1 The fiscal year of the Plan (the "Plan Year") shall end on December 31.
The performance period (the "Performance Period") with respect to which annual
incentive compensation may be payable under the Plan shall generally be the Plan
Year, provided, however, that the Committee shall have the authority to
designate different Performance Periods under the Plan.
2.2 Within the first ninety (90) days of each Performance Period, other than
the 1996 Plan Year Performance Period, the Committee shall establish in writing,
with respect to such Performance Period, one or more performance goals, a
specific target objective or objectives with respect to such performance goals
and an objective formula or method for computing the amount of annual incentive
compensation payable to certain Officers under the Plan if the performance goals
are attained. Notwithstanding the foregoing sentence, for any Performance
Period, such goals, objectives and computation formulae or methods must be
established within that number of days, beginning on the first day of such
Performance Period, which is no more than twenty-five percent (25%) of the total
number of days in such Performance Period.
<PAGE>
2.3 Performance goals shall be based upon one or more of the following business
criteria for the Company as a whole or any of its operating divisions or other
operating units, any of which may be measured either in absolute terms or as
compared to other companies: financial ratings of the Company, return on equity,
earnings, earnings growth, earnings per share, growth in earnings per share,
operating earnings, growth in operating earnings, operating earnings per share,
growth in operating earnings per share, insurance premiums, growth in insurance
premiums, total return to shareholders (stock price appreciation plus
dividends), combined ratio, expense ratio, number of agents and growth in number
of agents. In addition, to the extent consistent with the goal of providing for
deductibility under Section 162(m) of the Code, performance goals may be based
upon an Officer's attainment of personal objectives with respect to any of the
foregoing performance goals or implementing policies and plans, negotiating
transactions and sales, developing long-term business goals or exercising
managerial responsibility. Measurements of the Company's or an Officer's
performance against the performance goals established by the Committee shall be
objectively determinable and shall be determined according to generally accepted
accounting principles ("GAAP") as in existence on the date on which the
performance goals are established and without regard to any changes in such
principles after such date.
2.4 The Committee may also make additional annual incentive compensation awards
to Officers, other than Covered Employees, who have produced exceptional,
unanticipated results during the Performance Period.
3. DETERMINATION OF ANNUAL INCENTIVE COMPENSATION AWARDS
3.1 As soon as practicable after the end of each Performance Period, the
Committee shall certify in writing the extent to which the Company and the
Officers have achieved the performance goal or goals for such Performance
Period, including the specific target objective or objectives and the
satisfaction of any other material terms of the annual incentive compensation
award and the Committee shall calculate the amount of each Officer's annual
incentive compensation for such Performance Period based upon the performance
goals, objectives and computation formulae or methods for such Performance
Period. The Committee shall have no discretion to increase the amount of any
Covered Employee's annual incentive compensation as so determined.
3.2 No Officer's annual incentive compensation for any Performance Period shall
exceed 120% of the base annual salary of the Company's Chief Executive Officer
as of July 10, 1996 ($410,000).
4. PAYMENT OF AWARDS
4.1 Approved annual incentive compensation awards shall be payable by the
Company in cash to each Officer as soon as practicable after the end of each
Performance Period and after the Committee has certified in writing pursuant to
Section 3.1 that the relevant performance goals have been achieved. In the
event of an Officer's death, any such award shall be payable to his or her
beneficiary as designated pursuant to Section 4.3 or, absent such a designation,
to the Officer's estate.
<PAGE>
4.2 If an Officer's employment by the Company shall terminate prior to the last
day of a Performance Period because of disability, retirement in accordance with
the Company's retirement policies, resignation pursuant to written agreement
with the Company, leave of absence or death, then the annual incentive
compensation award that would have been payable to the Officer absent such
termination shall be prorated based on the Officer's active service during the
Performance Period. If an Officer's employment by the Company shall terminate
prior to the last day of a Performance Period because of voluntary or
involuntary resignation or termination not pursuant to a written agreement with
the Company, no annual incentive compensation award shall be payable to such
Officer with respect to such Performance Award.
4.3 An Officer may file with the Company a written designation of a beneficiary
or beneficiaries under the Plan and may from time to time revoke or change any
such designation of beneficiary. Any designation of beneficiary under the Plan
shall be controlling over any other disposition, testamentary or otherwise;
provided, however, that if the Committee shall be in doubt as to the entitlement
of any such beneficiary to any annual incentive compensation award hereunder,
the Committee may determine to recognize only the legal representative of such
Officer, in which case the Company, the Committee and the members thereof shall
not be under any further liability to anyone.
5. OTHER TERMS AND CONDITIONS
5.1 No annual incentive compensation awards shall be paid under the Plan unless
and until the material terms (within the meaning of Section 162(m)(4)(C) of the
Code) of the Plan, including the business criteria described in Section 2.3 of
the Plan, are disclosed to the Company's shareholders and are approved by the
shareholders by a majority of votes cast in person or by proxy (including
abstentions to the extent abstentions are counted as voting under applicable
state law).
5.2 No person shall have any legal claim to be granted an award under the Plan
and the Committee shall have no obligation to treat Officers uniformly. Except
as may be otherwise required by law, annual incentive compensation awards under
the Plan shall not be subject in any manner to anticipation, alienation, sale,
transfer, assignment, pledge, encumbrance, charge, garnishment, execution, or
levy of any kind, either voluntary or involuntary. Annual incentive
compensation awarded under the Plan shall be payable from the general assets of
the Company and no Officer shall have any claim with respect to any specific
assets of the Company.
5.3 Neither the Plan nor any action taken under the Plan shall confer upon any
Officer any right with respect to any continuance of employment by the Company
or to maintenance of the Officer's compensation at any level nor shall they
interfere in any way with the right of the Company to terminate his or her
employment at any time.
5.4 The Company may deduct from any award any applicable withholding taxes or
any amounts owed by the Officer to the Company.
<PAGE>
6. ADMINISTRATION
6.1 All members of the Committee shall be persons who qualify as "outside
directors" as defined under Section 162(m) of the Code and Treasury Regulation
(S) 1.162-27, promulgated thereunder, or any successor thereto. Until changed
by the Board, the Compensation Committee of the Board shall constitute the
Committee hereunder.
6.2 The Committee shall have full power and authority to administer and
interpret the provisions of the Plan and to adopt such rules, regulations,
agreements, guidelines and instruments for the administration of the Plan and
for the conduct of its business as the Committee deems necessary or advisable.
6.3 Except with respect to matters which under Section 162(m)(4)(C) of the Code
are required to be determined in the sole and absolute discretion of the
Committee, the Committee shall have full power to delegate to any officer or
employee of the Company the authority to administer and interpret the procedural
aspects of the Plan, subject to the Plan's terms, including adopting and
enforcing rules to decide procedural and administrative issues.
6.4 The Committee may rely on opinions, reports or statements of officers or
employees of the Company and of Company counsel (inside or retained counsel),
public accountants and other professional or expert persons.
6.5 The Board reserves the right to amend or terminate the Plan in whole or in
part at any time. Unless otherwise prohibited by applicable law, any amendment
required to conform the Plan to the requirements of Section 162(m) of the Code
may be made by the Committee. No amendment may be made to the performance
criteria specified in Section 2.3 or the maximum annual incentive compensation
payable to any participant as specified in Section 3.2 without shareholder
approval unless shareholder approval is not required in order for annual
incentive compensation paid to Covered Employees to constitute qualified
performance-based compensation under Section 162(m) of the Code.
6.6 No member of the Committee shall be liable for any action taken or omitted
to be taken or for any determination made by him or her in good faith with
respect to the Plan, and the Company shall indemnify and hold harmless each
member of the Committee against any cost or expense (including counsel fees) or
liability (including any sum paid in settlement of a claim with the approval of
the Committee) arising out of any act or omission in connection with the
administration or interpretation of the Plan, unless arising out of such
person's own fraud or bad faith.
6.7 The place of administration of the Plan shall be in the State of Illinois,
and the validity, construction, interpretation, administration and effect of the
Plan and of its rules and regulations, and rights relating to the Plan, shall be
determined solely in accordance with the laws of the State of Illinois.
<PAGE>
HORACE MANN EDUCATORS CORPORATION
LONG TERM INCENTIVE PLAN
PURPOSE
This Long Term Incentive Plan (the "Plan") is designed to reward certain
officers (the "Officers") of Horace Mann Educators Corporation (the "Company")
for achieving corporate and operating unit or departmental long term performance
objectives. The Plan is intended to provide an incentive for superior work and
to motivate participating Officers toward even higher achievement and business
results, to tie their goals and interests to those of the Company and its
shareholders and to enable the Company to attract and retain highly qualified
executive employees. The Plan is also intended to secure the full deductibility
of incentive compensation payable to the Company's Chief Executive Officer and
the other four highest compensated executive officers (collectively the "Covered
Employees") whose compensation is required to be reported in the Company's proxy
statement and all compensation payable hereunder to such persons is intended to
qualify as "performance-based compensation" as described in Section 162(m)(4)(C)
of the Internal Revenue Code of 1986, as amended (the "Code").
1. ELIGIBILITY AND PARTICIPATION
1.1 Prior to or at the time performance objectives are established for a
"Performance Period," as defined below, the Committee designated under Section
6.1 (the "Committee") of the Company's Board of Directors (the "Board") will
designate in writing which Officers of the Company shall in fact be participants
for such Performance Period.
2. PLAN YEAR, PERFORMANCE PERIODS AND PERFORMANCE OBJECTIVES
2.1 The fiscal year of the Plan (the "Plan Year") shall end on December 31.
The performance period (the "Performance Period") with respect to which
incentive compensation may be payable under the Plan shall generally be more
than one Plan Year, with the number of Plan Years in each Performance Period
determined by the Committee, provided, however, that the Committee shall have
the authority to designate different Performance Periods under the Plan.
2.2 Within the first ninety (90) days of each Performance Period, other than
the 1996 Performance Period, the Committee shall establish in writing, with
respect to such Performance Period, one or more performance goals, a specific
target objective or objectives with respect to such performance goals and an
objective formula or method for computing the amount of incentive compensation
payable to each Officer under the Plan if the performance goals are attained.
Notwithstanding the foregoing sentence, for any Performance Period, such goals,
objectives and computation formulae or methods must be established within that
number of days, beginning on the first day of such Performance Period, which is
no more than twenty-five percent (25%) of the total number of days in such
Performance Period.
<PAGE>
2.3 Performance goals shall be based upon one or more of the following business
criteria for the Company as a whole or any of its operating divisions or other
operating units, any of which may be measured either in absolute terms or as
compared to other companies: financial ratings of the Company, return on equity,
earnings, earnings growth, earnings per share, growth in earnings per share,
operating earnings, growth in operating earnings, operating earnings per share,
growth in operating earnings per share, insurance premiums, growth in insurance
premiums, total return to shareholders (stock price appreciation plus
dividends), combined ratio, expense ratio, number of agents and growth in number
of agents. In addition, to the extent consistent with the goal of providing for
deductibility under Section 162(m) of the Code, performance goals may be based
upon an Officer's attainment of personal objectives with respect to any of the
foregoing performance goals or implementing policies and plans, negotiating
transactions and sales, developing long-term business goals or exercising
managerial responsibility. Measurements of the Company's or an Officer's
performance against the performance goals established by the Committee shall be
objectively determinable and shall be determined according to generally accepted
accounting principles ("GAAP") as in existence on the date on which the
performance goals are established and without regard to any changes in such
principles after such date.
2.4 The Committee may also make additional incentive compensation awards to
Officers, other than Covered Employees, who have produced exceptional,
unanticipated results during the Performance Period.
3. DETERMINATION OF INCENTIVE COMPENSATION AWARDS
3.1 As soon as practicable after the end of each Performance Period, the
Committee shall certify in writing the extent to which the Company and the
Officers have achieved the performance goal or goals for such Performance
Period, including the specific target objective or objectives and the
satisfaction of any other material terms of the incentive compensation award and
the Committee shall calculate the amount of each Officer's incentive
compensation for such Performance Period based upon the performance goals,
objectives and computation formulae or methods for such Performance Period. The
Committee shall have no discretion to increase the amount of any Covered
Employee's annual incentive compensation as so determined.
3.2 No Officer's incentive compensation for any Performance Period shall exceed
240% of the base annual salary of the Company's Chief Executive Officer as of
July 10, 1996 ($410,000).
4. PAYMENT OF AWARDS
4.1 Approved incentive compensation awards shall be payable by the Company in
cash to each Officer as soon as practicable after the end of each Performance
Period and after the Committee has certified in writing pursuant to Section 3.1
that the relevant performance goals have been achieved. In the event of an
Officer's death, any such award shall be payable to his or her beneficiary as
designated pursuant to Section 4.3 or, absent such a designation, to the
Officer's estate.
<PAGE>
4.2 If an Officer's employment by the Company shall terminate prior to the last
day of a Performance Period because of disability, retirement in accordance with
the Company's retirement policies, resignation pursuant to written agreement
with the Company, leave of absence or death, then the incentive compensation
award that would have been payable to the Officer absent such termination shall
be prorated based on the Officer's active service during the Performance Period.
If an Officer's employment by the Company shall terminate prior to the last day
of a Performance Period because of voluntary or involuntary resignation or
termination not pursuant to a written agreement with the Company, no incentive
compensation award shall be payable to such Officer with respect to such
Performance Award.
4.3 An Officer may file with the Company a written designation of a beneficiary
or beneficiaries under the Plan and may from time to time revoke or change any
such designation of beneficiary. Any designation of beneficiary under the Plan
shall be controlling over any other disposition, testamentary or otherwise;
provided, however, that if the Committee shall be in doubt as to the entitlement
of any such beneficiary to any incentive compensation award hereunder, the
Committee may determine to recognize only the legal representative of such
Officer, in which case the Company, the Committee and the members thereof shall
not be under any further liability to anyone.
5. OTHER TERMS AND CONDITIONS
5.1 No incentive compensation awards shall be paid under the Plan unless and
until the material terms (within the meaning of Section 162(m)(4)(C) of the
Code) of the Plan, including the business criteria described in Section 2.3 of
the Plan, are disclosed to the Company's shareholders and are approved by the
shareholders by a majority of votes cast in person or by proxy (including
abstentions to the extent abstentions are counted as voting under applicable
state law).
5.2 No person shall have any legal claim to be granted an award under the Plan
and the Committee shall have no obligation to treat Officers uniformly. Except
as may be otherwise required by law, incentive compensation awards under the
Plan shall not be subject in any manner to anticipation, alienation, sale,
transfer, assignment, pledge, encumbrance, charge, garnishment, execution, or
levy of any kind, either voluntary or involuntary. Incentive compensation
awarded under the Plan shall be payable from the general assets of the Company
and no Officer shall have any claim with respect to any specific assets of the
Company.
5.3 Neither the Plan nor any action taken under the Plan shall confer upon any
Officer any right with respect to any continuance of employment by the Company
or to maintenance of the Officer's compensation at any level nor shall they
interfere in any way with the right of the Company to terminate his or her
employment at any time.
5.4 The Company may deduct from any award any applicable withholding taxes or
any amounts owed by the Officer to the Company.
<PAGE>
6. ADMINISTRATION
6.1 All members of the Committee shall be persons who qualify as "outside
directors" as defined under Section 162(m) of the Code and Treasury Regulation
(S) 1.162-27, promulgated thereunder, or any successor thereto. Until changed
by the Board, the Compensation Committee of the Board shall constitute the
Committee hereunder.
6.2 The Committee shall have full power and authority to administer and
interpret the provisions of the Plan and to adopt such rules, regulations,
agreements, guidelines and instruments for the administration of the Plan and
for the conduct of its business as the Committee deems necessary or advisable.
6.3 Except with respect to matters which under Section 162(m)(4)(C) of the Code
are required to be determined in the sole and absolute discretion of the
Committee, the Committee shall have full power to delegate to any officer or
employee of the Company the authority to administer and interpret the procedural
aspects of the Plan, subject to the Plan's terms, including adopting and
enforcing rules to decide procedural and administrative issues.
6.4 The Committee may rely on opinions, reports or statements of officers or
employees of the Company and of Company counsel (inside or retained counsel),
public accountants and other professional or expert persons.
6.5 The Board reserves the right to amend or terminate the Plan in whole or in
part at any time. Unless otherwise prohibited by applicable law, any amendment
required to conform the Plan to the requirements of Section 162(m) of the Code
may be made by the Committee. No amendment may be made to the performance
criteria specified in Section 2.3 or the maximum incentive compensation payable
to any participant as specified in Section 3.2 without shareholder approval
unless shareholder approval is not required in order for incentive compensation
paid to Covered Employees to constitute qualified performance-based compensation
under Section 162(m) of the Code.
6.6 No member of the Committee shall be liable for any action taken or omitted
to be taken or for any determination made by him or her in good faith with
respect to the Plan, and the Company shall indemnify and hold harmless each
member of the Committee against any cost or expense (including counsel fees) or
liability (including any sum paid in settlement of a claim with the approval of
the Committee) arising out of any act or omission in connection with the
administration or interpretation of the Plan, unless arising out of such
person's own fraud or bad faith.
6.7 The place of administration of the Plan shall be in the State of Illinois,
and the validity, construction, interpretation, administration and effect of the
Plan and of its rules and regulations, and rights relating to the Plan, shall be
determined solely in accordance with the laws of the State of Illinois.
<PAGE>
HORACE MANN EDUCATORS CORPORATION
ANNUAL STOCK OPTION GRANT PLAN
In conjunction with Short Term Incentive Plan and the Long Term Incentive Plan,
it is the intention of the Board of Directors (the "Board") that stock options
be granted annually to individual officers of Horace Mann Educators Corporation
(the "Company") pursuant to the Horace Mann Educators Corporation 1991 Stock
Incentive Plan (the "Plan"), as amended.
The Committee, as defined in the Plan, will designate prior to or at the time
performance objectives are established for annual cash incentive plan under the
Short Term Incentive Plan, which officers of the Company shall be eligible to
receive such options and the number of stock options within a specified range.
The number of stock options granted within a specified range shall be a function
of the Committee's assessment of each individual officer's performance during
the prior year, the importance to the Corporation of retaining the individual
and that individual's potential for future contributions to the Corporation.
Annual stock option grants will be made at the time the Committee certifies in
writing the extent to which the terms and conditions of the applicable annual
cash incentive plan have been achieved.
Stock options, pursuant to the Plan, will be granted at fair market value on the
date of grant, will have ten year terms and will vest in accord with the Plan.
<PAGE>
CATASTROPHE EQUITY SECURITIES ISSUANCE OPTION AGREEMENT
This Catastrophe Equity Securities Issuance Option Agreement (this
"Agreement") is entered into as of February 15, 1997 between Horace Mann
Educators Corporation, a Delaware corporation ("HM"), and Centre Reinsurance
(U.S.) Limited, a Bermuda corporation ("Option Writer").
RECITALS
WHEREAS, HM is an insurance holding company with certain subsidiaries which
insure life and property/casualty risks;
WHEREAS, Option Writer is a reinsurance company in the business of
reinsuring certain property/casualty insurance risks;
WHEREAS, HM and Option Writer wish to enter into a financial accommodation
under which, during a specified time period, HM has the option (the "Securities
Issuance Option", as defined in Section 1.31) to require Option Writer to
purchase shares of HM preferred stock (the "Preferred Shares", as defined in
Section 1.22), in the event that HM incurs a Qualifying Catastrophic Event (as
defined in Section 1.24); and
WHEREAS, Option Writer requires that, as a condition to any Securities
Issuance Option exercise, it not become a holder of more than 50% of the HM
Common Stock (on an as-converted basis) upon such exercise.
WHEREAS, HM and Option Writer desire to memorialize their agreement with
respect to the Securities Issuance Option on the terms and conditions set forth
below;
NOW, THEREFORE, for good and valuable consideration, receipt of which is
hereby acknowledged, HM and Option Writer agree as follows:
AGREEMENT
1. Definitions. Terms used in this Agreement shall have the respective
meanings ascribed to them below.
1.1 "Agreement Year" means the period beginning at 12:00 A.M. Central
Time on March 1, 1997 and ending at 12:00 A.M. Central Time on January 1, 1998,
and each subsequent one (1) year period, during the Exposure Period, beginning
at 12:00 A.M. Central Time on January 1 and ending at 12:00 A.M. Central Time on
the next following January 1.
1.2 "Attachment Point" means (a) with respect to the initial Exposure
Period ending at 12:00 A.M. on January 1, 2000, the greater of (i)US$65,000,000,
or (ii) the amount
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<PAGE>
of the total property catastrophe reinsurance excess of loss coverage actually
maintained by HM and HM Insurance Subsidiaries which is then in effect less up
to US$15,000,000 of uncollectible reinsurance, and (b) with respect to the two
(2) year extension of the Exposure Period, if any, the greater of (i)
US$75,000,000, or (ii) the amount of the total property catastrophe reinsurance
excess of loss coverage actually maintained by HM and HM Insurance Subsidiaries
which is then in effect less up to US$15,000,000 of uncollectible reinsurance.
1.3 "Certificate of Designations" means the Certificate of
Designations for the Preferred Shares, substantially in the form attached as
Exhibit 1.3, to be adopted by the Board of Directors of HM and filed with the
Secretary of State of Delaware in accordance with Section 151 of the Delaware
General Corporation Law of 1953, as amended.
1.4 "Effective Date" means March 1, 1997.
1.5 "Event" means a "loss occurrence" as defined in the Company's
excess of loss property catastrophe reinsurance agreements, a copy of which
definition is attached as Exhibit 1.5, provided, however, that such definition
shall not be materially changed or amended without the prior written consent of
Option Writer, which consent shall not be unreasonably withheld.
1.6 "Exchange Act" means the Securities Exchange Act of 1934, as
amended, and all rules and regulations promulgated thereunder.
1.7 "Exercise Date" means the date of purchase and sale of Preferred
Shares pursuant to an exercise of the Securities Issuance Option which date
shall be specified in the Notice of Exercise and shall be the later of forty-
five (45) days following delivery of a Notice of Exercise or ten (10) business
days following receipt of all necessary insurance regulatory approvals
(including without limitation, any Form A approvals required for the issuance
and sale of the Preferred Shares), provided that the Exercise Date shall not be
later than the one hundred eightieth (180th) day after the date of delivery of
the Notice of Exercise, or such later date, if any, resulting from alternative
dispute resolution under Section 8, which date shall be ten (10) business days
after the rendering of a final decision pursuant to Section 8.
1.8 "Exercise Term" means (a) with respect to a single Event, the one
(1) year period commencing upon the occurrence of a Qualifying Catastrophic
Event and ending at 12:00 A.M. Central Time on the first anniversary of such
occurrence (as the same may be extended under Section 2.4) during which HM has
the right to exercise the Securities Issuance Option, or (b) with respect to
multiple Events, the period commencing upon the occurrence of a Qualifying
Catastrophic Event and ending six (6) months following the Agreement Year during
which such multiple Events occur, which six (6) month period ends at 12:00 A.M.
