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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER: 33-64820
AMERICO LIFE, INC.
(Exact Name of Registrant as Specified in its Charter)
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MISSOURI NO. 43-1627599
(State of Incorporation) (I.R.S. Employer Identification No.)
1055 BROADWAY 64105
KANSAS CITY, MISSOURI (Zip Code)
(Address of Principal Executive Offices)
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Registrant's telephone number including area code: (816) 391-2700
Securities Registered Pursuant to Section 12(b) of the Act: None
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. [X]
Shares of common stock outstanding as of March 25, 1997: 10,000, none of
which is held by non-affiliates.
DOCUMENTS INCORPORATED BY REFERENCE: None
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TABLE OF CONTENTS
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ITEM PAGE
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PART I
1. Business.................................................... 2
2. Properties.................................................. 12
3. Legal Proceedings........................................... 12
4. Submission of Matters to a Vote of Security Holders......... 13
PART II
Market for Registrant's Common Equity and Related
5. Stockholder Matters......................................... 14
6. Selected Consolidated Financial Data........................ 14
Management's Discussion and Analysis of Financial Condition
7. and Results of Operations................................... 15
8. Financial Statements and Supplementary Data................. 23
Changes in and Disagreements with Accountants on Accounting
9. and Financial Disclosure.................................... 24
PART III
10. Directors and Executive Officers of the Registrant.......... 25
11. Executive Compensation...................................... 26
Security Ownership of Certain Beneficial Owners and
12. Management.................................................. 26
13. Certain Relationships and Related Transactions.............. 27
PART IV
Exhibits, Financial Statement Schedules and Reports on Form
14. 8-K......................................................... 29
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PART I
ITEM 1. BUSINESS
GENERAL
Americo Life, Inc. ("Americo" or the "Company") is a holding company whose
subsidiaries are engaged in the life insurance business. The Company's
wholly-owned insurance subsidiaries are: Great Southern Life Insurance Company
("Great Southern"), located in Dallas, Texas, and The Victory Life Insurance
Company ("Victory Life"), United Fidelity Life Insurance Company ("United
Fidelity"), The College Life Insurance Company of America ("College Life"),
Loyalty Life Insurance Company ("Loyalty Life") and National Farmers Union Life
Insurance Company ("National Farmers Union"), all located in Kansas City,
Missouri.
Americo was incorporated on October 26, 1992 as a Missouri corporation, for
the purpose of becoming a holding company for the life insurance operations
conducted by the subsidiaries of Financial Holding Corporation ("FHC"). FHC, a
privately-owned corporation, owns all outstanding shares of capital stock of
Americo. As of December 31, 1992, FHC transferred to Americo all outstanding
capital stock of FHC Life Insurance Company ("FHC Life"), a Texas corporation,
which was the holding company for FHC's insurance and certain other
subsidiaries. On February 28, 1994, FHC Life was merged into its wholly-owned
subsidiary, United Fidelity, as a result of which United Fidelity became
directly owned by Americo. United Fidelity directly owns each of Americo's other
insurance subsidiaries, except Loyalty Life, which is a subsidiary of Great
Southern. All historical information in this Form 10-K is presented as if
Americo had owned FHC Life or United Fidelity throughout the periods covered
herein.
The Company's development began with the acquisition of life insurance
companies and blocks of life insurance business. Until 1989, the Company had no
meaningful marketing operations and its strategy at that time was to increase
the number of policies it administered. This allowed the Company to take
advantage of its decision to outsource its data processing operations and the
investments it made in technology (further discussed on page 7). As a result,
the Company is able to administer policies at a relatively low marginal cost
which improves the Company's competitive position with respect to the
acquisition of existing life insurance business and the sale of new life
insurance business.
Following the Great Southern acquisition in 1989, the Company began to
expand its asset and policy base by pursuing two strategies: (i) continued
select acquisitions of insurance companies and blocks of business, and (ii)
increased sales of new business. The acquisition strategy led to the
acquisitions of Loyalty Life and National Farmers Union in 1991 and the
acquisition of Victory Life in 1995. Victory Life, whose assets consist
primarily of an in-force block of traditional life and annuity policies, was
acquired for a purchase price of $42.8 million. In connection with the
acquisition of Victory Life, the Company reinsured all the insurance business of
The Kansas Life Insurance Company ("Kansas Life"), the former parent of Victory
Life. The Victory Life and Kansas Life transactions added approximately $270.0
million of insurance liabilities and increased the Company's indebtedness by
$32.9 million.
Following the acquisition of Great Southern, the Company expanded its scope
of operations to include the marketing of life insurance and annuity products
through the existing Great Southern distribution channels. The Company is also
expanding its product offerings and entering new markets with the objective of
increasing its sales of new business. Further, the Company has entered into a
variety of other transactions designed to increase sales.
In 1993, the Company entered into a joint venture whose purpose was the
sale of tax-qualified life and annuity products of the Company's life insurance
subsidiaries. At December 31, 1996, the Company had insurance liabilities
generated as a result of this joint venture of approximately $208.0 million.
In July 1995, the Company entered into administrative agreements with The
Ohio Casualty Insurance Company ("Ohio Casualty") under which Americo has been
providing policy administrative services for the approximately 75,000 policies
of The Ohio Life Insurance Company ("Ohio Life"), with associated policy
liabilities of approximately $310.0 million. This arrangement has also provided
Great Southern access to sell
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its life insurance products through the independent agents of Ohio Casualty.
Great Southern intends to assume the life insurance policies of Ohio Life
beginning in 1997.
In February 1996, the Company entered into an agreement with Fremont
General Corporation to provide administrative services for approximately 20,000
policies of Fremont Life Insurance Company ("Fremont Life") with associated
policy liabilities of approximately $460.0 million. The Company's life insurance
subsidiaries began to assume the life insurance policies of Fremont Life during
1996. The Company has begun to offer annuity products through certain of the
marketing organizations which were previously writing business for Fremont Life.
In January 1997, the Company entered into a stock purchase agreement to
acquire The Ohio State Life Insurance Company ("Ohio State") and Investors
Guaranty Life Insurance Company ("IGL") from Farmers Group, Inc. for a purchase
price of approximately $330.0 million. At December 31, 1996, Ohio State and IGL
had assets of $1,099 million and liabilities of $767.0 million. Ohio State and
IGL each have active marketing organizations through which they are currently
selling life insurance and annuity products. The Company anticipates that the
sales production of Ohio State and IGL will complement its own marketing
efforts. The closing of the acquisition is contingent upon obtaining regulatory
approvals. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Subsequent Events."
Including the above transactions, the Company will have approximately $3.3
billion of invested assets under management and approximately one million
policies under administration. In addition to expanding its product offerings,
the Company's future operating strategy includes pursuing selected acquisitions
of in-force blocks of life insurance or insurance companies. The Company will
also focus on opportunities to enter arrangements, including acquisitions, which
can supplement the Company's current marketing and distribution systems and
increase its asset and policy base.
The Company has investments, in the form of 50% interests, in Argus Health
Systems, Inc. ("Argus"), which is engaged in prescription drug claim processing,
and Hereford LLP, which owns and manages the building occupied by Argus. In
December 1996, Great Southern disposed of its 50% interest in GSSW, Limited
Partnership ("GSSW"), which manages and operates multi-family apartment
complexes. See "Non-Insurance Operations."
LIFE INSURANCE BUSINESS
The Company's in-force life insurance business consists of traditional and
interest-sensitive life insurance and annuities. At December 31, 1996, the
insurance in force on interest-sensitive life insurance contracts was $17.3
billion, the insurance in force on traditional life insurance contracts was
$10.3 billion and annuity liabilities totalled $527.3 million.
The Company's life insurance subsidiaries offer a portfolio of individual
interest-sensitive life insurance products, including interest-sensitive whole
life and universal life insurance and customary riders. The Company's life
insurance subsidiaries also offer single premium and flexible premium annuity
products, including tax-qualified annuities. The Company also has available a
portfolio of traditional life insurance products, including individual term and
whole life insurance. Interest-sensitive life insurance products accounted for
substantially all new life policies written in 1996. The principal differences
among the types of these products offered by the Company relate to policy
provisions affecting the amount and timing of premium payments.
Interest-sensitive life insurance products have characteristics similar to
annuities with respect to the crediting of a current rate of interest at or
above a guaranteed minimum rate and the use of surrender charges to discourage
premature withdrawal of cash values. Universal life insurance policies also
involve variable premium charges against the policyholder's account balance for
the cost of insurance and administrative expenses. In contrast,
interest-sensitive whole life products generally have fixed premiums.
Interest-sensitive life insurance products are designed with a combination of
front-end loads, periodic variable charges, and back-end loads or surrender
charges. Traditional life insurance products have premiums and benefits
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predetermined at issue; the premiums are set at levels that are designed to
exceed expected policyholder benefits and Company expenses.
The following table shows collected premiums of the Company during 1996,
1995 and 1994 by product category.
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PREMIUMS COLLECTED
FOR PERIODS INDICATED
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FIRST YEAR(1) RENEWAL TOTAL
--------------- ---------------- ----------------
PRODUCT CATEGORY $ % $ % $ %
---------------- - - - - - -
(IN THOUSANDS)
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YEAR ENDED
DECEMBER 31, 1996
Traditional.................................. 4,048 4.5 61,475 23.4 65,523 18.6
Interest-sensitive........................... 34,888 38.6 132,266 50.4 167,154 47.4
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Total life................................. 38,936 43.1 193,741 73.8 232,677 66.0
Annuities.................................... 51,419 56.9 68,734 26.2 120,153 34.0
------ ----- ------- ----- ------- -----
Direct and assumed premiums................ 90,355 100.0 262,475 100.0 352,830 100.0
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Less ceded premiums........................ (91,711)
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Total...................................... 261,119
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YEAR ENDED
DECEMBER 31, 1995
Traditional.................................. 3,206 3.9 58,895 29.8 62,101 22.2
Interest-sensitive........................... 28,731 34.8 118,515 60.0 147,246 52.6
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Total life................................. 31,937 38.7 177,410 89.8 209,347 74.8
Annuities.................................... 50,592 61.3 20,064 10.2 70,656 25.2
------ ----- ------- ----- ------- -----
Direct and assumed premiums................ 82,529 100.0 197,474 100.0 280,003 100.0
====== ===== ======= ===== =====
Less ceded premiums........................ (80,638)
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Total...................................... 199,365
=======
YEAR ENDED
DECEMBER 31, 1994
Traditional.................................. 3,404 4.6 53,653 30.6 57,057 22.9
Interest-sensitive........................... 27,147 37.0 115,260 65.8 142,407 57.3
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Total life................................. 30,551 41.6 168,913 96.4 199,464 80.2
Annuities.................................... 42,824 58.4 6,335 3.6 49,159 19.8
------ ----- ------- ----- ------- -----
Direct and assumed premiums................ 73,375 100.0 175,248 100.0 248,623 100.0
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Less ceded premiums........................ (64,181)
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Total...................................... 184,442
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(1) Traditional first year premiums include premiums from the reissuance of
matured term policies.
MARKETING AND DISTRIBUTION
The Company's new business efforts have been divided into four segments as
defined more fully below: Individual Markets, Special Markets, Tax-qualified
Markets and the Seniors Market.
Individual Markets. The Company delivers its products to the individual
markets using two methods of distribution, Personal Producing General Agents
("PPGA") and marketing organizations. The Company's PPGA marketing system
utilizes approximately 450 independent agents who market the Company's products.
None of the agents is employed by the Company, but each is a party to a general
agency agreement which
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governs the terms of his or her arrangement with the Company. PPGAs who
represent the Company may also represent other insurers. Of the $23.1 million
total annualized first-year life insurance premiums generated by the Company
during 1996, approximately $11.0 million (or 48%) was derived from sales through
the Company's PPGA system. No single PPGA accounted for over 2% of the Company's
total annualized first-year life insurance premiums in 1996.
Approximately $5.1 million, or 22%, of the Company's annualized first-year
life insurance premiums in 1996 came from eight large marketing organizations
made up of non-exclusive independent agents whose aggregate membership
approximated 2,000 at December 31, 1996.
In 1996, the Company expanded its Career Partners Program,(TM) introduced
in 1995. The Career Partners Program(TM) is intended to increase the production
from individual agents and reduce the Company's reliance on large marketing
organizations and brokers. The Career Partners Program(TM) attempts to build a
longer term relationship between the Company and the individual agents by
providing benefits in addition to commissions to reward production and longevity
in the program. In 1996, the Company experienced improved retention, consistency
of production and stronger relationships with agents participating in the Career
Partners Program(TM). In 1996, the Company released an enhanced interactive,
multi-media sales presentation software to assist its agents in new life
insurance sales.
Special Markets/Payroll Deductions. The Company's special marketing efforts
consist of offering voluntary payroll deduction, interest-sensitive universal
life insurance to employees of large and medium-sized companies and accounted
for $2.8 million, or 12%, of the Company's annualized first-year life insurance
premiums in 1996. This effort is conducted through Great Southern's special
marketing agency force. The agency force, which consists of approximately 75
general agents, primarily contacts companies that have a minimum of 100 eligible
employees. In 1996, one agent accounted for 6% of the Company's total annualized
first-year life insurance premiums from all sources.
Tax-Qualified Life Insurance and Annuity Markets. Great Southern and
College Life have expanded their marketing capabilities in the tax-qualified
life insurance and annuity markets, specifically products qualified under
Internal Revenue Code Sections 401(k) and 403(b), through a joint venture
founded in July 1993 ("Joint Venture"), effected through College Insurance
Group, Inc. ("CIG"). These products are marketed to public school teachers
through a specialty field force of independent agents. CIG is owned equally by
United Fidelity and an unrelated individual. CIG, in turn, owns 100% of the
stock of Financial Assurance Incorporated ("FAI") and 100% of the stock of
Annuity Service Corp. ("ASC"). Pursuant to the Joint Venture, both parties
generally share the profits from 401(k) and 403(b) business written by marketing
companies on behalf of Great Southern and College Life. Sales generated through
the Joint Venture, expressed in terms of collected premiums, increased from
$14.6 million in 1993 to $89.3 million in 1996.
Seniors Markets. In 1996, Great Southern and College Life expanded their
marketing capabilities into the seniors life insurance and annuity markets.
Following the Fremont Life transaction, the Company was introduced to a select
group of independent marketing organizations ("IMO") that specialize in the
marketing of fixed annuities to seniors. The Company introduced products to this
distribution source in the fourth quarter of 1996. The senior market, generally
considered to include individuals over age 55, is expected to experience double
digit annual growth resulting from a number of factors, including growth in
consumer concerns over social security and pension plans and the aging of the
consumer population. The Company anticipates competing in this market by
offering fixed annuity products with riders and benefits tailored to the needs
of maturing individuals.
COMPETITION
The Company competes with a large number of other insurers as well as
non-insurance financial services companies, such as banks, broker/dealers and
mutual funds, some of whom have greater financial resources, offer alternative
products and, with respect to other insurers, have higher ratings than the
Company. National banks, with their preexisting customer bases for financial
services products, may pose increasing competition in the future to insurers who
sell annuities, including the Company, as a result of the U.S. Supreme Court's
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1994 decision in NationsBank of North Carolina v. Variable Annuity Life
Insurance Company, which permits national banks to sell annuity products of life
insurance companies in certain circumstances.
The Company believes that the principal competitive factors in the sale of
life insurance are product features, product pricing and crediting rates,
commission structure, high credit standing and perceived stability of insurer,
and service provided to the policyholder. The Company believes that its ability
to compete with other insurance companies is dependent upon its ability to
attract and retain agents to market its insurance products and its ability to
develop competitive products that are also profitable. The Company believes that
it has good relationships with its agents and marketing groups, has an adequate
variety of policies approved for issuance, and is generally competitive within
the industry. The Company also competes with other entities in acquiring life
insurance companies and blocks of insurance business.
A primary factor in a company's ability to compete in the sales of life
insurance business and the acquisition of life insurance companies is the
ratings it receives from various rating agencies. The Company's primary
marketing subsidiaries, Great Southern and College Life, are rated "A
(Excellent)" by A.M. Best and have a claims paying ability rating of "A (Good)"
from Standard and Poor's Corporation ("S&P"). Loyalty Life and National Farmers
Union are rated "B+ (Very Good)" by A.M. Best. A.M. Best's ratings for insurance
companies currently range from "A++ (Superior)" to "F (In Liquidation)", and
some insurance companies are not rated. Publications of A.M. Best indicate that
the "A" rating is assigned to those companies that, in A.M. Best's opinion, have
achieved excellent overall performance when compared to the standards
established by A.M. Best and that generally have demonstrated a strong ability
to meet their obligations to policyholders over a long period of time. The "B+"
rating is assigned to companies that, in A.M. Best's opinion, have achieved very
good overall performance when compared to the standards established by A.M. Best
and that generally have a strong ability to meet their obligations to
policyholders, but whose financial strength may be susceptible to unfavorable
changes in underwriting or economic conditions. The "A" rating is assigned by
S&P to companies which, in S&P's opinion, offer good financial security, but the
capacity to meet policyholder obligations is somewhat susceptible to adverse
economic and underwriting conditions. While ratings do not constitute
recommendations to buy or sell a company's insurance products, and are subject
to change or withdrawal at any time, they are considered an important
measurement in some markets.
Following the announcement that the Company had entered into an agreement
to acquire Ohio State and IGL, A.M. Best placed the ratings of all the insurance
subsidiaries under review with developing implications. The ratings will remain
under review until the acquisition is completed and A.M. Best has evaluated the
implications of the acquisition. Management of the Company believes that the
ratings of the insurance subsidiaries should be affirmed by A.M. Best.
OPERATIONS
The Company has the goal of providing superior service to policyholders and
agents at very competitive costs. Management has made strategic decisions over
the last several years in an effort to achieve this goal. In order to most
effectively manage the various insurance operations of the Company, it has
consolidated certain common functions. The Company has centralized its product
development, marketing, accounting, regulatory compliance and investment
management functions and believes that by doing so it has been able to more
efficiently service its operations.
The Company has "outsourced" its data processing requirements through
contracts entered into by FHC with data processing vendors. FHC currently has
data processing agreements with The Continuum Company ("Continuum"). To avail
itself of these resources, the Company has entered into a data processing
agreement with FHC. See "Item 13" of this Form 10-K "Certain Relationships and
Related Transactions." By outsourcing data processing requirements, the Company
has reduced costs while improving its flexibility to increase the number of
policies it administers, whether through acquisition or administrative
arrangements.
The Company also utilizes a system called Automated Work Distributor
("AWD") to process policyholder transactions. The AWD system uses digital
imaging technology to control work flow and performs other functions designed to
increase efficiency. The Company has leveraged its investment in the
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AWD system through the addition of the Ohio Life, Fremont Life and Victory Life
policies to its administration base.
INVESTMENTS
Investment income is a significant component of the Company's total
revenues and has a significant impact on the Company's profitability. The
Company follows a conservative investment philosophy with an emphasis on
balancing credit and interest rate risk. The insurance subsidiaries of Americo
are restricted by insurance statutes and regulations as to the type of
investments that they are permitted to make and the amount of funds that may be
used for any one type of investment. In compliance with these statutes and
regulations and in keeping with the Company's investment policy, the Company
invests primarily in fixed maturity securities which are rated as investment
grade by nationally recognized statistical rating organizations (or, if not
rated by such firms, with designations of "1" or "2" as assigned by the National
Association of Insurance Commissioners ("NAIC")). At December 31, 1996, the
Company's investment portfolio contained no investment securities which were in
default as to principal or interest.
The Company's investment portfolio is designed to reasonably match
investment maturities to the projected cash flow requirements of the Company's
outstanding liabilities. The Company maintains a substantial portion of its
investment portfolio in fixed income securities with call protection.
At December 31, 1996, the average yield of the fixed maturity portfolio, as
calculated on the amortized cost of the portfolio, was 7.8%. The profitability
of the Company's interest-sensitive life products and annuity products is
significantly affected by the spread between the investment yield on the
Company's investments and the interest rates credited to these liabilities.
The Company has divided its fixed maturity securities portfolio into "Held
to Maturity" and "Available for Sale." Securities have been categorized as
available for sale except for those securities that the Company has the intent
and the ability to hold until maturity. The primary factor which influences the
Company's decision to characterize its investments as held to maturity is the
cash flow requirements of the Company's liabilities. Securities designated as
available for sale include securities that may be sold in response to changes in
interest rates, changes in prepayment risk, liquidity needs, management of
taxable income and similar economic factors.
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The carrying amounts of the Company's investments at December 31, 1996 were
as follows:
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TOTAL
HELD TO AVAILABLE CARRYING
INVESTMENT CATEGORY MATURITY(1) FOR SALE(2) AMOUNT PERCENTAGE
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(IN THOUSANDS)
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Fixed maturities:
U.S. Treasury and government securities........ $ 4,594 $ 97,011 $ 101,605 4.8%
Mortgage-backed securities:
Collateralized mortgage obligations......... 278,179 74,288 352,467 16.7
Pass-through certificates:
GNMA...................................... 29,821 146,881 176,702 8.3
FHLMC..................................... 4,090 937 5,027 0.2
FNMA...................................... 2,149 8,225 10,374 0.5
Other asset-backed securities.................. 27,852 52,864 80,716 3.8
Corporate bonds................................ 510,766 290,068 800,834 37.9
-------- -------- ---------- -----
Total fixed maturities................. $857,451 $670,274 $1,527,725 72.2%
======== ========
Equity securities................................ 48,262 2.3
Investment in equity subsidiaries................ 18,078 0.9
Mortgage loans on real estate.................... 184,326 8.7
Investment real estate........................... 22,417 1.1
Policy loans..................................... 204,607 9.7
Cash and cash equivalents........................ 96,069 4.5
Other invested assets............................ 13,437 0.6
---------- -----
Total cash and invested assets......... $2,114,921 100.0%
========== =====
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(1) Carrying amount is amortized cost. The market value of "Held to Maturity"
securities at December 31, 1996 was $847.8 million.
(2) Carrying amount is market value. The amortized cost of "Available for Sale"
securities at December 31, 1996 was $671.8 million.
See Note 4 of the Notes to Consolidated Financial Statements, and the
discussion under the heading "Investment Portfolio" in Item 7 appearing
elsewhere in this Form 10-K for information about the composition and
performance of the Company's investment portfolio and the risks inherent in such
investments.
NON-INSURANCE OPERATIONS
The Company selectively makes investments in businesses outside of the
insurance industry. The primary investments of this manner over the last several
years have been the investments in Argus and GSSW, both of which were accounted
for using the equity method.
ARGUS: The Company and an unrelated third party each own a 50% equity
interest in Argus. Argus is principally engaged in the business of providing
services in connection with the point-of-sale adjudication, processing and
paying of prescription drug claims. Argus' principal customers include health
maintenance organizations, preferred provider organizations, health insurance
companies and managed health companies. For the year ended December 31, 1996,
Argus processed over 129 million claims compared to 128 million claims processed
in 1995. At December 31, 1996, Argus had approximately 240 full-time employees
and maintains its corporate headquarters in Kansas City, Missouri. Currently,
there are less than 10 prescription drug claim processors in the managed care
business. Argus faces increasing competition from other drug claim processors
and customers choosing to perform their own drug claim processing.
GSSW: In 1992, the Company and an unrelated third party formed a limited
partnership, GSSW, for the purpose of purchasing real estate and mortgage loans
from the Resolution Trust Corporation. GSSW
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purchased 62 assets, consisting of 56 performing and non-performing mortgage
loans and fee simple interests in three shopping centers and in three parcels of
real estate and subsequently sold or restructured many of the assets.
In December 1996, in a transaction negotiated with the party owning the
other 50% interest in GSSW, the Company disposed of its 50% interest in GSSW in
exchange for cash of $22.6 million and 100% interests in several real estate
limited partnerships formerly owned by GSSW. The Company recorded the limited
partnerships received in connection with the disposition at their aggregate
historical book value of $18.7 million and recorded a gain of $15.8 million on
the transaction.
UNDERWRITING
The Company has adopted and follows detailed, uniform underwriting
procedures designed to assess and quantify insurance risks before issuing life
insurance policies to individuals. The purpose of the Company's underwriting
practices is to identify its exposure to sub-standard risk classes, so that such
can be appropriately priced. The underwriting practice of the Company is to
require medical examinations of applicants for life insurance of $100,000 or
more. The Company does not require medical or other examinations of, but employs
simplified underwriting procedures on, eligible employees who acquire insurance
under a voluntary payroll deduction program.
The increasing incidence of Acquired Immune Deficiency Syndrome ("AIDS") is
expected to affect mortality adversely for the life insurance industry. The
Company has responded by considering AIDS information in underwriting and
pricing decisions. AIDS claims to date, as a percentage of total claims, have
not been significant for the Company's insurance subsidiaries. The impact of
future AIDS claims on policies issued by the Company's insurance subsidiaries is
extremely difficult to evaluate. The Company's insurance subsidiaries have
implemented, where legally permitted, underwriting procedures designed to assist
in the detection of the AIDS virus in applicants.
REINSURANCE
In keeping with industry practices, the Company reinsures portions of its
life insurance exposure with unaffiliated reinsurance companies under
traditional indemnity reinsurance agreements. Generally, the Company enters into
indemnity reinsurance arrangements to assist in diversifying its risk and to
limit its maximum loss on risks that exceed the Company's policy retention
limits, currently ranging from $50,000 to $350,000 per life. Indemnity
reinsurance does not fully discharge the Company's obligation to pay policy
claims on the reinsured business. The Company remains responsible for policy
claims to the extent the reinsurer fails to pay such claims. At December 31,
1996, the Company had ceded to reinsurers approximately $4.9 billion (18%) of
life insurance in force, of which 84% was reinsured with insurance companies
rated "A (Excellent)" or better by A.M. Best. Approximately $1.4 billion of the
insurance in force was ceded to a single reinsurer, which was rated "A" by A.M.
Best. Additionally, in connection with the Joint Venture, the Company ceded
$100.1 million of insurance liabilities to FAI at December 31, 1996. The Company
evaluates the financial strength of its reinsurers upon inception of a
reinsurance treaty and on an annual basis thereafter.
Certain of the insurance subsidiaries of the Company have ceded blocks of
insurance under financial reinsurance treaties which have the effect of
increasing the statutory surplus of the Company. As a result of such reinsurance
transactions, the Company has increased its statutory surplus after the effect
of income taxes by approximately $28.0 million; however, the effect of these
reinsurance treaties is not included in stockholder's equity of the Company
presented in accordance with generally accepted accounting principles ("GAAP").
Financial reinsurance increases the ceding insurer's statutory surplus with the
expectation that such increased surplus will be returned to the reinsurer out of
future earnings, if any, and guarantees the reinsured against any future
statutory losses, if any, on the policies reinsured. The ability of an insurance
subsidiary to pay dividends to Americo may be affected by the reduction in
statutory earnings caused by reductions in the outstanding levels of financial
reinsurance. The risk fees paid to the reinsurers under these treaties totalled
$0.9 million and $1.2 million for the years ended December 31, 1996 and 1995,
respectively.
9
<PAGE> 11
See Note 6 of the Notes to the Consolidated Financial Statements of the Company
included in Item 8 in this Form 10-K.
Applicable regulations, including those of the insurance departments of
Texas and Kansas, recognize financial reinsurance to the extent it meets
specified requirements, including those applicable to the transfer of risk to
the reinsurer. The requirements for risk transfer have been the subject of
debate in the industry generally. The NAIC adopted a model regulation for
reinsurance (the "NAIC Model") and has incorporated these requirements into its
accounting guidance for reinsurance agreements entered into after December 31,
1995. The NAIC Model identifies six risk categories (morbidity, mortality,
lapse, credit quality, reinvestment and disintermediation) and 17 types of
insurance policies, specifies which of these risk categories is significant with
respect to each policy type and requires that reinsurance of such policy type
transfer all such significant risks. In addition, the NAIC Model requires that
transfers of investment risk reflect capital gains and losses. The Company's
future reinsurance agreements will be required to comply with the NAIC Model.
Management believes that the Company's in-force financial reinsurance
agreements are in substantial compliance with all applicable state requirements
at the present time and effect a valid transfer of risk to the reinsurer.
Management further believes that all surplus credits from financial reinsurance
(which result from statutory assets or reserve credits recorded to reflect
financial reinsurance transactions) are appropriate under the current laws of
Texas and Kansas as interpreted by the insurance departments of Texas and
Kansas.
REGULATION
The Company's insurance subsidiaries, except Victory Life, are domiciled in
Texas. Victory Life is domiciled in Kansas. One or more of the life insurance
subsidiaries is licensed to sell insurance in the District of Columbia and all
states, except New York.
General Regulation. The Company is subject to comprehensive regulation in
the various states in which it is authorized to conduct business. The laws of
these states establish supervisory agencies with broad regulatory authority to,
among other matters, grant and revoke licenses for transacting business,
regulate trade practices, establish reserve requirements, regulate the form and
content of policies, and prescribe the type and amount of investments permitted.
These supervisory agencies periodically examine the business and accounts of the
Company's insurance subsidiaries and require them to file detailed annual
statements prepared in accordance with statutory accounting practices.
Increased scrutiny has been placed upon the insurance regulatory framework,
and a number of state legislatures have considered or enacted legislative
proposals that alter, and in many cases increase, state authority to regulate
insurance companies and their holding company systems. In addition, legislation
has been introduced periodically in Congress which could result in the federal
government assuming some role in the regulation of the insurance industry. In
recent years, the NAIC has taken initiatives to reduce insurance company
insolvencies and market conduct violations. Principal among these are the
development of a new model investment law and the codification of statutory
accounting standards. State insurance departments will not have to adopt the
model investment law in order to be considered accredited by the NAIC. The
investment limitations contained therein may impact the Company's insurance
subsidiaries if the model investment law is adopted by Texas or Kansas. The NAIC
has also approved and recommended to states for adoption model laws related to
product design and illustrations. The Company is evaluating its current product
portfolio in response to these initiatives. It is not possible to predict the
future impact of changing state and federal regulation on the operations of the
Company and its insurance subsidiaries.
The insurance laws of Texas and Kansas require the insurance subsidiaries
to maintain at least $1.4 million and $1.2 million, respectively, in capital
stock and statutory surplus. In addition, each of the Company's insurance
subsidiaries is subject to the supervision of the regulators of each state in
which it is licensed. Such regulators have the discretionary authority, in
connection with the continual licensing of any such subsidiary, to limit or
prohibit new issuances of business to policyholders within their jurisdiction
when, in their judgment, such regulators determine that such subsidiary is not
maintaining adequate statutory surplus or capital. The Company does not believe
the current or anticipated levels of statutory surplus of its insurance
10
<PAGE> 12
subsidiaries present a material risk that any such regulator would limit the
amount of new insurance business that an insurance subsidiary intends to issue.
Holding Company Regulations. Substantially all states also regulate members
of insurance holding company systems. FHC is registered as a holding company
system pursuant to such legislation in Texas and Kansas. Generally, under
insurance holding company statutes, a state insurance authority must approve in
advance the direct or indirect acquisition of 10% or more of the voting
securities of an insurance company chartered in its state.
The insurance holding company statutes also regulate certain transactions
among affiliates, including the payment of dividends by an insurance company to
its parent. In many states, such as Texas and Kansas, without the consent of the
state's insurance commissioner, an insurance company may not pay dividends to
its parent in excess of the greater of (i) the insurer's prior year statutory
net gain from operations, or (ii) 10% of its prior year ending statutory capital
and surplus, subject in either case to sufficient earned statutory surplus from
which dividends may be paid. Both states require an insurance company to file a
dividend notification within three days of declaration and ten days prior to
payment of ordinary dividends.
Under Texas regulations, interest and principal on any newly-issued surplus
debentures may be paid only with prior approval of the Texas Department of
Insurance. Surplus debentures issued by the Company's insurance subsidiaries
contain payment schedules which have been approved by the Texas Department of
Insurance. Therefore, the Company's insurance subsidiaries do not require
approval from the Texas Department of Insurance for each payment of principal
and interest unless such payments differ from the approved schedule.
Risk-Based Capital Requirements. The NAIC's risk-based capital ("RBC")
rules are used to evaluate the adequacy of statutory capital and surplus in
relation to a company's investment and insurance risks. The RBC formula is used
by the states as an early warning tool to identify under-capitalized companies
for the purpose of initiating regulatory action. The NAIC's RBC model act
provides for four levels of potential involvement by state regulators for
inadequately capitalized insurance companies as follows: (1) Company Action
Level, (2) Regulatory Action Level, (3) Authorized Control Level and (4)
Mandatory Control Level. Generally, action will be triggered when the ratio of a
company's total adjusted capital (defined as the total of its statutory capital,
surplus and asset valuation reserve ("AVR")) to its Authorized Control Level RBC
(the "RBC Ratio") falls below 200%. Based upon the Company's calculations, all
of its insurance subsidiaries had RBC ratios exceeding 200% at December 31,
1996.
Texas has its own RBC requirements, the stated purpose of which is to
require a minimum level of capital and surplus to absorb the financial,
underwriting and investment risks assumed by an insurer. The Texas Regulations
do not contain "Action Levels" (like those adopted by the NAIC) prescribing
certain corrective actions if RBC threshold levels are not met, although the
Commissioner of the Texas Department of Insurance does have the power to take
similar corrective actions if a company does not maintain the required minimum
level of capital and surplus. Under the Texas Regulations, an insurer has met
RBC requirements if its admitted assets exceed its liabilities by at least 6%.
At December 31, 1996, the Company's Texas insurance subsidiaries' admitted
assets exceeded their liabilities by more than the required 6% level.
Assessments Against Insurers. The Company may be required, under the
solvency or guaranty laws of most states in which it does business, to pay
assessments (up to certain prescribed limits) to fund policyholder losses or
liabilities of insurance companies that become insolvent. These assessments may
be deferred or forgiven under most guaranty laws if they would threaten an
insurer's financial strength and, in certain instances, may be offset against
future premium taxes. The incurrence and amount of such assessments have
increased in recent years and are generally expected to increase in future
years. As a result of such assessments, the Company paid approximately $1.2
million and $1.2 million in the years ended December 31, 1996 and 1995,
respectively.
Investment Reserves. Insurance companies are required to establish an AVR
which consists of two main components: a "default component", to provide for
future credit-related losses on fixed income investments, and an "equity
component", to provide for losses on all types of equity investments, including
real estate.
11
<PAGE> 13
Insurance companies are also required to establish an interest maintenance
reserve ("IMR"), which is credited with the portion of realized capital gains
and losses from the sale of fixed income securities attributable to changes in
interest rates. The IMR is required to be amortized against earnings on a basis
reflecting the remaining period to maturity of the fixed income securities sold.
Any increase in such reserves does not affect GAAP net income, but results in a
reduction in statutory surplus, and accordingly, may affect the amount of
dividends that may be paid by the Company's insurance subsidiaries.
Reporting. As part of their routine regulatory oversight process, state
insurance departments conduct periodic detailed examinations of the books,
records and accounts of insurance companies domiciled in their states. Such
examinations are generally conducted approximately once every three to five
years in cooperation with the departments of two or three other states under
guidelines promulgated by the NAIC. College Life was examined as of December 31,
1990; Great Southern and Loyalty Life were examined as of December 31, 1992;
Victory Life was examined as of June 30, 1992; and United Fidelity was examined
as of June 30, 1995; National Farmers Union is being examined as of December 31,
1995. The results of these examinations did not have a significant impact on the
capital and surplus of the Company's insurance subsidiaries.
There can be no assurance that insurance-related laws and regulations will
not become more restrictive in the future and thereby have a material adverse
effect on the operations of the Company or on the ability of the Company's
subsidiaries to make payments on the surplus debentures or to pay dividends and
thus on the Company's ability to service its debt.
EMPLOYEES
At March 1, 1997, Americo and its wholly-owned subsidiaries employed
approximately 420 persons.
ITEM 2. PROPERTIES
The principal executive offices of the Company are located at 1055
Broadway, Kansas City, Missouri 64105 and the Company's telephone number is
(816) 391-2700.
The principal operations of the insurance subsidiaries are conducted from
Kansas City, Missouri and Dallas, Texas. United Fidelity, College Life, National
Farmers Union and Loyalty Life operate from approximately 45,000 square feet of
leased office space located at 1055 Broadway, Kansas City, Missouri 64105. The
property is leased from Broadway Square Partners, a Missouri limited partnership
of which a corporation controlled by the Merriman family is a 50% partner. The
lease expires on February 28, 1998.
Great Southern's operations are conducted from approximately 51,000 square
feet of leased office space located at 500 N. Akard, Dallas, Texas 75221. The
lease was renewed in May 1995 and expires in May 1997. The Company has entered
into a ten year lease for office space at the same location commencing in June
1997.
Victory Life's operations were conducted in a building owned by the Company
in Murfreesburo, Tennessee until July 1996, when Victory Life's operations were
relocated to the Company's Kansas City offices. The Company sold the
Murfreesburo building in September 1996.
The Company also has operations in leased office space of approximately
8,000 square feet located at 790 The City South Drive, Orange, California 92668.
The lease expires in November 1997.
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company is party to litigation and arbitration
proceedings in the ordinary course of its business, none of which is expected to
have a material adverse effect on the Company.
In recent years, life insurance companies have been named as defendants in
lawsuits, including class action lawsuits, relating to life insurance pricing
and sales practices. A number of these lawsuits have resulted in substantial
jury awards or settlements. In May 1996, a policyholder of Great Southern filed
a complaint in Louisiana state court against Great Southern and an agent of
Great Southern (Sharon K. Self and Johnnie W. Self, et al v. Great Southern Life
Insurance Company and A.A. Cohn) related to the sale of an interest
12
<PAGE> 14
sensitive whole life policy on a "vanishing premium" basis and seeking
unspecified damages. The plaintiffs seek to represent a class of Great Southern
policyholders. The suit was removed to the United States District Court for the
Middle District of Louisiana and is now proceeding in that court. In February
1997, Great Southern was named a defendant in a lawsuit filed in the Circuit
Court of Dade County, Florida related to the sale of universal life policies,
and alleging that policyholders were misled regarding the premiums payable for
such policies (Irwin Ginsberg v. Jack Goldberg and Great Southern Life Insurance
Company). The plaintiff in such lawsuit seeks to represent a class of Great
Southern policyholders and claims unspecified compensatory and punitive damages.
Because this lawsuit has only recently been served on Great Southern, no
responsive pleadings have been filed and the Company is still investigating the
matter. Great Southern intends to defend these cases vigorously. There can be no
assurance that any future litigation relating to pricing and sales practices
will not have a material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
13
<PAGE> 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
All of the outstanding shares of capital stock of the Company are owned by
FHC. There is no established public trading market for the Company's capital
stock.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below represent
historical results of Americo as if Americo was in existence and had owned the
insurance subsidiaries throughout the periods covered herein. The historical
financial information for the five years ended December 31, 1996 and at December
31, 1996, 1995, 1994, 1993 and 1992 has been derived from the audited
Consolidated Financial Statements of the Company. The selected consolidated
financial data set forth below is qualified in its entirety by reference to and
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and the Company's Consolidated
Financial Statements and the Notes thereto included elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1996 1995(2) 1994(1) 1993 1992
---- ------- ------- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Premiums and policy revenues........... $ 165,602 $ 140,130 $ 134,225 $ 134,856 $ 141,910
Net investment income.................. 186,725 152,047 130,149 132,327 128,219
Net realized investment gains
(losses)............................. (120) (282) (3,529) 7,584 17,227
Gain on disposition of partnership
interest............................. 15,825 -- -- -- --
Other income........................... 3,567 2,168 117 6,736 4,057
---------- ---------- ---------- ---------- ----------
Total income......................... 371,599 294,063 260,962 281,503 291,413
Policyholder benefits.................. 218,659 169,162 151,835 151,907 165,778
Commissions............................ 13,473 9,662 8,711 9,355 10,827
Amortization expense................... 29,714 26,666 23,534 22,972 16,945
Interest expense....................... 12,263 10,593 9,254 7,540 8,798
Other operating expenses............... 56,703 47,124 45,110 44,538 40,538
---------- ---------- ---------- ---------- ----------
Income before provision for income
taxes................................ 40,787 30,856 22,518 45,191 48,527
Provision for income taxes............. 13,513 11,126 9,159 16,190 16,266
---------- ---------- ---------- ---------- ----------
Income before extraordinary loss....... 27,274 19,730 13,359 29,001 32,261
Extraordinary loss..................... -- -- -- (798) (2,625)
---------- ---------- ---------- ---------- ----------
Net income............................. $ 27,274 $ 19,730 $ 13,359 $ 28,203 $ 29,636
========== ========== ========== ========== ==========
Net income applicable to common stock
per common share:
Income before extraordinary loss..... $ 2,727.40 $ 1,973.00 $ 1,335.90 $ 2,900.10 $ 3,226.10
Extraordinary loss................... -- -- -- (79.80) (262.50)
---------- ---------- ---------- ---------- ----------
Net income........................... $ 2,727.40 $ 1,973.00 $ 1,335.90 $ 2,820.30 $ 2,963.60
========== ========== ========== ========== ==========
Average common shares outstanding...... 10 10 10 10 10
========== ========== ========== ========== ==========
BALANCE SHEET DATA:
Total investments...................... $2,018,852 $2,014,634 $1,582,592 $1,710,165 $1,545,736
Total assets........................... 2,830,710 2,459,805 1,994,628 2,056,167 1,914,514
Total debt............................. 133,312 133,451 100,702 100,736 80,770
Total liabilities...................... 2,623,688 2,269,042 1,844,632 1,897,332 1,804,027
Stockholder's equity................... 207,022 190,763 149,996 158,835 110,487
</TABLE>
- -------------------------
(1) On February 28, 1994, the Company sold its investment in 100% of the common
stock of PFS Holding Company ("PFSH") and its wholly-owned subsidiary,
Premium Financing Specialists, Inc. to FHC.
(2) On July 10, 1995, the Company acquired all of the outstanding common stock
of Victory Life.
14
<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following discussion analyzes significant items affecting the results
of operations and the financial condition of the Company. This discussion should
be read in conjunction with the accompanying consolidated financial statements
and the notes thereto.
GENERAL
The Company is engaged in the life insurance and tax-qualified annuity
business and has sought to improve profitability by pursuing a strategy of
selective acquisitions and the issuance of profitable new business.
Historically, the Company's objective had been to increase the volume of life
insurance in force through the acquisition of companies and blocks of business.
With the acquisition of Great Southern in 1989, the Company decided to
supplement this growth by developing its marketing and distribution systems to
generate sales of new business. The volume of insurance in force has increased
49% from $18.5 billion in 1989 to $27.6 billion in 1996. The growth since 1989
has been a result of a combination of acquisitions, reinsurance assumed and new
business. The growth in the Company's volume of life insurance inforce for the
last three years is summarized in the following table.
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(IN BILLIONS)
<S> <C> <C> <C>
Beginning of year balance................................ $26.9 $23.0 $23.5
Insurance business acquired or assumed................... 2.0 4.7 --
New business written..................................... 2.1 2.0 2.5
Terminations............................................. (3.4) (2.8) (3.0)
----- ----- -----
End of year balance...................................... $27.6 $26.9 $23.0
===== ===== =====
</TABLE>
The Company's generation of new business increased in each of the three
years ended December 31, 1996. Annualized annuity premiums increased
significantly as a result of an increase in tax-qualified business written in
connection with a joint venture arrangement entered into by the Company in 1993.