Central Time on the July 1 next following the end of such Agreement Year (as the
same may be extended under Section 2.4), during which HM has the right to
exercise the Securities Issuance Option.
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<PAGE>
1.9 "Exposure Period" means the period beginning at 12:00 A.M.
Central Time on March 1, 1997 and ending at 12:00 A.M. Central Time on January
1, 2000, which period may be extended by HM for an additional two (2) year
period ending at 12:00 A.M. Central Time on January 1, 2002, provided that HM
gives Option Writer notice of such proposed extension at least thirty (30) days
prior to January 1, 2000, and provided further that, at 12:00 A.M. Central Time
on January 1, 2000, (a) HM has not previously exercised the Securities Issuance
Option, (b) neither the S&P Ratings of, nor the A. M. Best claims payment
ability ratings of, the HM property/casualty insurance subsidiaries which in the
aggregate write more than fifty percent (50%) of HM's net property/casualty
insurance premiums written have been downgraded below the level of A- and (c) HM
is not in material breach of any provision of the Transaction Agreements.
1.10 "GAAP" means United States generally accepted accounting
principles, consistently applied.
1.11 "HM" means Horace Mann Educators Corporation, a Delaware
corporation.
1.12 "HM Common Stock" means the common stock of HM.
1.13 "HM Financial Statements" means the HM financial statements
specified in Section 3.9.
1.14 "HM Insurance Subsidiaries" means Horace Mann Insurance Company,
an insurance company formed under the laws of Illinois; Allegiance Insurance
Company, an insurance company formed under the laws of California; Teachers
Insurance Company, an insurance company formed under the laws of Illinois;
Horace Mann Life Insurance Company, an insurance company formed under the laws
of Illinois; Allegiance Life Insurance Company, an insurance company formed
under the laws of Illinois; and such other insurance company subsidiaries of HM
as may be agreed in writing between HM and Option Writer.
1.15 "Notice of Exercise" means the written notice of HM's intent to
exercise the Securities Issuance Option as described in Section 2.3.
1.16 "Notice of Objection" means Option Writer's written notice of
objection to a Notice of Exercise, as described in Section 2.3.
1.17 "Option Exercise Fee" means the amount paid by HM to Option
Writer at the time of each separate exercise of the Securities Issuance Option,
as set forth in Section 2.2(f).
1.18 "Option Fee" means the amounts paid by HM to Option Writer as
consideration for the Securities Issuance Option, as set forth in Section 2.1.
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<PAGE>
1.19 "Original Value" means the Preferred Share Purchase Price for
each Preferred Share, as proportionally adjusted for all stock splits, stock
dividends, and any other subdivisions, combinations, reclassifications, or
recapitalizations affecting the Preferred Shares.
1.20 "Option Writer" means Centre Reinsurance (U.S.) Limited, a
Bermuda corporation.
1.21 "Preferred Share Purchase Price" means US$1,000 per Preferred
Share payable by Option Writer to HM as set forth in Section 2.3.
1.22 "Preferred Shares" means the Cumulative Nonvoting Convertible
Preferred Shares of HM described in the Certificate of Designations.
1.23 "Property Catastrophe Reinsurance" means the property
catastrophe reinsurance maintained by HM as described in Section 5.6.
1.24 "Qualifying Catastrophic Event" means (a) with respect to a
single Event, any single Event taking place during an Agreement Year from which
HM incurs an Ultimate Loss in an amount greater than the Attachment Point, or
(b) with respect to multiple Events taking place during an Agreement Year,
multiple Events from which HM incurs an Ultimate Loss in the aggregate from such
Events in an amount greater than the Attachment Point. A single Event that
takes place during the Exposure Period but which has not developed into a
Qualifying Catastrophic Event prior to the first anniversary of such Event shall
not constitute a Qualifying Catastrophic Event for purposes of this Agreement.
A single Event that takes place during the Exposure Period and which develops
into a Qualifying Catastrophic Event prior to the first anniversary of such
Event, but after expiration of the Exposure Period, shall constitute a
Qualifying Catastrophic Event for purposes of this Agreement. Multiple Events
that have taken place during any Agreement Year within the Exposure Period but
which have not developed into a Qualifying Catastrophic Event prior to the end
of six (6) months after the end of such Agreement Year shall not constitute a
Qualifying Catastrophic Event for purposes of this Agreement. Multiple Events
that have taken place during any Agreement Year within the Exposure Period and
which develop into a Qualifying Catastrophic Event prior to the end of six (6)
months after the end of such Agreement Year shall constitute a Qualifying
Catastrophic Event for purposes of this Agreement.
1.25 "Registration Rights Agreement" means the Registration Rights
Agreement described in Section 6.2.
1.26 "S&P Rating" means a claims payment ability rating, as published
from time to time, by the Standard & Poor's Division of the McGraw-Hill
Companies.
1.27 "SAP" means statutory accounting principles, consistently
applied.
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<PAGE>
1.28 "SAP Consolidated Surplus" means the consolidated surplus of the
HM Insurance Subsidiaries determined based on the following: with respect to
(a) any Insurance Subsidiary engaged principally in life insurance, the sum of
(i) the amount reported on page 3, line 38, column 1 of its Annual Statement
required under the laws of its state of domicile, plus (ii) the asset valuation
reserve/interest maintenance reserve of such Insurance Subsidiary; or (b) any
Insurance Subsidiary engaged principally in property/casualty insurance, the
amount reported on page 3, line 25, column 1 of its Annual Statement required
under the laws of its state of domicile; or an amount determined in a consistent
manner for any date other than one as of which an Annual Statement is prepared;
provided, however, that if at any time SAP shall be modified to decrease the
amount calculated under clause (b) of this Section 1.28 by a reserve similar to
the asset valuation reserve/interest maintenance reserve, then the amount under
such clause (b) shall be deemed to be the sum of such reduced amount plus such
reserve.
1.29 "SEC" means the United States Securities and Exchange
Commission.
1.30 "Securities Act" means the Securities Act of 1933, as amended,
and all rules and regulations promulgated thereunder.
1.31 "Securities Issuance Option" means HM's option to obligate
Option Writer to purchase Preferred Shares with an Original Value of up to
US$100,000,000, subject to the terms and conditions set forth in this Agreement
(provided, however, that up to an additional US$50,000,000 of Preferred Shares,
valued at Original Value, which are issued but subsequently redeemed by HM shall
be reincluded in the Preferred Shares subject to the Securities Issuance Option
as provided in Section 6.1, and provided, further, that in no event shall Option
Writer be required to (a) purchase, in the aggregate, more than US$150,000,000
of Preferred Shares valued at Original Value, or (b) hold at any one time more
than US$100,000,000, in the aggregate, of Preferred Shares valued at Original
Value and HM Common Stock into which the Preferred Shares may have been
converted, valued at the conversion rate).
1.32 "Single Investor" means, with respect to holders of the
Preferred Shares, any group of one or more separate legal persons or entities
which are owned or managed by, or under common ownership or management with, one
another.
1.33 "Transaction Agreements" means this Agreement, its schedules and
exhibits, the Registration Rights Agreement and the Certificate of Designations.
1.34 "Ultimate Loss" means the actual direct losses (including the
paid loss, all reserves for unpaid losses, and coinsurance paid by the HM
Insurance Subsidiaries) incurred by the HM Insurance Subsidiaries from an Event
or multiple Events during the applicable Agreement Year (a) with respect to a
single Event, prior to accounting for the Property Catastrophe Reinsurance in
place at the time such Event took place, but after accounting for all other
reinsurance, and (b) with respect to multiple Events, after accounting for the
Property Catastrophe Reinsurance (to be calculated as if HM were in compliance
with
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Section 5.6 hereof, if in fact HM is not in compliance with such Section) and
all other reinsurance then in effect. A loss shall not be included in the
calculation of Ultimate Loss for more than one Qualifying Catastrophic Event.
2. Securities Issuance Option.
2.1 Option Fee. To acquire the right to exercise the Securities
Issuance Option during the Exercise Term with respect to a Qualifying
Catastrophic Event, HM shall pay to Option Writer an Option Fee (the "Option
Fee") for each Agreement Year as follows: (a) for the first Agreement Year,
US$1,250,000, and (b) for all subsequent Agreement Years, 1.475% of the Original
Value of that portion of the Preferred Shares subject to the Securities Issuance
Option which are not then issued and outstanding pursuant to an exercise of the
Securities Issuance Option (including up to US$50,000,000 of Preferred Shares,
valued at Original Value, to the extent that such Preferred Shares have been
issued but subsequently redeemed by HM as provided in Section 6.1). The first
Option Fee payment of US$1,250,000 shall be delivered upon execution of this
Agreement, and subsequent Option Fee payments shall be delivered on January 1
(or the next following business day) of 1998 and each subsequent year within the
Exposure Period (as it may be extended). In consideration of the payment of the
Option Fee, Option Writer hereby grants to HM the right to exercise the
Securities Issuance Option on the terms set forth in this Agreement.
2.2 Exercise Rights. HM shall have the right to exercise the
Securities Issuance Option subject to the following limitations:
a. The first exercise of the Securities Issuance Option must be
made with respect to a number of Preferred Shares having a minimum aggregate
Original Value of US$15,000,000, and may only be made in integral multiples of
US$1,000,000 above such minimum amount.
b. The second or any subsequent exercise of the Securities
Issuance Option must be made with respect to a number of Preferred Shares having
a minimum aggregate Original Value of US$5,000,000, and may only be made in
integral multiples of US$1,000,000 above such minimum amount.
c. In no event shall the Preferred Shares issued pursuant to any
one exercise of the Securities Issuance Option have an aggregate Original Value
in excess of the amount of the decline in SAP Consolidated Surplus resulting
from the Qualifying Catastrophic Event (to be calculated as if HM were in
compliance with Section 5.6 hereof, if in fact HM is not in compliance with such
Section) with respect to which such Securities Issuance Option exercise is
effected, which amount shall be limited, if the circumstances require, such that
no more than US$15,000,000 of such amount is attributable to uncollectible
reinsurance.
d. In no event shall the Preferred Shares issued pursuant to any
one exercise of the Securities Issuance Option have an aggregate Original Value
in excess of US$100,000,000.
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e. In no event shall the Preferred Shares issued pursuant to all
exercises of the Securities Issuance Option, considered in the aggregate, have
an Original Value of greater than US$150,000,000 (provided, however, that
included in such amount is up to US$50,000,000 of Preferred Shares, valued at
Original Value, which are issued but subsequently redeemed by HM and reincluded
in the Preferred Shares subject to the Securities Issuance Option as provided in
Section 6.1), provided, however, that in no event shall Option Writer be
required to (a) purchase, in the aggregate, more than US$150,000,000 of
Preferred Shares valued at Original Value, or (b) hold at any one time more than
US$100,000,000, in the aggregate, of Preferred Shares valued at Original Value
and HM Common Stock into which Preferred Shares may have been converted, valued
at the conversion rate.
f. Upon each separate exercise of the Securities Issuance
Option, HM shall pay to Option Writer an Option Exercise Fee which shall equal
US$25,000 for the first exercise and US$15,000 for each subsequent exercise.
g. In no case shall HM exercise the Securities Issuance Option
more than one time (i) per Qualifying Catastrophic Event resulting from any
single Event, (ii) per Qualifying Catastrophic Event resulting from multiple
Events occurring during any one (1) Agreement Year, or (iii) with respect to any
one Agreement Year (regardless of the number of Qualifying Catastrophic Events
occurring during such Agreement Year).
2.3 Method of Exercise. In the event that HM desires to exercise the
Securities Issuance Option with respect to a Qualifying Catastrophic Event, HM
shall provide written notice to Option Writer during the Exercise Term of its
intent to exercise the Securities Issuance Option (a "Notice of Exercise"). The
Notice of Exercise shall specify the number of Preferred Shares to be issued
pursuant to the exercise of the Securities Issuance Option, the aggregate
Preferred Share Purchase Price payable for such Preferred Shares based on
Original Value and the proposed Exercise Date. Following delivery of a Notice
of Exercise in accordance with Section 9.2, Option Writer shall have until the
end of the forty-five (45) day period following delivery of the Notice of
Exercise to investigate whether the conditions to exercise of the Securities
Issuance Option have been satisfied and shall, by the end of such 45 day period,
either issue a Notice of Objection (hereinafter defined) or state its intent not
to issue a Notice of Objection based on its investigation theretofore conducted,
provided, however, that if the Exercise Date is extended for more than an
additional forty-five (45) days (beyond the initial forty-five (45) day notice
period) for any reason, Option Writer shall have a period of ten (10) business
days to update its investigation, which ten (10) business day period shall
commence on the date that is the later of (a) the date that HM certifies to
Option Writer that all conditions to exercise of the Securities Issuance Option
set forth in Article 5 hereof shall have been satisfied, or (b) the 45th day
immediately preceding the actual Exercise Date. In connection with such
investigation, HM shall provide Option Writer, or its designated agent,
reasonable access to its loss records relating to the Qualifying Catastrophic
Event in question (including, without limitation, policy files, claim files, and
loss and loss reserve files or information), during normal business hours, in
order to allow Option Writer to undertake such investigation. In the event that
Option Writer determines that the conditions to exercise
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of the Securities Issuance Option set forth in Article 5 have been satisfied,
Option Writer shall deliver, on the Exercise Date (or the next following
business day if the Exercise Date falls on a Saturday, Sunday or nationally
recognized holiday), by wire transfer of immediately available funds, in U.S.
dollars, the aggregate Preferred Share Purchase Price specified in the Notice of
Exercise, against the delivery by HM of the corresponding number of Preferred
Shares. In the event that Option Writer determines that the conditions for
exercise of Securities Issuance Option have not been met, Option Writer shall
deliver a written notice of objection to exercise of the Securities Issuance
Option (the "Notice of Objection") to HM within such forty-five (45) day period
or the ten (10) business day update period described above, as applicable. Such
Notice of Objection shall specify in reasonable detail the reason(s) for Option
Writer's objection to the exercise of the Securities Issuance Option. If, within
twenty (20) days following delivery of the Notice of Objection to HM, HM and
Option Writer cannot reach an agreement regarding the exercise of the Securities
Issuance Option, their dispute shall be submitted to dispute resolution in
accordance with Section 8 below. If Option Writer has not delivered a Notice of
Objection to HM, Option Writer and HM shall cooperate and shall use their
commercially reasonable efforts to cause the conditions listed in Section 5.3
which involve obligations of Option Writer or HM, as applicable, to be satisfied
as soon as reasonably practicable, including without limitation making any Form
A filings required under applicable state insurance laws, rules and regulations.
2.4 Extension of Exercise Term. Notwithstanding anything in this
Agreement to the contrary, in the event that HM files, prior to the end of any
Exercise Term, preliminary proxy materials with the SEC relating to a submission
to holders of HM Common Stock for approval of the issuance of the Preferred
Shares (or the issuance of shares of HM Common Stock upon conversion of the
Preferred Shares), as required by any exchange listing or other regulatory
requirements, the Exercise Term shall be extended by a period of ninety (90)
days plus, if any such materials are not reviewed by the staff at the SEC within
thirty (30) days, an additional number of days (not to exceed fifteen (15) days
in any event) equal to the number of days in excess of thirty between the filing
of such preliminary materials with the SEC and the initial receipt by HM of
written comments thereon from the SEC staff.
3. Representations and Warranties of HM. HM represents and warrants to
Option Writer (which representations and warranties shall be deemed to be
repeated by HM on each Exercise Date and which representations and warranties
shall be deemed to include any certification made by any officer of HM pursuant
to the terms of this Agreement) as follows:
3.1 Existence and Qualifications of HM. HM is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware, and HM has the full corporate power and authority to execute and
deliver the Transaction Agreements to which it is a party, and to perform its
obligations under, and to consummate the transactions contemplated by, the
Transaction Agreements to which it is a party, including, without limitation,
the delivery of the Preferred Shares pursuant to the exercise of the Securities
Issuance Option.
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3.2 No Violation or Conflict. The execution and delivery of the
Transaction Agreements to which it is a party by HM, and the performance of HM
under such Transaction Agreements, do not violate or conflict with any
applicable law, any provision of HM's organizational documents or any order or
judgment of any court or other government agency applicable to HM or any of its
assets or subsidiary or affiliated companies, or any contractual restriction
binding upon or affecting HM or any of its subsidiary or affiliated companies or
its assets. HM and the HM Subsidiaries, as applicable, have complied, in all
material respects, with all representations, warranties, covenants and
agreements contained in any Transaction Agreements.
3.3 Consents. All governmental and other consents that are required
to have been obtained by HM with respect to the execution and delivery of this
Agreement have been obtained and are in full force and effect and all conditions
of any such consents have been complied with.
3.4 Binding Obligations. The execution of the Transaction Agreements
to which it is a party has been duly authorized by all necessary corporate
action of HM, and such Transaction Agreements (a) have been duly executed and
delivered by HM, (b) constitute legal, valid and binding obligations of HM, and
(c) are enforceable against HM in accordance with their terms (subject to
applicable bankruptcy, reorganization, insolvency, moratorium or similar laws
affecting creditors' rights generally and subject, as to enforceability, to
equitable principles of general application).
3.5 Absence of Litigation. There is not pending or, to its
knowledge, threatened against HM or any of its subsidiaries or affiliates, any
action, suit or proceeding before any court, tribunal, governmental body, agency
or official or any arbitrator or mediator that is likely to affect the legality,
validity and enforceability of this Agreement against HM.
3.6 Preferred Shares. HM has, or will have as of the applicable
Exercise Date, 100,000 authorized Preferred Shares, and such Preferred Shares,
when issued pursuant to the exercise of the Securities Issuance Option, shall,
upon delivery of payment therefor, be validly issued, fully paid and non-
assessable. Upon issuance pursuant to this Agreement, the Preferred Shares
shall be free and clear of any lien, encumbrance or other restriction (other
than as set forth in the Transaction Agreements), and upon delivery of and
payment for the Preferred Shares as provided in this Agreement, Option Writer
will acquire good title to the Preferred Shares purchased under this Agreement,
free and clear of any lien, encumbrance or other restriction (other than as set
forth in the Transaction Agreements).
3.7 HM Common Stock. The shares of HM Common Stock into which the
Preferred Shares may be converted, as set forth in the Certificate of
Designations, shall, upon issuance pursuant to such conversion, be validly
issued, fully paid and non-assessable. Such shares of HM Common Stock shall be
free and clear of any lien, encumbrance or other restriction (other than as set
forth in the Transaction Agreements), and upon conversion as provided in the
Certificate of Designations, Option Writer will acquire good title to the
requisite number of shares of HM Common Stock, free and clear of any lien,
encumbrance or
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other restriction (other than as set forth in the Transaction Agreements). Such
shares of HM Common Stock shall be subject to the Registration Rights Agreement
described in Section 6.2.
3.8 Options or Other Rights. Except for this Agreement, there is no
outstanding right, subscription, warrant, call, unsatisfied preemptive right,
option or other agreement of any kind to purchase or otherwise to receive from
HM any authorized but unissued, unauthorized or treasury shares of the Preferred
Shares.
3.9 Financial Statements. HM has furnished Option Writer with true
and complete copies of (a) the statutory annual statements of the HM Insurance
Subsidiaries containing balance sheets as of December 31, 1994 and 1995 and
statements of earnings for the years ended December 31, 1994 and 1995
(collectively, the "Subsidiary Statements"), and (b) the Form 10-K and Annual
Report of HM for the year ended December 31, 1995 (collectively, the "Annual
Reports"). The Subsidiary Statements have been prepared in accordance with SAP
and the Annual Reports have been prepared in accordance with GAAP, and both the
Subsidiary Statements and the Annual Reports present fairly in all material
respects the financial position of HM and/or the HM Insurance Subsidiaries, and
the results of their respective operations, as of the dates indicated and for
the periods then ended.
3.10 Licenses and Permits. The HM Insurance Subsidiaries have all
requisite licenses, permits and authority (collectively, "Licenses") that are
necessary for the conduct of their respective insurance and other businesses, if
any, such Licenses are in full force and effect, and no proceeding is pending or
threatened to suspend, revoke or limit any License which is material to the
operations of any such insurance company.
3.11 Regulatory Filings. All previous regulatory filings by HM with
the SEC and applicable insurance regulatory authorities, at the time of filing,
(a) in the case of filings with the SEC, did not contain any material
misstatements or omissions, and (b) in the case of filings with applicable
insurance regulatory authorities, were appropriately responsive to, and in
compliance with, the insurance regulatory requirements in all material respects.
All previous regulatory filings by the HM Insurance Subsidiaries with applicable
insurance regulatory authorities were, at the time of filing, appropriately
responsive to, and in compliance with, the insurance regulatory requirements in
all material respects.
4. Representations and Warranties of Option Writer. Option Writer
represents and warrants to HM (which representations and warranties shall be
deemed repeated by Option Writer on each Exercise Date) as follows:
4.1 Existence and Qualifications of Option Writer. Option Writer is
a corporation duly organized, validly existing and in good standing under the
laws of Bermuda, and Option Writer has the full corporate power and authority to
execute and deliver the Transaction Agreements to which it is a party, and to
perform its obligations under, and consummate the transactions contemplated by
the Transaction Agreements to which it is a
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party, including, without limitation, the purchase of the Preferred Shares
pursuant to the exercise of the Securities Issuance Option.
4.2 No Violation or Conflict. The execution and delivery of the
Transaction Agreements to which it is a party by Option Writer, and the
performance of Option Writer under such Transaction Agreements, do not violate
or conflict with any applicable law, any provision of Option Writer's
organizational documents or any order or judgment of any court or other
government agency applicable to Option Writer or any of its assets or subsidiary
or affiliated companies, or any contractual restriction binding upon or
affecting Option Writer or any of its subsidiary or affiliated companies or its
assets. Option Writer has complied, in all material respects, with all
representations, warranties, covenants and agreements contained in any
Transaction Agreements.
4.3 Consents. All governmental and other consents that are required
to have been obtained by Option Writer with respect to the execution and
delivery of this Agreement have been obtained and are in full force and effect
and all conditions of any such consents have been complied with.
4.4 Binding Obligations. The execution of the Transaction Agreements
to which it is a party has been duly authorized by all necessary corporate
action of Option Writer, and such Transaction Agreements (a) have been duly
executed and delivered by Option Writer, (b) constitute legal, valid and binding
obligations of Option Writer, and (c) are enforceable against Option Writer in
accordance with their terms (subject to applicable bankruptcy, reorganization,
insolvency, moratorium or similar laws affecting creditors' rights generally and
subject, as to enforceability, to equitable principles of general application).
4.5 Absence of Litigation. There is not pending or to its knowledge,
threatened against Option Writer or any of its subsidiaries or affiliates, any
action, suit or proceeding before any court, tribunal, governmental body, agency
or official or any arbitrator or mediator that is likely to affect the legality,
validity and enforceability of this Agreement against Option Writer.