The following table summarizes the Company's sales in terms of annualized
premiums:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Life insurance premiums.................................. $23.1 $20.1 $24.8
Annuity premiums......................................... 52.6 49.2 38.5
----- ----- -----
$75.7 $69.3 $63.3
===== ===== =====
</TABLE>
The Company intends to continue its focus on the sale of interest-sensitive
life insurance and annuity products through its marketing and distribution
systems. In addition, the Company may also pursue selected acquisitions of
blocks of life insurance business and life insurance companies.
YEAR TO YEAR COMPARISONS
In 1995 and 1996, the Company entered into significant transactions which
impacted its results of operations and balance sheet. In July 1995, the Company
acquired all the outstanding common stock of Victory Life for $42.8 million. In
connection with the purchase of Victory Life, the Company reinsured all the
insurance business of Kansas Life, the former parent of Victory Life. The
Victory Life and Kansas Life transactions added approximately $270.0 million of
insurance liabilities and $32.9 million of notes payable to the Company's
consolidated balance sheet. The insurance business of Victory Life and Kansas
Life is collectively referred to as Victory Life in the following discussion.
The results of operations of Victory Life are included in the Company's results
of operations for the period from the date of acquisition.
15
<PAGE> 17
In October 1995, in connection with administrative agreements entered into
with Ohio Casualty and Ohio Life, an unaffiliated company reinsured 100% of the
insurance business of Ohio Life on a coinsurance basis. This unaffiliated
company reinsured certain risks on these same liabilities to Great Southern on a
modified coinsurance basis. In July 1996, the Company entered into similar
agreements with Fremont Life. The invested assets related to the reinsured
business are owned by the unaffiliated company. The Company has offset the
receivable from the unaffiliated company against its liabilities under the
modified coinsurance agreement in the Company's consolidated balance sheet. At
December 31, 1996 and 1995, the reinsured business, consisting primarily of
annuities and universal life policies, had aggregate insurance liabilities of
$774 million and $347 million, respectively. The earnings from these
transactions are included in the Company's results of operations from the dates
of the agreements.
The effects of the above transactions, collectively referred to as the
Acquisitions, on the individual income statement components, excluding the costs
of financing, are as follows (in millions):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Premiums and policy revenues................................ $40.3 $11.0
Net investment income....................................... 55.2 14.3
Other income................................................ 0.1 0.5
Policyholder benefits....................................... 67.6 18.3
Commissions................................................. 3.9 0.5
Amortization expense........................................ 3.6 1.3
Other operating expenses.................................... 7.8 1.1
</TABLE>
The operating expenses in the above table include only the direct expenses
related to providing administration for the policies and assets of the
Acquisitions. The operating expenses shown do not include any allocation of
indirect or overhead expenses.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Income before provision for income taxes increased $9.9 million to $40.8
million in 1996 from $30.9 million in 1995. The primary reasons for the net
increase were (i) income from the Acquisitions and (ii) gain from the
disposition of the Company's interest in GSSW, partially offset by (iii) a
decrease in net investment income, (iv) an increase in death benefits and (v) an
increase in other operating expenses. The items and significant changes in
individual income statement components are discussed in more detail below.
Premiums and policy revenues. Premiums and policy revenues totalled $165.6
million in 1996 compared to $140.1 million in 1995. Adjusting for the
Acquisitions, premiums and policy revenues decreased $3.8 million from 1995 to
1996.
Because the Company currently writes little new traditional business,
traditional premiums will decrease as the amount of in-force traditional
business decreases. Excluding the traditional premiums of $27.8 million in 1996
and $8.7 million in 1995 attributable to the Acquisitions, traditional premiums
decreased $2.8 million from 1995 to 1996. Policy revenues consist of mortality,
administration and surrender charges on interest sensitive life and annuity
products. Excluding the policy revenues of the Acquisitions of $12.5 million in
1996 and $2.3 million in 1995, policy revenues decreased $1.0 million from 1995
to 1996. Policy revenues in 1995 included $0.4 million of nonrecurring surrender
charges related to certain group life annuities. Collected premiums on
interest-sensitive and annuity products increased by $69.4 million from 1995 to
1996. This increase in collected premiums is not reflected in premiums and
policy revenues because GAAP requires that premiums collected on these types of
products be treated as deposit liabilities rather than revenue.
Net investment income. Net investment income increased $34.7 million to
$186.7 million in 1996 from $152.0 million in 1995. Excluding the investment
income of the Acquisitions, investment income decreased $6.1 million, primarily
attributable to (i) a decrease in income of the Company's equity subsidiaries
and (ii) changes in expected prepayments on mortgage-backed securities.
16
<PAGE> 18
The Company's share of earnings from its equity subsidiaries decreased from
$9.4 million in 1995 to $5.5 million in 1996 as a result of a reduction in gains
on the sale of real estate by GSSW in 1996 compared to 1995 and increased
expenses at the Company's other equity subsidiaries. Gains from the sale of real
estate by GSSW added $1.2 million to investment income in 1996 compared to $3.3
million in 1995. Income from the Company's investment in Argus decreased in 1996
due to increased systems development costs incurred by Argus.
Management continually evaluates the expected prepayments of the
mortgage-backed securities portfolio to more accurately reflect expected
paydowns on the securities as market interest rates change. In 1996, interest
rates increased, reducing the expected prepayment rate. In 1995, expected
prepayments of the portfolio were accelerated as interest rates had declined. As
a result of the changes in expected prepayments, amortization of premiums and
accretion of discounts were accelerated in 1995, causing an increase in net
investment income of $1.3 million in 1995. The decrease in investment income in
1996 from the reduced expected prepayment rate was offset by discounts
recognized upon the early repayment on certain of the Company's mortgage loans.
Gain on disposition of partnership interest. In December 1996, in a
transaction negotiated with the party owning the other 50% interest in GSSW, the
Company disposed of its 50% interest in GSSW in exchange for cash of $22.6
million and 100% interests in several real estate limited partnerships formerly
owned by GSSW. The Company recorded the limited partnerships at their aggregate
historical book value of $18.7 million and recorded a gain of $15.8 million on
the transaction.
Other income. Other income in 1996 and 1995 included $2.5 million and $1.2
million, respectively, of gains from the sales of blocks of accident and health
business owned by the Company.
Policyholder benefits. Policyholder benefits were $49.5 million higher in
1996 than in 1995. Excluding the effects of the Acquisitions, policyholder
benefits increased $0.2 million from 1995 to 1996. This increase in
policyholders benefits resulted from increased death benefits, partially offset
by a lower increase in benefit reserves in 1996 compared to 1995. The Company
experienced an unusually high level of death benefits during the first half of
1996, including a small number of policies with very large face amounts which
had offsetting benefit reserve releases. Lower benefit reserve increases in 1996
also resulted from the decrease in traditional premiums.
Amortization expense. Amortization expense increased $3.0 million in 1996
to $29.7 million, including an increase of $2.3 million related to the
Acquisitions. Included in amortization expense is an adjustment to deferred
policy acquisition costs and the cost of business acquired assets of $3.2
million in 1996 and $4.0 million in 1995. These adjustments result from
revisions made to the Company's estimate of future gross profits of its interest
sensitive life and annuity policies. Under GAAP, deferred policy acquisitions
costs and the cost of business acquired assets on interest-sensitive life
products are amortized based on the estimated future gross profits of the
related policies.
Interest expense. Interest expense increased $1.7 million to $12.3 million
in 1996 from $10.6 million in 1995. Average outstanding indebtedness was $133.5
million with an average cost of 9.19% in 1996 compared to average outstanding
indebtedness of $116.5 million with an average cost of 9.10% in 1995. Average
outstanding indebtedness was higher in 1996 than 1995 due to the issuance of
$32.8 million of notes payable in connection with the acquisition of Victory
Life in July 1995.
Other operating expenses. Other operating expenses increased to $56.7
million in 1996 from $47.1 million in 1995. The increase in other operating
expenses primarily resulted from increased expenses associated with servicing
the policies of the Acquisitions. Other operating expenses also increased in
1996 as a result of increased product development and marketing expenses, partly
in connection with the Ohio Life and Fremont Life marketing alliances.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Income before provision for income taxes increased $8.4 million to $30.9
million in 1995 from $22.5 million in 1994. The primary reasons for the
increase, in addition to the Acquisitions were (i) an increase in
17
<PAGE> 19
net investment income, (ii) a decrease in net realized investment losses, and
(iii) a decrease in death benefits. These items and significant changes in
individual income statement components are discussed in more detail below.
Premiums and policy revenues. Premiums and policy revenues totalled $140.1
million in 1995 compared to $134.2 million in 1994.
Because the Company currently writes little new traditional business,
traditional premiums will decrease as the amount of in-force traditional
business decreases. After subtracting the effect of the Acquisitions,
traditional premiums decreased $5.5 million in 1995. This decrease was partially
offset by an increase in policy revenues on interest-sensitive and annuity
products. Collected premiums on interest-sensitive and annuity products
increased by $26.3 million in 1995. This increase in collected premiums is not
reflected in premiums and policy revenues because GAAP requires that premiums
collected on these types of products be treated as deposit liabilities rather
than revenue.
Net investment income. Net investment income increased $21.9 million from
$130.1 million in 1994 to $152.0 million in 1995. The increase, excluding the
investment income of the Acquisitions, is attributable to (i) changes in
expected prepayments on mortgage-backed securities, (ii) an increase in income
of the Company's equity subsidiaries and (iii) an increase in interest earned on
short-term investments.
In 1995, expected prepayments of the portfolio were accelerated as interest
rates had declined. In 1994, interest rates increased, reducing the expected
prepayment rate. As a result of the changes in expected prepayments,
amortization of premiums and accretion of discounts were accelerated in 1995,
causing an increase in net investment income of $1.4 million in 1995 compared to
1994.
The Company's share of earnings from its equity subsidiaries increased to
$9.4 million in 1995 from $7.1 million in 1994. The increase in earnings from
equity subsidiaries resulted primarily from an increase in operating income on
real estate owned by GSSW and $3.3 million of gains from the sale of real estate
for the year ended December 31, 1995 compared to $1.2 million of gains on
mortgage loan paydowns in 1994. Additionally, earnings from the Company's other
equity subsidiaries improved in 1995.
Net investment income earned on short-term investments increased $2.1
million in 1995 primarily due to an increase in the interest rate earned on
short-term investments of approximately 200 basis points over 1994.
Net realized investment gains (losses). In 1995, the Company recorded net
realized investment losses of $0.3 million on sales of $392.6 million compared
to net realized investment losses of $2.0 million on sales of $264.7 million in
1994. The decrease in net realized investment losses incurred reflects increased
market values of the Company's investment portfolio in 1995. Additionally, the
Company recognized a $1.5 million loss in 1994 on the write-down of its
investment in ImmunOnc, Inc., a related party.
Other income. Other income in 1995 includes a $1.2 million gain on the sale
of a block of accident and health business owned by the Company.
Policyholder benefits. Policyholder benefits were $17.3 million higher in
1995 than in 1994. Excluding the effects of the Acquisitions, policyholder
benefits decreased $1.0 million from 1994 to 1995. The primary reason for the
reduction in policyholder benefits is a decrease in death benefits of $2.0
million. The Company experienced unusually high mortality in the first three
months of 1994. Death benefits for the last nine months of 1994 and throughout
1995 returned to levels expected by the Company.
Amortization expense. Amortization expense increased $3.2 million from
$23.5 million in 1994 to $26.7 million in 1995. Excluding the effects of the
Acquisitions, amortization expense increased $1.8 million from 1994 to 1995.
This increase is a result of the revisions by the Company of its estimates of
future gross profits on interest-sensitive life products in 1994 and 1995. Under
GAAP, deferred policy acquisitions costs and the cost of business acquired on
interest-sensitive life products are amortized based on the estimated future
gross profits of the related policies. As a result of these revisions, the
amortization of deferred policy acquisition costs and cost of business acquired
increased $4.0 million in 1995 compared to an increase of $0.9 million in 1994.
18
<PAGE> 20
Interest expense. Interest expense increased $1.3 million to $10.6 million
in 1995 from $9.3 million in 1994. The increase is due to approximately $32.8
million of notes payable issued in connection with the acquisition of Victory
Life in July 1995. The average interest rate on this newly issued debt during
1995 was 7.09%. See Note 7 to the Consolidated Financial Statements of the
Company, included elsewhere in this Form 10-K, for further explanation of the
terms of the newly issued debt.
Provision for income taxes. The provision for income taxes decreased from a
rate of 40.7% of pre-tax income in 1994 to 36.1% of pre-tax income in 1995. In
1994, the Company recorded additional income tax expense of $1.3 million due to
increasing the valuation allowance of deferred tax benefits which may not be
recoverable in the future. Additionally, in 1994 the Company recorded income tax
expense of $0.5 million with respect to a final settlement with the IRS
regarding examinations of certain subsidiaries.
FINANCIAL CONDITION AND LIQUIDITY
Liquidity. The liquidity needs of Americo, whose principal assets are
investments in its insurance subsidiaries, are dependent upon receipt of
sufficient funds from its subsidiaries. The cash requirements of Americo consist
of debt service requirements on notes payable, amounts due FHC under Advisory
and Data Processing Agreements with FHC and its own operating expenses. These
cash requirements are met by payments of principal and interest on surplus
debentures issued by United Fidelity and dividends from United Fidelity. Americo
also receives payments under investment advisory and data processing agreements
with the insurance subsidiaries which permit Americo to recover a portion of the
amounts paid by it under similar agreements with FHC. On a stand-alone basis,
Americo had $12.8 million of cash and cash equivalents and marketable equity
securities at December 31, 1996 available for debt service and other corporate
requirements.
The Company has outstanding the $100.0 million senior subordinated notes it
issued in 1993. These senior subordinated notes bear interest at 9.25% and
mature in May 2005. The notes are redeemable at the option of the Company
beginning in 1998. The redemption prices are in excess of par in 1998 and 1999.
In connection with the acquisition of Victory Life in July 1995, the
Company issued notes payable totalling $32.9 million. The Company borrowed $21.0
million under a $70.0 million credit agreement with a syndicate of banks and
issued notes payable with face amounts totalling $17.0 million to the seller of
Victory Life. The credit agreement, as amended in December 1996 and February
1997, is a revolving credit facility until December 1999; amounts then
outstanding convert into a term loan repayable in six equal semi-annual
installments. Amounts outstanding under the credit agreement bear interest at
either a bank prime rate or 7/8% over a LIBOR rate. At December 31, 1996, the
discounted value of the notes payable that were issued to the seller of Victory
Life was $11.6 million, assuming an average effective rate of 11.6%. $5.0
million of the $17.0 million face amount matures in 2015; the remaining $12.0
million of notes is payable in 24 equal semi-annual installments which began in
1995.
At December 31, 1996, United Fidelity has four surplus debentures payable
to Americo with an aggregate outstanding unpaid balance of $137.8 million. The
surplus debentures have been approved by the Texas Department of Insurance. The
surplus debentures contain restrictions which prevent United Fidelity from
making principal and interest payments if such payments reduce United Fidelity's
statutory capital and surplus below an amount specified in the surplus debenture
agreements. The most restrictive minimum surplus requirement contained in the
surplus debentures is $37.5 million; United Fidelity's capital and surplus at
December 31, 1996 was $86.7 million. Any future payment of principal or interest
on such surplus debentures will be limited by the ability of the subsidiaries of
United Fidelity to pay dividends to United Fidelity and may be further limited
by United Fidelity's RBC requirements. The Company does not believe that United
Fidelity will have any difficulty in meeting its obligations under these surplus
debentures in the foreseeable future.
The terms of the surplus debentures have been established to provide for
the payment of principal and interest to Americo in amounts sufficient to make
payments on the Company's external debt in accordance with their payment
schedules. The surplus debentures and their payment schedules have been approved
by the Texas Department of Insurance; therefore, each scheduled payment will not
require the approval of the Texas Department of Insurance.
19
<PAGE> 21
In order to meet its obligations under the surplus debentures, United
Fidelity uses funds generated by its direct and assumed insurance operations and
dividends from its insurance subsidiaries. The ability of the insurance
subsidiaries to pay dividends is subject to regulatory restrictions. The
insurance holding company statutes in Texas and Kansas regulate payment of
dividends by an insurance company to its parent. Without the consent of the
states' insurance commissioner, an insurance company may not pay dividends to
its parent in excess of the greater of (i) the insurer's prior year statutory
net gain from operations, or (ii) 10% of its prior year ending statutory capital
and surplus, subject in either case to sufficient earned statutory surplus from
which such dividends may be paid. Additionally, an insurance company is required
to notify the respective insurance department ten days prior to the payment of
ordinary dividends.
The ability of the life insurance subsidiaries to pay dividends is also
affected by the AVR and IMR, as these statutory reserves directly impact capital
and surplus of the life insurance subsidiaries. Also, the need to maintain an
RBC ratio in excess of minimum requirements could affect the dividend paying
ability of a life insurance subsidiary.
The principal sources of liquidity for the Company's insurance subsidiaries
are premium receipts, net investment income received and net proceeds from
investments that have been sold or matured or from mortgage loans that have been
repaid. Cash flows from premiums received and investment income are generally
sufficient to meet the obligations which consist of the payment of claims and
benefits on insurance policies, purchases of investments and the payment of
operating expenses. Although there is no intent to dispose of investments at
this time, the Company's investments are substantially in readily marketable
securities.
The Company has structured its interest-sensitive life insurance and
annuity products to include substantial surrender charges so as to reduce the
probability of unexpected increases in policy or contract surrenders, which
would create a need for increased liquidity. At December 31, 1996, approximately
90% of the reserves for interest-sensitive life insurance products were for
policies with surrender charges or otherwise not subject to discretionary
withdrawal by the policyholder.
The Company believes that its investment portfolio will allow it to satisfy
all existing contractual obligations to policyholders. At December 31, 1996, the
Company's investment portfolio included cash and short-term investments
totalling $96.1 million, marketable equity securities totalling $48.3 million as
well as $380.2 million in U.S. Treasury and government securities,
mortgage-backed securities and asset-backed securities and $290.1 million of
corporate bonds classified as available for sale that management believes could
be readily converted to cash.
Financial condition. Stockholder's equity increased to $207.0 million at
December 31, 1996 from $190.8 million at December 31, 1995. The increase was the
result of net income of $27.3 million, a decrease in net unrealized investment
gains of $9.0 million, and a $2.0 million dividend to FHC. Net unrealized
investment losses in 1996 were recorded due to the decline in the market value
of the Company's available for sale fixed maturity securities, partially offset
by unrealized gains on marketable equity securities. See Note 4 to the Company's
Consolidated Financial Statements included elsewhere in this Form 10-K for
further discussion of the components of the change in net unrealized investment
gains.
The policy liabilities related to the Ohio Life and Fremont Life business
totalled approximately $774.0 million and $348.0 million at December 31, 1996
and 1995, respectively. As Great Southern completes the assumption of these
policies, these liabilities will become direct liabilities of Great Southern and
will be recorded on the Company's consolidated balance sheet. As of December 31,
1996, Great Southern had completed the assumption of policies with liabilities
totalling $245.4 million.
Statutory capital and surplus of the Company's insurance subsidiaries at
December 31, 1996 includes $42.9 million relating to financial reinsurance
agreements which is not included in stockholder's equity on a GAAP basis.
Financial reinsurance treaties between National Farmers Union and an
unrelated reinsurer contain statutory minimum surplus requirements and require
National Farmers Union to place securities in an escrow account ($273.4 million
at December 31, 1996) to secure National Farmers Union's obligations to the
20
<PAGE> 22
reinsurer. National Farmers Union is restricted from declaring dividends if
adjusted surplus is less than $27.5 million. Adjusted surplus is defined in the
treaties as statutory capital and surplus plus the AVR less the admitted asset
value of all affiliated investments. At December 31, 1996, National Farmers
Union had adjusted surplus of $36.5 million.
Investment Portfolio. The Company has what it considers to be a
conservative investment philosophy. The Company's investment portfolio is
designed to match investment maturities as closely as possible to the projected
cash flow requirements of the Company's outstanding liabilities. The Company's
policy is to have a substantial portion of its investment portfolio in fixed
income securities with call protection.
In November 1995, the FASB issued "A Guide to Implementation of Statement
115 on Accounting for Certain Investments in Debt and Equity Securities" (the
Guide) which, among other things, provided entities with a one time opportunity
to transfer some or all securities from held to maturity. In December 1995, the
Company transferred fixed maturity securities with an amortized book value of
$195,207 and a market value of $198,329 out of the held to maturity category
into the available for sale category. Additionally, the Company transferred
fixed maturity securities with an amortized book value of $169,439 and a market
value of $178,883 out of the available for sale category into the held to
maturity category.
The NAIC assigns securities quality ratings called "NAIC designations" that
are used by insurers when preparing their annual statements. The NAIC assigns
designations to publicly-traded as well as privately-placed securities. The
designations assigned by the NAIC range from class 1 to class 6, with a rating
in class 1 being of the highest quality. The following table sets forth the
composition of the Company's fixed maturity securities according to NAIC
designations and S&P and Moody's ratings at December 31, 1996:
<TABLE>
<CAPTION>
EQUIVALENT TOTAL
S&P MOODY'S NAIC HELD TO AVAILABLE CARRYING
RATING(1) RATING(1) RATING(1) MATURITY(2) FOR SALE(3) AMOUNT PERCENTAGE
--------- --------- ---------- ----------- ----------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Investment grade:
AAA................... Aaa 1 $372,649 $381,345 $ 753,994 49.4%
AA.................... Aa1, Aa2, Aa3 1 83,520 75,499 159,019 10.4
A..................... A1, A2, A3 1 296,676 113,376 410,052 26.8
BBB................... Baa1, Baa2, Baa3 2 100,747 93,788 194,535 12.7
-------- -------- ---------- -----
Subtotal.............. 853,592 664,008 1,517,600 99.3%
Non-investment grade:
BB or below........... Ba1 or below 3, 4 3,859 6,266 10,125 0.7%
-------- -------- ---------- -----
Total fixed maturity
investments......... $857,451 $670,274 $1,527,725 100.0%
======== ======== ========== =====
</TABLE>
- -------------------------
(1) The ratings set forth above are based on the ratings assigned by S&P and
Moody's Investors Service, Inc. ("Moody's"). If S&P's ratings were
unavailable, ratings assigned by Moody's were used. If ratings assigned by
S&P and Moody's were not equivalent, securities were categorized in this
table based upon the rating assigned by S&P. Bonds not rated by S&P or
Moody's are classified for the purpose of the table according to the rating
assigned to them by the NAIC as follows: NAIC class 1 is included in the "A"
rating; class 2, in "BBB" and class 3, "BB or below".