4.6 Investment Representation. Option Writer understands that the
issuance of Preferred Shares under this Agreement and the issuance of HM Common
Stock upon conversion of Preferred Shares have not been and will not (except as
contemplated pursuant to the Registration Rights Agreement) be registered under
the Securities Act and such Preferred Shares and HM Common Stock will be issued
in reliance upon the exemption afforded by Section 4(2) of the Securities Act
for transactions by an issuer not involving any public offering. Option Writer
represents that (a) it is acquiring the Preferred Shares and such HM Common
Stock solely for its own account, for investment purposes only, and not with a
view to distribution, fractionalization or resale thereof, (b) it will not sell
or otherwise dispose of the Preferred Shares and such HM Common Stock except in
compliance with the registration requirements or exemption provisions of
applicable securities laws including the Securities Act, (c) it has not relied
on HM for any explanation of the application of the various state and federal
securities laws with regard to the acquisition of the Preferred Shares and such
HM
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Common Stock, (d) it has access to complete information regarding the business
and finances of HM, and has received, read and understood the contents of the
Annual Report to Shareholders and Notice of Meeting and Proxy Statements for HM
as of and for each of the years ended December 31, 1993, 1994 and 1995, (e) it
has such knowledge and experience in business and financial matters that it has
been able to fully understand and completely evaluate the risks and merits of
holding the Preferred Shares and such HM Common Stock as provided in this
Agreement, and (f) it is able to bear the economic risk and limitation in
liquidity of an investment in the Preferred Shares and such HM Common Stock.
5. Conditions to Exercise of Securities Issuance Option. With respect to
each exercise of the Securities Issuance Option, the right of HM to effect such
exercise of the Securities Issuance Option shall be subject to the satisfaction
by HM at, or waiver by Option Writer at or prior to, the Exercise Date, of the
following conditions:
5.1 Occurrence of Event. A Qualifying Catastrophic Event shall have
occurred with respect to the HM Insurance Subsidiaries collectively.
5.2 HM Net Worth. With respect to the first exercise of the
Securities Issuance Option, after accounting for the Qualifying Catastrophic
Event, but prior to payment for any Preferred Shares to be purchased upon such
first exercise of the Securities Issuance Option, the consolidated stockholders'
equity of HM and its consolidated subsidiaries, as determined in accordance with
GAAP (the "HM Net Worth") shall not be less than US$175,000,000. With respect
to any subsequent exercise of the Securities Issuance Option, after accounting
for the Qualifying Catastrophic Event and any payment for Preferred Shares
previously issued pursuant to an exercise of the Securities Issuance Option, the
HM Net Worth shall not be less than US$175,000,000.
5.3 Compliance with Laws and Consents. HM shall have complied with
all laws and regulations applicable to the authorization and issuance of the
Preferred Shares, and subject to the following sentence, the conversion of the
Preferred Shares into HM Common Stock, including the adoption by the Board of
Directors of HM of the Certificate of Designations, and the filing of such
Certificate of Designations with the Secretary of State of Delaware. HM and
Option Writer shall have obtained all consents and approvals (whether
shareholder, regulatory, contractual or otherwise) necessary for the
authorization and issuance of the Preferred Shares, the conversion of the
Preferred Shares into HM Common Stock, and the authorization and issuance of
such HM Common Stock, including without limitation the filing and approval of
any Form A application with the applicable insurance departments (but excluding
any filings required under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended) provided that, if any insurance regulator shall for any reason
decline to approve the conversion of the Preferred Shares and/or the issuance of
HM Common Stock pursuant to such conversion, but shall approve the authorization
and issuance of the Preferred Shares then such approval of the conversion of the
Preferred Shares and/or the issuance of HM Common Stock pursuant to such
conversion, as applicable, shall not be a condition to exercise
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of the Securities Issuance Option, provided further, however, that HM has
reasonably cooperated with Option Writer to obtain such approvals.
5.4 Review of Financial Statements by Auditor. HM's regular outside
auditor or accounting firm shall have reviewed HM's consolidated balance sheet
and statement of earnings for the most recent quarter ending prior to the date
of the applicable Notice of Exercise, and shall have issued its review report on
such quarterly financial statements, and HM shall provide an adjusted
consolidated balance sheet for HM for the period up to the Exercise Date, and HM
shall represent and warrant, as of the Exercise Date, that such adjusted
consolidated balance sheet presents fairly in all material respects the
financial position of HM as of the date indicated. In addition, HM shall supply
Option Writer with such information as Option Writer may reasonably request to
permit Option Writer to determine satisfaction by HM of the conditions to
exercise set forth in Sections 5.1, 5.2, 5.4, 5.6 and 5.7 of this Agreement.
5.5 No Insolvency or Bankruptcy. None of HM or the HM Insurance
Subsidiaries shall (a) be a debtor under any bankruptcy, insolvency or similar
law affecting creditors generally, (b) be the subject of any liquidation,
transformation or rehabilitation proceeding, (c) be under the supervision of any
governmental regulatory body, or (d) have had a receiver or similar person or
entity appointed for any of its property.
5.6 Maintenance of Current HM Reinsurance Program. HM shall have in
effect a reinsurance program, of reasonably consistent quality with its
reinsurance program in effect on the Effective Date, with an excess of loss
cover with an original limit and a single reinstatement limit per year in effect
of not less than sixty-six percent (66%) of the 250 year return period loss for
the HM Insurance Subsidiaries as determined by the Applied Insurance Research
model in use by HM and the HM Insurance Subsidiaries on the Effective Date, and
consistent with the "base case" analysis computed under such model, a copy of
which is attached as Exhibit 5.6.
5.7 HM Common Stock Ownership Threshold. The purchase of Preferred
Shares pursuant to an exercise of the Securities Issuance Option shall not (when
taking into account all shares of HM Common Stock in which Option Writer then
holds direct, indirect or beneficial ownership) result in Option Writer having
direct, indirect or beneficial ownership of more than fifty percent (50%) of the
issued and outstanding shares of HM Common Stock, assuming that such Preferred
Shares, together with any other Preferred Shares already then held directly,
indirectly or beneficially by Option Writer, were converted into shares of HM
Common Stock on the Exercise Date.
5.8 Accuracy of Representations, Warranties and Covenants. Each of
the representations and warranties of HM made in Article 3 of this Agreement
shall be true in all material respects on and as of the Exercise Date and with
the same effect as though such representations and warranties had been made on
and as of such date except as otherwise contemplated or permitted by this
Agreement, and HM shall not be in breach of any of the covenants of HM made in
Article 6 of this Agreement; and Option Writer shall have received
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a certificate to that effect, in the form attached as Exhibit 5.8, dated the
Exercise Date and executed on behalf of HM by a duly authorized officer.
5.9 Payment of Fees. All Option Fee payments then due and the
applicable Option Exercise Fee shall have been paid in full.
5.10 Legal Opinion. Option Writer shall have received, from counsel
for HM, an opinion of counsel dated as of the Exercise Date which is
substantially in the form attached as Exhibit 5.10.
6. Covenants and Agreements. Option Writer and HM make the following
covenants and agreements:
6.1 Redemption Rights. The Preferred Shares shall be subject to
redemption as provided in the Certificate of Designations. Up to US$50,000,000
of Preferred Shares (valued at Original Value) which are redeemed by HM pursuant
to such redemption right shall upon redemption be reincluded in the Preferred
Shares subject to subsequent exercises of the Securities Issuance Option under
this Agreement, provided, however, that this reinclusion right shall be
nonrecurring so that the amount of the Preferred Shares which are so redeemed
and reincluded would not, if subsequently reissued and then redeemed again, be
so reincluded another time.
6.2 Registration Rights. Holders of Registrable Securities (as
defined in the Registration Rights Agreement) shall have registration rights in
accordance with the terms of the Registration Rights Agreement in the form
attached as Exhibit 6.2, which Registration Rights Agreement shall be executed
by HM and Option Writer concurrently with this Agreement.
6.3 Resale Rights.
a. The Preferred Shares will be freely transferable subject only to
restrictions imposed by Federal and state securities laws, except that (i) any
transfer of the Preferred Shares having an Original Value of more than
US$25,000,000 to any Single Investor shall require the prior written consent of
HM, and (ii) any transfer of any amount of Preferred Shares to any "Prohibited
Transferee" (as defined below) that acquires such Preferred Shares other than
solely for investment purposes (as evidenced by a written representation to HM
to such effect by such transferee), shall require the prior written consent of
HM. Subject to the foregoing restrictions, Option Writer shall have the right
to sell or transfer any Preferred Shares to other investors that qualify as
"qualified institutional buyers" as defined in Rule 144A of the General
Regulations of the Securities Act, provided that (a) Option Writer shall first
deliver an opinion of counsel acceptable to HM indicating that any such proposed
investors meet the definition of "qualified institutional buyers", and (b) in no
case shall Option Writer have the right to sell or transfer any Preferred Shares
to any proposed transferee which includes any of the leveraged buy-out firms or
competitors of HM listed on the attached
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Schedule 6.3 or their affiliates or subsidiaries, which Schedule 6.3 may be
reasonably updated and modified from time to time, by notice given by HM to
Option Writer, provided that such update or modification shall be based upon
industry changes reasonably determined by HM to change the identity of leveraged
buy-out firms or competitors of HM or their affiliates or subsidiaries (each of
the entities listed on Schedule 6.3, as so updated or modified from time to
time, is herein referred to as a "Prohibited Transferee"). In connection with
any proposed Rule 144A sales by Option Writer, HM shall provide Option Writer
with (i) copies of all SEC filings made by HM within the previous one (1) year
period and any press releases issued by HM since the date of the last such
filing, and (ii) only in the event that HM securities cease to be listed on a
national securities exchange or traded on NASDAQ or any other similar national
over-the-counter market, copies of all Rule 144A information with respect to HM.
Notwithstanding the foregoing, Option Writer shall be able to sell or transfer
Preferred Shares to its affiliates and affiliated investment funds within the
Zurich Group of companies without the prior consent of HM; provided, however,
that any such sale or transfer shall not subject HM to suffer any material cost
or expense, and provided further, that if such affiliate is foreign, there would
be no material adverse effect on HM due to the fact that such affiliate is a
foreign entity.
Prior to the registration of the Preferred Shares, pursuant to
the Registration Rights Agreement or otherwise, the certificates evidencing the
Preferred Shares shall bear a legend which evidences restrictions upon
transferability of the Preferred Shares. The legend shall read as follows:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY
STATE OR FOREIGN SECURITIES LAWS, AND MAY NOT BE SOLD OR TRANSFERRED
IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT OR AN EXEMPTION
FROM REGISTRATION THEREUNDER. THE SECURITIES REPRESENTED BY THIS
CERTIFICATE ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON TRANSFER
SET FORTH IN A CATASTROPHE EQUITY SECURITIES ISSUANCE OPTION AGREEMENT
BETWEEN THE COMPANY AND CENTRE REINSURANCE (U.S.) LIMITED, A BERMUDA
CORPORATION, DATED AS OF FEBRUARY 15, 1997, AS AMENDED AND MODIFIED
FROM TIME TO TIME. A COPY OF SUCH AGREEMENT MAY BE OBTAINED BY THE
HOLDER HEREOF AT THE COMPANY'S PRINCIPAL PLACE OF BUSINESS WITHOUT
CHARGE.
The first sentence of the legend (and the eighth and eleventh words of the
second sentence) shall be removed from any certificate representing Preferred
Shares (a) sold under an effective registration statement under the Securities
Act, or (b) as to which, in an opinion of counsel reasonably satisfactory to HM
(which opinion shall be paid for solely by the holder of such
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Preferred Shares), such registration is not necessary or required, and that the
transfer will not otherwise violate the Securities Act, the Exchange Act, or
applicable state or foreign securities laws; and any stop transfer instructions
previously given to HM's transfer agent shall be revoked as to such Preferred
Shares upon the occurrence of (a) or (b) above.
b. The shares of HM Common Stock into which the Preferred
Shares may be convertible shall not be subject to any restrictions on sale or
transfer by Option Writer pursuant to this Agreement.
Prior to the registration of any shares of HM Common Stock into
which the Preferred Shares are converted, pursuant to the Registration Rights
Agreement or otherwise, the certificates representing such shares of HM Common
Stock shall bear a legend which evidences restrictions upon transferability of
such shares of HM Common Stock. Such legend shall read as follows:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY
STATE OR FOREIGN SECURITIES LAWS, AND MAY NOT BE SOLD OR TRANSFERRED
IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT OR AN EXEMPTION
FROM REGISTRATION THEREUNDER.
The legend shall be removed from any certificate representing either (a) shares
of HM Common Stock sold under an effective registration statement under the
Securities Act, or (b) shares of HM Common Stock as to which, in an opinion of
counsel reasonably satisfactory to HM (which opinion shall be paid for solely by
the holder of such shares of HM Common Stock), such registration is not
necessary or required, and that the transfer will not otherwise violate the
Securities Act, the Exchange Act, or applicable state or foreign securities
laws; and stop transfer instructions previously given to HM's transfer agent
shall be revoked as to such shares of HM Common Stock upon the occurrence of (a)
or (b) above.
6.4 Preferred Share Preference. The liquidation preference of the
Preferred Shares shall be at least equal to the highest liquidation preference
of any other class of preferred shares of HM issued and outstanding at the time
of liquidation. During the term of this Agreement and during the period when
any Preferred Shares remain issued and outstanding, HM shall not issue any
preferred or other capital stock which ranks equal or senior to Preferred Shares
with respect to dividend or distribution rights or rights to distributions on
liquidation without the prior written approval, which approval shall not be
unreasonably withheld, of (i) Option Writer if no Preferred Shares are then
outstanding, or (ii) the holders of more than fifty percent (50%) of the
outstanding Preferred Shares if Preferred Shares are then outstanding.
6.5 Restrictions on HM and Option Writer. During the period when any
Preferred Shares remain issued and outstanding, without the prior written
consent of the holders of more than fifty percent (50%) of such Preferred
Shares, which consent shall not be
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unreasonably withheld, (a) HM and the HM Insurance Subsidiaries shall not (i)
pay dividends on, make redemptions of, or make other distributions with respect
to, any capital stock of HM other than the Preferred Shares except that
subsidiaries of HM may pay dividends to HM and HM may pay dividends on the HM
Common Stock at any time if all dividends theretofore accrued on the Preferred
Shares shall be paid in full in cash to the holders of Preferred Shares before
the declaration or payment of any such dividends on the HM Common Stock; (ii)
enter into related party transactions at other than arm's length, or (iii)
except in the ordinary course of business, make any loan or advance to, or
investment in, any person or entity, and (b) HM shall not dispose of its
interest in any material subsidiary (i.e., any subsidiary which contains more
than ten percent (10%) of the consolidated assets or produces more than ten
percent (10%) of the consolidated annual revenue of HM); provided, however, that
the restrictions set forth in clauses (a)(iii) and (b) above shall only apply in
the event that HM has not then paid all dividends then accrued and payable with
respect to such Preferred Shares.
6.6 Option Writer Filings. Notwithstanding anything in this Agreement
to the contrary, Option Writer shall be responsible for making any filing
required under Section 13(d) or Section 16 of the Exchange Act, but the making
of such filings shall not be a condition to the exercise of the Securities
Issuance Option.
6.7 Regulatory Filings for Conversion. HM, Option Writer and their
respective affiliates shall make all regulatory filings, including without
limitation all filings under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, which are necessary or desirable to permit Option Writer to
convert any Preferred Shares into shares of HM Common Stock in accordance with
its terms as promptly as possible following any request by Option Writer. Option
Writer and HM shall cooperate and use commercially reasonable efforts to obtain
any insurance regulatory approvals not theretofore obtained, including without
limitation any Form A filings required under applicable insurance laws, rules
and regulations.
6.8 Change of Control. In the event of a change of control of HM (as
defined in the Certificate of Designations), HM shall be obligated to redeem any
issued and outstanding Preferred Shares on the terms and conditions set forth in
the Certificate of Designations, and this Agreement shall be automatically
canceled upon receipt of the Redemption Price (as defined in the Certificate of
Designations) by Option Writer, provided, however, that the cancellation of this
Agreement shall not affect any rights or obligations arising out of or relating
to events occurring or circumstances existing prior to such cancellation, and
provided further, however, that this Agreement shall be reinstated in the event
the Redemption Price must be refunded or returned by Option Writer due to any
preferential transfer or fraudulent conveyance claim.
6.9 Option Writer Credit Support. Option Writer shall, promptly upon
request by HM, in the event that the S&P Ratings of both Option Writer and
Centre Reinsurance Limited, a Bermuda corporation, fall below AA- during any
period during which HM has the ability to exercise the Securities Issuance
Option, purchase at Option Writer's sole expense an irrevocable standby letter
of credit drawable in New York, from a financial institution reasonably
acceptable to HM, which letter of credit secures the performance of
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Option Writer under this Agreement and effectively raises the claims payment
ability of the Option Writer under this Agreement to an S&P Rating of AAA. Such
letter of credit shall remain in effect until the earlier of (a) five (5) days
following the end of the period during which HM has the ability to exercise the
Securities Issuance Option, and (b) the date that the S&P Ratings of either
Option Writer or Centre Reinsurance Limited shall be at least AA-. Such letter
of credit shall initially be in a principal amount equal to the Original Value
of the Preferred Shares subject to the Securities Issuance Option which are not
then issued and outstanding, and such principal amount shall subsequently be
adjusted from time to time based on adjustments to the total Original Value of
the Preferred Shares subject to the Securities Issuance Option, whether due to
exercises of the Securities Issuance Option, redemption of Preferred Shares
which are reincluded in the Preferred Shares subject to the Securities Issuance
Option in accordance with Section 6.1, or otherwise.
6.10 Option Writer Common Stock Ownership. Option Writer shall not
acquire or own HM Common Stock (other than through the acquisition of Preferred
Shares by exercise of the Securities Issuance Option and the subsequent
conversion of such Preferred Shares into HM Common Stock) if such acquisition or
ownership could result in the inability to satisfy the condition contained in
Section 5.7.
6.11 Maintenance of Reinsurance. During the Exposure Period and
Exercise Term, if any, and during any period in which any Preferred Shares
remain outstanding, HM shall maintain the reinsurance program described in
Section 5.6.
6.12 Plans and Reports. HM shall promptly deliver, or cause the
delivery, to Option Writer of copies of (a) HM's most recent two (2) year future
business plan, which plan will generally be available on or about March 1 of
each calendar year, (b) HM's most recent Form 10-K and Annual Report, and (c)
the most recent statutory annual statements for the HM Insurance Subsidiaries.
The failure of HM to deliver any such items shall not be deemed a breach of this
Agreement unless such item is actually available, has been requested in writing
by Option Writer, and has not been delivered by HM within thirty (30) days after
HM's receipt of such request. Option Writer shall keep all documents or
information delivered to Option Writer pursuant to this Section 6.12 (except for
the Form 10-K and Annual Report and statements described in clauses (b) and (c)
above) in strictest confidence and shall use them solely in connection with the
Transaction Agreements, except as otherwise required by law.
6.13 Stock Dividends or Distributions. In the event that Option
Writer, whether as a holder of Common Stock or as a holder of Preferred Shares,
receives (or is entitled to receive upon conversion of such Preferred Shares, as
the case may be) a distribution (by stock dividend or otherwise) of any
securities, the sale of which is registered, not required to be registered or
exempt from such registration under the Securities Act in the hands of public
holders of the HM Common Stock, but the sale of which is not registered, but is
required to be registered or exempt from registration under the Securities Act
in the hands of Option Writer, HM shall at its option, within a reasonable time
period following a request by Option Writer, either (a) notify Option Writer
that it will be permitted to include such securities as "Registrable Securities"
as defined in the Registration Rights Agreement, or (b)
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repurchase such securities from Option Writer at market value as determined in
the public market. In the event that there is no public market for such
securities, HM and Option Writer shall appoint a mutually agreeable third-party
appraiser to establish the value of such securities, provided that if the
parties fail to agree on such third-party appraiser, the value will be
determined pursuant to Section 8(a).
6.14 Press Releases and Confidentiality. Neither HM nor Option Writer
shall issue any press release or other announcements to the public relating to
the execution of the Transaction Agreements or the transactions contemplated
thereunder without the prior written consent of the other party. Each of Option
Writer and HM shall hold confidential all financial and other information
supplied by the other party in respect of the Transaction Agreements or the
transactions contemplated therein, and Option Writer and HM agree to keep
confidential the specific economics of the Securities Issuance Option, including
but not limited to, the Option Fee and the Option Exercise Fee; provided that
such confidentiality obligation shall apply only to non-public information, and
information which was not available to the other party on a non-confidential
basis from a third party. Notwithstanding any provision of this Section to the
contrary, either Option Writer or HM may make any disclosure required to be made
by it under applicable law (including federal securities law) if it determines
in good faith that it is necessary to do so, and gives prior notice to the other
party and discusses such disclosure with such other party. In addition, either
Option Writer or HM may make any disclosure to which the other party gives its
prior written consent.
7. Termination. This Agreement and the transactions contemplated by this
Agreement may be terminated by mutual written consent signed by HM and Option
Writer at any time prior to the end of the Exposure Period, in which case Option
Writer shall refund to HM a portion of the annual Option Fee previously paid for
the then current year as agreed between HM and Option Writer.
8. Alternative Dispute Resolution.
(a) In the event of a dispute regarding the satisfaction of any of
the conditions set forth in Sections 5.1, 5.2, 5.4 or 5.6 of this Agreement,
such dispute shall be referred to a "Big Six" public accounting firm except for
any such accounting firm which serves as a then current accountant or outside
auditor for either HM or Option Writer (the "Accountant"). Either party may
submit a dispute to the Accountant by making a written submission to the
Accountant and the other party, which written submission shall include the
submitting party's documentation of such dispute, and the submitting party's
position on the issue(s). The other party shall then have ten (10) business days
to submit to the Accountant and the first party its documentation of the dispute
and its position on the issue(s); provided, however, that if such other party
fails to make a timely and complete submission to the Accountant, such other
party shall be deemed to have conceded the dispute. Upon receipt of submissions
from both parties with respect to a given dispute, the Accountant shall then
have ten (10) business days in which to resolve the dispute by selecting one
party's position or the
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other's. The decision of the Accountant in the event of alternative dispute
resolution under this Section 8 shall be final and binding upon the parties, and
each party shall bear its own costs plus one-half (1/2) of the costs of the
Accountant.
(b) In the event of a dispute regarding the satisfaction of any of
the conditions set forth in Article 5 of this Agreement, except for conditions
set forth in Sections 5.1, 5.2, 5.4 or 5.6, such dispute shall be referred to a
panel of three arbitrators. Notice requesting arbitration must be in writing in
accordance with Section 9.2 of this Agreement.
One arbitrator shall be chosen by each party within twenty (20)
business days of delivery of a written notice of request for arbitration by a
party. The two arbitrators shall, before instituting the hearing, choose a third
arbitrator who shall preside at the hearing. If either party fails to appoint
its arbitrator within twenty (20) business days of the notice of request for
arbitration, the other party, after ten (10) business days notice of its
intention to do so, may appoint the second arbitrator.
If the two arbitrators are unable to agree upon the third arbitrator
within fifteen (15) business days of their appointment, the two arbitrators
shall request the American Arbitration Association to appoint the third
arbitrator with the qualifications identified herein.
All arbitrators shall be impartial, and unless the parties otherwise
agree, all arbitrators shall be attorneys with at least fifteen (15) years of
corporate law experience.
The procedure to be followed in the arbitration hereunder shall be as
prescribed herein and in such directives as shall be issued by the arbitrators.
Either party may submit a dispute to the arbitration panel by making a
written submission to the panel and the other party, which written submission
shall include the submitting party's documentation of such dispute, and the
submitting party's position on the issue(s). The other party shall then have ten
(10) business days to submit to the panel and the other party its documentation
of the dispute and its position on the issue(s); provided, however, that if such
party fails to make a timely and complete submission to the panel, such other
party shall be deemed to have conceded the dispute.
Upon receipt of submissions from both parties with respect to a given
dispute, the panel shall then have ten (10) business days in which to resolve
the dispute by determining whether the condition has been satisfied. The
decision of any two arbitrators when rendered in writing shall be final and
binding. The arbitration award shall be based on and accompanied by a written
opinion containing findings of fact and conclusions of law. Each party shall
bear the expense of its own arbitrator and shall jointly and equally bear with
the other party the cost of the third arbitrator.
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9. Miscellaneous.
9.1 Amendments. The provisions of this Agreement may not be waived,
altered, amended or repealed, in whole or in part, except by the written consent
of both parties to this agreement.
9.2 Notices. Any notice or other communication required or permitted
under this Agreement shall be in writing and shall be deemed to have been given
(a) on the date of delivery if delivered personally or sent by facsimile
transmission (which transmission shall be confirmed by telephone), (b) twenty-
four (24) hours after sending if sent by overnight delivery service, or (c) five
(5) days after mailing if sent by certified, registered or express mail, postage
prepaid, if properly addressed or directed to such party at the appropriate
address or facsimile number set forth below, or such address or facsimile number
as such party may designate by written notice to the other parties:
(i) if to HM to:
Horace Mann Educators Corporation
Mail No. G 016
One Horace Mann Plaza
Springfield, Illinois 62715-0001
Attention: George Zock
Fax No.: (217) 788-5798
with a copy to:
Gibson, Dunn & Crutcher LLP
200 Park Avenue
New York, NY 10166-0193
Attention: Conor Reilly
Fax No.: (212) 351-5247
and a copy to:
Aon Securities Corporation
123 N. Wacker Drive
Chicago, Illinois 60606
Attention: Bryon Ehrhart
Lawrence Harb
Fax No.: (312) 701-2174
(ii) if to Option Writer to:
Centre Reinsurance (U.S.) Limited
Cumberland House
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One Victoria Street
P.O. Box HM 1788
Hamilton HM HX
Bermuda
Attention: President
Fax No.: (441) 295-3705
with a copy to:
ZC ReSource Limited
One Chase Manhattan Plaza, 44th Floor
New York, New York 10005
Attention: General Counsel
Fax No.: (212) 898-5444
9.3 Entire Agreement. This Agreement (including the Exhibits and the
Schedules) contains the entire agreement between the parties, and supersedes all
prior agreements, written or oral, with respect to the Securities Issuance
Option.
9.4 Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York (without regard to any
choice of law or conflict of law rules that would cause the application of any
laws or rules of any jurisdiction other than the State of New York).
9.5 Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties and their respective successors and assigns,
and any references to a specific party in this Agreement shall include such
party's permitted successors or assigns. Neither party shall have the right to
assign or otherwise transfer its rights or obligations under this Agreement
without the prior written consent of the other party, provided, however, that
any holder or holders of Preferred Shares, or Common Stock into which such
Preferred Shares are convertible, shall be a third-party beneficiary under this
Agreement having all the rights of Option Writer, subject to the obligations of,
and limitations on, Option Writer contained in this Agreement, and provided,
further, that Option Writer may assign this Agreement to any affiliate of Option
Writer provided that such affiliate agrees to and complies with the terms and
conditions applicable to Option Writer under this Agreement, including without
limitation the terms set forth in Section 6.9.
9.6 Severability. Each term, covenant, condition or provision of this
Agreement shall be viewed as separate and distinct, and in the event that any
such term, covenant, condition or provision shall be deemed by a court of
competent jurisdiction to be invalid, the remaining provisions shall continue in
full force and effect.
9.7 Necessary Acts. Each party to this Agreement shall perform any
further acts and execute and deliver any additional agreements, assignments,
documents or
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instruments that may be reasonably necessary or desirable to carry out the
provisions or effectuate the purposes of this Agreement.
9.8 Legal Expenses. If any legal action or any arbitration or other
proceeding is brought to enforce the provisions of this Agreement, or because of
an alleged dispute, breach, default or misrepresentation in connection with any
of the provisions of this Agreement, the successful or prevailing party or
parties, whether or not such party or parties have instituted the action, shall
be entitled to recover all attorneys' fees and other costs incurred in such
action or proceeding, in addition to any other relief to which it or they may be
entitled. Notwithstanding the forgoing, in the event of alternative dispute
resolution under Section 8, each party shall bear its own costs as set forth in
Section 8.
9.9 Counterparts. This Agreement may be executed in separate
counterparts, each of which when so executed and delivered shall be an original,
but all of which shall together constitute one and the same instrument.
9.10 Headings. The headings in this Agreement are for reference only,
and shall not affect the interpretation of this Agreement.
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IN WITNESS WHEREOF, the parties to this Agreement have caused it to be duly
executed as of the date first written above.
HORACE MANN EDUCATORS CORPORATION
By: /s/ George J. Zock
---------------------------------
Title: Senior Vice President & Treasurer
-----------------------------------
By: /s/ Paul J. Kardos
---------------------------------
Title: President and Chief Executive Officer
---------------------------------------
CENTRE REINSURANCE (U.S.) LIMITED
By: /s/ Rolf Staub
--------------------------------------
Title: Assistant Secretary
-----------------------------------
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EXHIBIT 1.3
HORACE MANN EDUCATORS CORPORATION
CERTIFICATE OF DESIGNATIONS
PURSUANT TO SECTION 151 OF THE GENERAL CORPORATION
LAW OF THE STATE OF DELAWARE
SERIES A CUMULATIVE CONVERTIBLE
PREFERRED STOCK
- --------------------------------------------------------------------------------
RESOLVED, that, pursuant to the authority vested in the Board of Directors of
the Corporation in accordance with the provisions of its Certificate of
Incorporation, a series of Preferred Stock of the Corporation be, and hereby is,
created and that the designation and amount thereof and the voting powers,
preferences and relative, participating, optional or other special rights of the
shares of such series, and the qualifications, limitations or restrictions
thereon, are as follows:
SECTION 1. DESIGNATION. The series of Preferred Stock established hereby shall
be designated the "Series A Cumulative Convertible Preferred Stock" (the "Series
A Preferred Shares") and the authorized number of Series A Preferred Shares
shall be 100,000 shares.
SECTION 2. DIVIDENDS.
---------
(a) Holders of outstanding Series A Preferred Shares will be entitled
to receive, when and as declared by the Board of Directors out of funds legally
available therefore, cash dividend payments in the amount of the Dividend Yield
on each Series A Preferred Share, payable quarterly for each of the quarters
ending March, June, September and December of each year, payable in arrears on
the first business day of each succeeding April, July, October and January,
respectively (each such date being hereinafter referred to as a "Preferred
Dividend Payment Date"). The first dividend shall be payable on the Preferred
Dividend Payment Date corresponding to the quarter in which the Issuance Date
falls. Each such dividend will be payable to holders of record as they appear on
the stock books of the Corporation on such record dates, not less than 10 nor
more than 50 days preceding the related Preferred Dividend Payment Date, as
shall be fixed by the Board of Directors. Dividends on each Series A Preferred
Share shall accrue on a daily basis and compound quarterly commencing on the
Issuance Date for such share and continuing to, but not including, the
Redemption Date, Special Redemption Date or Conversion Date for such share (or
other date on which such Series A Preferred Share is no
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longer outstanding) and accrued dividends for each quarterly dividend period
shall accumulate as Unpaid Dividend Yield, to the extent not paid, on the
Preferred Dividend Payment Date for the quarter in which they accrued. Dividend
payments under this paragraph (a) shall accrue whether or not the Corporation
shall have earnings, whether or not there shall be funds legally available for
the payment of such dividends and whether or not such dividends are declared.
(b) So long as any Series A Preferred Shares shall remain outstanding,
no dividend (other than a dividend payable in shares of Common Stock or rights
to obtain Common Stock or any class of capital stock of the Corporation which is
junior to the Series A Preferred Shares) shall be declared, nor shall the
Corporation make any other distribution or payment or set aside anything of
value for distribution or payment on, or redeem, repurchase or otherwise acquire
any shares of, the Common Stock of the Corporation or any other class of stock
or series thereof ranking junior to the Series A Preferred Shares in the payment
of dividends (other than a redemption or purchase of shares of Common Stock of
the Corporation made for purposes of an employee incentive or benefit plan of
the Corporation or any of its subsidiaries) unless the full amount of Unpaid
Dividend Yield, if any, accumulated on all outstanding Series A Preferred Shares
through all past Preferred Dividend Payment Dates shall have been paid and not
refunded. No dividend shall be declared on any share or shares on any class of
stock of the Corporation or series thereof ranking on a parity with the Series A
Preferred Shares in respect of payment of dividends for any prior dividend
payment period of said parity stock unless there shall have been declared on all
shares then outstanding of the Series A Preferred Shares terminating with or
before such prior dividend payment period of such parity stock, like
proportional dividends determined ratably in proportion to the respective Unpaid
Dividend Yield accumulated to date for all previous quarterly dividend periods
on all outstanding Series A Preferred Shares and the dividends accumulated on
all outstanding shares of said parity stock.
(c) CHANGE IN TAX LAWS.
-------------------
(i) If because of an increase or decrease (up to and including
full elimination), effective on or after March 1, 1997, of the dividends
received deduction ("DRD") with respect to dividend payments on the Series A
Preferred Shares presently permitted by any Tax Law (a "change in the DRD Tax
Law"), corporate holders of Series A Preferred Shares ("Corporate Holders")
would realize a greater or lesser after-tax yield from dividend payments on a
Series A Preferred Shares than would have been the case had such change in the
DRD Tax Law not occurred (a positive or negative "Tax Effect," respectively),
then a dividend adjustment shall be calculated on the Series A Preferred Shares
(whether or not held by Corporate Holders) so that a Corporate Holder's net
after-tax yield would be the same as if there has been no change in the DRD Tax
Law. Calculation of the dividend adjustment pursuant to this paragraph (c) of
Section 2 shall be made (1) without regard to any other changes in Tax laws
except those affecting the deductibility of dividends received by Corporate
Holders (including changes in the characterization of Series A Preferred Shares
dividends which impact their deductibility under any DRD related Tax Law); and
(2) assuming that Corporate Holders pay federal income tax at the highest
marginal corporate income tax rate effective at March 1, 1997.
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(ii) For purposes of calculating the Preferred Dividend Yield
Rate as set forth in Section 8 herein, any adjustment in dividends required
pursuant to paragraph (c) (1) of this Section 2 shall be expressed as (1) the
dividend payment required, after considering the change in DRD Tax law, to
equalize a Corporate Holder's net after tax yield, expressed as a percentage (in
decimals) of (2) dividends which would have accrued to such Corporate Holder had
the change in DRD Tax law not occurred (such percentage referred to as the
"Preferred Dividend Tax Adjustment Factor"). Therefore, if in equalization of
any negative Tax Effect, the Corporation were required to pay $15.00 in extra
dividends for each $100.00 of dividends that would have accrued and been payable
without regard to any changes in the DRD Tax Law, the Preferred Dividend Tax
Adjustment Factor would be 1.15 ($115.00 / $100.00). Conversely, if in
equalization of any positive Tax Effect, the Corporation were entitled to pay
$8.00 less in dividends for each $100.00 of dividends that would have accrued
and been payable without regard to any changes in the DRD Tax Law, the Preferred
Dividend Tax Adjustment Factor would be 0.92 ($92.00 / $100.00).
(iii) Upon the occurrence of any changes in the DRD Tax Law
resulting in a positive or negative Tax Effect, dividends accruing on each
Series A Preferred Share shall be calculated using the Preferred Dividend Tax
Adjustment Factor, effective as of the first day of the quarterly dividend
period in which such change in the DRD Tax Laws become effective, or from the
Issuance Date, if such Issuance Date occurred for such Series A Preferred Share
during the quarterly dividend period in which the change in the DRD Tax Law
occurred. Dividends calculated using the adjusted Preferred Dividend Yield Rate
shall continue to be payable on the Preferred Dividend Payment Date immediately
following the end of such quarterly dividend period. To the extent not paid on
any Series A Preferred Share outstanding on the record date corresponding to the
Preferred Dividend Payment Date for such quarterly dividend period, any
additional dividend shall accumulate as Unpaid Dividend Yield of such share and
shall remain a part thereof until (but only until) such dividend is paid.
SECTION 3. CASH REDEMPTION BY THE CORPORATION.
- ---------- -----------------------------------
(a) REDEMPTION AT OPTION OF CORPORATION. The Corporation may not
redeem the Series A Preferred Shares at any time prior to the first anniversary
of the Issuance Date of such Series A Preferred Shares. At any time and from
time to time on or after such anniversary date, the Corporation may, at its
option, with proper notice as set forth in paragraph (b) of this Section 3,
redeem any or all of the outstanding Series A Preferred Shares, as of a Proposed
Redemption Date specified in the notice to holders, for cash in an amount equal
to the Redemption Price per share, subject to a minimum aggregate Redemption
Price for all Series A Preferred Shares redeemed of $15,000,000 plus integral
multiples of $1,000,000 above such minimum amount. Notwithstanding anything to
the contrary in this paragraph (a), the Corporation may provide notice of its
intention to redeem any Series A Preferred Shares prior to the first anniversary
of their Issuance Date, so long as the Proposed Redemption Date specified in
such notice is a date on or after the date of such first anniversary.
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(b) NOTICE OF REDEMPTION. In order to properly effect the redemption
of Series A Preferred Shares, the Corporation will provide notice, to holders of
record of the Series A Preferred Shares to be redeemed, not less than (i) thirty
(30) days prior to the Proposed Redemption Date if the Proposed Redemption Date
is three (3) years, eight (8) months and fifteen (15) days or less from the
Issuance Date of such Series A Preferred Shares, and (ii) forty-five (45) days
prior to the Proposed Redemption Date if the Proposed Redemption Date is more
than three (3) years, eight (8) months and fifteen (15) days after the Issuance
Date of such Series A Preferred Shares. Such notice may be provided by mail,
first class postage prepaid, to the holders of record of the Series A Preferred
Shares at their respective addresses as the same shall appear on the books of
the Corporation or any transfer agent for the Series A Preferred Shares, or by
facsimile or telecopy, as set forth in paragraph (a) of Section 9 herein. Each
such notice shall state, as appropriate: (1) the Proposed Redemption Date; (2)
the total number of Series A Preferred Shares to be redeemed and, if fewer than
all Series A Preferred Shares are to be redeemed, the number of such shares held
by such holder to be redeemed; (3) the Redemption Price; (4) the place or places
where certificates for such shares are to be surrendered for redemption; and (5)
that dividends on the Series A Preferred Shares to be redeemed will cease to
accrue on the Proposed Redemption Date.
Each holder of Series A Preferred Shares called for redemption shall
surrender the certificates evidencing such shares to the Corporation at the
place designated in such notice and shall thereupon be entitled to receive the
cash payable upon such redemption. In case less than all of the shares
represented by any such surrendered certificate are redeemed, a new certificate
shall be issued promptly at the expense of the Corporation representing the
balance of the shares. If proper notice of redemption shall have been duly
provided to holders of the Series A Preferred Shares in accordance with this
paragraph (b), and payment therefor has been made or duly provided for, then,
notwithstanding that the certificates evidencing any of such shares so called
for redemption shall not have been surrendered, as of the close of business on
the Redemption Date the shares represented thereby shall be deemed no longer
outstanding, dividends with respect to such Series A Preferred Shares shall
cease to accrue and all rights of the holder with respect to such Series A
Preferred Shares shall forthwith cease and terminate, except for the right of
the holders to receive the cash payable upon such redemption, without interest,
upon surrender of the certificates therefor.
(c) REVOCATION OF NOTICE TO REDEEM. The Corporation's election to
redeem the Series A Preferred Shares pursuant to paragraph (a) of this Section 3
shall be fully or partially revocable, and any notice to holders of Series A
Preferred Shares provided in accordance with paragraph (b) of this Section 3
shall be subject to revocation or amendment by the Corporation. In order to
properly effect the revocation or amendment of such notice, the Corporation will
provide notice of its revocation or amendment, not less than one business day
prior to the Proposed Redemption Date, to holders of record of the Series A
Preferred Shares previously notified of the proposed redemption. Such notice may
be provided in any of the manners permissible for providing notice of redemption
under paragraph (b) of this Section 3. Such notice of revocation or amendment
shall clearly state that: (1) on the Proposed Redemption Date, the Corporation
will not redeem any of the Series A Preferred Shares, or if
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notice of partial revocation, the amended number of Series A Preferred Shares
held by such holder to be redeemed, and the balance of Series A Preferred Shares
held by such holder not being redeemed; and (2) dividends on the Series A
Preferred Shares not being redeemed will continue to accrue on and after the
Proposed Redemption Date without interruption. Notwithstanding the foregoing, in
the event that a notice of conversion has been delivered in accordance with
paragraph (e) of Section 4 below (which notice of conversion then remains
unrevoked), the Corporation shall not issue a notice of redemption under
paragraph (b) of this Section 3, or revoke a previously issued notice of
redemption, within thirty (30) days prior to the Proposed Conversion Date set
forth in such notice of conversion.
(d) RATABLE REDEMPTION. If fewer than all outstanding Series A
Preferred Shares are to be redeemed on any Redemption Date, the shares to be
redeemed (which shall be a whole number) shall be selected by the Corporation
from outstanding Series A Preferred Shares not previously called for redemption
by lot or pro rata (to the extent possible without redeeming fractional shares)
or by any other method determined by the Corporation in its sole discretion to
be equitable.
(e) SPECIAL REDEMPTION EVENT. Notwithstanding anything to the
contrary in this Section 3, at any time after the occurrence of a Special
Redemption Event, any holder of Series A Preferred Shares shall be entitled, at
the option of such holder, to cause any or all of such shares to be redeemed by
the Corporation for cash in the amount of the Redemption Price per share as of a
Special Redemption Date. To properly effect the redemption of any Series A
Preferred Shares pursuant to this paragraph (e) of Section 3, the holder of
Series A Preferred Shares shall provide notice to the Corporation not less than
ten (10) business days prior to the proposed Special Redemption Date. Such
notice must be provided by first class, registered mail, postage prepaid, to the
Corporation at its principal executive offices, or by facsimile or telecopy, at
the address or number set forth in paragraph (a) of Section 9 herein. Each such
notice shall state, as appropriate: (1) the proposed Special Redemption Date;
(2) the number of Series A Preferred Shares (which must be a whole number of
shares) to be redeemed; (3) the name or names in which such holder wishes any
Series A Preferred Shares not to be so redeemed to be issued and the address to
which such holder wishes delivery to be made of such balance certificate or
certificates; and (4) a statement setting forth the facts and circumstances
under which the holder believes a Special Redemption Event has occurred. The
Corporation shall give notice of the occurrence of a Special Redemption Event to
all holders of Series A Preferred Shares promptly upon the occurrence of such
event.
(f) CANCELLATION OF SHARES. All Series A Preferred Shares redeemed by
the Corporation as provided in this Section 3 (or otherwise acquired by the
Corporation) shall be retired and thereupon restored to the status of authorized
but unissued Series A Preferred Shares.
SECTION 4. CONVERSION BY HOLDERS INTO COMMON STOCK.
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(a) RIGHT OF CONVERSION. Except as provided in paragraph (b) of this
Section 4, no holder of Series A Preferred Shares may convert such shares into
shares of
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Common Stock at any time prior to the close of business of the fourth
anniversary of the Issuance Date of such Series A Preferred Shares. At any time
and from time to time after such anniversary date, on the terms and subject to
the conditions set forth in this Section 4, any holder of Series A Preferred
Shares shall be entitled, at the option of such holder, to cause any or all of
such shares to be converted into shares of Common Stock of the Corporation at
the conversion rate set forth in paragraph (d) of this Section 4, as of the
Proposed Conversion Date specified in such holder's notice to the Corporation
delivered pursuant to paragraph (e) of this Section 4. The minimum number of
Series A Preferred Shares for which conversion may be elected shall be 1,000, or
such lesser number which constitutes all of the outstanding Series A Preferred
Shares held by such holder.
Notwithstanding anything to the contrary in this paragraph (a), the
holder of Series A Preferred Shares may provide notice of its intention to
convert any or all of such shares prior to the fourth anniversary of the
Issuance Date of such Series A Preferred Shares, so long as the Proposed
Conversion Date specified in such notice is a date after the date of such fourth
anniversary.
(b) SPECIAL CONVERSION EVENTS. Notwithstanding anything to the
contrary in paragraph (a) of this Section 4, at any time after the occurrence of
a Special Conversion Event, any holder of Series A Preferred Shares shall be
entitled, at the option of such holder, to cause any or all of such shares to be
converted into shares of Common Stock of the Corporation at the Special
Conversion Rate as of the Proposed Conversion Date specified in such holder's
notice to the Corporation delivered pursuant to paragraph (e) of this Section 4.
Such notice shall be effective only to the extent that the condition resulting
in a Special Conversion Event has not been cured prior to the delivery of such
notice.
(c) PRIORITY OF CORPORATION'S RIGHT OF REDEMPTION. Notwithstanding
paragraphs (a) and (b) of this Section 4, no Series A Preferred Shares shall be
converted on or after the close of business on any Redemption Date for which
notice has been properly delivered in accordance with Section 3 hereof. The
Corporation's right to redeem any or all shares of Series A Preferred Stock on
or prior to any Proposed Conversion Date shall supersede any holder's right of
conversion under this Section 4, whether or not such holder's notice of
conversion was properly delivered prior to the Corporation's notice to redeem,
so long as the Corporation's notice to redeem was properly delivered in
accordance with Section 3 hereof at least (i) thirty (30) days prior to the
Proposed Conversion Date if such notice to redeem is delivered three (3) years,
eight (8) months and fifteen (15) days or less from the applicable Issuance
Date, or (ii) forty-five (45) days prior to the Proposed Conversion Date if such
notice to redeem is delivered more than (3) years, eight (8) months and fifteen
(15) days from the applicable Issuance Date.