(2) Carrying amount is amortized cost. The market value of "Held to Maturity"
securities at December 31, 1996 was $847.8 million.
(3) Carrying amount is market value. The amortized cost of "Available for Sale"
securities at December 31, 1996 was $671.8 million.
The Company continually reviews its non-investment grade debt securities
(NAIC designations 3 through 6) for evidence of declines in value which are
other than temporary. The Company does not anticipate any material increase in
its investments in non-investment grade debt securities. At December 31, 1996,
the Company's investment portfolio contained no securities which were in default
as to principal or interest.
21
<PAGE> 23
The Company maintains a mortgage-backed securities ("MBS") portfolio, which
consists of "pass-through" obligations and collateralized mortgage obligations
("CMOs"). Approximately 90% of the MBS portfolio consists of securities or pools
of securities guaranteed by the U.S. government, including those issued by
Government National Mortgage Association, or those issued by Federal National
Mortgage Association and Federal Home Loan Mortgage Corporation.
The primary risk associated with MBSs is that a changing interest rate
environment might cause prepayment of the underlying mortgages at speeds slower
or faster than anticipated at the time of their purchase. The degree to which a
security is at risk to either increases or reductions in yield is influenced by
the difference between its carrying value and par value, the relative
sensitivity of the underlying mortgages to prepayment in a changing interest
rate environment and the repayment priority of the securities in the overall
securitization structure.
The Company manages the yield and cash flow variability of its MBS
portfolio by (i) purchasing securities backed by collateral with lower
prepayment sensitivity (such as mortgages priced at a discount to par value),
(ii) avoiding securities whose values are heavily influenced by changes in
prepayments (such as interest-only and principal-only securities) and (iii)
concentrating on securities with prepayment protected structures (such as
planned amortization class CMO's). See Note 4 to the Company's Consolidated
Financial Statements included elsewhere in this Form 10-K for a summary of the
Company's investments in CMO's.
At December 31, 1996, approximately $184.3 million in carrying value of the
Company's investment portfolio consisted of mortgage loans, which were
collateralized primarily by multi-family apartments, office buildings and retail
properties located in 33 states. Approximately 39% of the portfolio was
multi-family apartments, 23% was office buildings, 25% was retail space and 13%
was other types of properties. At December 31, 1996, approximately 21% of the
mortgage loan portfolio was secured by properties in Texas, and 21% in Missouri
and 11% in Kansas. No more than 10% of the remaining portfolio was secured by
properties in any one state.
At December 31, 1996, only 1.9% of the mortgage loan portfolio consisted of
loans with balloon payments that mature before January 1, 1998. At December 31,
1996, mortgage loans delinquent by more than 90 days, as determined on a
contract delinquency basis, totalled approximately $0.2 million, which
constituted 0.1% of mortgage loans and was 0.01% of cash and invested assets.
Loans foreclosed upon and transferred to real estate owned in the Company's
consolidated balance sheet totalled $1.6 million, or less than 1% of total
mortgage loans at December 31, 1996. The favorable default experience is
principally attributed to the Company having been selective in the purchase of
mortgages in connection with acquisitions of its life insurance subsidiaries. In
light of the current market interest rate environment, the Company may
experience prepayments on its mortgage loan portfolio, thus reducing its yield
on such portfolio. The Company plans to continue applying its historical
underwriting standards to future investments in mortgage loans.
Real estate investments were only 1.1% of the carrying value of the
Company's cash and invested assets at December 31, 1996.
Non-Insurance Subsidiaries. During 1996, Americo received a dividend from
Argus consisting of $8.0 million of cash and a $1.5 million note receivable from
Broadway Square Partners, a related party. Americo used $4.5 million of the cash
received to purchase a 50% interest in Hereford LLP, which owns and manages the
building leased by Argus. Hereford LLP was formed in 1996 to purchase the
building which was previously owned by Argus.
Subsequent Event. In January 1997, the Company entered into a stock
purchase agreement to acquire The Ohio State Life Insurance Company ("Ohio
State") and Investors Guaranty Life Insurance Company ("IGL") from an unrelated
party for a purchase price of approximately $330.0 million, subject to certain
purchase price adjustments. The acquisition will be financed by a combination of
internal funds and reinsurance. At December 31, 1996, Ohio State and IGL had
assets of $1,099.0 million and liabilities of $767.0 million. The closing of the
acquisition is contingent upon obtaining regulatory approvals from applicable
state insurance departments.
22
<PAGE> 24
Immediately following the acquisition, Ohio State and IGL will reinsure
100% of their insurance liabilities to an unaffiliated reinsurer (the
"Reinsurer") on a coinsurance basis. Ohio State and IGL will transfer
approximately $685.0 million of assets to the Reinsurer and will receive a
ceding commission of $133.0 million from the Reinsurer. The Reinsurer will
reinsure certain risks on a 70% quota share of the same insurance liabilities to
Great Southern on a modified coinsurance basis, which provides that the
Reinsurer retains the assets and liabilities. The Reinsurer will receive 100% of
the statutory profits from the reinsured policies until the Reinsurer has
recovered the initial ceding commission. After that time, the Reinsurer will
receive 30% of the statutory profits from the reinsured policies.
The acquisition of Ohio State and IGL will be accounted for using the
purchase method of accounting. The direct policy liabilities will be included on
the Company's balance sheet. The assets retained by the Reinsurer will be
included on the Company's balance sheet as a receivable from the Reinsurer.
The Company is in negotiations with an unrelated party to sell Loyalty
Life. In December 1996, the insurance business of Loyalty Life was reinsured to
National Farmers Union, leaving approximately $7.0 million of net assets in
Loyalty Life. The sale of Loyalty Life will have no adverse affect on ongoing
operations of the Company.
EFFECTS OF ACCOUNTING PRONOUNCEMENTS TO BE ADOPTED IN THE FUTURE
In June 1996, the Financial Accounting Standards Board issued Statement of
Accounting Standards ("SFAS") No. 125 "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities." SFAS No. 125 establishes
new criteria for determining whether a transfer of financial assets in exchange
for cash or other consideration should be accounted for as a sale or as a pledge
of collateral in a secured borrowing, and new accounting requirements for
pledged collateral. SFAS 125 is effective for transactions occurring after
December 31, 1996. The implementation of portions of this statement with respect
to accounting for pledged collateral, repurchase agreements and similar
transactions was deferred for one year by SFAS No. 127 "Deferral of the
Effective Date of Certain Provision of the FASB Statement No. 125" issued in
December 1996. Implementation of these new accounting standards is not expected
to have a material impact on the consolidated financial statements of the
Company.
EFFECTS OF INFLATION AND INTEREST RATE CHANGES
Management does not believe that inflation has had a significant effect on
its consolidated results of operations.
Management is aware that prevailing market interest rates may shift
significantly and has strategies in place to manage either an increase or
decrease in prevailing rates. In a rising interest rate environment, the
Company's average cost of funds would increase over time as it prices its new
and renewing interest-sensitive and investment products to maintain generally
competitive market rates. Management would seek to place new funds in
investments which were matched in duration to, and higher yielding than, its
liabilities. Management believes that liquidity to fund withdrawals would be
available through incoming cash flow, the sale of short-term or floating rate
instruments or reverse repurchase agreements on the Company's substantial
mortgage-backed securities portfolio, thereby avoiding the sale of fixed rate
assets in an unfavorable bond market.
In a declining rate environment, the Company's cost of funds would decrease
over time, reflecting lower interest crediting rates on its interest-sensitive
and investment products. Should increased liquidity be required for withdrawals,
management believes that a significant portion of its investments could be sold
without adverse consequences in light of the general strengthening which would
be expected in the bond market.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's audited consolidated financial statements for the three years
ended December 31, 1996 and the related report of independent accountants
thereon are set forth at pages F-2 to F-31 hereof and are incorporated herein by
reference. Reference is made to the Index to Financial Statements on page F-1
herein.
23
<PAGE> 25
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
24
<PAGE> 26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company's Directors and Executive Officers are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Michael A. Merriman.................... 39 Chairman of the Board
Gary L. Muller......................... 50 President, Chief Executive Officer and Director
Timothy S. Sotos....................... 48 Director
Donna H. Kinnaird...................... 45 Senior Vice President, Chief Operating Officer --
Kansas City
Gary E. Jenkins........................ 39 Senior Vice President, Chief Financial Officer and
Treasurer
Mark K. Fallon......................... 42 Senior Vice President and Assistant Secretary --
Investments
David F. Hill.......................... 42 Senior Vice President and Chief Marketing Officer
</TABLE>
Americo's current Board of Directors consists of three directorships. Each
director of Americo, except Timothy S. Sotos, was elected to such position in
1992 in connection with the Company's incorporation. Michael A. Merriman and
Gary L. Muller are also directors of FHC. The executive officers of Americo are
elected by the Board of Directors from time to time as it deems necessary or
advisable, and are subject to removal by the Board.
All executive decisions, including decisions concerning executive officer
compensation, are made by the Board of Directors. No member of the Board
receives any compensation, other than reimbursement for travel expenses, for
services as such.
CERTAIN INFORMATION ABOUT OFFICERS
Michael A. Merriman was elected Chairman of the Board, effective November
1, 1995, of Americo, FHC and several of its subsidiaries, including all of
Americo's insurance subsidiaries. Previously, Mr. Merriman served as a director
and officer of all these same entities.
Gary L. Muller is President and Chief Executive Officer and a director of
Americo. Mr. Muller is also a director and officer of FHC and of several of its
subsidiaries, including all of Americo's insurance subsidiaries.
Timothy S. Sotos was elected as a director of Americo on November 1, 1995.
He also serves as a director of all of the insurance subsidiaries. He is the
Chairman of the Board and Executive Vice President of Clinical Reference
Laboratory, which is 80% owned by the Merriman family. He is the brother-in-law
of Michael A. Merriman.
Donna H. Kinnaird is Senior Vice President and Chief Operating Officer of
Americo and has been Senior Vice President of its insurance subsidiaries since
August 1989. In 1994, she assumed the position of Chief Operating Officer of the
Kansas City-based insurance companies. She served as Chief Financial Officer
from 1989 to 1994.
Gary E. Jenkins has served as Senior Vice President and Chief Financial
Officer of Americo since July 1994. He became Treasurer of Americo and the
insurance subsidiaries on November 1, 1995. From June 1993 to July 1994, Mr.
Jenkins provided financial consulting services to Aachen Holdings Inc. (former
shareholder of Academy Life Insurance Company). He served as Chief Financial
Officer of Academy Life Insurance Company for six years before it was acquired
by Providian Corporation in January 1993.
Mark K. Fallon became Senior Vice President and Assistant Secretary --
Investments of Americo and all of the life subsidiaries on November 1, 1995.
Previously, he served as Vice President of Americo and all of the life
subsidiaries since 1993. He was the Director of Investments of American General
Corporation from July 1987 to April 1993.
David F. Hill became Senior Vice President and Chief Marketing Officer of
Americo and all of the life insurance subsidiaries on July 1, 1996. Previously,
he was Senior Vice President of ReliaStar Financial
25
<PAGE> 27
Corporation from September 1993 to March 1996. He served as President and Chief
Executive Officer of Pierce National Life from July 1992 to September 1993.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth all compensation paid to (i) the Chief
Executive Officer of the Company and (ii) the other five most highly compensated
Executive Officers of the Company for the three years ended December 31, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
NAME AND -------------------- ALL OTHER
PRINCIPAL OCCUPATION YEAR SALARY(2) BONUS COMPENSATION(1)
-------------------- ---- --------- ----- ---------------
<S> <C> <C> <C> <C>
Gary L. Muller..................................... 1996 $462,000 $350,000 $ 3,203
President, Chief Executive Officer 1995 462,000 350,000 3,140
and Director 1994 462,000(3) -- 1,992
Michael A. Merriman................................ 1996 363,000 -- 3,203
Chairman of the Board 1995 363,000 -- 3,186
1994 363,000 -- 1,020
Donna H. Kinnaird.................................. 1996 190,000 175,000 3,203
Senior Vice President and 1995 190,000 150,000 3,186
Chief Operating Officer -- Kansas City 1994 185,524 100,000 1,041
Gary E. Jenkins.................................... 1996 175,000 175,000 3,203
Senior Vice President, 1995 175,000 150,000 186
Chief Financial Officer and Treasurer 1994 63,717 50,000 44,321
Mark K. Fallon..................................... 1996 155,000 150,000 3,203
Senior Vice President and 1995 155,000 150,000 3,186
Assistant Secretary -- Investments 1994 155,000 100,000 --
</TABLE>
- -------------------------
(1) Includes amounts contributed by the Company for the benefit of the person
identified under the Company's Savings Plan (as hereinafter defined) and
Supplemental Accidental Death and Dismemberment coverage. Includes
relocation and tax reimbursement in 1994 for Gary E. Jenkins.
(2) The 1994 salary amounts include the following amounts paid in 1993 as
prepayment of 1994 salaries: Gary L. Muller -- $462,000 and Michael A.
Merriman -- $363,000. These amounts were expensed in the Company's financial
statements in 1994.
(3) The 1994 salary amount for Gary L. Muller does not include $300,000 paid to
him by FHC in 1994 as a prepayment on his 1995 salary. The Company
reimbursed FHC for this amount and recorded the related salary expense in
1995.
Supplemental Accidental Death and Dismemberment coverage in the amount of
$500,000 is provided for all senior officers of Americo and its subsidiaries
that hold the following named positions: Vice President, Senior Vice President,
Executive Vice President, President, Chief Executive Officer and Chairman of the
Board. Currently, this policy covers approximately 35 employees of Americo and
its subsidiaries.
Executive officers hold no outstanding options to purchase the Company's
stock.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company has 10,000 shares of Common Stock outstanding at March 25, 1997
all of which were beneficially owned by FHC, whose principal executive offices
are located at 300 West 11th Street, Kansas City, Missouri 64105 and whose phone
number is (816) 391-2000. The Company has no other outstanding shares of capital
stock.
26
<PAGE> 28
The following table sets forth certain information with respect to
beneficial ownership by Directors and Executive Officers of Americo, named in
Item 11 "Summary Compensation Table" above, of FHC's Common Stock.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL ACTUAL PERCENT
TITLE OF CLASS NAME OF BENEFICIAL OWNER OWNERSHIP OF CLASS
- -------------- ------------------------ ----------------- --------------
<S> <C> <C> <C>
Common Stock Michael A. Merriman............................ 112,000(1) 29.8%
Timothy S. Sotos............................... 49,800(2) 13.3%
Gary L. Muller................................. 52,500(3) 14.0%
All directors and executive officers as a
group.......................................... 214,300 57.1%
</TABLE>
- -------------------------
(1) Includes (i) 40,000 shares held in irrevocable trust of Elaine A. Merriman
for the benefit of Michael A. Merriman and Marybeth Merriman Sotos (the wife
of Timothy S. Sotos), of which trust Michael A. Merriman is the sole Trustee
with sole voting and investment power and (ii) 9,000 shares held as
Custodian for Jack D. Merriman, II, over which shares Michael A. Merriman
has sole voting and investment power.
(2) Includes (i) 40,500 shares owned by Marybeth Merriman Sotos and (ii) 9,300
shares held as Custodian for Maryelaine Sotos, Timothy J. Sotos and James P.
Sotos, over which shares Timothy S. Sotos has sole voting and investment
power.
(3) During 1995, FHC paid Mr. Muller $234,944 for an option to acquire 17,301 of
these shares at a per share price of $188.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
AGREEMENTS WITH FHC
Americo or one of its subsidiaries have the following agreements with FHC
or its affiliates, none of which may be deemed the result of arm's length
negotiations between independent parties.
Advisory Agreement. The Company appointed FHC to act as investment advisor
on a non-exclusive basis to the Company and its wholly-owned insurance
subsidiaries pursuant to an advisory agreement between the Company and FHC
("Advisory Agreement"). Under the Advisory Agreement, FHC supervises and directs
the composition of the investment portfolios of the Company and its insurance
subsidiaries in accordance with their respective objectives and policies. For
its services under the Advisory Agreement, FHC is paid in advance a quarterly
fee based on the aggregate statutory book value of the investable assets of the
Company and its subsidiaries as of the end of the prior fiscal quarter. Under
this formula the fee paid for the year ended December 31, 1996 was $6.1 million.
FHC also is entitled to receive reimbursement for certain commissions, brokerage
and other expenses incurred by it in the performance of its duties. The Company
recovers amounts paid to FHC under the Advisory Agreement from the insurance
subsidiaries, subject to regulatory limitations. The Advisory Agreement provides
that FHC shall not be liable for any losses except for those resulting from
willful misfeasance, bad faith or gross negligence, or from reckless disregard
by FHC of its duties.
Data Processing Agreement. Pursuant to a data processing services agreement
("Data Processing Agreement") between FHC and the Company, FHC provides the
Company and its insurance subsidiaries with record-keeping services for certain
life insurance and annuity products. In providing these services, FHC utilizes
contract personnel and computerized data processing systems. For its services,
FHC is paid a fee of $14.35 for each policy serviced per year, subject to
renegotiation and annual adjustments based on changes in the consumer price
index. This amount generally represents FHC's cost of providing such services
plus amortization of FHC's development costs. The aggregate fee paid for the
year ended December 31, 1996 under the Data Processing Agreement was $9.8
million. FHC also is entitled to reimbursement for its reasonable out-of-pocket
expenses incurred in performing the Data Processing Agreement. The Company is
also a party to a separate data processing services agreement with its
wholly-owned insurance subsidiaries wherein the subsidiaries agree to use such
services and to pay for them pursuant to a separate data processing services
agreement (the "Subsidiary Data Processing Agreement"). Under the Data
Processing Agreement,
27
<PAGE> 29
Americo agrees to indemnify FHC against liabilities arising out of, among other
matters, actions taken by FHC under the agreement in good faith and due
diligence. Americo's subsidiaries made similar indemnification agreements with
Americo under the Subsidiary Data Processing Agreement.
Reimbursement of Expense Agreement. The Company and its subsidiaries have
entered into a cost sharing agreement with FHC respecting air transportation
expenses arising from the use of an airplane leased by FHC. Under this
agreement, each party pays the cost of any air transportation expenses which can
be identified as incurred for its sole benefit and expenses which cannot be so
identified are allocated based on utilization. Americo and its subsidiaries
incurred approximately $0.8 million of expense under this agreement for the year
ended December 31, 1996.
FHC Lease. The Company's subsidiary, United Fidelity, leases to FHC a
building in Kansas City which is occupied by FHC. Under the terms of the lease,
FHC pays $8,500 per month in rent and has an option to purchase the building for
$1.2 million, an amount equal to its statutory book value and which approximates
its current fair market value. The exercise price of the option will be revised
annually to the greater of fair market value or statutory carrying value.
Management believes that the rentals under the lease are comparable to market
rental values for comparable space and footage in the local market.
OTHER TRANSACTIONS
In connection with the Joint Venture, referred to under "Marketing and
Distribution" contained in Item 1 herein, FHC and ASC each entered into separate
services agreements with FAI, pursuant to which FHC and ASC provide certain
administrative functions to FAI with respect to certain tax-qualified insurance
and annuity products ("403(b) Business"). For these services, FAI pays a fixed
fee (on a per policy basis) for all 403(b) Business existing at December 31,
1992 and a percentage fee (based on first year premiums) for all 403(b) Business
written or reinsured by FAI after December 31, 1992. Generally, these percentage
fees will increase by 4% annually. These service agreements each had an initial
term of three years commencing July 30, 1993, and renew annually thereafter
unless terminated by the parties. FAI paid $1,045,454 and $1,493,115 to FHC and
ASC, respectively, under these service agreements during 1996. Each of FHC and
ASC have agreed to indemnify FAI against all liabilities resulting from such
servicer's gross negligence, fraudulent conduct or bad faith in the performance
of its duties under the respective services agreement.
FHC and certain of its non-life insurance subsidiaries, including the
Company, are parties to a tax sharing agreement under which (i) tax savings and
tax detriments inure to the benefit or detriment, respectively, of the party
contributing the expense or other item that reduces or increases, respectively,
the consolidated group's taxes from what they would have been had each member
filed separately, and (ii) losses arising from filing the consolidated return
and rights to average income by carryforwards and carrybacks are equitably
divided among the parties in the same manner that they benefitted from savings
caused by filing a consolidated return.
One of the Company's insurance subsidiaries leases office space (and
related parking facilities) in buildings owned by Broadway Square Partners, a
general partnership in which one of the partners is SCOL, Inc. ("SCOL"), a
Missouri corporation, owned by members of the Merriman family. The aggregate
amount paid (including rentals and expense reimbursement) under the lease to
Broadway Square Partners in 1996 was approximately $899,000. The terms of the
lease are as favorable to the Company's subsidiary as those offered other
unaffiliated tenants of the building.
Subsidiaries of the Company paid an aggregate of approximately $178,000 in
1996 to Clinical Reference Laboratory, Inc., a Kansas corporation ("Clinical
Laboratory"), which is 80% owned by the Merriman family and of which Timothy S.
Sotos is Chairman of the Board. The amounts paid were for testing services
performed for the Company's subsidiaries and were competitive with rates charged
by Clinical Laboratory to similarly situated unaffiliated insurance companies
for similar services.
28
<PAGE> 30
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Financial Statement Schedules:
Reference is made to the indexes set forth on pages F-1 and S-1 of this
report.