(d) CONVERSION RATE. For purposes of conversion of Series A Preferred
Shares to shares of Common Stock pursuant to this Section 4 other than a Special
Conversion Event under paragraph (b) of this Section 4, each Series A Preferred
Share shall be converted into the number of Common Stock shares resulting from
dividing (i) the Original Value of such Series A Preferred Share, plus Unpaid
Dividend Yield to and including the Conversion Date,
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by (ii) the greater of (A) the Market Price at Conversion, or (B) the Minimum
Book Value Price (such greater value to be referred to as the "Conversion
Price")
(e) NOTICE OF CONVERSION. In order to properly effect the conversion
of Series A Preferred Shares, the holder of such shares will provide notice to
the Corporation not less than one hundred five (105) days prior to the Proposed
Conversion Date. Such notice must be provided by first class, registered mail,
postage prepaid, to the Corporation at its principal executive offices, at the
address or number set forth in paragraph (a) of Section 9 herein. Each such
notice shall state, as appropriate: (1) the Proposed Conversion Date; (2) the
number of Series A Preferred Shares (which must be a whole number of shares) to
be converted; (3) the name or names in which such holder wishes the certificate
or certificates for Common Stock and for any Series A Preferred Shares not to be
so converted to be issued and the address to which such holder wishes delivery
to be made of the new certificates to be issued upon conversion; and (4) an
acknowledgment that the shares to be converted remain subject to the
Corporation's right of redemption in accordance with Section 3.
Notwithstanding the preceding paragraph, for any conversion pursuant
to paragraph (b) of Section 4, the holder of Series A Preferred Shares may
properly convert such shares into shares of Common Stock upon providing notice
to the Corporation, not less than five (5) business days prior to the Proposed
Conversion Date, in the manner set forth in the preceding paragraph. Such notice
shall contain the information described above for conversion pursuant to
paragraph (a) of Section 4, as well as a statement setting forth the facts and
circumstances under which the holder believes a Special Conversion Event has
occurred.
(f) REVOCATION OF NOTICE TO CONVERT. The right of any holder of Series
A Preferred Shares electing to convert the Series A Preferred Shares pursuant to
paragraphs (a) or (b) of this Section 4 shall be fully or partially revocable,
and any notice to the Corporation provided in accordance with paragraph (e) of
this Section 4 shall be subject to revocation or amendment by the holder of the
shares to which such notice relates. In order to properly effect the revocation
or amendment of such notice, the holder shall provide notice to the Corporation
of its revocation or amendment not less than three (3) business days prior to
the Proposed Conversion Date. Such notice shall be provided in the same manner
specified as permissible for providing notice of conversion under paragraph (e)
of this Section 4, and shall clearly state that: (1) the holder of such Series A
Preferred Shares will not convert any of such shares, or if notice of partial
revocation, the amended number of Series A Preferred Shares held by such holder
that are to be converted, and (2) if true, that the Market Price at Conversion
is less than the Minimum Book Value Price such that dividends on the Series A
Preferred Shares not being converted will accrue on such shares at the higher
Preferred Dividend Yield Rate for such period of time as is set forth in Section
8.
(g) SURRENDER OF SERIES A PREFERRED SHARES. Any holder of Series A
Preferred Shares desiring to convert any such shares into shares of Common Stock
shall surrender the certificate or certificates representing the Series A
Preferred Shares being converted, duly assigned or endorsed for transfer to the
Corporation (or accompanied by duly executed stock powers relating thereto), at
the principal executive office of the Corporation or
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the offices of the transfer agent for the Series A Preferred Shares or such
office or offices in the continental United States of an agent for conversion as
may from time to time be designated by notice to the holders of the Series A
Preferred Shares by the Corporation or the transfer agent for the Series A
Preferred Shares, accompanied by a copy of the written notice of conversion
previously provided to the Corporation in accordance with paragraph (e) of this
Section 4.
(h) DELIVERY OF COMMON STOCK. Upon the effectiveness of a conversion
of Series A Preferred Shares on the Conversion Date for such shares, the
Corporation, subject to the provisions of paragraph (k) of this Section 4
regarding fractional shares and paragraph (m) of this Section 4 regarding
payment of taxes, shall issue and send by first-class mail, postage prepaid, to
the holder thereof, or to such holder's designee, at the address designated by
such holder a certificate or certificates for the number of whole shares of
Common Stock to which such holder shall be entitled upon conversion. In case
there shall have been surrendered a certificate or certificates representing
Series A Preferred Shares only part of which are to be converted, the
Corporation, subject to the provisions of paragraph (m) of this Section 4
regarding payment of taxes, shall issue and deliver to such holder or such
holder's designee a new certificate or certificates for the number of Series A
Preferred Shares which shall not have been converted.
(i) EFFECTIVENESS OF CONVERSION. Any conversion of Series A Preferred
Shares into shares of Common Stock made at the option of the holder thereof
shall be effective immediately following the close of business on the Conversion
Date. At and after the effective time on the Conversion Date, the person or
persons entitled to receive the Common Stock issuable upon such conversion shall
be treated for all purposes as the record holder or holders of such shares of
Common Stock.
(j) CONVERSION PRICE ADJUSTMENTS. The conversion rate of any Series A
Preferred Shares shall be subject to the following adjustments:
(A) If any capital reorganization or reclassification of the
capital stock of the Corporation, or any consolidation or merger of the
Corporation with another corporation, or the sale of all or substantially all of
its assets to another corporation, or any other transaction, shall be effected
in such a way that holders of Common Stock shall be entitled to receive stock,
securities or assets with respect to or in exchange for Common Stock, then, as a
condition of such reorganization, reclassification, consolidation, merger, sale,
or other transactions, lawful and adequate provisions (in form authorized and
approved by the Board of Directors of the Corporation) shall be made whereby
each holder of any Series A Preferred Shares shall thereafter have the right to
receive, upon the basis and upon the terms and conditions specified herein and
in lieu of the shares of Common Stock of the Corporation immediately theretofore
receivable upon the conversion of such Series A Preferred Shares, such shares of
stock, securities or assets as may be issued or payable with respect to or in
exchange for a number of outstanding shares of such Common Stock equal to the
number of shares of Common Stock immediately theretofore so receivable had such
reorganization, reclassification, consolidation, merger, sale, or other
transactions, not taken place, and in any
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such case appropriate provision shall be made with respect to the rights and
interests of such holder to the end that the provisions hereof (including,
without limitation, provisions for adjustments of the conversion rate) shall
thereafter be applicable, as nearly as may be, in relation to any shares of
stock, securities or assets thereafter deliverable upon the exercise of such
conversion rights. If applicable, the Corporation shall reserve as provided by
paragraph (l) of this Section 4 such shares of common stock, other capital stock
or other securities of the Corporation as may be issuable upon conversion of
Series A Preferred Shares as provided by this Section 4 and shall comply with
the other requirements of paragraph (l) of this Section 4 in respect of such
shares or other securities so as to permit their issuance to holders of Series A
Preferred Shares upon conversion thereof.
The Corporation will not effect any such consolidation or merger,
or any sale of all or substantially all of its assets or properties, unless (i)
prior to the consummation thereof the successor corporation (if other than the
Corporation) resulting from such consolidation or merger or the corporation
purchasing such assets shall assume, by written instrument (in form authorized
and approved by the Board of Directors), executed and mailed or delivered to
each holder of shares of Series A Preferred Stock at the last address of such
holder appearing on the books of the Corporation, the obligation to deliver to
such holder such shares of stock, securities or assets as, in accordance with
the foregoing provisions, such holder may be entitled to receive or (ii) the
Series A Preferred Stock shall have been redeemed by the Corporation pursuant to
paragraph (a) or (e) of Section 3 hereof.
(B) In any case in which (i) this Section 4 shall require that an
adjustment as a result of any event become effective after the opening of
business on a specified business day following a record date, and (ii) the date
fixed for conversion pursuant to paragraph (e) of this Section 4 occurs after
such record date but before the occurrence of the event on such date, then (iii)
the Corporation may elect to defer until after the occurrence of such event (1)
issuing to the holder of any Series A Preferred Shares surrendered for
conversion certificates representing the shares or securities issuable upon such
conversion, and (2) paying to such holder any amount in cash in lieu of a
fractional share of Common Stock in accordance with paragraph (k) of this
Section 4, provided, however, that such deferral is not for an unreasonable
period of time.
(k) FRACTIONAL SHARES. No fractional shares of Common Stock shall be
issued upon conversion of any Series A Preferred Shares but, in lieu of any
fraction of a share of Common Stock which would otherwise be issuable in respect
of the aggregate number of Series A Preferred Shares surrendered for conversion
at one time by the same holder, the Corporation shall pay an amount in cash
equal to the same fraction of the Conversion Price (based on the Market Price at
Conversion).
(l) RESERVATION OF SHARES. The Corporation shall at all times reserve
and keep available out of the authorized but unissued shares of Common Stock the
maximum number of shares of Common Stock into which all Series A Preferred
Shares from time to time outstanding are convertible, but shares of Common Stock
held in the treasury of the
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Corporation may in its discretion be delivered upon any conversion of Series A
Preferred Shares.
(m) TAXES. The Corporation shall pay any and all stock transfer and
documentary stamp taxes that may be payable in respect of any issuance or
delivery of shares of Common Stock or any other securities issued upon
conversion of the Series A Preferred Shares pursuant hereto. The Corporation
shall not, however, be required to pay any such tax which may be payable in
respect of any transfer involved in the issuance and delivery of shares of
Common Stock or other securities in a name other than that in which the Series A
Preferred Shares with respect to which such shares are issued were registered,
or any payment to any person other than the registered holder thereof, and shall
not be required to make any such issuance or delivery unless and until the
person otherwise entitled to such issuance or payment has paid to the
Corporation the amount of any such tax or has established, to the satisfaction
of the Corporation, that such tax has been paid or is not payable.
(n) CANCELLATION OF SHARES. All Series A Preferred Shares converted
into shares of Common Stock, other capital stock or other securities of the
Corporation as provided in this Section 4 (or otherwise acquired by the
Corporation) shall be retired and thereupon restored to the status of authorized
but unissued shares of preferred stock, par value $0.001 per share, undesignated
as to series.
SECTION 5. LIQUIDATION RIGHTS.
- ---------- -------------------
(a) In the event of any Liquidation, after payment or provision for
payment has been made of the debts and other liabilities of the Corporation, the
holders of Series A Preferred Shares shall be entitled to receive, out of the
net assets of the Corporation, for each share its Original Value plus an amount
equal to the sum of Unpaid Dividend Yield (whether or not declared) accrued and
unpaid thereon for all previous periods and the current period, whether or not
accumulated, and no more. After such amount is paid in full, no further
distributions or payments shall be made in respect of Series A Preferred Shares,
such Series A Preferred Shares shall no longer be deemed to be outstanding or be
entitled to any other powers, preferences, rights or privileges, including
voting rights, and such Series A Preferred Shares shall be surrendered for
cancellation to the Corporation.
(b) The full amount payable to the holders of Series A Preferred
Shares shall be paid before any distribution shall be made to the holders of any
class of common stock of the Corporation or any other class of stock or series
thereof ranking junior to the Series A Preferred Shares with respect to the
distribution of assets upon a Liquidation. No payment on account of any
Liquidation shall be made to the holders of any class or series of stock ranking
on a parity with the Series A Preferred Shares in respect of the distribution of
assets upon Liquidation unless there shall likewise be paid at the same time to
the holders of the Series A Preferred Shares like proportionate amounts
determined ratably in proportion to the full amounts to which the holders of all
outstanding Series A Preferred Shares and the holders of all outstanding shares
of such parity stock are respectively entitled with respect to such
distribution.
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(c) If the assets distributed to the holders of Series A Preferred
Shares upon any Liquidation shall be insufficient to permit the payment to such
holders of the full amount to which they are entitled in such circumstances,
then such assets or the proceeds thereof shall be distributed among such holders
ratably in proportion to the sums which would be payable to such holders if all
sums were paid in full.
(d) Once any payment required upon any Liquidation is made to any
holder of Series A Preferred Shares, there shall not be any conversion rights in
respect of such shares pursuant to Section 4 hereof unless the full amount of
all such distributions and payment made in respect of such shares being
converted is remitted to the Corporation prior to or concurrently with the
conversion of such shares.
(e) Neither the merger nor consolidation of the Corporation into or
with any other corporation, nor the merger or consolidation of any other
corporation into or with the Corporation, nor a sale, transfer or lease of all
or any part of the assets of the Corporation, shall be deemed to be a
Liquidation for purposes of this Section 5.
(f) Written notice of any Liquidation, stating the payment date or
dates when and the place or places where the amounts distributable in such
circumstances shall be payable, shall be given by first class mail, postage
prepaid, not less than thirty (30) days prior to any payment date stated
therein, to the holders of record of the Series A Preferred Shares at their
respective addresses as the same shall appear on the books of the Corporation or
any transfer agent for the Series A Preferred Shares.
SECTION 6. VOTING RIGHTS.
- ---------- --------------
(a) Except as otherwise provided by paragraph (b) of this Section 6 or
required by law, the holders of Series A Preferred Shares shall not be entitled
to vote on any matter on which the holders of any voting securities of the
Corporation shall be entitled to vote.
(b) So long as any Series A Preferred Shares remain outstanding, the
Corporation shall not without first obtaining the approval (by vote or written
consent, as provided by applicable law) of the holders of more than fifty
percent (50%) of the then outstanding Series A Preferred Shares, voting together
as a single class:
(A) alter or change the rights, preferences or privileges of the
Series A Preferred Shares so as to affect adversely such Series A Preferred
Shares;
(B) sell, convey or otherwise dispose of or encumber all or
substantially all of its property or business or merge into or consolidate with
any other corporation (other than a corporation owned by or under common
ownership with the Corporation), provided, however, that the holders of Series A
Preferred Shares shall have no
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voting rights under this subparagraph (B) of paragraph (b) of this Section 6
with respect to an event or occurrence which constitutes a Special Redemption
Event;
(C) increase the authorized number of Series A Preferred Shares;
or
(D) create any new class or series of stock, or any other
securities convertible into equity securities of the Corporation having rights
or preferences over, or on a parity with, the Series A Preferred Shares.
SECTION 7. SINKING FUND. No sinking fund or other mechanism for the segregation
of funds shall be established for the purpose of redemption or repurchase of the
Series A Preferred Shares or payment of dividends thereon.
SECTION 8. CERTAIN DEFINITIONS. For purposes of this Certificate of
Designations, the following terms shall have the meanings as set forth below.
"AVERAGE MARKET PRICE" means, with respect to a share of Common Stock
on any date of determination, the lesser of (a) the average of the daily Closing
Prices for the thirty (30) consecutive Trading Days ending on the date of
determination, or (b) the average of the daily Closing Prices for the fifteen
(15) consecutive Trading Days ending on the date of determination; provided,
however, that in averaging the daily Closing Prices for such Trading Days, all
adjustments shall be made as are necessary to reflect any subdivision,
reclassification, recapitalization or combination of, or dividend paid or
distribution made on, shares of Common Stock during such period of Trading Days.
"CHANGE OF CONTROL" means, with respect to the Corporation, (i) the
acquisition of ownership (by any Person or "group" within the meaning of
Sections 13(d) and 13(g) of the Securities Exchange Act of 1934, as amended) of
greater than 50% of the voting power of the capital stock of the Corporation
(whether by sale or other transfer of capital stock, merger, consolidation or
other reorganization or means, including a reorganization under bankruptcy or
insolvency laws); or (ii) the consummation of a sale, transfer or other
disposition of greater than 50% of the assets of the Corporation (determined on
a combined and consolidated fair market value basis) in one or a series of
related transactions to any Person that is not an affiliate of the Corporation.
"CLOSING PRICE" on any Trading Day shall mean the closing sales price
regular way on such day for one share of Common Stock or, in case no such sale
takes place on such day, the average of the reported closing bid and asked
prices regular way, in each case on the New York Stock Exchange, or, if the
Common Stock is not listed or admitted to trading on such Exchange, on the
principal national securities exchange on which the Common Stock is listed or
admitted to trading, or, if not listed or admitted to trading on any national
securities exchange, the average of the closing bid and asked prices of the
Common Stock on the over-the-counter market on the day in question as reported
by the National Quotation Bureau Incorporated, or a similarly generally accepted
reporting service, or if not so available in such
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manner as furnished by any New York Stock Exchange member-firm selected from
time to time by the Board of Directors of the Corporation for that purpose.
"COMMON STOCK" means common stock of the Corporation, par value $0.001
per share.
"CONSOLIDATED SURPLUS" means the consolidated surplus of the
Corporation's life and property/casualty insurance subsidiaries determined based
on the following: with respect to (a) any insurance subsidiary of the
Corporation engaged principally in life insurance, the sum of (i) the amount
reported on page 3, line 38, column 1 of its Annual Statement required under the
laws of its state of domicile, plus (ii) the asset valuation reserve/interest
maintenance reserve of such subsidiary; or (b) any insurance subsidiary of the
Corporation engaged principally in property/casualty insurance, the amount
reported on page 3, line 25, column 1 of its Annual Statement required under the
laws of its state of domicile; or an amount determined in a consistent manner
for any date other than one as of which an Annual Statement is prepared;
provided, however, that if at any time SAP shall be modified to decrease the
amount calculated under clause (b) of this paragraph by a reserve similar to the
asset valuation reserve/interest maintenance reserve, then the amount under such
clause (b) shall be deemed to be the sum of such reduced amount plus such
reserve.
"CONVERSION DATE" shall be the same day as the Proposed Conversion
Date, provided that (i) the holder of Series A Preferred Shares has not
delivered a notice of revocation in accordance with paragraph (f) of Section 4;
and (ii) the Corporation has not properly delivered a notice of redemption
pursuant to paragraph (c) of Section 3 naming any date on or prior to the
Proposed Conversion Date as the Proposed Redemption Date, and such notice to
redeem has not been revoked prior to such date. Notwithstanding the foregoing,
in the event that the holders of more than fifty percent (50%) of the
outstanding Series A Preferred Shares hold registration rights with respect to
Common Stock into which such Series A Preferred Shares can be converted, and
such holders have delivered to the Corporation, concurrently with any notice of
conversion under paragraph (e) of Section 4, a notice requesting registration of
such Common Stock upon conversion in an underwritten securities offering, then
the Conversion Date shall be delayed so that it occurs (i) on or after the
effective date of such registration, and (ii) immediately prior to the purchase
of such Common Stock by the underwriter(s) undertaking such offering.
"CONVERSION PRICE" has the meaning set forth in paragraph (d) of
Section 4.
"DIVIDEND YIELD" means, with respect to each Series A Preferred Share
for each quarter, or such lesser period as may arise in connection with the
issuance, redemption or conversion of such share, or with any Liquidation, the
amount accruing on such share during the quarter, or such lesser period, at an
annual rate equal to the Preferred Dividend Yield Rate, applied to the sum of
(A) such share's Original Value, plus (B) Unpaid Dividend Yield thereon for all
prior periods. Dividend Yield for any period shorter than a full quarterly
dividend period shall be computed on the basis of a 360 day year of twelve 30-
day months. Dividend Yield will begin accruing on each Series A Preferred Share
on the Issuance Date of
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such share and shall accrue to, but not including, the Redemption Date, Special
Redemption Date or Conversion Date for such share (or other date on which such
Series A Preferred Share is no longer outstanding).
"GAAP" means United States generally accepted accounting principles,
consistently applied.
"ISSUANCE DATE" means, for each Series A Preferred Share, the date on
which such share was originally issued by the Corporation.
"LIBOR" means the ninety (90) day London Interbank Offered Rate, as
reported in The Wall Street Journal or any other similar financial publication
selected by the Corporation. For purposes of calculating the Preferred Dividend
Yield Rate for any particular Series A Preferred Shares, LIBOR shall be such
rate as reported on the applicable Issuance Date; provided, such rate shall be
adjusted up or down, effective on the first day of each subsequent calendar
quarter (i.e., January 1, April 1, July 1 and October 1), to reflect the current
published rate on the last Trading Day of the prior calendar quarter, until such
time that no Series A Preferred Shares remain outstanding.
"LIQUIDATION" means any dissolution, liquidation or winding up of the
affairs of the Corporation, whether voluntary or involuntary.
"MARKET PRICE AT CONVERSION" means the Average Market Price of one
share of Common Stock determined as of the Proposed Conversion Date.
"MINIMUM BOOK VALUE PRICE" means one hundred percent (100%) of the
book value per share of the Common Stock, on a fully diluted basis, as of the
end of the most recent calendar quarter preceding the date of determination (or
on the date of determination, if such date falls at quarter-end), computed in
accordance with GAAP.
"ORIGINAL ISSUANCE DATE" means the first date on which any Series A
Preferred Shares were originally issued by the Corporation.
"ORIGINAL VALUE" of each Series A Preferred Share shall be equal to
$1,000, as proportionally adjusted for all stock splits, stock dividends, and
any other subdivisions, combinations, reclassifications, or recapitalization
affecting the Series A Preferred Shares.
"PERSON" means any individual, partnership, joint venture,
corporation, limited liability company, association, joint stock company, trust,
or unincorporated organization or association, or a government or any department
or agency or political subdivision thereof.
"PREFERRED DIVIDEND PAYMENT DATE" has the meaning set forth in
paragraph (a) of Section 2.
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<PAGE>
"PREFERRED DIVIDEND TAX ADJUSTMENT FACTOR" has the meaning set forth
in paragraph (c) of Section 2.
"PREFERRED DIVIDEND YIELD RATE" means (A) the sum of (i) LIBOR,
expressed as an annual percentage, and (ii) an additional percentage amount
based on the S&P Rating of the Series A Preferred Shares (adjusted annually) as
set forth in the table below (provided that such additional percentage shall be
two percent (2%) during any interim period where such S&P Rating is not
available), multiplied by (B) the Preferred Dividend Tax Adjustment Factor, if
any.
<TABLE>
<CAPTION>
S&P RATING ADDITIONAL PERCENTAGE AMOUNT
---------- ----------------------------
<S> <C>
AA 1.44%
AA- 1.49%
A+ 1.54%
A 1.59%
A- 1.69%
BBB+ 1.79%
BBB 1.99%
BBB- 2.24%
BB+ 2.65%
BB 2.85%
BB- 3.13%
Less than BB- 3.50%
</TABLE>
Upon the occurrence of a Special Conversion Event, the Preferred
Dividend Yield Rate shall be adjusted effective as of the Preferred Dividend
Payment Date next succeeding the date of such Special Conversion Event based on
the S&P Rating as adjusted pursuant to such Special Conversion Event.