Financial statements of the Company's 50%-owned subsidiaries have been
omitted because the Company's proportionate share of the income from continuing
operations before income taxes of such subsidiaries is less than 20% of
consolidated income from continuing operations before income taxes, and the
Company's investment in and advances to such subsidiaries is less than 20% of
consolidated total assets of the Company.
(b) Exhibits:
<TABLE>
<CAPTION>
INCORPORATED BY
REFERENCE FROM:
---------------
<S> <C> <C>
2.1(a) (5) Stock Purchase Agreement dated March 5, 1995 by and among
Victory Financial Group, Inc., its wholly-owned subsidiary,
Kansas Life Insurance Company and the Registrant.
2.1(b) (6) Letter Agreement dated July 10, 1995 among Registrant and
Victory Financial Group, Inc. respecting certain provisions
of the Stock Purchase Agreement.
2.1(c) (6) Pledge and Escrow Agreement dated July 10, 1995 among the
Registrant, Victory Financial Group, Inc. and NationsBank of
Texas, N.A.
2.1(d) (6) Indemnity Agreement Respecting Mortgages (and other matters)
dated July 10, 1995 between Victory Financial Group, Inc.
and Registrant.
2.1(e) (6) Letter Agreement dated as of July 7, 1995 among Registrant,
The Victory Life Insurance Company and Victory Financial
Group, Inc. regarding estimated federal income tax deposits.
2.2 (6) Reinsurance, Transfer and Assumption Agreement dated as of
July 5, 1995, between Kansas Life Insurance Company and
National Farmers Union Life Insurance Company..
2.3(a) * Stock Purchase Agreement dated January 21, 1997 between
Great Southern Life Insurance Company and Farmers Group,
Inc.
2.3(b) * Form of Automatic Coinsurance Reinsurance Agreement to be
entered into between The Ohio State Life Insurance Company
and Employers Reassurance Corporation.
2.3(c) * Form of Automatic Coinsurance Reinsurance Agreement to be
entered into between Investors Guaranty Life Insurance
Company and Employers Reassurance Corporation.
2.3(d) * Form of Modified Coinsurance Retrocession Agreement (Ohio
State Life Business) to be entered into between Great
Southern Life Insurance Company and Employers Reassurance
Corporation.
2.3(e) * Form of Modified Coinsurance Retrocession Agreement
(Investors Guaranty Life Business) to be entered into
between Great Southern Life Insurance Company and Employers
Reassurance Corporation.
2.3(f) * Escrow Agreement (Ohio State Life/Investors Guaranty Life
Business) to be entered into between Great Southern Life
Insurance Company and Employers Reassurance Corporation.
2.3(g) * Investment Management Agreement (Ohio State Life Business)
to be entered into between Americo Life, Inc. and Employers
Reassurance Corporation.
2.3(h) * Investment Management Agreement (Investors Guaranty Life
Business) to be entered into between Americo Life, Inc. and
Employers Reassurance Corporation.
3.1 (1) Restated Articles of Incorporation, as amended, of the
Registrant.
3.2 (1) Bylaws, as amended, of the Registrant.
</TABLE>
29
<PAGE> 31
<TABLE>
<CAPTION>
INCORPORATED BY
REFERENCE FROM:
---------------
<S> <C> <C>
4.1(a) (1) Conformed copy of Indenture, dated as of May 26, 1993,
between Registrant and Commerce Bank of Kansas City, N.A.,
as trustee.
4.1(b) (1) Form of 9 1/4% Senior Subordinated Note Due 2005 (included
in the Indenture filed as Exhibit 4.1a hereto).
4.2(a) (6) Credit Agreement dated as of July 6, 1995 between Registrant
and The Chase Manhattan Bank as administrative agent.
4.2(b) (6) Security Agreement dated as of July 6, 1995 between
Registrant and The Chase Manhattan Bank as administrative
agent.
4.2(c) * Form of amended and restated credit agreement dated as of
December 27, 1996 between Registrant and The Chase Manhattan
Bank as administrative agent.
4.2(d) * Form of amendment No. 1 to the amended and restated credit
agreement dated as of February 27, 1997, between the
Registrant and The Chase Manhattan Bank as administrative
agent.
4.3(a) (6) Form of Registrant's $5,000,000 6 1/2% Senior Subordinated
Set-off Note due 2015.
4.3(b) (6) Form of Registrant's $6,000,000, 6 1/2% Senior Subordinated
Note (No. VNO-1) due 2010. (Two identical notes (No. VNO-1
and No. VNO-2) were originally issued on July 10, 1995.
Pursuant to instruction 2 to Item 601 of Regulation S-K,
only VNO-1 was filed.)
4.4 (3) Amended and Restated Surplus Debenture No. 004, dated
December 31, 1993, as amended in the amount of $57,760,000
made by FHC Life Insurance Company to the Registrant.
4.5 (3) Amended and Restated Surplus Debenture No. 005, dated
December 31, 1993, in the amount of $26,000,000 made by FHC
Life Insurance Company to the Registrant.
4.6 (9) Amended and Restated Surplus Debenture No. 006, dated
December 1, 1995, as amended, in the amount of $16,125,753
made by United Fidelity Life Insurance Company to the
Registrant.
4.7 (6) Surplus Debenture No. 007 dated July 10, 1995, in the amount
of $38,000,000 made by United Fidelity Life Insurance
Company to the Registrant.
4.8 (1) In accordance with Item 601(b)(4)(iii)(A) of Regulation S-K,
certain instruments respecting long term debt of the
Registrant and its subsidiaries have been omitted but will
be furnished to the Commission upon request.
10.1 (1) Senior Officer Accidental Death and Dismemberment Policy.
10.2 (4) Tax Sharing Agreement dated as of December 1, 1994, among
the Registrant, Financial Holding Corporation, Cidat
Aviation Incorporated, Assured Leasing Corporation, Landmark
Mortgage Company, First Consulting & Administration, Inc.,
Hanover Financial Corporation, FHC Life Insurance Company,
United Fidelity Life Insurance Company, PFS Holding Company,
Premium Finance Specialists, Inc., Premium Financing
Specialists of California and PFS Financing Corporation.
10.3 (1) Reimbursement of Expense Agreement dated January 1, 1993,
among the Registrant, Financial Holding Corporation, United
Fidelity Life Insurance Company, The College Life Insurance
Company of America, Loyalty Life Insurance Company, National
Farmers Union Life Insurance Company, FHC Life Insurance
Company, Great Southern Life Insurance Company, PFS Holding
Company and Premium Financing Specialists, Inc.
10.4 (1) Cost Sharing Agreement dated as of January 1, 1993, among
the Registrant, United Fidelity Life Insurance Company, The
College Life Insurance Company, Premium Financing
Specialists, Inc., PFS Holding Company, Financial Assurance
Marketing Corporation, FHC Life Insurance Company, Great
Southern Life Insurance Company, Loyalty Life Insurance
Company and National Farmers Union Life Insurance Company.
</TABLE>
30
<PAGE> 32
<TABLE>
<CAPTION>
INCORPORATED BY
REFERENCE FROM:
---------------
<S> <C> <C>
10.5 (1) Data Processing Services Agreement dated as of January 1,
1993, between the Registrant and Financial Holding
Corporation.
10.6 (1) Subsidiary Data Processing Services Agreement dated as of
January 1, 1993, among the Registrant, FHC Life Insurance
Company, United Fidelity Life Insurance Company, Great
Southern Life Insurance Company, The College Life Insurance
Company of America, Loyalty Life Insurance Company and
National Farmers Union Life Insurance Company.
10.7(a) (1) Advisory Agreement dated as of January 1, 1993, between the
Registrant and Financial Holding Corporation.
10.7(b) (3) First Amendment to Advisory Agreement dated September 17,
1993 by and between the Registrant and Financial Holding
Corporation.
10.8 (1) Office Building Lease dated as of January 1, 1993, between
Financial Holding Corporation and United Fidelity Life
Insurance Company.
10.9 (1) Lease Agreement dated February 24, 1988, between Broadway
Square Partners and United Fidelity Life Insurance Company.
10.10 (1) Lease dated November 1, 1990, between United Fidelity Life
Insurance Company and First Consulting & Administration,
Inc., a subsidiary of Financial Holding Corporation
(included as Exhibit A to Exhibit 10.11).
10.11 (1) Assignment of Lease dated as of April 1, 1993 between United
Fidelity Life Insurance Company and Financial Holding
Corporation respecting the First Consulting &
Administration, Inc. lease described in Exhibit 10.10.
10.12 (1) Office Sublease Agreement dated April 21, 1992, as amended
January 19, 1993, between Southwestern Life Insurance
Company and Financial Holding Corporation.
10.13(a) (1) Stock Purchase Agreement dated February 26, 1993, among
Financial Holding Corporation, United Fidelity Life
Insurance Company, Financial Assurance Incorporated and
Robert L. Myer.
10.13(b) (2) First Amendment to Stock Purchase Agreement dated June 24,
1993, among Financial Holding Corporation, United Fidelity
Life Insurance Company, Financial Assurance Incorporated and
Robert L. Myer.
10.14(a) (1) Stock Purchase Agreement dated February 26, 1993, among
Financial Holding Corporation, Robert L. Myer and Annuity
Service Corp.
10.14(b) (2) First Amendment to Stock Purchase Agreement dated June 24,
1993, among Annuity Service Corp., Financial Holding
Corporation, United Fidelity Life Insurance Company and
Robert L. Myer.
10.15 (1) Subscription Agreement dated February 26, 1993, among
Financial Holding Corporation, Robert L. Myer, Annuity
Service Corp. and United Fidelity Life Insurance Company.
10.16 (1) Shareholders' Agreement dated July 30, 1993, among College
Insurance Group, Inc., Robert L. Myer, United Fidelity Life
Insurance Company and Financial Holding Corporation.
10.17(a) (1) Services Agreement dated July 30, 1993, between Financial
Assurance Incorporated and Financial Holding Corporation.
10.17(b) (2) Services Agreement dated July 30, 1993, between Financial
Assurance Incorporated and Annuity Service Corp.
10.18 (1) Stock Transfer Restriction and Option Agreement dated June
30, 1989 among DST Systems, Inc., Argus Health Systems, Inc.
and Financial Holding Corporation.
10.19 (3) Supplemental Tax Sharing Agreements dated December 31, 1993
among Financial Holding Corporation, the Registrant and
United Fidelity Life Insurance Company.
</TABLE>
31
<PAGE> 33
<TABLE>
<CAPTION>
INCORPORATED BY
REFERENCE FROM:
---------------
<S> <C> <C>
10.20(a) (7) Master Agreement dated as of July 31, 1995, among The Ohio
Life Insurance Company, The Ohio Casualty Insurance Company,
the Registrant and Great Southern Life Insurance Company.
10.20(b) (8) First Amendment to Master Agreement between The Ohio Life
Insurance Company, The Ohio Casualty Insurance Company and
Great Southern Life Insurance Company dated as of October 2,
1995.
10.20(c) (8) Assignment and Assumption Agreement between The Ohio Life
Insurance Company and Great Southern Life Insurance Company
dated as of October 2, 1995.
10.20(d) (8) Data Processing Agreement between The Ohio Casualty
Insurance Company and the Registrant dated as of October 2,
1995.
10.20(e) (8) Escrow Agreement between Commerce Bank, N.A. of Kansas City,
Missouri, Employer's Reassurance Corporation of Overland
Park, Kansas and Great Southern Life Insurance Company dated
as of October 2, 1995.
10.20(f) (8) Escrow Agreement between Commerce Bank, N.A. of Kansas City,
Missouri, Employer's Reassurance Corporation of Overland
Park, Kansas and The Ohio Casualty Insurance Company dated
as of October 2, 1995.
10.20(g) (8) Investment Management Agreement between the Registrant and
Employer's Reassurance Corporation of Overland Park, Kansas
dated as of October 2, 1995.
10.20(h) (8) Noncompetition Agreement between Ohio Casualty Corporation,
The Ohio Casualty Insurance Company and Financial Holding
Corporation dated as of October 2, 1995.
10.20(i) (8) Assumption Reinsurance Agreement between The Ohio Casualty
Insurance Company and Great Southern Life Insurance Company
dated as of October 2, 1995.
10.20(j) (8) Assumption Reinsurance Agreement between The Ohio Life
Insurance Company and Great Southern Life Insurance Company
dated as of October 2, 1995.
10.20(k) (8) Reinsurance Agreement between Employer's Reassurance Company
of Overland Park, Kansas and The Ohio Life Insurance
Company, effective January 1, 1995 (transfer date October 2,
1995) and amendments thereto.
10.20(l) (8) Retrocession Agreement between Great Southern Life Insurance
Company and Employer's Reassurance Company of Overland Park,
Kansas, effective January 1, 1995 and amendments thereto.
10.20(m) (8) Services Agreement between the Registrant, The Ohio Life
Insurance Company and The Ohio Casualty Insurance Company
dated as of October 2, 1995.
10.21(a) (10) Master Agreement dated February 26, 1996 among Fremont Life
Insurance Company, Fremont General Corp., the Registrant and
Great Southern Life Insurance Company.
10.21(b) (11) First Amendment to Master Agreement dated as of July 1,
1996, among Fremont Life Insurance Company, Fremont General
Corp., Registrant and Great Southern Life Insurance Company.
10.21(c) (11) Letter Agreement dated as of July 1, 1996, among Fremont
General Corp., Fremont Life Insurance Company, Registrant
and Great Southern Life Insurance Company.
10.21(d) (11) Services Agreement dated as of July 1, 1996, between
Registrant and Fremont Life Insurance Company.
10.21(e) (11) Assumption Reinsurance and Coinsurance Agreement (Universal
Life) dated as of July 1, 1996, between Fremont Life
Insurance Company and Great Southern Life Insurance Company.
10.21(f) (11) Assumption Reinsurance and Coinsurance Agreement (Annuities)
dated as of July 1, 1996, between Fremont Life Insurance
Company and Great Southern Life Insurance Company.
10.21(g) (11) Assignment and Assumption Agreement dated as of July 1,
1996, between Fremont Life Insurance Company and Great
Southern Life Insurance Company.
</TABLE>
32
<PAGE> 34
<TABLE>
<S> <C> <C>
10.21(h) (11) Automatic Coinsurance Universal Life Reinsurance Agreement dated as of December 31, 1995,
between Fremont Life Insurance Company and Employers Reassurance Corporation.
10.21(i) (11) Amendment No. 1 to the Automatic Coinsurance Universal Life Reinsurance Agreement dated as
of December 31, 1995, between Employers Reassurance Corporation and Fremont Life Insurance
Company.
10.21(j) (11) Automatic Coinsurance Annuity Reinsurance Agreement dated as of January 1 1996, between
Employers Reassurance Corporation and Fremont Life Insurance Company.
10.21(k) (11) Amendment No. 1 to the Automatic Coinsurance Annuity Reinsurance Agreement dated as of
January 1, 1996, between Employers Reassurance Corporation and Fremont Life Insurance
Company.
10.21(l) (11) Escrow Agreement dated as of July 1, 1996, among Commerce Bank, Employers Reassurance
Corporation and Great Southern Life Insurance Company.
10.21(m) (11) Modified Coinsurance Annuity Retrocession Agreement dated as of January 1, 1996, between
Employers Reassurance Corporation and Great Southern Life Insurance Company.
10.21(n) (11) Modified Coinsurance Universal Life and Annuity Retrocession Agreement dated as of
December 31, 1995, between Employers Reassurance Corporation and Great Southern Life
Insurance Company.
10.21(o) (11) Amendment No. 1 to the Investment Management Agreement dated as of December 31, 1995,
between Registrant and Employers Reassurance Corporation.
10.22(a) * Agreement to Redeem Partnership Interest among Great Southern Life Insurance Company, GSSW
Limited Partnership, BGFRTS, L.C., and Southwestern Life Insurance Company dated December
30, 1996.
10.22(b) * Agreement Regarding Purchase, Sale, and Assignment of Membership Interest among Great
Southern Life Insurance Company, Southwestern Financial Services Corporation, and
Southwestern Life Insurance Company dated December 30, 1996.
10.22(c) * Agreement Regarding Purchase and Sale of General Partner Interests between Americo
Services, Inc. and GSSW -- REO Ownership Corporation dated December 30, 1996.
21. * Subsidiaries of the Registrant.
27. * Financial Data Schedule
</TABLE>
- -------------------------
(1) Registrant's Form S-4 (File No. 33-64820) filed June 22, 1993.
(2) Registrant's Amendment No. 1 to Form S-4 (File No. 33-64820) filed August
30, 1993.
(3) Registrant's March 31, 1994 Form 10-Q.
(4) Registrant's December 31, 1994 Form 10-K.
(5) Registrant's March 31, 1995 Form 10-Q.
(6) Registrant's Form 8-K dated as of July 10, 1995.
(7) Registrant's June 30, 1995 Form 10-Q.
(8) Registrant's September 30, 1995 Form 10-Q.
(9) Registrant's December 31, 1995 Form 10-K
(10) Registrant's March 31, 1996 Form 10-Q.
(11) Registrant's June 30, 1996 Form 10-Q.
* Filed herewith
- -------------------------
(c) Reports on Form 8-K:
There were no reports on Form 8-K filed for the three months ended
December 31, 1996.
33
<PAGE> 35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Kansas
City and the State of Missouri, on the 28th day of March, 1997.
AMERICO LIFE, INC.