With respect to any Series A Preferred Shares that have been issued
and outstanding for four (4) years or more, the additional percentage amounts
listed in the right hand column of the above table shall be modified on each
anniversary of the Issuance Date for such Series A Preferred Shares, beginning
on the fourth (4th) anniversary of such Issuance Date, by adding to such
percentage amount an amount equal to: 12.5 basis points times the number of such
anniversaries of the Issuance Date that have passed after the third (3rd)
anniversary (i.e., the fourth (4th) anniversary shall be counted as the first
(1st) anniversary that has so passed, the fifth (5th) anniversary shall be
counted as the second (2nd) anniversary that has so passed, etc.) for all
rating classes from AA through A-; 25 basis points times the number of such
anniversaries of the Issuance Date that have passed after the third (3rd)
anniversary (i.e., the fourth (4th) anniversary shall be counted as the first
(1st) anniversary that has so passed, the fifth (5th) anniversary shall be
counted as the second (2nd) anniversary that has so passed, etc.) for rating
classes BBB+ and BBB; and 50 basis points times the number of such anniversaries
of the Issuance Date that have passed after the third (3rd) anniversary (i.e.,
the fourth (4th) anniversary shall be counted as the first (1st) anniversary
-15-
<PAGE>
that has so passed, the fifth (5th) anniversary shall be counted as the second
(2nd) anniversary that has so passed, etc.) for all rating classes of BBB- or
lower.
"PROPOSED CONVERSION DATE" shall mean the date on which a holder of
Series A Preferred Shares proposes to convert any or all of the Series A
Preferred Shares, as set forth in its notice to the Corporation properly
delivered in accordance with paragraph (e) of Section 4.
"PROPOSED REDEMPTION DATE" shall mean the date on which the
Corporation proposes to redeem any or all of the Series A Preferred Shares, as
set forth in its notice to holders of Series A Preferred Shares properly
delivered in accordance with paragraph (b) of Section 3.
"REDEMPTION DATE" shall be the same day as the Proposed Redemption
Date, provided that (i) the Corporation has not withdrawn its intention to
redeem the Series A Preferred Shares pursuant to paragraph (c) of Section 3; and
(ii) proper provision for the payment of the Redemption Price to holders of
Series A Preferred Shares being redeemed has been made in accordance with
paragraph (b) of Section 3 by the close of business on the Proposed Redemption
Date.
"REDEMPTION PRICE" for each Series A Preferred Share shall be equal to
the sum of (A) the Original Value, plus (B) Unpaid Dividend Yield to and
including the Redemption Date on such share, provided, however, that the
Redemption Price for any redemption occurring (a) after the first anniversary
but on or before the second anniversary of the Issuance Date of such Preferred
Share shall be equal to 102% of such sum, (b) after the second anniversary but
on or before the third anniversary of the Issuance Date of such Preferred Share
shall be equal to 101% of such sum, and (c) after the third anniversary of the
Issuance Date of such Preferred Share shall be equal to 100% of such sum.
"S&P RATING" means the risk rating of the Series A Preferred Shares as
determined annually as of each anniversary of the Original Issuance Date (and in
addition as soon as practicable after the occurrence of a Special Conversion
Event) by the Standard & Poor's Division of the McGraw-Hill Companies. The
Corporation shall use its reasonable best efforts to obtain an S&P Rating with
respect to the Series A Preferred Shares as soon as practicable after the
applicable Issuance Date or Special Conversion Event, if any.
"SAP" means statutory accounting principles, consistently applied,
applicable to the Subsidiaries.
"SPECIAL CONVERSION EVENT" means the occurrence of the following
event: the consolidated stockholders' equity of HM and its consolidated
subsidiaries, as determined in accordance with GAAP, is less than
US$175,000,000, including the invested capital relating to any issued and
outstanding Series A Preferred Shares, and such condition remains uncured for
over sixty (60) days.
-16-
<PAGE>
"SPECIAL CONVERSION RATE" means, with respect to the conversion of
Series A Preferred Stock to shares of Common Stock in the event of a Special
Conversion Event, the conversion of each Series A Preferred Share into the
number of Common Stock shares resulting from dividing (i) the Original Value of
such Series A Preferred Share, plus Unpaid Dividend Yield to and including the
Conversion Date, by (ii) the greater of (A) the Market Price at Conversion, or
(B) ninety percent (90%) of the Minimum Book Value Price.
"SPECIAL REDEMPTION DATE" shall be the day designated by any holder of
Series A Preferred Shares for redemption by the Corporation of any or all Series
A Preferred Shares held by such holder, as set forth in the notice of such
election, properly delivered in accordance with paragraph (e) of Section 3,
following a Special Redemption Event.
SPECIAL REDEMPTION EVENT" means the occurrence of a Change of Control
without the written consent of the holders of a majority of the Series A
Preferred Shares then outstanding.
"SUBSIDIARIES" means Horace Mann Insurance Company, an insurance
company formed under the laws of Illinois; Allegiance Insurance Company, an
insurance company formed under the laws of California; Teachers Insurance
Company, an insurance company formed under the laws of Illinois; Horace Mann
Life Insurance Company, an insurance company formed under the laws of Illinois;
and Allegiance Life Insurance Company, an insurance company formed under the
laws of Illinois.
"TAX LAWS" means the Internal Revenue Code of 1986, as amended, or any
other revenue statute of the United States or in any United States regulation,
ruling, administrative interpretation or judicial or other official
interpretation (including a change in the characterization of dividends on the
Series A Preferred Shares) applicable to the Corporation and/or corporate
holders. For purposes of paragraph (c) of Section 2, "Tax Laws" does not
include the tax laws of any state, municipality or foreign jurisdiction, or any
tax law relating to the computation of taxes or treatment of income, expenses or
deductions, or characterization of the dividends on the Series A Preferred
Shares under the Alternative Minimum Tax rules.
"TRADING DAY" shall mean a date on which the New York Stock Exchange
(or if different, the principal national securities exchange on which the Common
Stock is listed or admitted to trading) is open for the transaction of business.
"UNPAID DIVIDEND YIELD" of any Series A Preferred Share means, for any
particular quarterly period (or lesser period, as may arise in connection with
the issuance, redemption or conversion of such shares, or payments on such
shares in connection with any Liquidation), an amount equal to the excess, if
any, of (A) the aggregate Dividend Yield accrued on such share in such period,
over (B) the aggregate amount of cash dividends or distributions paid by the
Corporation in satisfaction of Dividend Yield on such shares for such period.
-17-
<PAGE>
SECTION 9. MISCELLANEOUS.
-------------
(a) Any notice or other communication required or permitted hereunder
shall be in writing and shall be deemed to have been given on the earlier of (a)
the receipt thereof, or (b) five (5) days after mailing if sent by first class,
registered mail, postage prepaid, if properly addressed or directed to such
party at the appropriate address set forth below, or such address such party may
designate by written notice to the other parties:
(i) if to the Corporation to:
Horace Mann Educators Corporation
Mail No. G 016
One Horace Mann Plaza
Springfield, Illinois 62715-0001
Attention: George Zock
Senior Vice President & Treasurer
with a copy to:
Gibson, Dunn & Crutcher LLP
200 Park Avenue
New York, NY 10166-0193
Attention: Conor Reilly
(ii) if to a holder of the Series A Preferred Shares: to such
holder at the address for such holder as listed in the stock record books of the
Corporation (which may include the records of any transfer agent for the Series
A Preferred Shares if appropriate).
(b) In the event a holder of Series A Preferred Shares shall not by
written notice designate the name to whom payment upon redemption of Series A
Preferred Shares should be made or the address to which the certificate or
certificates representing such shares, or such payment, should be sent, the
Corporation shall be entitled to register such shares, and make such payment, in
the name of the holder of such Series A Preferred Shares as shown on the records
of the Corporation and to send the certificate or certificates representing such
shares, or such payment, to the address of such holder shown on the records of
the Corporation.
(c) All payments in the form of dividends and distributions and
distributions upon any Liquidation or otherwise made upon the Series A Preferred
Shares and any other shares of stock ranking on a parity with the Series A
Preferred Shares with respect to such dividend or distribution shall be made pro
rata, so that amounts paid per share on the Series A Preferred Shares and such
other shares of stock shall in all cases bear to each other the same ratio that
the required dividends, distributions or payments, as the case may be, payable
per share on the Series A Preferred Shares and such other shares of stock bear
to each other.
-18-
<PAGE>
(d) The Corporation may appoint, and from time to time discharge and
change, a transfer agent for the Series A Preferred Shares.
-19-
<PAGE>
ANNEX A
EXAMPLES OF TAX ADJUSTMENT MECHANISM
CERTIFICATE OF DESIGNATIONS
HORACE MANN EDUCATOR'S CORPORATION
SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK
EXAMPLE 1: If a change in the DRD Tax Law was to eliminate the 70% dividends
received deduction (the "70% DRD"), the following additional
dividend would be calculated by the Corporation on the Series A
Preferred Shares pursuant to paragraph (c) of Section 2 of the
Statement of Resolution Establishing Series (the "Statement"):
PRE-CHANGE YIELD TO CORPORATE HOLDER PER $100 OF DIVIDENDS:
<TABLE>
<CAPTION>
<S> <C>
Dividend...............................$100.00
Less: 70% DRD.......................... 70.00
-------
Taxable Dividend.......................$ 30.00
Highest Marginal Tax Rate.............. 35%
-------
Federal Income Tax.....................$ 10.50
After-Tax Yield........................$ 89.50
=======
AFTER-CHANGE YIELD TO CORPORATE HOLDER PER $100 OF DIVIDENDS:
Dividend...............................$100.00
Highest Marginal Tax Rate.............. 35%
-------
Federal Income Tax.....................$ 35.00
-------
After-Tax Yield........................$ 65.00
=======
ADDITIONAL PAYMENT BY THE CORPORATION PER $100 OF DIVIDENDS
REQUIRED TO EQUALIZE AFTER-TAX YIELD:
Pre-Change Yield.......................$ 89.50
After-Change Yield..................... 65.00
-------
..........................$ 24.50
+ (1 minus Tax Rate)................... 0.65
-------
Additional Payment to Equalize
After-Tax Yield.......................$ 37.69
=======
</TABLE>
<PAGE>
In this example, the Corporation would be required to pay an
additional $37.69 per $100.00 of dividends to each holder of any
Series A Preferred Shares. Therefore, if the Preferred Dividend
Yield Rate were 7.5% (representing ninety days (90) year LIBOR plus
2%) prior to the change in the DRD Tax Law, the Preferred Dividend
Tax Adjustment Factor would be 1.3769 ($137.69 / $100.00), and the
Preferred Dividend Yield Rate would be increased (by 37.69%) to
10.32675% (7.5% X 1.3769).
EXAMPLE 2: If a change in the DRD Tax Law was to reduce the 70% dividends
received deduction received deduction to 50% (the "50% DRD"), the
following additional dividend would be calculated by the Corporation
on the Series A Preferred Shares pursuant to paragraph (c) of
Section 2 of the Statement.
PRE-CHANGE YIELD TO CORPORATE HOLDER PER $100 OF DIVIDENDS:
<TABLE>
<CAPTION>
<S> <C>
Dividend...................................$100.00
Less: 70% DRD.............................. 70.00
-------
Taxable Dividend...........................$ 30.00
Highest Marginal Tax Rate.................. 35%
-------
Federal Income Tax.........................$ 10.50
-------
After-Tax Yield............................$ 89.50
=======
AFTER-CHANGE YIELD TO CORPORATE HOLDER PER $100 OF DIVIDENDS
Dividend...................................$100.00
Less: 50% DRD.............................. 50.00
-------
Taxable Dividend...........................$ 50.00
Highest Marginal Tax Rate, as effective.... 35%
-------
Federal Income Tax.........................$ 17.50
-------
After-Tax Yield............................$ 82.50
=======
ADDITIONAL PAYMENT BY THE CORPORATION PER $100 OF DIVIDENDS
REQUIRED TO EQUALIZE AFTER-TAX YIELD:
Pre-Change Yield...........................$ 89.50
After-Change Yield......................... 82.50
-------
$ 7.00
+ (1 - (Tax Rate* (1-new DRD))=
+ (1 - (.35)(.50))=........................$ 0.825
-------
Additional Payment to Equalize
After-Tax Yield..........................$ 8.48
=======
</TABLE>
<PAGE>
In this example, the Corporation would be required to pay an
additional $8.48 per $100 of dividends to each holder of any Series A
Preferred Shares. Therefore, if the Preferred Dividend Yield Rate
were 7.5%, the Preferred Dividend Tax Adjustment Factor would be
1.0848 ($108.48 / $100.00), and the Preferred Dividend Yield Rate
would be increased (by 8.48%) to 8.136% (7.5% x 1.0848).
EXAMPLE 3: If a change in the Tax Laws increased the 70% dividends received
deduction to 80% (the "80% DRD"), and increased the highest marginal
tax rate (at October 1, 1996) from 35% to 55%, the following
additional dividend would be calculated by the Corporation on the
Series A Preferred Shares pursuant to this paragraph (c) of Section 2
of the Statement:
PRE-CHANGE YIELD TO CORPORATE HOLDER PER $100 OF DIVIDENDS:
<TABLE>
<CAPTION>
<S> <C>
Dividend................... $100.00
Less: 70% DRD............. 70.00
-------
Taxable Dividend........... $ 30.00
Highest Marginal Tax Rate.. 35%
-------
Federal Income Tax......... $ 10.50
-------
After-Tax Yield.......... $ 89.50
=======
</TABLE>
AFTER-CHANGE YIELD TO CORPORATE HOLDER PER $100 OF DIVIDENDS
<TABLE>
<CAPTION>
<S> <C>
Dividend................................. $100.00
Less: 80% DRD........................... 80.00
-------
Taxable Dividend......................... $ 20.00
Highest Marginal Tax Rate, as effective.. 55%
-------
Federal Income Tax....................... $ 11.00
-------
After-Tax Yield........................ $ 89.00
=======
</TABLE>
AFTER-CHANGE YIELD TO CORPORATE HOLDER PER $100 OF
DIVIDENDS CONSIDERED FOR PURPOSES OF ADJUSTMENT:
<TABLE>
<CAPTION>
<S> <C>
Dividend........................... $100.00
Less: 80% DRD..................... 80.00
-------
Taxable Dividend................... $ 20.00
Highest Marginal Tax Rate,
as effective at January 1, 1997.. 35%
-------
Federal Income Tax................. $ 7.00
-------
After-Tax Yield.................. $ 93.00
=======
</TABLE>
<PAGE>
REDUCTION IN FUTURE DIVIDENDS PAID BY THE CORPORATION PER $100 OF DIVIDENDS
REQUIRED TO EQUALIZE AFTER-TAX YIELD:
<TABLE>
<CAPTION>
<S> <C>
Pre-Change Yield..................... $89.50
After Change Yield................... 93.00
------
$ 3.50
------
+ (1-(Tax Rate*(1-new DRD))=
+ (1-(.35)(.20))=................ 0.93
------
Additional Payment to Equalize
After-Tax Yield.................. $ 3.75
======
</TABLE>
<PAGE>
EXHIBIT 6.2
REGISTRATION RIGHTS AGREEMENT
-----------------------------
This REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made as of
February 15, 1997, between Horace Mann Educators Corporation, a Delaware
corporation (the "Company") and Centre Reinsurance (U.S.) Limited, a Bermuda
corporation ("Option Writer").
1. Background. Pursuant to a Catastrophe Equity Securities Issuance
Option Agreement, dated as of February 15, 1997, between the Company and Option
Writer (the "Option Agreement"), Option Writer may acquire shares of the
Company's Series A Cumulative Nonvoting Cumulative Convertible Preferred Stock,
par value US$0.001 per share (the "Preferred Stock"). The number of shares of
Preferred Stock to be acquired by Option Writer, if any, will be determined in
accordance with applicable provisions of the Option Agreement. The shares of
Preferred Stock outstanding from time to time are referred to in this Agreement
as the "Preferred Shares." The Preferred Stock will, when issued, be
convertible, subject to certain conditions, into shares of the Company's common
stock, par value $0.001 per share ("Common Stock"), all as set forth in the
Certificate of Designations for the Preferred Stock (the "Certificate of
Designations"). Pursuant to the Option Agreement, the Company has agreed to
enter into this Agreement granting to the holders of the Preferred Shares the
right to register the Registrable Securities (hereinafter defined) upon the
terms and subject to the conditions set forth in this Agreement.
2. Definitions. As used in this Agreement, the following terms have the
following respective meanings:
"Affiliate" of a Person means any other Person that is controlled by,
controls, or is under common control with such Person.
"Certificate of Designations" is defined in Section 1.
"Commission" means the Securities and Exchange Commission or any other
Federal agency at the time administering the Securities Act.
"Common Stock" is defined in Section 1.
"Company" means Horace Mann Educators Corporation, a Delaware corporation.
"Conversion Shares" means the shares of Common Stock issued or issuable
upon conversion of the Preferred Stock.
1
<PAGE>
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations of the Commission thereunder, all as the same shall be
in effect from time to time.
"Initiating Holder" is defined in Section 3.1(a).
"Minimum Period" is defined in Section 3.3(b).
"Option Agreement" is defined in Section 1.
"Option Writer" means Centre Reinsurance (U.S.) Limited, a Bermuda
corporation.
"Person" means a corporation, association, partnership, limited liability
company, organization, business, individual, governmental or political agency,
or other entity.
"Preferred Shares" is defined in Section 1.
"Preferred Stock" is defined in Section 1.
"Registrable Securities" means (i) any Conversion Shares, (ii) any
Preferred Shares which a holder is unable to convert into Conversion Shares due
to a lack of approval, from the appropriate state insurance commissioner, of any
applicable insurance regulatory filing necessary for such conversion, and (iii)
any other securities which may be included as Registrable Securities as set
forth in Section 6.13 of the Option Agreement. As to any particular Registrable
Securities, once issued such securities shall cease to be Registrable Securities
when (a) a registration statement with respect to the sale of such securities
shall have become effective under the Securities Act and such securities have
been disposed of in accordance with such registration statement (b) they shall
have been sold as permitted by Rule 144 under the Securities Act, (c) they shall
have been otherwise transferred, new certificates for them not bearing a legend
restricting further transfer shall have been properly delivered by the Company
and subsequent public distribution of them shall not, in the reasonable opinion
of counsel to the Company, require registration of them under the Securities
Act, or (d) they shall have ceased to be outstanding.
"Registration Expenses" means all expenses incident to the Company's
performance of or compliance with Section 3, including, without limitation, all
registration, filing and NASD fees, all fees and expenses of complying with
securities or blue sky laws (including related counsel fees), all word
processing, duplicating and printing expenses, messenger and delivery expenses,
the fees and disbursements of counsel for the Company and of its independent
public accountants, including the expenses of "cold comfort" letter required by
or incident to such performance and compliance, fees of transfer agents any fees
and disbursements of underwriters customarily paid by issuers or sellers of
securities (excluding any underwriting discounts or commissions with respect to
the Registrable Securities), but excluding any fees or expenses of counsel to
any holders. Notwithstanding the foregoing, in the event the Company shall
2
<PAGE>
determine, in accordance with Section 3.2, not to register any securities with
respect to which it had given written notice of its intention to so register to
holders of Registrable Securities, all of the costs of the type (and subject to
any limitation to the extent) set forth in this definition and incurred by
Requesting Holders in connection with such registration on or prior to the date
the Company notifies the Requesting Holders of such determination shall be
deemed Registration Expenses.
"Requesting Holder" is defined in Section 3.2(a).
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations of the Commission thereunder, all as the same shall be in
effect from time to time.
"Selling Expenses" means all underwriting discounts and selling commissions
applicable to the sale of Registrable Securities and all fees and expenses of
counsel to Selling Holders.
"Selling Holder" is defined in Section 3.1(a)(ii).
"Significant Subsidiary" is defined under Rule 1-02(v) of Regulation S-X
promulgated under the Securities Act and the Exchange Act.
"Value" is defined in Section 3.1(a).
3. Registration Under the Securities Act.
-------------------------------------
3.1 Registration on Request.
-----------------------
(a) Request. Subject to Section 3.9, upon the written request of one
or more holders (the "Initiating Holders") of Registrable Securities,
representing not less than US$25,000,000 of the Registrable Securities (or such
lesser amount of Registrable Securities as set forth in Section 3.1(g)(ii)
below) based on the market value of such Registrable Securities at the time of
the request (with Preferred Shares valued on an as converted basis) (the
"Value"), that the Company effect the registration under the Securities Act of
all or part of such Initiating Holders' Registrable Securities, the Company will
promptly give written notice of such requested registration to all registered
holders of Registrable Securities, and the Company will use its commercially
reasonable efforts to effect, as early as practicable, the registration under
the Securities Act of
(i) the Registrable Securities which the Company has been so
requested to register by such Initiating Holders, and
(ii) all other Registrable Securities which the Company has been
requested to register by holders of Registrable Securities (such holders
together with the Initiating Holders are referred to in this Agreement as the
"Selling Holders") by written notice to the Company, within thirty (30) days
after the receipt of such written notice by the Company,
3
<PAGE>
all to the extent requisite to permit the disposition of the
Registrable Securities to be registered in such manner, subject to Section
3.1(d) below.
(b) Registration of Other Securities. Whenever the Company shall
effect a registration pursuant to this Section 3.1 in connection with an
offering and sale of Registrable Securities by one or more Selling Holders of
Registrable Securities, subject to the following sentence and Section 3.1(f)
below, (i) any person other than a Selling Holder who holds registration rights
with respect to securities of the Company (each, a "Registration Rights
Holder"), shall have the right to include, to the extent provided in the
relevant agreement between the Company and the Registration Rights Holder, in
the registration made pursuant to this Section 3.1 the securities held by the
Registration Rights Holders to which such registration rights relate, and (ii)
the Company shall have the right to include in the registration made pursuant to
this Section 3.1 securities to be issued by the Company (the securities for
which Registration Rights Holders and the Company can so require registration
are referred to in this Agreement as "Additional Securities"). No Additional
Securities, however, shall be included among the securities covered by the
registration made pursuant to this Section 3.1 if, in case of an underwritten
offering, the managing underwriter of such offering shall have advised the
Company and any Registration Rights Holder seeking to have Additional Securities
covered by such registration in writing that the inclusion of such Additional
Securities would adversely affect such offering, in which case the number of
Additional Securities included in such registration shall be limited to the
number that will not, in the judgment of the managing underwriter, adversely
affect the offering (such limited number to be allocated promptly (so as not to
interfere with the timing of the offering) between the Company and the affected
Registration Rights Holders as the Company shall determine).
(c) Registration Statement Form. Registrations under this Section
3.1 shall be on an appropriate registration form of the Commission, as
reasonably determined by the Company.
(d) Effective Registration Statement. A registration requested
pursuant to this Section 3.1 shall not be deemed to have been effected (i)
unless a registration statement with respect thereto has become effective and
remained effective in compliance with the provisions of the Securities Act until
the Minimum Period has been completed, (ii) if, after it has become effective,
such registration is interfered with by any stop order, injunction or other
order or requirement of the Commission or other governmental agency or court for
any reason not attributable to the Selling Holders and has not subsequently
become effective, or (iii) if the conditions to closing specified in the
underwriting agreement, if any, entered into in connection with such
registration are not satisfied or waived, other than by reason of a failure on
the part of Selling Holders.
(e) Selection of Underwriters. All registrations pursuant to this
Section 3.1 shall involve underwritten securities offerings. The underwriter or
underwriters of each underwritten offering of the Registrable Securities so to
be registered shall be selected by the Company from a list of four (4) reputable
securities underwriters submitted to the Company by the Selling Holders of more
than 50% of the Registrable Securities so to be registered.
4
<PAGE>
(f) Priority in Requested Registration. If the managing underwriter
of any underwritten offering shall advise the Company in writing (with a copy to
each Selling Holder of Registrable Securities requesting registration) that, in
its opinion, the number or type of securities requested to be included in such
registration (including any Additional Securities requested to be included
pursuant to Section 3.1(b)) is a number or type which would adversely affect
such offering (including, but not limited to, the price offered), then the
Company shall include in such registration, to the extent of the number which
the Company is so advised can be sold in such offering, Registrable Securities
requested to be included in such registration, pro rata among the Selling
Holders requesting such registration on the basis of the percentage of the
Registrable Securities of such Selling Holders requested so to be registered. In
connection with any such registration to which this Section 3.1(f) is
applicable, no securities other than Registrable Securities shall be covered by
such registration unless all Registrable Securities requested to be included in
such registration are so included. If all of the Registrable Securities
requested by the Initiating Holder to be included in such registration cannot be
included as provided in the first sentence of this Section 3.1(f), the Company
shall so notify the Initiating Holder and the Initiating Holder shall have the
right to withdraw the request for registration by giving written notice to the
Company within 20 days after receipt of notice thereof by the Company and, in
the event of such withdrawal, such request shall not be counted for purposes of
the requests for registration to which holders are entitled pursuant to Section
3.1 hereof (thereby allowing such holders to make a demand for registration
pursuant to Section 3.1 at another time).
(g) Limitations on Registration on Request. Notwithstanding anything
in this Section 3.1 to the contrary, in no event will the Company be required to
(i) effect more than three registrations pursuant to this Section 3.1, (subject
to the last sentence of Section 3.1(f) and 3.6(b)), it being understood that
Initiating Holders are entitled to one registration and up to two additional
conditional registrations as set forth below in this Section 3.1(g), (ii) effect
a registration in which the aggregate amount of Registrable Securities has a
Value less than US$25,000,000, unless the Value of Registrable Securities
outstanding is less than US$25,000,000 in which case the Company shall be
obligated to effect one and only one registration of no less than US$5,000,000
in Value of Registrable Securities pursuant to this Section 3.1, subject to the
other provisions hereof, unless less than US$5,000,000 in Value of Registrable
Securities remain outstanding due to a prior partial redemption of Registrable
Securities by HM, in which case such $5,000,000 minimum shall not apply, or
(iii) file a registration statement pursuant to this Section 3.1 within the
twelve-month period occurring immediately subsequent to the effectiveness
(within the meaning of Section 3.1(d)) of a registration statement filed
pursuant to this Section 3.1 or pursuant to Section 3.2. The conditions to any
second and third registrations under this Section 3.1 are as follows:
(A) Selling Holders shall be entitled to a second registration
if, at the time immediately preceding a sale in the first registration, such
Selling Holders either (i) hold Preferred Shares which on an as converted basis
would cause them, without giving effect to any other holdings of Common Stock
acquired other than upon conversion of Preferred Shares, to hold an ownership
interest in HM of greater than 33 1/3% based on market
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capitalization, or (ii) stand to receive, in a sale of Registrable Securities
pursuant to such registration, gross proceeds of less than 95% of the Option
Writer's cost basis in such Registrable Securities (which cost basis shall
include the amount paid by Option Writer for the relevant Preferred Shares, plus
accrued but unpaid dividends thereon). Notwithstanding the foregoing, in the
first registration (unless clause (A)(ii) above applies, in which case the
holders can withdraw from such first registration), the Selling Holders shall be
obligated to sell Registrable Securities with an aggregate value of at least 1/3
of the aggregate value of the outstanding Preferred Shares (valued on an as
converted basis) and Common Stock issued upon conversion of Preferred Shares.
(B) Selling Holders shall be entitled to a third registration if,
at the time immediately preceding a sale in the second registration, such
Selling Holders either (i) hold Preferred Shares which on an as converted basis
would cause them, without giving effect to any other holdings of Common Stock
acquired other than upon conversion of Preferred Shares, to hold an ownership
interest in HM of greater than 33 1/3% based on market capitalization, or (ii)
stand to receive, in a sale of Registrable Securities pursuant to such
registration, gross proceeds of less than 90% of the Option Writer's cost basis
in such Registrable Securities (which cost basis shall include the amount paid
by Option Writer for the relevant Preferred Shares, plus accrued but unpaid
dividends thereon). Notwithstanding the foregoing, in the second registration
(unless clause (B)(ii) above applies, in which case the Selling Holders can
withdraw from such second registration), the Selling Holders shall be obligated
to sell Registrable Securities with an aggregate value of at least 1/2 of the
aggregate value of the outstanding Preferred Shares (valued on an as converted
basis) and Common Stock issued upon conversion of Preferred Shares.
(C) In any third registration, the Selling Holders shall be
obligated to (i) sell all of the Common Stock that they then hold, (ii) convert
all of the Preferred Shares that they then hold into Common Stock and sell such
Common Stock (unless such Preferred Shares cannot be converted as set forth in
the definition of Registrable Securities above, in which case clause (C)(iii)
below applies), (iii) sell all of the Preferred Shares that they then hold which
cannot be converted and must therefore be registered in accordance with the
definition of Registrable Securities above, and (iv) sell all other securities
that they then hold pursuant to Section 6.13 of the Option Agreement.
3.2 Incidental Registration.
-----------------------
(a) Right to Include Registrable Securities. Subject to Section 3.9,
if the Company at any time proposes to register any of its securities under the
Securities Act by registration on any form other than Forms S-4 or S-8 (or any
successor forms), whether or not for sale for its own account, it will, each
such time give prompt written notice to all registered holders of Registrable
Securities of its intention to do so and of such holders' rights under this
Section 3.2. Upon the written request of any such holder (a "Requesting
Holder") made as promptly as practicable and in any event within twenty (20)
days after the receipt of any such notice (ten (10) days if the Company states
in such written notice or gives telephonic notice to all
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<PAGE>
registered holders of Registrable Securities, with written confirmation to
follow promptly thereafter, stating that (i) such registration will be on Form
S-3 and (ii) such shorter period of time is required because of a planned filing
date), which request shall specify the Registrable Securities intended to be
disposed of by such Requesting Holder, the Company will, subject to Section 3.9,
use its commercially reasonable efforts to effect the registration under the
Securities Act of all Registrable Securities which the Company has been so
requested to register by the Requesting Holders thereof, provided, however, that
if, at any time after giving written notice of its intention to register any
securities and prior to the effective date of registration statement filed in
connection with such registration, the Company shall determine for any reason
not to register or to delay registration of such securities the Company may, at
its election, give written notice of such determination to each Requesting
Holder of Registrable Securities and (i) in the case of a determination not to
register, shall be relieved of its obligation to register any Registrable
Securities in connection with such registration (but not from any obligation of
the Company to pay the Registration Expenses in connection therewith), without
prejudice, however, to the rights of any holder or holders of Registrable
Securities entitled to do so to request that such registration be effected as a
registration under Section 3.1, and (ii) in the case of a determination to delay
registering, shall be permitted to delay registering any Registrable Securities,
for the same period as the delay in registering such securities. Other than as
provided in Section 3.1, no registration effected under this Section 3.2 shall
relieve the Company of its obligation to effect any registration upon request
under Section 3.1.
(b) Priority in Incidental Registrations. If the managing
underwriter of any underwritten offering shall advise the Company in writing
(with a copy to each Requesting Holder) that, in its opinion, the number or type
of Registrable Securities requested to be included in such registration would
adversely affect such offering, then the Company will, subject to any relevant
agreements between the Company and Registration Rights Holders, include in such
registration, to the extent of the number and type which the Company is so
advised can be sold in (or during the time of) such offering, first, all
securities proposed by the Company to be sold for its own account, second, such
Registrable Securities and other securities of the Company with respect to which
the holders thereof have the right to require the Company to register such
securities in connection with any registration of securities to be offered by
the Company ("Other Securities") requested to be included in such registration,
such Registrable Securities and Other Securities to be included in such
registration pro rata on the basis of the estimated gross proceeds from the sale
thereof, and third, any other securities of the Company requested to be included
in such registration. There shall be no limit on the number or registrations
that may be requested pursuant to this Section 3.2.
(c) Limitations on Incidental Registrations. Notwithstanding
anything in this Section 3.2 to the contrary, in no event will the Company be
required to (i) grant a request to include Registrable Securities in any "shelf"
registration filed pursuant to Rule 415 under the Securities Act, or any
successor rule, relating to the offering of debt securities by the Company, or
(ii) grant a request to include Registrable Securities in any registration
unless the amount of all Registrable Securities which the Company has been so
requested to register by the Requesting
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Holders thereof (without giving effect to the application of the foregoing
subsection (b)) is at least US$25,000,000 (or such lesser amount as described in
Section 3.1(g)(ii)).
3.3 Registration Procedures. If and whenever the Company is required to
use its commercially reasonable efforts to effect the registration of any
Registrable Securities under the Securities Act as provided in Sections 3.1 and
3.2, the Company will as expeditiously as possible:
(a) prepare and file with the Commission the requisite registration
statement (within ninety (90) days after receipt of a request for registration
from the requisite Initiating Holders under Section 3.1(a) above) to effect such
registration and then use its commercially reasonable efforts to cause such
registration statement to become and remain effective for the Minimum Period,
provided, however, that the Company may discontinue any registration of its
securities which are not Registrable Securities (and, under the circumstances
specified in Section 3.2(a), its securities which are Registrable Securities) at
any time prior to the effective date of the applicable registration statement
relating thereto;
(b) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to keep such registration
statement effective and to comply with the provisions of the Securities Act with
respect to the disposition of all Registrable Securities covered by such
registration statement for such period as shall be required for the disposition
of all such Registrable Securities, provided that such period shall not exceed
ninety (90) days (such period being referred to in this Agreement as the
"Minimum Period");
(c) furnish to each seller of Registrable Securities covered by such
registration statement such number of conformed copies of such registration
statement and the prospectus included in such registration statement (including
each preliminary prospectus and any summary prospectus) and of each such
amendment and supplement thereto (in each case including all exhibits and
documents incorporated by reference therein), such number of copies of the
prospectus contained in such registration statement and any other prospectus
filed under Rule 424 under the Securities Act, in conformity with the
requirements of the Securities Act, and such other documents, as such seller may
reasonably request;
(d) use its commercially reasonable efforts (i) to register or
qualify all Registrable Securities and other securities covered by such
registration statement under such other securities or blue sky laws of such
States when an exemption is not available and as the sellers of Registrable
Securities covered by such registration statement shall reasonably request in
writing, (ii) to keep such registration or qualification in effect for the
Minimum Period, and (iii) to take any other action which may be reasonably
necessary or advisable to enable such sellers to consummate the disposition in
such jurisdictions of the securities to be sold by such sellers, except that the
Company shall not for any such purpose be required to qualify generally to do
business as a foreign corporation in any jurisdiction in which it would not, but
for the
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requirements of this Section 3.3(d), be obligated to be so qualified or to
consent to general service of process in any such jurisdiction;
(e) use its commercially reasonable efforts to cause all Registrable
Securities covered by such registration statement to be registered with or
approved by such other Federal or state governmental agencies or authorities as
may be necessary to enable the seller or sellers of such Registrable Securities
to consummate the disposition of such Registrable Securities;
(f) in the case of an underwritten or "best efforts" offering,
furnish at the effective date of such registration statement to each Selling
Holder, and such Person's underwriters, if any, a signed counterpart of:
(i) an opinion of counsel for the Company, dated the effective
date of such registration statement and, if applicable, the date
of the closing under the underwriting agreement, and
(ii) a "comfort" letter signed by the independent public
accountants who have certified the Company's financial statements
included or incorporated by reference in such registration
statement,
covering substantially the same matters with respect to such registration
statement (and the prospectus included therein) and, in the case of the
accountants' comfort letter, with respect to events subsequent to the date of
such financial statements, as are customarily covered in opinions of issuer's
counsel and in accountants' comfort letters delivered to the underwriters in
underwritten public offerings of securities and, in the case of the accountants'
comfort letter, such other financial matters, and, in the case of the legal
opinion, such other legal matters, as the underwriters may reasonably request;
(g) cause representatives of the Company to participate in any "road
show" or "road shows" reasonably requested by any underwriter of an underwritten
or "best efforts" offering of any Registrable Securities;
(h) notify each seller of Registrable Securities covered by such
registration statement, at any time when a prospectus relating thereto is
required to be delivered under the Securities Act, upon discovery that, or upon
the happening of any event as a result of which, the prospectus included in such
registration statement, as then in effect, includes an untrue statement of a
material fact or omits to state any material fact required to be stated therein
or necessary to make the statements therein not misleading, in the light of the
circumstances under which they were made, and at the request of any such seller
promptly prepare and furnish (subject to the proviso below) to it a reasonable
number of copies of a supplement to or an amendment of such prospectus as may be
necessary so that, as thereafter delivered to the purchasers of such securities,
such prospectus shall not include an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances under which
they were made; provided, however,
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<PAGE>
that the prompt delivery of such a supplement to or amendment of such prospectus
may be delayed by the Company pursuant to Section 3.6 below.
(i) use its commercially reasonable efforts to list the Registrable
Securities covered by such registration statement with any national securities
exchange on which securities of the same class as those requested to be included
in such registration statement are then listed (or, if such securities are not
listed on a national securities exchange but are quoted on The Nasdaq Stock
Market, to include such shares for quotation therein);
(j) provide a transfer agent and registrar for all Registrable Securities
to be registered under this Agreement, and a CUSIP number for all such
Registrable Securities, in each case not later than the effective date of such
registration;
(k) enter into such agreements (including an underwriting agreement as
provided below, if applicable) and take all such other actions reasonably
requested in order to expedite and facilitate the disposition of the Registrable
Securities to be registered; and
(l) otherwise use its commercially reasonable efforts to comply with all
applicable rules and regulations of the Commission, including without limitation
Section 11(a) of the Securities Act, and promptly furnish to each Selling Holder
of Registrable Securities a copy of any amendment or supplement to the
applicable registration statement or prospectus;
(m) notify each seller of Registrable Securities and the managing
underwriter or agent, and confirm the notice in writing (a) when the
registration statement, or any post-effective amendment to the registration
statement, shall have become effective, or any supplement to the prospectus or
any amendment to the prospectus shall have been filed, (b) of the receipt of any
comments from the Commission, (c) of any request of the Commission to amend the
registration statement or amend or supplement the prospectus or for additional
information, and (d) of the issuance by the Commission of any stop order
suspending the effectiveness of the registration statement or of any order
preventing or suspending the use of any preliminary prospectus, or of the
suspension of the qualification of the Registrable Securities for sale in any
jurisdiction, or of the institution or threatening of any proceedings for any
such purposes;
(n) use its commercially reasonable efforts to obtain the withdrawal of
any order suspending the effectiveness of the registration statement at the
earliest possible time;
(o) cooperate with the sellers of Registrable Securities and the managing
underwriter or agent, if any, to facilitate the timely preparation and delivery
of certificates (not bearing any restrictive legends) representing Registrable
Securities to be sold, and enable such Registrable Securities to be in such
denominations and registered in such names as such sellers or the managing
underwriter or agent, if any, may reasonably request;
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<PAGE>
(p) cause its subsidiaries and affiliates to take all action necessary or
advisable to effect the registration of the Registrable Securities contemplated
hereby, including preparing the filing any required financial information; and
(q) use its commercially reasonable efforts to take all other steps
necessary or advisable to effect the registration of the Registrable Securities
contemplated hereby.
The Company may require each seller of Registrable Securities as to
which any registration is being effected to furnish the Company such information
regarding such seller and the distribution of such securities as the Company may
from time to time reasonably request in writing in order to comply with Federal
and applicable state securities laws.
Each seller of Registrable Securities agrees, by requesting
registration thereof, that upon receipt of any notice from the Company of the
happening of any event of the kind described in Section 3.3(h), such holder will
immediately discontinue such holder's disposition of Registrable Securities
pursuant to the registration statement relating to such Registrable Securities
until such holder's receipt of the copies of the supplemented or amended
prospectus contemplated by Section 3.3(h) and, if so directed by the Company,
will deliver to the Company (at the Company's expense) all copies, other than
permanent file copies, then in such holder's possession of the prospectus
relating to such Registrable Securities current at the time of receipt of such
notice.
3.4 Underwritten Offerings.
----------------------
(a) Requested Underwritten Offerings. If requested by the
underwriters for any underwritten offering by holders of Registrable Securities
pursuant to registrations requested under Section 3.1, the Company will use
commercially reasonable efforts to enter into an underwriting agreement with
such underwriters for such offering, such agreement to be reasonably
satisfactory in substance and form to the Company, each such holder and the
underwriters and to contain such representations and warranties by the Company
and such other terms as are generally prevailing in agreements of that type,
including, without limitation, indemnities and the furnishing of an opinion of
counsel and "cold comfort" letters from the Company's independent certified
public accountants. The holders of the Registrable Securities proposed to be
distributed by such underwriters shall cooperate with the Company in the
negotiation of, and shall be parties to, the underwriting agreement between the
Company and such underwriters.
(b) Incidental Underwritten Offerings. If the Company proposes
to register any of its securities under the Securities Act as contemplated by
Section 3.2 and such securities are to distributed by or through one or more
underwriters, the Company will, subject to Section 3.9, if requested by any
Requesting Holder of Registrable Securities, use its commercially reasonable
efforts to arrange for such underwriters to include all the Registrable
Securities to be offered and sold by such Requesting Holder among the securities
of the Company to be distributed by such underwriters. The holders of
Registrable Securities to be distributed by such underwriters shall be parties
to the underwriting agreement between the Company and such underwriters.
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Notwithstanding the foregoing provisions of this Section 3.4(b), the Company
need not include any Registrable Securities of any such Requesting Holder in an
underwritten offering of the Company's securities under the circumstances
contemplated by Section 3.2(b) above.
3.5 Preparation: Reasonable Investigation. In connection with the
preparation and filing of each registration statement under the Securities Act
pursuant to this Agreement, the Company will give the holders of Registrable
Securities registered under such registration statement, their underwriters, if
any, and their respective counsel the opportunity to participate in the
preparation of such registration statement, and, to the extent practicable, each
amendment or supplement to such registration statement, and give each of them
such access to its books and records, pertinent corporate documents and
properties (to the extent customarily given to the underwriters of the Company's
securities), such opportunities to discuss the business of the Company with its
officers and the independent public accountants who have certified its financial
statements as shall be necessary to conduct a reasonable investigation within
the meaning of the Securities Act.
3.6 Limitations, Conditions and Qualifications to Obligations under
Registration Covenants. The obligations of the Company to use its commercially
reasonable efforts to cause the Registrable Securities to be registered under
the Securities Act are subject to each of the following limitations, conditions
and qualifications:
(a) The Company shall not be obligated to file any registration
statement pursuant to Section 3.1 at any time if the Company would be required
to include financial statements audited as of any date other than the end of its
fiscal year.
(b) The Company shall be entitled to postpone for a reasonable
period of time (but not exceeding 120 days) the filing, supplementing or
amending or any registration statement otherwise required to be prepared and
filed by it pursuant to Section 3.1 if the Company determines, in its reasonable
judgment, that such registration and offering would interfere with, or require
public disclosure of, any financing, acquisition, disposition, corporate
reorganization or other transaction involving the Company or any of its
Significant Subsidiaries, and promptly gives the holders of Registrable
Securities requesting registration pursuant to Section 3.1 written notice of
such determination and an approximation of the anticipated delay; provided,
however, that after any exercise of its right to postpone the filing of a
registration statement under this Section 3.6(b), the Company shall not, within
120 days of the expiration of any such postponement, exercise again its right of
postponement under this Section 3.6(b). The Company shall notify the Selling
Holders of the expiration of the period of delay. If the Company shall so
postpone the filing of a registration statement, such holders of Registrable
Securities requesting registration pursuant to Section 3.1 shall have the right
to withdraw the request for registration by giving written notice to the Company
within 15 days after receipt of the notice from the Company of the end of such
delay and, in the event of such withdrawal, such request for registration to
which holders of Registrable Securities are entitled pursuant to Section 3.1
shall not be considered a request for registration pursuant to Section 3.1
(thereby allowing such holders to make a demand for registration pursuant to
Section 3.1 at another time).
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3.7 Indemnification and Contribution.
--------------------------------
(a) In the event of a registration of any Registrable Securities
under the Securities Act pursuant to Section 3, the Company will, and hereby
does, indemnify and hold harmless, to the full extent permitted by law, each
seller of Registrable Securities covered by such registration statement and each
other Person who participates as an underwriter in the offering or sale of such
securities and each other Person, if any, who controls such seller or any such
underwriter within the meaning of the Securities Act, and their respective
directors, officers, partners, members and agents, against any losses, claims,
damages, liabilities and expenses, joint or several, to which such seller or
underwriter or any such director, officer, partner, member, agent or controlling
person may become subject under the Securities Act or otherwise including,
without limitation, the reasonable fees and expenses of legal counsel (including
those incurred in connection with any claim for indemnity hereunder), insofar as
such losses, claims, damages or liabilities (or actions or proceedings, whether
commenced or threatened, in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
any registration statement under which such Registrable Securities were
registered under the Securities Act pursuant to Section 3, any preliminary
prospectus, summary prospectus or final prospectus contained therein, or any
amendment or supplement thereof, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein in light of the
circumstances in which they were made not misleading, and will pay or reimburse
each such seller or underwriter and each such director, officer, partner, member
and controlling Person for any legal or other expenses reasonably incurred by
them in connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the Company shall not be liable in
any such case if and to the extent that any such loss, claim, damage, liability
(or action or proceeding in respect thereof) or expense arises out of or is
based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in such registration statement, any such preliminary
prospectus, final prospectus, summary prospectus, amendment or supplement in
reliance upon and in conformity with information furnished by any such seller or
underwriter and each such director, officer, partner, member and controlling
Person as the case may be, in writing specifically for use in such registration
statement, prospectus, amendment or supplement, and provided further that the
Company shall not be liable to any Person who participates as an underwriter in
the offering or sale of Registrable Securities or any other Person, if any, who
controls such underwriter within the meaning of the Securities Act, in any such
case to the extent that any such loss, claim, damage, liability (or action or
proceeding in respect thereof) or expense arises out of such Person's failure to
send or give a copy of the final prospectus, as the same may be then
supplemented or amended, to the Person asserting an untrue statement or alleged
untrue statement or omission or alleged omission at or prior to the written
confirmation of the sale of Registrable Securities to such Person if such
statement or omission was corrected in such final prospectus. Such indemnity
shall remain in
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<PAGE>
full force and effect regardless of any investigation made by or on behalf of
such seller or any such director, officer, partner, member, agent or controlling
person and shall survive the transfer of such securities by such seller.