By: /s/ GARY L. MULLER
------------------------------------
Name: Gary L. Muller
Title: President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
TITLE DATE
----- ----
<C> <S> <C>
/s/ MICHAEL A. MERRIMAN Chairman of the Board of March 28, 1997
- ----------------------------------------------------- Directors
Michael A. Merriman
/s/ GARY L. MULLER President, Chief Executive March 28, 1997
- ----------------------------------------------------- Officer and Director
Gary L. Muller
/s/ GARY E. JENKINS Senior Vice President, Chief March 28, 1997
- ----------------------------------------------------- Financial Officer and
Gary E. Jenkins Treasurer (Principal Financial
Officer and Principal
Accounting Officer)
</TABLE>
34
<PAGE> 36
AMERICO LIFE, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Audited Financial Statements for the Three Years Ended
December 31, 1996:
Report of Independent Accountants......................... F-2
Consolidated Balance Sheet at December 31, 1996 and
1995................................................... F-3
Consolidated Statement of Income for the Years Ended
December 31, 1996, 1995 and 1994....................... F-4
Consolidated Statement of Stockholder's Equity for the
Years Ended December 31, 1996, 1995 and 1994........... F-5
Consolidated Statement of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994....................... F-6
Notes to Consolidated Financial Statements................ F-8
</TABLE>
F-1
<PAGE> 37
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND
STOCKHOLDER OF AMERICO LIFE, INC.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of stockholder's equity and of cash flows
present fairly, in all material respects, the financial position of Americo
Life, Inc. and its subsidiaries at December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Kansas City, Missouri
March 17, 1997
F-2
<PAGE> 38
AMERICO LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
ASSETS
Investments:
Fixed maturities:
Held to maturity, at amortized cost (market: $847,832
and $832,417)......................................... $ 857,451 $ 808,909
Available for sale, at market (amortized cost: $671,792
and $657,862)......................................... 670,274 673,949
Equity securities, at market (cost: $33,341 and
$27,989)............................................... 48,262 36,805
Investment in equity subsidiaries......................... 18,078 49,035
Mortgage loans on real estate, net........................ 184,326 220,418
Investment real estate, net............................... 22,417 4,292
Policy loans.............................................. 204,607 210,926
Other invested assets..................................... 13,437 10,300
---------- ----------
Total investments...................................... 2,018,852 2,014,634
Cash and cash equivalents................................... 96,069 58,996
Accrued investment income................................... 25,287 23,889
Amounts receivable from reinsurers.......................... 375,150 97,924
Other receivables........................................... 13,969 11,442
Deferred policy acquisition costs........................... 72,438 56,568
Cost of business acquired................................... 200,710 163,660
Amounts due from affiliates................................. -- 7,041
Other assets................................................ 28,235 25,651
---------- ----------
Total assets........................................... $2,830,710 $2,459,805
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Policyholder account balances............................... $1,466,959 $1,140,535
Reserves for future policy benefits......................... 681,545 683,899
Unearned policy revenues.................................... 32,128 26,875
Policy and contract claims.................................. 30,959 22,506
Other policyholder funds.................................... 81,442 92,707
Notes payable............................................... 133,312 133,451
Amounts payable to reinsurers............................... 67,348 39,761
Deferred income taxes....................................... 43,195 43,033
Due to broker............................................... 50,013 44,998
Amounts due to affiliates................................... 2,168 --
Other liabilities........................................... 34,619 41,277
---------- ----------
Total liabilities...................................... 2,623,688 2,269,042
Stockholder's equity:
Common stock ($1 par value, 30,000 shares authorized,
10,000 shares issued and outstanding).................. 10 10
Additional paid-in capital................................ 3,745 3,745
Net unrealized investment gains........................... 37,189 46,204
Retained earnings......................................... 166,078 140,804
---------- ----------
Total stockholder's equity............................. 207,022 190,763
---------- ----------
Commitments and contingencies
Total liabilities and stockholder's equity............. $2,830,710 $2,459,805
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE> 39
AMERICO LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
INCOME
Premiums and policy revenues.............................. $ 165,602 $ 140,130 $ 134,225
Net investment income..................................... 186,725 152,047 130,149
Net realized investment losses............................ (120) (282) (3,529)
Gain on disposition of partnership interest............... 15,825 -- --
Other income.............................................. 3,567 2,168 117
--------- --------- ---------
Total income......................................... 371,599 294,063 260,962
--------- --------- ---------
BENEFITS AND EXPENSES
Policyholder benefits:
Death benefits......................................... 91,996 73,346 69,703
Interest credited on universal life and annuity
products............................................. 84,495 59,794 54,454
Other policyholder benefits............................ 57,088 41,828 40,071
Change in reserves for future policy benefits.......... (14,920) (5,806) (12,393)
Commissions............................................... 13,473 9,662 8,711
Amortization expense...................................... 29,714 26,666 23,534
Interest expense.......................................... 12,263 10,593 9,254
Other operating expenses.................................. 56,703 47,124 45,110
--------- --------- ---------
Total benefits and expenses.......................... 330,812 263,207 238,444
--------- --------- ---------
Income before provision for income taxes............. 40,787 30,856 22,518
PROVISION FOR INCOME TAXES.................................. 13,513 11,126 9,159
--------- --------- ---------
Net Income........................................... $ 27,274 $ 19,730 $ 13,359
========= ========= =========
Net income per common share................................. $2,727.40 $1,973.00 $1,335.90
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE> 40
AMERICO LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
(DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
COMMON STOCK
Balance at beginning and end of year...................... $ 10 $ 10 $ 10
-------- -------- --------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning and end of year...................... 3,745 3,745 3,745
-------- -------- --------
NET UNREALIZED INVESTMENT GAINS
Balance at beginning of year.............................. 46,204 23,167 43,365
Change during year........................................ (9,015) 23,037 (20,198)
-------- -------- --------
Balance at end of year.................................... 37,189 46,204 23,167
-------- -------- --------
RETAINED EARNINGS
Balance at beginning of year.............................. 140,804 123,074 111,715
Net income................................................ 27,274 19,730 13,359
Dividends................................................. (2,000) (2,000) (2,000)
-------- -------- --------
Balance at end of year.................................... 166,078 140,804 123,074
-------- -------- --------
Total stockholder's equity........................... $207,022 $190,763 $149,996
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE> 41
AMERICO LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................. $ 27,274 $ 19,730 $ 13,359
-------- -------- --------
Adjustments to reconcile net income to net cash used by
operating activities:
Depreciation and amortization.......................... 30,103 28,850 25,790
Deferred policy acquisition costs...................... (19,337) (18,565) (20,331)
Undistributed earnings of equity subsidiaries.......... (5,458) (10,103) (6,992)
Distributed earnings of equity subsidiaries............ 14,000 -- --
Amortization of unrealized investment gains............ (6,059) (6,774) (5,560)
(Increase) decrease in assets net of effects from
business acquisition:
Accrued investment income............................ (1,398) (180) (432)
Other invested assets................................ (1,596) 78 (610)
Amounts receivable from reinsurers................... (54,942) (28,852) (13,486)
Amount received from reinsurance transaction......... -- 20,854 --
Other receivables.................................... (2,527) (1,417) 6,188
Other assets net of amortization..................... (2,274) (2,274) (3,005)
Increase (decrease) in liabilities net of effects from
business acquisition:
Reserves for future policy benefits and unearned
policy revenues................................... (7,489) (11,524) (28,034)
Policyholder account balances........................ 10,573 (11,106) (17,301)
Policy and contract claims........................... 7,654 (5,460) 2,930
Other policyholder funds............................. (11,265) (1,091) 3,693
Amounts payable to reinsurers........................ (6,734) 2,039 (256)
Federal income taxes payable......................... -- (4,330) (2,403)
Provision for deferred income taxes.................. 5,576 (3,546) (2,749)
Other liabilities.................................... (5,775) 314 2,714
Amounts due to/due from affiliates................... 10,739 (8,928) (7,621)
Net realized losses on investments..................... 120 282 3,529
Gain on disposition of partnership interest............ (15,825) -- --
Amortization on bonds and mortgage loans............... 2,244 649 2,182
Other changes.......................................... (4,470) (2,065) (1,002)
-------- -------- --------
Total adjustments...................................... (64,140) (63,149) (62,756)
-------- -------- --------
Net cash used by operating activities............. (36,866) (43,419) (49,397)
-------- -------- --------
</TABLE>
(Continued)
F-6
<PAGE> 42
AMERICO LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of fixed maturity investments.................. $(304,743) $(463,723) $(191,231)
Purchases of other investments........................... (24,078) (38,760) (8,398)
Mortgage loans originated................................ (1,323) (25,730) (14,708)
Maturities or redemptions of fixed maturity
investments........................................... 45,791 135,402 81,687
Sales of fixed maturity investments
Held to maturity...................................... -- 5,915 2,370
Available for sale.................................... 190,368 233,425 167,028
Sales of other investments............................... 19,738 17,826 13,629
Redemption of partnership interest....................... 22,440 -- --
Payment for subsidiary acquired, net of cash acquired.... -- (22,966) --
Net proceeds from sale of subsidiary..................... -- -- 7,271
Repayments from mortgage loans........................... 40,401 24,203 33,450
Change in due to broker.................................. 5,014 44,998 (57,917)
Acquisition of equity subsidiary......................... (4,550) -- --
Change in policy loans................................... 6,459 680 5,921
--------- --------- ---------
Net cash provided (used) by investing activities.... (4,483) (88,730) 39,102
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Notes payable issued..................................... -- 21,000 --
Repayments of notes payable.............................. (545) (285) (34)
Debt issue cost paid..................................... -- (737) --
Receipts credited to policyholder account balances....... 176,845 164,386 160,032
Return of policyholder account balances.................. (95,878) (101,985) (86,908)
Dividends paid........................................... (2,000) (2,000) (2,000)
--------- --------- ---------
Net cash provided by financing activities........... 78,422 80,379 71,090
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents....... 37,073 (51,770) 60,795
Cash and cash equivalents at beginning of year............. 58,996 110,766 49,971
--------- --------- ---------
Cash and cash equivalents at end of year................... $ 96,069 $ 58,996 $ 110,766
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during year for:
Interest................................................... $ 12,280 $ 10,432 $ 9,250
Income taxes............................................... 5,226 14,037 17,134
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Acquisition of subsidiary:
Fair value of assets acquired, net of cash acquired... $ -- $ 285,870 $ --
Liabilities........................................... -- (251,002) --
Notes payable issued to seller........................ -- (11,902) --
--------- --------- ---------
Payment for subsidiary acquired, net of cash
acquired............................................ $ -- $ 22,966 $ --
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements
F-7
<PAGE> 43
AMERICO LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Americo Life, Inc. (the Company) is a holding company primarily for the
following stock life insurance companies, all of which are 100% owned: United
Fidelity Life Insurance Company (United Fidelity), Great Southern Life Insurance
Company (Great Southern), The Victory Life Insurance Company (Victory), The
College Life Insurance Company of America (College Life), Loyalty Life Insurance
Company (Loyalty Life) and National Farmers Union Life Insurance Company
(National Farmers), collectively referred to as the Insurance Companies. United
Fidelity owns 50% of College Insurance Group, Inc., a holding company which owns
100% of both Financial Assurance Incorporated (Financial Assurance), a stock
life insurance company, and Annuity Service Corp. The Company also has a 50%
interest in Argus Health Systems, Inc. (Argus), which processes prescription
drug claims. In December 1996, Great Southern disposed of its interest in GSSW
Limited Partnership (GSSW), a real estate holding company. Also in December
1996, the Company acquired a 50% interest in Hereford LLP, which owns and
manages the building leased by Argus. On February 28, 1994 the Company sold PFS
Holding Company (PFSH) and its wholly-owned subsidiary, Premium Financing
Specialists (PFS), to its parent Financial Holding Corporation (FHC).
All of the Insurance Companies except Victory are domiciled in Texas.
Victory is domiciled in Kansas. One or more of the Insurance Companies is
licensed in the District of Columbia and all states except New York. The above
companies comprise an Insurance Company Holding Group as defined by the laws of
the State of Texas and are bound by certain regulations thereof in the conduct
of their business.
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its direct and indirect wholly-owned subsidiaries. The Insurance Companies
maintain their accounts in conformity with accounting practices prescribed or
permitted by state insurance regulatory authorities. In the accompanying
financial statements, such accounts have been adjusted to conform with generally
accepted accounting principles (GAAP). All significant intercompany accounts and
transactions have been eliminated in consolidation.
The preparation of financial statements 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.
INVESTMENTS
Fixed maturity investments classified as held to maturity are debt
securities for which the Company has the positive intent and ability to hold to
maturity and are stated at amortized cost with premiums amortized to call dates
and discounts amortized to maturity dates. Marketable equity securities and
fixed maturities available for sale are reported at market value and the
resulting unrealized gains or losses, net of applicable income taxes, are
credited or charged to stockholder's equity. If a decline in the market value of
an individual investment is considered to be other than temporary, the loss is
recorded as a realized investment loss. Gains or losses on sales of securities
are computed using the specific identification method.
When the Company recognizes changes in conditions that cause a fixed
maturity investment to be transferred to a different category (e.g. held to
maturity or available for sale), the security is transferred at market value. If
the security is transferred from available for sale to held to maturity, the
related unrealized gain or loss is amortized to investment income over the
remaining life of the security. If the security is transferred from held to
maturity to available for sale, the unrealized gain or loss is included in
stockholder's equity.
F-8
<PAGE> 44
AMERICO LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For mortgage-backed securities, the Company anticipates prepayments
utilizing published data when applying the interest method. Periodic adjustments
to securities' carrying values as a result of changes in actual and anticipated
prepayments are credited or charged to net investment income.
Equity securities, consisting of marketable common and nonredeemable
preferred stocks, are carried at market value. The Company's 50% or less owned
subsidiaries are accounted for using the equity method, under which the
Company's proportionate share of earnings is recorded as a component of net
investment income.
Mortgage loans on real estate are stated at aggregate unpaid principal
balances, net of unamortized purchase premiums or discounts and less allowances
for estimated losses. Unamortized purchase premiums or discounts are amortized
using the effective yield method over the life of the related loan.
Policy loans are stated at aggregate unpaid principal balances.
Investment real estate is stated at cost, less allowances for depreciation
and, as appropriate, provisions for possible losses.
Futures contracts are accounted for as hedges. Gains or losses on open
contracts are recorded as an adjustment to the basis of the assets hedged and
are included in net unrealized investment gains. Gains or losses on terminated
hedges are recorded as an adjustment to the basis of the asset hedged and
amortized into income over the remaining life of the asset hedged.
In June 1996, the Financial Accounting Standards Board issued Statement of
Accounting Standards ("SFAS") No. 125 "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities." SFAS No. 125 establishes
new criteria for determining whether a transfer of financial assets in exchange
for cash or other consideration should be accounted for as a sale or as a pledge
of collateral in a secured borrowing, and new accounting requirements for
pledged collateral. SFAS 125 is effective for transactions occurring after
December 31, 1996. The implementation of portions of this statement with respect
to accounting for pledged collateral, repurchase agreements and similar
transactions was deferred for one year by SFAS No. 127 "Deferral of the
Effective Date of Certain Provisions of the FASB Statement No. 125" issued in
December 1996. Implementation of these new accounting standards is not expected
to have a material impact on the consolidated financial statements of the
Company.
CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with an original
maturity of three months or less to be cash equivalents.
DEFERRED POLICY ACQUISITION COSTS AND COST OF BUSINESS ACQUIRED
The costs of new business produced, principally commissions, certain policy
issue and underwriting expenses and certain variable agency expenses, are
deferred. The cost of business acquired represents the amount of purchase price
assigned to the value of the policies at acquisition. The cost of business
acquired asset is no greater than the actuarially determined present value of
future profits of the policies purchased. For traditional life products, these
costs are amortized in proportion to premium revenues over the premium-paying
period of related policies using assumptions consistent with those used in
computing benefit reserves. For universal life, interest-sensitive and
investment products, these costs are amortized in relation to the present value,
using the current credited interest rate, of expected gross profits of the
policies over the anticipated coverage period.
Retrospective adjustments of these amounts are made annually upon the
revision of estimates of current or future gross profits on universal life-type
products to be realized from a group of policies. Recoverability of deferred
policy acquisition costs and the cost of business acquired is evaluated annually
by comparing the
F-9
<PAGE> 45
AMERICO LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
current estimate of future profits to the unamortized asset balances. The
revision of estimates of future gross profits increased (decreased) income
related to deferred policy acquisition costs before provision for income taxes
by $1,446, $(1,524), and $(1,337) for the years ended December 31, 1996, 1995
and 1994, respectively. The revision of estimates of future gross profits
increased (decreased) income related to the cost of business acquired before
provision for income taxes by $(4,673), $(2,515), and $402 for the years ended
December 31, 1996, 1995 and 1994, respectively.
Anticipated investment returns, including realized gains and losses, from
the investment of policyholder balances are considered in determining the
amortization of deferred policy acquisition costs, the cost of business acquired
and unearned policy revenues. When fixed maturities are stated at market value
an adjustment is made to the deferred policy acquisition costs, the cost of
business acquired and unearned policy revenues equal to the change in
amortization that would have been recorded if those fixed maturities had been
sold at their fair value and the proceeds reinvested at current yields. This
adjustment is recorded net of income tax directly to the unrealized gain
component of stockholder's equity.
LONG-LIVED ASSETS
In 1996, the Company adopted SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". SFAS No. 121
established accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to the assets to be held
and used and for long-lived assets and certain identifiable intangibles to be
disposed of. Implementation of this new accounting standard did not have
material impact on the consolidated financial statements of the Company.
UNIVERSAL LIFE-TYPE AND ANNUITY PRODUCTS
Policyholder account balances of universal life-type, interest-sensitive
and annuity products represent accumulated contract values, without reduction
for potential surrender charges and deferred front-end contract charges which
are amortized over the term of the policies. Revenue for universal life-type and
other interest-sensitive products are principally comprised of insurance and
policy administration fees and surrender charges, as well as amortization of
deferred front-end contract charges. Benefits and claims are charged to expense
in the period incurred, net of related accumulated contract values released.
Interest on accumulated contract values is credited to contracts as earned.
Crediting rates for universal life-type and annuity products ranged from 3.0% to
7.5% at December 31, 1996.
TRADITIONAL LIFE INSURANCE PRODUCTS
Traditional life insurance products include whole life insurance and term
life insurance. Reserves for future policy benefits are estimated using a net
level premium method based upon historical experience of investment yields,
mortality and withdrawals including provisions for possible adverse deviation.
Investment yield assumptions are based on historical rates ranging from 7.5% to
9.0%. Mortality assumptions are based on the 1975-1980 Select and Ultimate Basic
Table with certain modifications including underwriting classifications and year
of issue. Withdrawal assumptions for all products are estimated based on the
Insurance Companies' experience. Additions to these reserves are required when
their balances, in addition to future net cash flows including investment
income, are insufficient to cover future benefits and expenses. Premiums for
these products are recognized as revenue when due. Traditional life insurance
benefits and claims are charged to expense in the period incurred.
F-10
<PAGE> 46
AMERICO LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
REINSURANCE
Premiums and expenses include amounts related to reinsurance assumed and
are stated net after deduction of amounts ceded. Reinsurance receivables and
prepaid reinsurance premiums are reported as assets and are recognized in a
manner consistent with the liabilities related to the underlying reinsured
contracts.
PARTICIPATING POLICIES
Participating life insurance policies represent approximately 2.9%, 4.5%
and 4.0% of the ordinary life insurance in force at December 31, 1996, 1995 and
1994, respectively. Premium income related to participating life insurance
policies represents 4.4%, 6.5% and 6.4% of premiums and policy revenues for the
years 1996, 1995 and 1994, respectively. The dividends paid and accrued are
calculated in accordance with the terms of the individual policy provisions and
the dividend schedule as reviewed and approved annually by the Board of
Directors.
PROPERTY AND EQUIPMENT
Company-occupied property, data processing equipment and furniture and
office equipment, included in other assets, are stated at cost less accumulated
depreciation of $7,213 and $6,195 at December 31, 1996 and 1995, respectively.
Depreciation is computed on a straight-line basis for financial reporting
purposes using estimated useful lives of five to 30 years. Depreciation expense
was $3,051, $1,957 and $2,072 for the years ended December 31, 1996, 1995 and
1994, respectively.
INCOME TAXES
Provision for income taxes includes deferred taxes arising from temporary
differences between the tax and financial reporting basis of assets and
liabilities. This liability method of accounting for income taxes also requires
the Company to reflect the effect of a tax rate change on accumulated deferred
income taxes in income for the period in which the change is enacted.
NET INCOME PER COMMON SHARE
Net income per common share is calculated by dividing the appropriate
income item by the average number of shares of common stock outstanding during
the period. There were no common share equivalents outstanding during 1996, 1995
or 1994.
RECLASSIFICATIONS
Previously reported amounts for prior years have in some instances been
reclassified to conform to the current year presentation.
2. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following estimated fair value disclosures are limited to the
reasonable estimates of the fair value of only the Company's financial
instruments. The Company does not anticipate that any significant assets will be
disposed of or that any significant liabilities would be settled at these
estimated fair values.
Investment securities: The estimated fair values of fixed maturity
securities are based on quoted market prices where available. For fixed maturity
securities not actively traded, fair values are estimated using values obtained
from independent pricing services. In the case of private placements, fair
values are determined using market values of comparable securities. The
estimated fair values of equity securities are based on quoted market prices.
F-11
<PAGE> 47
AMERICO LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Mortgage loans: The fair values of mortgage loans are estimated using
discounted cash flow analyses and interest rates being offered for similar loans
to borrowers with similar credit ratings.
Policy loans: Policy loans are generally issued with coupon rates below
market rates and are considered early payment of the life benefit. As such, the
carrying amount of these financial instruments is a reasonable estimate of their
fair value.
Other invested assets: The fair value of the note receivable from PFSH is
estimated by discounting future cash flows at current market rates.
Cash and cash equivalents: The carrying value of these instruments
approximates fair value.
Annuities: The fair values of the Company's annuities are estimated using
the current policyholder account balances reduced for an estimate of discounted
future profits.
Notes payable: The fair value of the Company's senior subordinated notes
equals the quoted market price at the reporting date. The carrying value of the
Company's senior bank debt approximates fair value since the current interest
rate reprices every thirty to ninety days. The fair value of the Company's other
notes payable was calculated using a discounted interest rate which reflects
prevailing market rates.
The estimated fair values of the Company's financial instruments at
December 31, are as follows:
<TABLE>
<CAPTION>
1996 1995
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ----- -------- -----
<S> <C> <C> <C> <C>
Financial assets:
Fixed maturities held to maturity................. $857,451 $847,832 $808,909 $832,417
Fixed maturities available for sale............... 670,274 670,274 673,949 673,949
Equity securities................................. 48,262 48,262 36,805 36,805
Mortgage loans.................................... 184,326 183,328 220,418 225,171
Policy loans...................................... 204,607 204,607 210,926 210,926
Other invested assets............................. 10,000 9,681 10,000 10,100
Cash and cash equivalents......................... 96,069 96,069 58,996 58,996
Financial liabilities:
Annuities......................................... 527,324 508,882 271,196 254,959
Notes payable..................................... 133,312 132,812 133,451 129,751
</TABLE>
3. CHANGES IN SUBSIDIARIES
In July 1995, the Company acquired all the outstanding common stock of
Victory, pursuant to the Stock Purchase Agreement dated as of March 3, 1995
("the Agreement") by and among Victory Financial Group, Inc., a Nevada
corporation (the "Seller"), its wholly-owned subsidiary, The Kansas Life
Insurance Company ("Kansas Life") and the Company. When the Agreement was
executed, Kansas Life was the immediate parent of Victory.
In connection with the acquisition of Victory, the Company, through
National Farmers, entered into a Reinsurance, Transfer and Assumption Agreement
(the "Reinsurance Agreement") under which National Farmers reinsured all the
insurance business of Kansas Life on a 100% coinsurance basis. National Farmers
received securities, cash and other assets totalling $23,295 equal to the
insurance liabilities assumed. National Farmers has subsequently completed the
assumption of this business.
The Company accounted for the acquisition of Victory and the insurance
business of Kansas Life using the purchase method of accounting. The operating
results of Victory and the insurance business acquired from Kansas Life from the
date of acquisition are included in the Company's statement of income.
F-12
<PAGE> 48
AMERICO LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The total amount paid by the Company for (1) the outstanding common stock
of Victory, (2) related consulting and noncompetition agreements and (3)
transaction expenses, was $42,752. The acquisition was funded by $17,000 of 6.5%
subordinated notes issued by the Company to the Seller, $21,000 borrowed under a
$70,000 revolving credit facility dated as of July 6, 1995 ("Credit Agreement"),
and $4,800 of internal funds.
The effect of the acquisition of Victory and the Reinsurance Agreement on
the Company's balance sheet at the date of acquisition was as follows:
<TABLE>
<S> <C>
Assets acquired:
Investments:
Fixed maturity securities.............................. $221,873
Cash................................................... 16,340
Other.................................................. 39,455
--------
277,668
Cost of business acquired................................. 20,931
Other assets.............................................. 6,054
--------
$304,653
========
Liabilities assumed:
Reserves for future policy benefits....................... $178,862
Policyholder account balances............................. 46,586
Other liabilities......................................... 46,303
Notes payable............................................. 32,902
--------
$304,653
========
</TABLE>
Summarized unaudited pro forma consolidated financial information of the
Company for the year ended December 31, assuming the transactions had occurred
on January 1 of each of the years presented below, is as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Total revenue........................................... $ 308,734 $ 297,012
Net income.............................................. 19,804 14,346
Net income per common share............................. 1,980.40 1,434.60
</TABLE>
Effective February 28, 1994, the Company sold PFS and PFSH to FHC for
$7,850 and recognized no gain on the sale. The 1994 unaudited pro forma net
income for the Company would have been $13,212 if PFSH had been sold on January
1, 1994. The Company's equity in pre-tax earnings of PFSH prior to the sale is
included in other income for the year ended December 31, 1994.
The Company owns a $10,000, 9.25% senior subordinated note ("the note")
issued by PFSH which matures in September 2004. The note is included in other
invested assets on the Company's consolidated balance sheet.