(b) In the event of a registration of any Registrable Securities
under the Securities Act pursuant to Section 3, each seller of Registrable
Securities under such registration, severally and not jointly, will, and hereby
does, indemnify and hold harmless the Company, each person, if any, who controls
the Company within the meaning of the Securities Act, each officer of the
Company who signs the registration statement, each director of the Company, each
underwriter and each person who controls any underwriter within the meaning of
the Securities Act, against all losses, claims damages or liabilities, joint or
several, to which the Company or such officer, director, underwriter or
controlling person may become subject under the Securities Act or otherwise, but
only insofar as such losses, claims, damages or liabilities (or actions in
respect thereof), arise out of or are based upon an untrue statement or alleged
untrue statement or omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading, made in reliance upon and in conformity with information
pertaining to such seller of Registrable Securities furnished in writing to the
Company by such seller of Registrable Securities specifically for use in such
registration statement under which such Registrable Securities were registered
under the Securities Act pursuant to Section 3, any preliminary prospectus or
final prospectus contained therein, or any amendment or supplement thereof, and
will pay or reimburse the Company and each such officer, director, underwriter
and controlling person for any legal or other expenses reasonably incurred by
them in connection with investigating or defending any such loss, claim, damage,
liability or actions; provided, however, that (i) the liability of each seller
of Registrable Securities under this Section 3.7 shall be limited to the
proportion of any such loss, claim, damage, liability or expense which is equal
to the proportion that the public offering price of the Registrable Securities
sold by such seller of Registrable Securities under such registration statement
bears to the total public offering price of all securities sold under such
registration statement, but not in any event to exceed the net proceeds received
by such seller of Registrable Securities for the sale of Registrable Securities
covered by such registration statement, and (ii) no seller of Registrable
Securities shall be liable for amounts paid in settlement of any such loss,
claim, damage, liability or action if such settlement is effected without the
consent of such seller of Registrable Securities, such consent not to be
unreasonably withheld or delayed. Such indemnity shall remain in full force and
effect, regardless of any investigation made by or on behalf of the Company or
any such director, officer or controlling person and shall survive the transfer
of such securities by such seller.
(c) Promptly after receipt by an indemnified party of notice of the
commencement of any action or proceeding involving a claim referred to in
Section 3.7(a) or (b), such indemnified party shall, if a claim is to be made
against the indemnifying party, notify the indemnifying party in writing of such
claim, but the failure to so notify the indemnifying party shall not relieve the
indemnifying party from any liability which it may have to such indemnified
party other than under this Section 3.7 and shall only relieve it from any
liability which it may have to such indemnified party under this Section 3.7 if
and to the extent the
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<PAGE>
indemnifying party is actually prejudiced by such failure. In case any such
action shall be brought against any indemnified party and the indemnified party
shall notify the indemnifying party of the commencement of that action, the
indemnifying party shall be entitled to participate in and, to the extent it
shall wish, to assume and undertake the defense of that action with counsel
reasonably satisfactory to such indemnified party, and, after notice from the
indemnifying party to such indemnified party of its election so to assume and
undertake the defense of that action, the indemnifying party shall not be liable
to such indemnified party under this Section 3.7 for legal and other
professional expenses subsequently incurred by such indemnified party in
connection with the defense of that action other than reasonable costs of
investigation and of liaison with counsel so selected; provided, however, that
if the defendants in any such action include both the indemnified party and the
indemnifying party, and the indemnified party shall have reasonably concluded
that there may be legal defenses or rights available to the indemnified party
(which have not been waived) which are in actual or potential conflict with
those available to the indemnifying party, the indemnified party shall have the
right to select one law firm to act as separate counsel and to assume such legal
defenses and otherwise to participate in the defense of such action, with the
reasonable fees and expenses of such separate counsel and other expenses related
to such participation to be reimbursed by the indemnifying party as incurred.
Upon the election by the indemnifying party to assume the defense of, or
otherwise contest, such litigation, proceeding or other action, the indemnifying
party shall not be liable for any legal or other expenses subsequently incurred
by the indemnified party in connection with the defense of such litigation,
proceeding or action unless (x) the indemnified party shall have employed such
counsel in connection with the assumption of legal defense or assertion of
rights in accordance with the provision of the preceding sentence or (y) the
indemnifying party fails to take reasonable steps necessary to diligently defend
such claim within twenty (20) days after receiving notice from the indemnified
party stating that the indemnified party believes the indemnifying party has
failed to take such steps, in which case the indemnified party may assume its
own defense and the indemnifying party shall be liable for reimbursement of all
legal and other expenses of the indemnified party as incurred by the indemnified
party. The parties shall cooperate in any such defense and give each other full
access to all information relevant to such defense. The indemnifying party shall
not be obligated to indemnify any party for any settlement entered into without
the indemnifying party's prior written consent, which consent shall not be
unreasonably withheld or delayed. No indemnifying party, in the defense of any
such claim or litigation against an indemnified party, shall consent to entry of
any judgment or enter into any settlement which does not include an
unconditional release by the claimant or plaintiff of such indemnified party
from all liability in respect of such claim or litigation, unless such
indemnified party shall otherwise consent in writing.
(d) If the indemnification provided for in this Section 3.7 shall for
any reason be held by a court to be unavailable to an indemnified party under
Section 3.7(a) or (b) hereof in respect of any loss, claim, damage or liability,
or any action in respect thereof, then, in lieu of the amount paid or payable
under Section 3.7(a) or (b), the indemnified party and the indemnifying party
under Section 3.7(a) or (b) shall contribute to the aggregate losses, claims,
damages and liabilities (including legal or other expenses reasonably incurred
in connection with investigating the same, including those incurred in
connection with any claim for indemnity hereunder), (i) in such proportion as is
appropriate to reflect the relative fault of the
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<PAGE>
Company and the prospective sellers of Registrable Securities covered by the
registration statement which resulted in such loss, claim, damage or liability,
or action or proceeding in respect thereof, with respect to the statements or
omissions which resulted in such loss, claim, damage or liability, or action or
proceeding in respect thereof, as well as any other relevant equitable
considerations or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such portion as shall be appropriate to reflect
the relative benefits received by the Company and such prospective sellers from
the offering of the securities covered by such registration statement; provided,
however, that for purposes of this clause (ii), the relative benefits received
by the prospective sellers shall be deemed not to exceed the amount of proceeds
received by such prospective sellers. No Person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any Person who was not guilty of such
fraudulent misrepresentation. Such prospective sellers' obligations to
contribute as provided in this Section 3.7(d) are several in proportion to the
relative value of their respective Registrable Securities covered by such
registration statement and not joint. In addition, no Person shall be obligated
to contribute hereunder any amounts in payment for any settlement of any action
or claim effected without such Person's consent, which consent shall not be
unreasonably withheld.
(e) Indemnification and contribution similar to that specified in the
preceding subdivisions of this Section 3.7 (with appropriate modifications)
shall be given by the Company and each seller of Registrable Securities with
respect to any required registration or other qualification of securities under
any federal or state law or regulation of any governmental authority other than
the Securities Act.
(f) The indemnification and contribution required by this Section 3.7
shall be made by periodic payments of the amount thereof during the course of
the investigation or defense, as and when bills are received or expense, loss,
damage or liability is incurred.
3.8 Removal of Legends on Certificates. Following the registration of
any Registrable Securities under the Securities Act and sales pursuant to such
registration, the Company shall (a) furnish to each holder of Registrable
Securities so registered and sold unlegended certificates representing ownership
of the registered Registrable Securities, in such denominations as shall be
requested, and (b) instruct the transfer agent to release any stop transfer
orders with respect to such registered Registrable Securities.
3.9 Conditions and Limitations on Registrations of Registrable
Securities.
(a) The Company shall not be required to effect any registration
of Registrable Securities pursuant to Section 3.2 if (i) it shall deliver to the
holder or holders requesting such registration an opinion of reputable counsel
to the effect that the Registrable Securities requested to be registered may be
sold by such holder without restriction or limitation and without registration
under the Securities Act, and (ii) the Company provides or has provided to the
holders of such Registrable Securities certificates therefor which do not
contain restrictive legends, as contemplated in Section 3.8.
16
<PAGE>
(b) The Company shall not be required to effect any registration of
Registrable Securities pursuant to this Agreement, if (i) the holder can resell
such Registrable Securities without restriction or limitation and without
registration under the Securities Act, and (ii) the Company provides or has
provided to the holders of such Registrable Securities certificates therefor
which do not contain restrictive legends, as contemplated in Section 3.8.
3.10 Expenses. All Registration Expenses, but not Selling Expenses,
shall be borne by the Company.
3.11 Rule 144 and 144A Reporting. With a view to making available the
benefits of certain rules and regulations of the Commission which may at times
permit the sale of the Registrable Securities to the public or other Persons
without registration, the Company, so long as it is required to file information
with the Commission pursuant to the requirements of the Exchange Act (or any
successor provision), shall:
(a) make and keep public information available, as contemplated by
Rule 144 under the Securities;
(b) file with the Commission in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act;
and
(c) furnish to each holder of Registrable Securities promptly upon
request (i)a written statement by the Company as to its compliance with the
reporting requirements of such Rule 144 of the Securities Act and the Exchange
Act, (ii) copies of all SEC filings made by the Company within the previous one
(1) year period and any press releases issued by the Company since the date of
the last such filing, and (iii) only in the event that Company securities cease
to be listed on a national securities exchange, copies of all Rule 144A
information with respect to the Company.
3.12 Market Stand-Off Agreement. If requested by the Company, each
holder of Registrable Securities included in a registration statement hereunder
shall not sell or otherwise transfer or dispose of any Conversion Shares or
Preferred Shares or other securities of the Company held by it (other than those
included in the registration) during the period specified by the managing
underwriter or underwriters of the underwritten offer being made pursuant to
such registration statement (which period shall not exceed seven days prior to
and 180 days following the effective date of such registration statement),
except as part of such registration, if and to the extent reasonably requested
by such managing underwriter or underwriters, provided that all officers and
directors of the Company, enter into similar agreements.
The obligations described in this Section 3.12 shall not apply to a
registration relating solely to employee benefit plans on S-8 or similar forms
which may be promulgated in the future, or a registration relating solely to a
Commission Rule 145 transaction on Form S-14 or Form S-15 or similar forms which
may be promulgated in the future. The Company may impose
17
<PAGE>
stop-transfer instructions with respect to securities subject to the
restrictions in this Section 3.12 until the end of such 180 day period.
4. Voting Percentages. In determining whether a required percentage or
amount of Registrable Securities has been met under this Agreement, the amount
required shall be calculated on the basis of the aggregate value of outstanding
Registrable Securities. For purposes of this Agreement, the value of each
Conversion Share shall be the average closing market price per share of the
Common Stock on the New York Stock Exchange on the thirty (30) most recent
trading days prior to the valuation date.
5. Amendments and Waivers. This Agreement may be amended with the consent
of the Company and holders of at least fifty percent (50%) of the Registrable
Securities and the Company may take any action prohibited by this Agreement, or
omit to perform any act required to be performed by it under this Agreement,
only if the Company shall have obtained the written consent to such amendment,
action or omission to act, of the holder or holders of at least fifty percent
(50%) of the Registrable Securities. Each holder of any Registrable Securities
at the time or subsequently outstanding shall be bound by any consent authorized
by this Section 5, whether or not such Registrable Securities shall have been
marked to indicate such consent.
6. Nominees for Beneficial Owners. In the event that any Registrable
Securities are held by a nominee or trustee for the beneficial owner, the
beneficial owner may, at its election in writing delivered to the Company, be
treated as the holder of such Registrable Securities for purposes of any request
or other action by any holder or holders of Registrable Securities pursuant to
this Agreement or any determination of any number or percentage of Registrable
Securities held by any holder or holders of Registrable Securities contemplated
by this Agreement. If the beneficial owner of any Registrable Securities so
elects, the Company may require assurances reasonably satisfactory to it of such
owner's beneficial ownership of such Registrable Securities.
7. Notices. All notices or other communications required or permitted
hereunder shall be given only in writing and only by personal delivery,
registered or certified mail, return receipt requested, or overnight courier
service, and shall be deemed given on the fifth day following the date when
deposited in the mail, on the day following the date of delivery to a courier
service (postage or charges prepaid) or when personally delivered, and addressed
to the particular party to whom the notice is to be sent as follows:
7.1 if to Option Writer, addressed in the manner set forth in the
Option Agreement, or at such other address as Option Writer shall have furnished
to the Company in writing;
7.2 if to any other holder of Registrable Securities, at the address
that such holder shall have furnished to the Company in writing, or, until any
such other holder so furnishes to the Company an address, then to and at the
address of the last holder of such Registrable Securities who has furnished an
address to the Company; or
18
<PAGE>
7.3 if to the Company, addressed to it in the manner set forth in the
Option Agreement or at such other address as the Company shall have furnished to
each holder of Registrable Securities at the time outstanding.
8. Transfer of Registration Rights. Any holder of Registrable Securities
may exercise the rights described in this Agreement subject to the terms and
conditions of this Agreement.
9. Successors and Assigns; Amendments. This Agreement shall be binding
upon and inure to the benefit of and be enforceable by transferees of the
Registrable Securities (and, with respect to the holders of Registrable
Securities, subject to the provisions respecting the minimum percentage of
Registrable Securities required in order to be entitled to certain rights, or
take certain actions, contained herein) the parties to this Agreement and their
respective successors and assigns. The parties to this Agreement may amend this
Agreement as provided in Section 5 without the consent of any other Person.
10. Descriptive Headings. The descriptive headings of the several sections
and paragraphs of this Agreement are inserted for reference only and shall not
limit or otherwise affect the meaning of the respective sections or paragraphs
to which they apply.
11. Governing Law. This Agreement shall be construed and enforced in
accordance with, and the rights of the parties shall be governed by, the laws of
the State of New York.
12. Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same document.
13. Certain Agreements and Grants.
13.1 The Company is not now a party to or otherwise bound by, any
agreement or contract (whether written or oral) with respect to any of its
securities which is inconsistent in any adverse respect with the registration
rights granted by the Company pursuant to this Agreement.
13.2 The Company will not at any time during the effectiveness of
this Agreement grant to any other person(s) any rights with respect to the
registration of any securities of the Company which have priority or are
inconsistent in any adverse respect with the registration rights granted by the
Company pursuant to this Agreement.
14. Severability. In the event that any one or more of the provisions
contained herein, or the application thereof in any circumstances, is held
invalid, illegal or unenforceable in any respect for any reason, the validity,
legality and enforceability of any such provision in every other respect and of
the remaining provisions contained herein shall not be in any way impaired
thereby, it being intended that all of the rights and privileges of the holders
of Registrable Securities shall be enforceable to the fullest extent permitted
by law.
19
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and
delivered by their respective duly authorized officers as of the date first
written above.
Horace Mann Educators Corporation
By /s/ George J. Zock
------------------------------
Name: George J. Zock
Title: Senior Vice President & Treasurer
By /s/ Paul J. Kardos
------------------------------
Name: Paul J. Kardos
Title: President and Chief Executive Officer
Centre Reinsurance (U.S.) Limited
By /s/ Rolf Staub
------------------------------
Name: Rolf Staub
Title: Assistant Secretary
20
<PAGE>
March 14, 1997
Mr. George Zock
Horace Mann Educators Corporation
Mail No. G016
One Horace Mann Plaza
Springfield, Illinois 62715-0001
Re: Securities Issuance Option Agreement
Dear George:
Reference is made to the Securities Issuance Option Agreement dated February 15,
1997 between Horace Mann Educators Corporation and Centre Reinsurance (U.S.)
Limited relating to the issuance by Horace Mann Educators Corporation of
Preferred Stock upon the happening of certain events (such agreement including
annexes thereto, the "Agreement").
Centre Reinsurance Limited indirectly owns 100% of the stock of Centre
Reinsurance (U.S.) Limited. Should Centre Reinsurance (U.S.) Limited be unable
to meet its payment or performance obligations to Horace Mann Educators
Corporation under the Agreement, Centre Reinsurance Limited will cause such
payment or performance.
By your acceptance, as evidenced by your signature below, you hereby agree,
except as otherwise may be required by law, to keep confidential and not
disclose to any person or entity the contents of this letter or the fact that
this letter was issued to you, provided, however; you may use this letter in
connection with any enforcement of your rights hereunder; and provided further,
however, that you may use this letter in discussions with AM Bests, Standard and
Poor's and other rating agencies. This letter is only for your benefit and
cannot be used or relied upon by any other person or enity.
<PAGE>
If you have any questions please do not hesitate to contact us.
Very truly yours,
Centre Reinsurance Limited
By /s/ Andrea Hodson
--------------------------
Name: Andrea Hodson
Title: Vice President & Assistant Secretary
Accepted and Agreed to as of March 14, 1997
---------
Horace Mann Educators Corporation
By /s/ George J. Zock
--------------------------
Name: George J. Zock
Title: Senior Vice President & Treasurer
<PAGE>
EXHIBIT 11
HORACE MANN EDUCATORS CORPORATION
COMPUTATION OF NET INCOME PER SHARE
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Primary - reported:
Weighted average number of common shares
outstanding during the period 23,479 25,039 28,958
------- ------- -------
Net income for the period $64,639 $73,926 $62,855
------- ------- -------
Net income per share - assuming no dilution $ 2.75 $ 2.95 $ 2.17
======= ======= =======
Primary:
Weighted average number of common shares
outstanding during the period 23,479 25,039 28,958
Weighted average number of common equivalent
shares to reflect the dilutive effect of
common stock equivalent securities:
Warrants 118 110 110
Stock options 291 193 199
Common stock units related to Deferred
Equity Compensation Plan for Directors 3 -- --
------- ------- -------
Total common and common equivalent shares 23,891 25,342 29,267
------- ------- -------
Net income per share $ 2.71 $ 2.92 $ 2.15
======= ======= =======
Percentage of dilution compared to reported
net income per share 1.5% 1.0% 0.9%
(Continued on next page)
</TABLE>
<PAGE>
EXHIBIT 11 (CONTINUED)
HORACE MANN EDUCATORS CORPORATION
COMPUTATION OF NET INCOME PER SHARE
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Primary - reported:
Weighted average number of common shares
outstanding during the period 23,479 25,039 28,958
------- ------- -------
Net income for the period $64,639 $73,926 $62,855
------- ------- -------
Net income per share - assuming no dilution $ 2.75 $ 2.95 $ 2.17
======= ======= =======
Fully diluted:
Weighted average number of common shares
outstanding during the period 23,479 25,039 28,958
Weighted average number of common equivalent
shares to reflect the dilutive effect of
common stock equivalent securities:
Warrants 122 116 110
Stock options 398 318 199
Common stock units related
to Deferred Equity
Compensation Plan for Directors 3 - -
Weighted average number of common equivalent
shares to reflect the dilutive effect of
convertible notes - 2,857 2,857
------- ------- -------
Total common and common equivalent shares
adjusted to calculate fully diluted
earnings per share 24,002 28,330 32,124
------- ------- -------
Net income for the period $64,639 $73,926 $62,855
Interest expense, net of tax,
on convertible notes - 4,016 3,979
------- ------- -------
Adjusted net income for the period $64,639 $77,942 $66,834
------- ------- -------
Net income per share -
assuming full dilution $ 2.69 $ 2.75 $ 2.08
======= ======= =======
Percentage of dilution compared to
reported net income per share 2.2% 6.8% 4.1%
</TABLE>
<PAGE>
EXHIBIT 12
HORACE MANN EDUCATORS CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994 1993 1992
------ ------ ----- ------ ------
<S> <C> <C> <C> <C> <C>
Income from continuing operations
before income taxes $100.6 $103.6 $86.2 $112.8 $ 94.2
Interest expense 10.5 11.6 9.5 9.1 18.3
------ ------ ----- ------ ------
Earnings $111.1 $115.2 $95.7 $121.9 $112.5
====== ====== ===== ====== ======
Fixed charges - interest expense $ 10.5 $ 11.6 $ 9.5 $ 9.1 $ 18.3
Ratio of earnings to fixed charges 10.6x 9.9x 10.1x 13.4x 6.1x
</TABLE>
<PAGE>
EXHIBIT 21
HORACE MANN EDUCATORS CORPORATION
SIGNIFICANT SUBSIDIARIES AND THEIR RESPECTIVE STATES OF INCORPORATION
DECEMBER 31, 1996
Allegiance Insurance Company - California
Allegiance Life Insurance Company - Illinois
Horace Mann Life Insurance Company - Illinois
Horace Mann Insurance Company - Illinois
Teachers Insurance Company - Illinois
Horace Mann Investors, Inc. - Maryland
Horace Mann Service Corporation - Illinois
<PAGE>
EXHIBIT 23
The Board of Directors
Horace Mann Educators Corporation:
We consent to incorporation by reference in the registration statements (No.
33-47066 and No. 33-45152) on Form S-8 of Horace Mann Educators Corporation and
subsidiaries (the Company) of our report dated January 27, 1997, relating to the
consolidated balance sheets of the Company as of December 31, 1996, 1995 and
1994, and the related consolidated statements of operations, changes in
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1996, and all related schedules, which report appears
in the December 31, 1996 annual report on Form 10-K of the Company.
KPMG Peat Marwick LLP
Chicago, Illinois
March 25, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND> This schedule contains summary financial information extracted from
the Consolidated Balance Sheet and the Consolidated Statement of Operations and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 2,658,512<F1>
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 35,416
<REAL-ESTATE> 7,592
<TOTAL-INVEST> 2,784,336
<CASH> 13,704
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 75,071
<TOTAL-ASSETS> 3,861,026
<POLICY-LOSSES> 2,154,254<F2>
<UNEARNED-PREMIUMS> 155,776
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 118,549
<NOTES-PAYABLE> 133,564
<COMMON> 29
0
0
<OTHER-SE> 484,366
<TOTAL-LIABILITY-AND-EQUITY> 3,861,026
502,699
<INVESTMENT-INCOME> 198,607
<INVESTMENT-GAINS> 2,451
<OTHER-INCOME> 0
<BENEFITS> 346,691
<UNDERWRITING-AMORTIZATION> 41,063
<UNDERWRITING-OTHER> 97,021
<INCOME-PRETAX> 100,619
<INCOME-TAX> 26,817
<INCOME-CONTINUING> 73,802
<DISCONTINUED> (9,163)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 64,639
<EPS-PRIMARY> 2.75
<EPS-DILUTED> 2.75
<RESERVE-OPEN> 345,889<F3>
<PROVISION-CURRENT> 368,648
<PROVISION-PRIOR> (62,546)
<PAYMENTS-CURRENT> 206,370
<PAYMENTS-PRIOR> 139,272
<RESERVE-CLOSE> 306,349<F3>
<CUMULATIVE-DEFICIENCY> 62,546
<FN>
<F1> Refer to Note 3 - Investments of the Company's Consolidated Notes to
Financial Statements for December 31, 1996.
<F2> Refer to the Company's Consolidated Balance Sheet as of December 31, 1996.
<F3> These balances are net of reinsurance recoverables. See also Note 1 -
Significant Accounting Policies of the Company's Consolidated Notes to
Financial Statements for December 31, 1996.
</FN>
</TABLE>