F-13
<PAGE> 49
AMERICO LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS
FIXED MATURITIES
The amortized cost of investments in fixed maturities, the cost of equity
securities and the estimated market values of such investments by category of
securities, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Held to maturity:
U. S. Treasury and government securities...... $ 4,594 $ 160 $ (110) $ 4,644
Public utility securities..................... 61,929 2,465 (1,470) 62,924
Corporate securities.......................... 448,837 7,638 (12,510) 443,965
Asset-backed securities....................... 27,852 28 (629) 27,251
Mortgage-backed pass-through securities....... 36,060 735 (385) 36,410
Collateralized mortgage obligations........... 278,179 1,212 (6,753) 272,638
---------- ------- -------- ----------
857,451 12,238 (21,857) 847,832
---------- ------- -------- ----------
Available for sale:
U. S. Treasury and government securities...... 98,100 204 (1,293) 97,011
Public utility securities..................... 27,678 274 (18) 27,934
Corporate securities.......................... 262,924 2,935 (3,725) 262,134
Asset-backed securities....................... 52,089 897 (122) 52,864
Mortgage-backed pass-through securities....... 156,304 383 (644) 156,043
Collateralized mortgage obligations........... 74,697 844 (1,253) 74,288
---------- ------- -------- ----------
671,792 5,537 (7,055) 670,274
---------- ------- -------- ----------
Subtotal, all fixed maturities........ 1,529,243 17,775 (28,912) 1,518,106
---------- ------- -------- ----------
Equity securities............................... 33,341 15,484 (563) 48,262
---------- ------- -------- ----------
Total fixed maturities and equity
securities.......................... $1,562,584 $33,259 $(29,475) $1,566,368
========== ======= ======== ==========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
----------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Held to maturity:
U. S. Treasury and government securities...... $ 3,165 $ 251 $ (18) $ 3,398
Public utility securities..................... 54,049 2,964 (90) 56,923
Corporate securities.......................... 395,018 17,694 (543) 412,169
Asset-backed securities....................... 22,551 -- -- 22,551
Mortgage-backed pass-through securities....... 30,265 741 (49) 30,957
Collateralized mortgage obligations........... 303,861 5,508 (2,950) 306,419
---------- ------- -------- ----------
808,909 27,158 (3,650) 832,417
---------- ------- -------- ----------
Available for sale:
U. S. Treasury and government securities...... 151,174 2,907 (51) 154,030
Public utility securities..................... 48,011 1,926 (11) 49,926
Corporate securities.......................... 181,328 6,741 (1,164) 186,905
Asset-backed securities....................... 39,622 1,772 -- 41,394
Mortgage-backed pass-through securities....... 172,898 3,784 -- 176,682
Collateralized mortgage obligations........... 64,829 871 (688) 65,012
---------- ------- -------- ----------
657,862 18,001 (1,914) 673,949
---------- ------- -------- ----------
Subtotal, all fixed maturities........ 1,466,771 45,159 (5,564) 1,506,366
---------- ------- -------- ----------
Equity securities............................... 27,989 10,024 (1,208) 36,805
---------- ------- -------- ----------
Total fixed maturities and equity
securities.......................... $1,494,760 $55,183 $ (6,772) $1,543,171
========== ======= ======== ==========
</TABLE>
F-14
<PAGE> 50
AMERICO LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The amortized cost and market values of mortgage-backed securities by
category at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
HELD TO MATURITY AVAILABLE FOR SALE
---------------------- ----------------------
ESTIMATED ESTIMATED
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Pass-through agency securities...................... $ 36,060 $ 36,410 $156,304 $156,043
Collateralized mortgage obligations:
Sequential class.................................. 73,575 71,308 26,688 27,057
Planned amortization class........................ 142,965 139,871 23,551 22,995
Accrual class..................................... 50,469 50,290 22,044 21,655
Other............................................. 11,170 11,169 2,414 2,581
-------- -------- -------- --------
278,179 272,638 74,697 74,288
-------- -------- -------- --------
Total securities............................... $314,239 $309,048 $231,001 $230,331
======== ======== ======== ========
</TABLE>
The amortized cost and estimated market value of fixed maturities which are
held to maturity and available for sale 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 penalties.
<TABLE>
<CAPTION>
FIXED MATURITIES FIXED MATURITIES
HELD TO MATURITY AVAILABLE FOR SALE
---------------------- ----------------------
ESTIMATED ESTIMATED
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Due in one year or less............................. $ 3,756 $ 3,758 $ 9,490 $ 9,503
Due after one year through five years............... 25,186 25,266 87,745 87,907
Due after five years through ten years.............. 223,392 220,093 112,826 112,257
Due after ten years................................. 290,878 289,667 230,730 230,276
Mortgage-backed securities.......................... 314,239 309,048 231,001 230,331
-------- -------- -------- --------
$857,451 $847,832 $671,792 $670,274
======== ======== ======== ========
</TABLE>
In November 1995, the FASB issued "A Guide to Implementation of Statement
115 on Accounting for Certain Investments in Debt and Equity Securities" (the
Guide) which, among other things, provided entities with a one time opportunity
to transfer some or all securities from held to maturity. In December 1995, the
Company transferred fixed maturity securities with an amortized book value of
$195,207 and a market value of $198,329 out of the held to maturity category
into the available for sale category. Additionally, the Company transferred
fixed maturity securities with an amortized book value of $169,439 and a market
value of $178,883 out of the available for sale category into the held to
maturity category. In 1993, the Company also transferred securities from the
available for sale category to the held to maturity category. The net unrealized
gains of $53,426 and $59,485 at December 31, 1996 and 1995, respectively,
relating to these investments transferred to held to maturity are being
amortized into income using the effective yield method over the lives of the
related securities.
At December 1996, the Company held below investment grade (S&P rating below
BBB-) corporate debt securities with an aggregate carrying value of $10,125 and
market value of $10,168. At December 31, 1995, the Company held below investment
grade corporate debt securities with an aggregate carrying value of $9,791 and
market value of $10,126. These holdings amounted to approximately 0.4 % and 0.4%
of the Company's total assets at December 31, 1996 and 1995, respectively.
F-15
<PAGE> 51
AMERICO LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Fixed maturities with an amortized book value of $72,062 and $285,305 were
on deposit with insurance regulatory agencies of certain states at December 31,
1996 and 1995, respectively.
MORTGAGE LOANS ON REAL ESTATE
At December 31, mortgage loans on real estate consisted of:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Mortgage loan principal.................................. $187,477 $225,879
Net unamortized purchase discount........................ (2,851) (5,161)
Allowance for losses..................................... (300) (300)
-------- --------
Net mortgage loans..................................... $184,326 $220,418
======== ========
</TABLE>
The Company's mortgage loans on real estate are diversified by property
type, location and loan size and are collateralized by the related properties.
At December 31, 1996, mortgage loans on real estate were concentrated in the
following property types and states:
<TABLE>
<CAPTION>
% OF
1996 PORTFOLIO
---- ---------
<S> <C> <C>
Property type:
Commercial:
Multi-family apartments............................... $ 71,007 38.5%
Office buildings...................................... 42,832 23.2
Retail space.......................................... 45,227 24.5
Industrial/Warehouses................................. 21,684 11.8
Residential.............................................. 3,576 2.0
-------- -----
Total................................................. $184,326 100.0%
======== =====
</TABLE>
At December 31, 1996, the following states had a concentration of mortgage
loans aggregating more than 10% of the Company's mortgage loans: Texas --
$39,535; Missouri -- $38,490 and; Kansas -- $20,282.
INVESTMENT IN EQUITY SUBSIDIARIES
The following table presents summarized financial information on a combined
proportionate basis of the Company's equity affiliates. Amounts presented
include the accounts of the Company's equity subsidiaries, CIG, Argus, Hereford
LLP (acquired in 1996), a hotel development joint venture (acquired in 1995) and
GSSW (disposed of in 1996).
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current assets..................................... $12,952 $22,371 $13,539
Noncurrent assets.................................. 67,358 90,359 66,213
Current liabilities................................ 2,829 3,517 3,016
Noncurrent liabilities............................. 59,403 60,157 40,309
Net revenues....................................... 32,401 37,737 38,690
Expenses applicable to net revenues................ 26,307 25,682 29,687
Income from continuing operations.................. 6,505 11,978 9,004
Net income......................................... 5,458 9,457 7,135
</TABLE>
In 1996, GSSW distributed $6,000 cash to the Company. In December 1996, the
Company disposed of its interest in GSSW in exchange for cash of $22,629 and
100% interests in several real estate limited partnerships which were formerly
owned by GSSW. The Company recorded the limited partnerships at their
F-16
<PAGE> 52
AMERICO LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
historical book values of $18,662 and recorded a gain of $15,825 on the
transaction. The limited partnerships, with assets consisting primarily of
investment real estate, are included in the consolidated financial statements of
the Company at December 31, 1996. In December 1994, GSSW distributed to the
Company mortgage loan participations with an aggregate principal balance of
$11,940 and a book value of $7,920. These loan participations are included in
mortgage loans on real estate in the Company's consolidated financial
statements.
In December 1996, the Company received a dividend from Argus consisting of
$8,000 cash and a $1,500 note receivable from a related party. The Company used
$4,500 of the cash received to purchase a 50% interest in Hereford LLP, which
owns and manages the building leased by Argus.
NET INVESTMENT INCOME
Net investment income for the years ended December 31, is comprised of the
following:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Fixed maturities............................................ $104,442 $ 98,034 $ 88,367
Equity securities........................................... 1,101 524 502
Equity in earnings of equity subsidiaries................... 5,458 10,103 6,992
Mortgage loans on real estate............................... 21,344 20,169 19,145
Policy loans................................................ 13,719 12,247 11,656
Reinsurance funds held by reinsurer (Note 6)................ 37,425 6,007 --
Cash, short-term investments and other...................... 7,452 8,988 6,850
-------- -------- --------
Total investment income................................ 190,941 156,072 133,512
Less investment expenses.................................... (4,216) (4,025) (3,363)
-------- -------- --------
Net investment income.................................. $186,725 $152,047 $130,149
======== ======== ========
</TABLE>
REALIZED GAINS AND LOSSES
Realized gains and losses from the sales and other redemptions of
investments for the years ended December 31, are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Fixed maturity securities:
Held to maturity:
Realized gains......................................... $ 93 $ -- $ 509
Realized losses........................................ (124) (668) (183)
Available for sale:
Realized gains......................................... 2,162 274 400
Realized losses........................................ (3,524) (407) (1,866)
Equity securities:
Realized gains............................................ 2,340 372 804
Realized losses........................................... (1,851) (264) (1,990)
Other investments:
Realized gains............................................ 788 502 65
Realized losses........................................... (4) (91) (1,268)
------- ----- -------
Total net realized investment losses........................ $ (120) $(282) $(3,529)
======= ===== =======
</TABLE>
During 1996, 1995, and 1994, the Company sold held to maturity fixed
maturity investments with an amortized cost of $0, $6,583 and $2,462,
respectively. The Company sold these investments based upon
F-17
<PAGE> 53
AMERICO LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
evidence of the deterioration of the issuers' creditworthiness. The Company
realized losses of $0, $668 and $93 in 1996, 1995 and 1994, respectively, on
these sales.
Following are the components of net unrealized investment gains as of
December 31:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Investments carried at amortized cost:
Fixed maturities available for sale.................... $ (1,518) $ 16,087
Fixed maturities reclassified from available for sale
to held to maturity................................. 53,426 59,485
Investments carried at estimated fair value:
Equity securities...................................... 14,922 8,816
Effect on other balance sheet accounts................... (11,123) (14,749)
Deferred income taxes.................................... (18,518) (23,435)
-------- --------
Net unrealized investment gains..................... $ 37,189 $ 46,204
======== ========
</TABLE>
The carrying value of investments that were non-income producing during the
three year period ended December 31, 1996 was not material to the Company's
consolidated financial position.
5. DEFERRED POLICY ACQUISITION COSTS AND COST OF BUSINESS ACQUIRED
The balances of and changes in deferred policy acquisition costs and the
cost of business acquired as of and for the years ended December 31, are as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Deferred policy acquisition costs:
Balance, beginning of year................................ $ 56,568 $ 48,905 $ 39,498
Capitalization of expenses................................ 19,337 18,565 20,331
Interest accretion........................................ 4,075 3,779 3,484
Amortization.............................................. (7,401) (12,080) (20,160)
Amounts related to fair value adjustment of fixed maturity
securities............................................. (141) (2,601) 5,752
-------- -------- --------
Balance, end of year...................................... $ 72,438 $ 56,568 $ 48,905
======== ======== ========
Cost of business acquired:
Balance, beginning of year................................ $163,660 $132,623 $145,827
Additions................................................. 60,181 52,156 --
Interest accretion........................................ 12,210 9,862 9,640
Amortization.............................................. (34,908) (26,394) (22,202)
Amounts related to fair value adjustment of fixed maturity
securities............................................. 1,658 (4,587) (642)
Impact of realization of acquired tax benefits............ (2,091) -- --
-------- -------- --------
Balance, end of year...................................... $200,710 $163,660 $132,623
======== ======== ========
</TABLE>
F-18
<PAGE> 54
AMERICO LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The estimated amortization and interest accretion of the cost of business
acquired for the five years ending December 31, 2001 are as follows:
<TABLE>
<CAPTION>
INTEREST ESTIMATED
AMORTIZATION ACCRETION NET DECREASE
------------ --------- ------------
<S> <C> <C> <C>
1997.......................................... $34,021 $13,099 $20,922
1998.......................................... 32,759 11,741 21,018
1999.......................................... 29,988 9,940 20,048
2000.......................................... 26,769 8,421 18,348
2001.......................................... 24,987 7,491 17,496
</TABLE>
6. INSURANCE LIABILITIES AND REINSURANCE
Insurance liabilities at December 31, consist of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Policyholder account balances:
Universal life............................................ $ 939,635 $ 869,339
Annuities................................................. 527,324 271,196
---------- ----------
$1,466,959 $1,140,535
========== ==========
Future policy benefits:
Traditional life.......................................... $ 659,718 $ 671,136
Accident and health....................................... 3,090 1,054
Supplementary contracts................................... 18,737 11,709
---------- ----------
$ 681,545 $ 683,899
========== ==========
</TABLE>
Approximately 62% of the annuity account balances of the Insurance
Companies are subject to surrender charges upon early withdrawal.
The Insurance Companies cede and assume reinsurance with unaffiliated
companies. The maximum portion of the risk retained on the life of any
individual is $350.
In October 1995, the Company entered into several agreements with an
unaffiliated insurance company and a third-party reinsurer ("the Reinsurer").
One of the agreements calls for the direct insurer to reinsure substantially all
of its insurance policies and contracts to the Reinsurer on a coinsurance basis.
The direct insurer transferred approximately $348,000 of assets to the Reinsurer
and received a ceding commission of $37,328. On July 2, 1996, the Company
entered into similar agreements with another unaffiliated insurance company. The
direct insurer transferred approximately $405,000 of assets to the Reinsurer and
received a ceding commission of $34,745. The Reinsurer entered into modified
coinsurance agreements to reinsure certain risks on the same insurance policies
to Great Southern. The modified coinsurance agreements provide that the assets
and insurance liabilities related to the reinsured policies are to be retained
by the Reinsurer. The assets retained by the Reinsurer, a company rated A+ by
A.M. Best Company, are held in an escrow account for the benefit of Great
Southern.
Great Southern also entered into reinsurance agreements with the direct
insurers. The reinsurance agreements provide for Great Southern to reinsure the
life insurance policies and contracts of the direct insurers on an assumption
basis. Great Southern will record the direct insurance liabilities and a related
reinsurance recoverable from the Reinsurer when Great Southern completes the
assumption reinsurance transaction. The completion of the assumption of the
policies will be subject to necessary insurance department and policyholder
approvals. The policies will be assumed by Great Southern subject to the
coinsurance agreements in place between the direct insurers and the Reinsurer.
F-19
<PAGE> 55
AMERICO LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company accounted for its obligations under the modified coinsurance
agreements by recording a liability to the Reinsurer for the present value of
the payments projected to be paid to the Reinsurer. The Company also recorded a
receivable from the Reinsurer equal to the statutory liabilities held by the
Reinsurer. Consistent with the right of offset contained in the agreement, the
Company has netted the receivable from the Reinsurer against the liability to
the Reinsurer and has presented a net liability on the balance sheet. The net
liability included in amounts payable to reinsurers was $61,127 and $30,071 at
December 31, 1996 and 1995, respectively. The reserve for future policy
benefits, net of miscellaneous assets and liabilities, related to the reinsured
policies was approximately $773,815 and $347,517 at December 31, 1996 and 1995,
respectively. As of December 31, 1996, Great Southern had completed the
assumption of policies with liabilities totalling $245,361 and these liabilities
are included on the Company's consolidated balance sheet. At December 31, 1996
and 1995, $88,748 and $30,872, respectively, of cost of business acquired was
included on the Company's consolidated balance sheet related to the reinsured
policies. Premiums and policy revenues and policyholder benefits assumed under
the modified coinsurance agreements are included in the Company's statement of
income. Interest earned by the Company on the statutory liabilities held by the
Reinsurer is recorded as investment income.
The Reinsurer will receive all statutory profits from the reinsured
policies until the Reinsurer has recovered the initial ceding commission. Upon
termination of the modified coinsurance agreement, Great Southern is required to
reimburse the Reinsurer for the amount of the unrecovered ceding commission.
Amounts receivable from reinsurers consists of the following at December
31:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Amounts recoverable for ceded future policy benefits...... $350,062 $82,686
Amounts recoverable on ceded policy and contract claims... 10,223 5,475
Amounts recoverable on paid losses........................ 3,247 2,455
Other..................................................... 11,618 7,308
-------- -------
$375,150 $97,924
======== =======
</TABLE>
Amounts receivable from reinsurers include $13,269 and $11,779 from one
unrelated insurance company at December 31, 1996 and 1995, respectively. Also
included in amounts receivable from reinsurers is $100,122 and $59,025 from
Financial Assurance at December 31, 1996 and 1995, respectively. At December 31,
1996, the amounts receivable from reinsurers includes $245,361 due from the
Reinsurer.
Reinsurance contracts do not relieve the Company from its obligation to
policyholders. Failure of reinsurers to honor their obligations would result in
losses to the Company. The Company evaluates the financial condition of its
reinsurers and monitors concentrations of credit risk arising from activities or
economic characteristics of the reinsurers to minimize its exposure to
significant losses from reinsurer insolvencies. At December 31, 1996, no
allowance has been established as all amounts are deemed collectible.
Premiums ceded under reinsurance agreements were $35,050, $41,224 and
$33,475 for the years ended December 31, 1996, 1995 and 1994, respectively.
Reinsurance recoveries netted against other policyholder benefits totalled
$50,678, $32,139 and $32,777 for the years ended December 31, 1996, 1995 and
1994, respectively. The Insurance Companies are liable for reinsurance ceded to
other companies in the event the reinsurers are unable to pay their portion of
the policy benefits.
Certain of the Insurance Companies have ceded blocks of insurance under
financial reinsurance treaties to provide funds for acquisitions and other
purposes. These reinsurance transactions represent financial arrangements under
generally accepted accounting principles, and accordingly, are not reflected in
the accompanying financial statements except for the associated risk fees. The
risk fees paid to the reinsurers under these treaties totalled $884, $1,194 and
$945 for the years ended December 31, 1996, 1995 and 1994, respectively. These
fees are charged against premiums and policy revenues in the consolidated
statement of
F-20
<PAGE> 56
AMERICO LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
income. For statutory accounting purposes, these financial reinsurance
transactions provide a reserve credit which increases statutory surplus.
Certain financial reinsurance treaties entered into by the Insurance
Companies contain minimum statutory surplus requirements and require the
Insurance Companies to place securities in an escrow account ($273,421 at
December 31, 1996) to secure obligations to the reinsurer. The Insurance
Companies are in compliance with all requirements at December 31, 1996.
7. NOTES PAYABLE
Notes payable as of December 31, are comprised of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Senior subordinated notes bearing interest at 9.25%, due
2005...................................................... $100,000 $100,000
Borrowing under $70,000 amended and restated credit
agreement, bearing interest at 7/8% over LIBOR rate (6.45%
at December 31, 1996), due in six equal semi-annual
installments of $3,500 beginning in 2000.................. 21,000 21,000
Unsecured discounted $12,000 notes, bearing interest at an
effective interest rate of 11.5%, payable in semi-annual
equal installments due 2010............................... 8,584 8,838
Unsecured discounted $5,000 note, bearing interest at an
effective interest rate of 12.0%, due 2015................ 2,981 2,951
Other....................................................... 747 662
-------- --------
$133,312 $133,451
======== ========
</TABLE>
On or after June 1, 1998, the senior subordinated notes (the Notes) are
redeemable at the option of the Company, in whole or in part, at the redemption
prices (expressed as percentages of principal amount) set forth below:
<TABLE>
<S> <C>
1998........................................................ 104.6250%
1999........................................................ 102.3125%
2000 and thereafter......................................... 100.0000%
</TABLE>
In 1995, the Company entered into a $70,000 Credit Agreement which was
provided by a syndicate of lenders with The Chase Manhattan Bank as the
administrative agent. The Credit Agreement was amended and restated in December
1996 and subsequently amended in February 1997. The Credit Agreement operates as
a revolving credit facility until December 31, 1999. The amount of loans then
outstanding will convert into a term loan and amortize in six equal semi-annual
installments commencing July 1, 2000. Amounts outstanding under the Credit
Agreement accrue interest at a variable rate or the prime rate. Amounts
outstanding under the Credit Agreement rank senior to the Company's other
currently outstanding debt and are secured by a pledge of the common stock of
the Company's subsidiaries, United Fidelity and Landmark Mortgage Company, and
by the surplus debentures of United Fidelity. The Company pays 0.2% per year on
the unused portion of the Credit Agreement.
The unsecured discounted notes issued to the Seller bear interest at 6.5%
per annum payable semi-annually and rank pari passu with the Notes. The Company
recorded the notes at their fair value at the date of issuance using effective
interest rates of 11.5% and 12.0%. The unamortized discount at December 31, 1996
was $4,685. The $5,000 note is subject to contractual set-off rights and is held
under a pledge and escrow agreement to secure the Seller's indemnification
obligations to the company.
The Notes and the Credit Agreement contain certain covenants including, but
not limited to, limitations on indebtedness, liens securing indebtedness, sale
or issuance of capital stock of the Company's subsidiaries, restricted payments,
issuance of other subordinated indebtedness, financial reinsurance, investments,
dividends
F-21
<PAGE> 57
AMERICO LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
and other distributions by the Company's subsidiaries, dividends by the Company,
transactions with affiliates, the sale of assets and repayment of subordinated
indebtedness by the Company. The Company was in compliance with all debt
covenants at December 31, 1996.
The aggregate principal payments due during each of the next five years are
as follows:
<TABLE>
<S> <C>
1997........................................................ $ 585
1998........................................................ 625
1999........................................................ 618
2000........................................................ 7,657
2001........................................................ 7,702
Later years................................................. 116,125
--------
$133,312
========
</TABLE>
8. STOCKHOLDER'S EQUITY AND STATUTORY SURPLUS
The Insurance Companies are required by the applicable state's department
of insurance to maintain minimum levels of statutory capital and surplus. The
reported statutory capital and surplus of each company at December 31, 1996 was:
<TABLE>
<CAPTION>
REPORTED STATUTORY
COMPANY CAPITAL AND SURPLUS
------- -------------------
<S> <C>
United Fidelity............................................. $ 86,667
Great Southern.............................................. 109,240
College Life................................................ 41,823
Loyalty Life................................................ 6,463
National Farmers............................................ 34,145
Victory..................................................... 5,613
</TABLE>
Dividend distributions of the Insurance Companies to their respective
stockholder exceeding the greater of statutory net gain from operations during
the preceding year or 10% of capital and surplus at the end of the preceding
year are subject to the prior approval of the applicable state department of
insurance. Dividends from the Insurance Companies may be paid only from
statutory earned surplus as determined in accordance with accounting practices
prescribed or permitted by the applicable state insurance regulatory
authorities. In addition, the National Association of Insurance Commissioners
(NAIC) and Texas each have minimum risk-based capital requirements which
effectively restrict the payment of dividends by the Insurance Companies. At
December 31, 1996 the Insurance Companies had statutory capital and surplus in
excess of the levels required by the NAIC and Texas risk-based capital
guidelines.
The American Institute of Certified Public Accountants Statement of
Position (SOP) 94-5 "Disclosure of Certain Matters in the Financial Statements
of Insurance Enterprises" requires insurance enterprises to disclose permitted
statutory accounting practices which have a material effect on capital and
surplus or RBC. Permitted practices encompass those practices not prescribed by
state laws, regulations and administrative rules or by existing NAIC
authoritative literature. The Company does not have any statutory accounting
practices which are required to be disclosed under SOP 94-5.
Accounting practices used to prepare statutory financial statements for
regulatory filings of stock life insurance companies differ from GAAP.
The following tables reconcile capital stock and surplus and net income of
the Insurance Companies determined in accordance with accounting practices
prescribed or permitted by the state insurance departments with consolidated
stockholder's equity and net income of the Company on a GAAP basis. Included in
F-22
<PAGE> 58
AMERICO LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the amounts stated in accordance with statutory accounting practice are amounts
recorded in accordance with GAAP for non-insurance subsidiaries.
STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
---- ----
<S> <C> <C>
Capital stock and surplus, on basis of statutory accounting
practices, as filed with insurance regulatory
authorities............................................... $ 115,246 $ 78,170
Cost of business acquired................................... 109,093 132,433
Deferred policy acquisition costs........................... 72,438 56,568
Invested assets adjustments................................. 44,699 58,512
Reserve for future policy benefits.......................... 62,506 70,856
Asset valuation reserve and interest maintenance reserve.... 24,833 26,229
Surplus debentures.......................................... (137,714) (137,751)
Reserve credits on financial reinsurance treaties........... (42,899) (52,087)
Deferred income taxes....................................... (43,195) (43,033)
Other....................................................... 2,015 866
--------- ---------
Stockholder's equity, on basis of GAAP...................... $ 207,022 $ 190,763
========= =========
</TABLE>
NET INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net income, on basis of statutory accounting practices, as
filed with insurance regulatory authorities............... $ 47,124 $ 23,140 $ 16,301
Amortization of cost of business acquired................... (22,698) (16,532) (12,562)
Net change in deferred policy acquisition costs............. 13,191 10,264 9,774
Change in realized gains (losses)........................... 895 (7,627) (2,667)
Adjustment of policy and claim liabilities.................. 6,242 6,889 10,801
Adjustment of reserves and premiums on financial
reinsurance............................................... (9,188) 4,098 (7,094)
Deferred income tax provision............................... (5,576) 3,546 2,749
Interest expense on notes payable........................... (12,263) (10,593) (9,250)
Adjustment of fixed maturity securities amortization........ 2,064 4,176 3,767
Effects of reinsurance transaction.......................... 6,048 -- --
Amortization of debt acquisition costs...................... (336) (301) (185)
Other....................................................... 1,771 2,670 1,725
-------- -------- --------
Net income, on basis of GAAP................................ $ 27,274 $ 19,730 $ 13,359
======== ======== ========
</TABLE>
9. INCOME TAXES
Americo Life, Inc. and certain of the Insurance Companies file a
consolidated federal life and non-life income tax return with FHC and FHC's
non-life subsidiaries. The remaining Insurance Companies file separate or
consolidated life insurance company federal income tax returns, as applicable.
The Company and its subsidiaries are charged or credited an amount of federal
income tax equal to the tax that would have been due for each entity on a
separate return basis in accordance with a written tax allocation agreement. Net
operating losses of members in each consolidated return are utilized on a
first-in, first-out basis.
F-23
<PAGE> 59
AMERICO LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The provision for U.S. federal income taxes for the years ended December
31, is comprised of the following:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current tax provision....................................... $ 7,937 $14,672 $11,908
Deferred tax provision...................................... 5,576 (3,546) (2,749)
------- ------- -------
Provision for income taxes............................. $13,513 $11,126 $ 9,159
======= ======= =======
</TABLE>
The provision for income taxes differed from the amounts computed by
applying the applicable U.S. statutory federal income tax rate of 35% to pretax
income from continuing operations as a result of the following differences:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Computed tax at statutory rate.............................. $14,275 $10,800 $ 7,881
Increase (decrease) in tax resulting from:
Increase in valuation allowance........................... -- 572 1,294
Availability of dividends received deduction to offset
taxable temporary differences.......................... (503) (934) (704)
Other..................................................... (259) 688 688
------- ------- -------
Provision for income taxes $13,513 $11,126 $ 9,159
======= ======= =======
</TABLE>
The provision for deferred income taxes for the years ended December 31, is
comprised of the following:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Investments $ 2,310 $(7,759) $(8,376)
Reserves.................................................... 727 642 1,254
Reinsurance................................................. (583) 1,767 (242)
Cost of business acquired................................... (2,991) 1,467 4,208
Deferred policy acquisition costs........................... 3,537 333 324
Net operating losses........................................ 2,333 444 (215)
Other....................................................... 243 (440) 298
------- ------- -------
Provision for deferred income taxes.................... $ 5,576 $(3,546) $(2,749)
======= ======= =======
</TABLE>
F-24
<PAGE> 60
AMERICO LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company's net deferred federal tax liabilities are comprised of the tax
cost or benefit associated with the following items based on the 35% tax rate in
effect:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred tax liability:
Cost of business acquired................................. $39,862 $43,585
Investments............................................... 3,932 1,622
Deferred policy acquisition costs......................... 6,137 2,600
Reinsurance............................................... 3,228 3,811
Net unrealized investments gains.......................... 19,497 24,065
Other..................................................... 321 272
------- -------
Total deferred tax liability......................... 72,977 75,955
------- -------
Deferred tax asset:
Policy reserves........................................... 30,891 31,618
Utilization of net operating losses....................... 902 3,235
Other deductible temporary differences.................... 542 622
------- -------
Deferred income tax assets before valuation allowances...... 32,335 35,475
Less: valuation allowance................................. (2,553) (2,553)
------- -------
Total deferred tax asset............................. 29,782 32,922
------- -------
Net deferred tax liability.................................. $43,195 $43,033
======= =======
</TABLE>
A valuation allowance is provided at December 31, 1996 and 1995 related to
the tax benefit of loss carryovers and deductible differences because it is more
likely than not that such benefits will not be realized.
Under the provision of the pre-1984 life insurance company income tax
regulations, a portion of "gain from operations" of a life insurance company was
not subject to current taxation but was accumulated, for tax purposes, in a
special tax memorandum account designated as "Policyholders' Surplus Account"
(PSA). Federal income taxes will become payable on this account at the then
current tax rate when and to the extent the account exceeds a specific maximum,
or when and if distributions to stockholders, other than stock dividends and
other limited exceptions, are made in excess of the accumulated previously-taxed
income. At December 31, 1996, the Insurance Companies had aggregate balances in
their PSA of approximately $11,549. Federal income tax of $4,043 would be due if
the entire balance is distributed at the current income tax rate of 35%. No
provision has been recorded relating to any potential distributions from the PSA
subsequent to 1996.
At December 31, 1996, the Insurance Companies had aggregate balances in
their Shareholder Surplus Accounts (SSA) of approximately $61,521, respectively,
from which distributions could be made without incurring any federal tax
liability with respect to the PSA accounts.
The Company has non-life regular and AMT NOL carryovers of approximately
$2,685 which will expire in the year 2009 if unutilized.
10. COMMITMENTS AND CONTINGENCIES
The Company leases certain data processing equipment and office space, some
of which are from related parties, under operating leases. Rental expense was
$1,931, $1,881 and $1,837 in 1996, 1995 and 1994,
F-25
<PAGE> 61
AMERICO LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
respectively, and is included in other operating expenses. Approximate future
minimum lease commitments for leases whose terms are greater than one year at
December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997........................................................ $1,910
1998........................................................ 469
1999........................................................ 255
2000........................................................ 10
2001 and thereafter......................................... --
------
$2,644
======
</TABLE>
In May 1996, a policyholder of Great Southern filed a complaint in
Louisiana state court against Great Southern and an agent of Great Southern
(Sharon K. Self and Johnnie W. Self, et al v. Great Southern Life Insurance
Company and A.A. Cohn) related to the sale of an interest sensitive whole life
policy on a "vanishing premium" basis and seeking unspecified damages. The
plaintiffs seek to represent a class of Great Southern policyholders. The suit
was removed to the United States District Court for the Middle District of
Louisiana and is now proceeding in that court. In February 1997, Great Southern
was named a defendant in a lawsuit filed in the Circuit Court of Dade County,
Florida related to the sale of universal life policies, and alleging that
policyholders were misled regarding the premiums payable for such policies
(Irwin Ginsberg v. Jack Goldberg and Great Southern Life Insurance Company). The
plaintiff in such lawsuit seeks to represent a class of Great Southern
policyholders and claims unspecified compensatory and punitive damages. Because
this lawsuit has only recently been served on Great Southern, no responsive
pleadings have been filed and the Company is still investigating the matter.
Great Southern intends to defend these cases vigorously. The amount of any
liability that may arise as a result of these cases, if any, cannot be
reasonably estimated at this time and no provision for loss has been made in the
accompanying financial statements.
The Company is named as defendant in a number of other lawsuits arising
from the normal course of business. Management does not expect that these
actions will result in a material loss to the Company.
11. EMPLOYEE BENEFIT PLANS
Great Southern is a sponsor of several contributory postretirement benefit
plans which provide life and medical insurance to participating retired
employees and agents. Pursuant to the purchase agreement, Great Southern's
former parent assumed responsibility for employees and agents who retired on or
after August 1, 1984. Future costs of benefits for employees and agents who
retired prior to August 1, 1984, are the responsibility of the Company. A
liability for these postretirement benefits of $2,680 and $2,750 is included in
other liabilities at December 31, 1996 and 1995, respectively.
The Company sponsors a 401(k) Retirement Savings Plan (the Plan) in which
substantially all employees are eligible to participate. During 1996, 1995 and
1994, the Company contributed approximately $225, $186 and $190, respectively,
to the Plan based on employees' contributions.
F-26
<PAGE> 62
AMERICO LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. SEGMENT INFORMATION
Consolidated business segment information as of and for the years ended
December 31, is summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues:
Individual life and other insurance.................... $ 365,071 $ 283,168 $ 252,893
Corporate and other non-insurance...................... 6,528 10,895 8,069
---------- ---------- ----------
Total............................................... $ 371,599 $ 294,063 $ 260,962
========== ========== ==========
Income before provision for income taxes:
Individual life and other insurance.................... $ 25,398 $ 23,439 $ 18,589
Corporate and other non-insurance...................... 15,389 7,417 3,929
---------- ---------- ----------
Total............................................... $ 40,787 $ 30,856 $ 22,518
========== ========== ==========
Assets:
Individual life and other insurance.................... $2,773,616 $2,394,397 $1,943,445
Corporate and other non-insurance...................... 57,094 65,408 51,183
---------- ---------- ----------
Total............................................... $2,830,710 $2,459,805 $1,994,628
========== ========== ==========
</TABLE>
Individual life and other insurance revenues include premiums paid by
policyholders on traditional insurance contracts, product charges on universal
life and investment-type contracts, other income, allocations of net investment
income and net realized investment gains and losses.
Corporate and other non-insurance revenues represent investment income on
equity affiliates and unallocated assets, and unallocated net realized
investment gains and losses.
Individual life and other insurance income before provision for income
taxes represents total revenue, policy and claim benefits, operating expenses
and net realized investment gains and losses. Corporate and other non-insurance
income before provision for income taxes represents corporate revenues, expenses
not directly allocable to product segments, debt service costs, unallocated net
realized investment gains and losses and amortization expense relating to debt
acquisition costs and goodwill. Corporate and non-insurance amortization expense
was $336, $301, and $185, for the years ended December 31, 1996, 1995 and 1994,
respectively.
13. RELATED PARTIES
The Company and FHC are involved in advisory and data processing services
agreements. Under the advisory agreement, FHC supervises and directs the
composition of the investment portfolios of the Company and its subsidiaries in
accordance with their respective objectives and policies. For these services,
FHC is compensated based on the aggregate statutory book value of the investable
assets of the Insurance Companies. Under the data processing agreement, FHC
provides the Company and its subsidiaries with record-keeping services for
certain life insurance and annuity products. For its services, FHC is paid a fee
per policy serviced. The Company and its subsidiaries are also involved in a
cost-sharing agreement with FHC respecting air transportation expenses arising
from the use of an airplane leased by FHC.
Amounts due from (to) affiliates at December 31, 1996 and 1995 include
$(293) and $5,494, due from (to) FHC arising from intercompany tax allocations
and other amounts from CIG and FHC arising from the normal course of business.
F-27
<PAGE> 63
AMERICO LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
United Fidelity leases office space from a partnership in which a related
party has a 50% interest. The Insurance Companies utilize Clinical Reference
Laboratory, Inc., a related party, for laboratory testing services.
The following table summarizes the related party transactions for the three
years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Data processing agreement between the Company and FHC....... $9,778 $8,073 $8,216
Advisory agreement between the Company and FHC.............. 6,143 4,750 4,350
Air transportation cost sharing agreement................... 765 551 667
Rental expense.............................................. 913 899 836
Laboratory services......................................... 178 163 170
</TABLE>
College Life and Great Southern are involved in coinsurance agreements with
Financial Assurance. Under the terms of the agreements, College Life and Great
Southern agree to reinsure certain business, as defined in a separate marketing
agreement, with Financial Assurance on a 50% coinsurance basis. Additionally,
College Life and Great Southern agree to reimburse Financial Assurance for a
portion of the policy issue and maintenance expenses relating to servicing the
policies.
14. SUBSEQUENT EVENT
In January 1997, the Company entered into a stock purchase agreement to
acquire The Ohio State Life Insurance Company ("Ohio State") and Investors
Guaranty Life Insurance Company ("IGL") from an unrelated party for a purchase
price of approximately $330,000, subject to certain purchase price adjustments.
The acquisition will be financed by a combination of internal funds and
reinsurance. At December 31, 1996, Ohio State and IGL had assets of
approximately $1,099,000 and liabilities of $767,000. The closing of the
acquisition is contingent upon obtaining regulatory approvals from applicable
state insurance departments.
Immediately following the acquisition, Ohio State and IGL will reinsure
100% of their insurance liabilities to the Reinsurer on a coinsurance basis.
Ohio State and IGL will transfer approximately $685,000 of assets to the
Reinsurer and will receive a ceding commission of $133,000 from the Reinsurer.
The Reinsurer will reinsure certain risks on a 70% quota share of the same
insurance liabilities to Great Southern on a modified coinsurance basis, which
provides that the Reinsurer retains the assets and liabilities. The Reinsurer
will receive 100% of the statutory profits from the reinsured policies until the
Reinsurer has recovered the initial ceding commission. After that time, the
Reinsurer will receive 30% of the statutory profits from the reinsured policies.
The acquisition of Ohio State and IGL will be accounted for using the
purchase method of accounting. The direct policy liabilities will be included on
the Company's balance sheet. The assets retained by the Reinsurer will be
included on the Company's balance sheet as a receivable from the Reinsurer.
F-28
<PAGE> 64
AMERICO LIFE, INC.
INDEX TO FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants on Financial Statement
Schedules................................................. S-2
Schedule II Condensed Financial Information of
Registrant................................................ S-3
Schedule IV Reinsurance................................. S-7
Schedule V Valuation and Qualifying Accounts........... S-8
</TABLE>
All other financial statement schedules for which provision is made in the
applicable accounting regulation of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable, and therefore
have been omitted.
S-1
<PAGE> 65
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES
To the Board of Directors and
Stockholder of Americo Life, Inc.
Our audits of the consolidated financial statements referred to in our
report dated March 17, 1997, appearing on page F-2 of this Form 10-K also
included an audit of the Financial Statement Schedules listed in Item 14(a)(2)
of this Form 10-K. In our opinion, these Financial Statement Schedules present
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
PRICE WATERHOUSE LLP
Kansas City, Missouri
March 17, 1997
S-2
<PAGE> 66
SCHEDULE II
AMERICO LIFE, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEET
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
ASSETS ---- ----
<S> <C> <C>
Equity securities, at market (cost: $5,228 and $6,978)...... $ 7,565 $ 9,528
Investment in subsidiaries.................................. 184,584 170,556
Mortgage loans on real estate............................... -- 74
Cash and cash equivalents................................... 5,259 546
Surplus debentures receivable............................... 137,845 138,592
Property and equipment, net................................. 2,126 696
Amounts due from affiliates................................. -- 3,026
Other assets................................................ 11,119 8,819
-------- --------
Total assets........................................... $348,498 $331,837
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Notes payable............................................... $132,564 $132,790
Accrued interest payable.................................... 915 932
Amounts due to affiliates................................... 1,515 --
Deferred income taxes....................................... 2,612 2,279
Other liabilities........................................... 3,870 5,073
-------- --------
Total liabilities...................................... 141,476 141,074
-------- --------
STOCKHOLDER'S EQUITY:
Common stock ($1 par value, 30,000 shares authorized, 10,000
issued and outstanding)................................... 10 10
Additional paid-in capital.................................. 3,745 3,745
Net unrealized investment gains............................. 37,189 46,204
Retained earnings........................................... 166,078 140,804
-------- --------
Total stockholder's equity............................. 207,022 190,763
-------- --------
Total liabilities and stockholder's equity............. $348,498 $331,837
======== ========
</TABLE>
See notes to condensed financial information
S-3
<PAGE> 67
SCHEDULE II
AMERICO LIFE, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF INCOME
(DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
INCOME
Management and data processing fees from subsidiaries..... $12,055 $10,708 $10,256
Interest income on surplus debentures receivable.......... 12,842 11,053 9,837
Net investment income..................................... 415 819 397
Net realized investment gains (losses).................... 107 -- (249)
Other income.............................................. 6,673 1,557 --
------- ------- -------
Total income........................................... 32,092 24,137 20,241
------- ------- -------
EXPENSES
Management and advisory fees to parent.................... 15,921 12,823 12,566
Interest expense.......................................... 12,263 10,593 9,250
Other operating expenses.................................. 2,958 1,454 2,188
Amortization of debt acquisition expenses................. 664 301 183
------- ------- -------
Total expenses......................................... 31,806 25,171 24,187
------- ------- -------
Income (loss) before provision for (benefit from)
income taxes and equity in income of subsidiaries.... 286 (1,034) (3,946)
PROVISION FOR (BENEFIT FROM) INCOME TAXES................... 1,418 (581) (2,306)
------- ------- -------
Loss before equity in income of subsidiaries........... (1,132) (453) (1,640)
EQUITY IN INCOME OF SUBSIDIARIES............................ 28,406 20,183 14,999
------- ------- -------
Net Income............................................. $27,274 $19,730 $13,359
======= ======= =======
</TABLE>
See notes to condensed financial information
S-4
<PAGE> 68
SCHEDULE II
AMERICO LIFE, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $ 27,274 $ 19,730 $ 13,359
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Undistributed equity in earnings of subsidiaries....... (28,406) (20,183) (14,999)
Dividends received from subsidiaries................... 8,000 -- 5,000
Depreciation and amortization.......................... 943 462 298
(Increase) decrease in other assets, net of
amortization expense................................. (545) (4,820) 1,164
Decrease in other liabilities.......................... (1,220) (1,332) (376)
Provision for deferred income taxes.................... 408 428 (892)
Increase (decrease) in amounts due to/from
affiliates........................................... 4,541 (2,684) 1,483
Other changes.......................................... (535) 306 (576)
-------- -------- --------
Total adjustments................................. (16,814) (27,823) (8,898)
-------- -------- --------
Net cash provided (used) by operating
activities...................................... 10,460 (8,093) 4,461
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Payment for subsidiary acquired........................... -- (23,252) --
Receipt from UFL for subsidiary acquired.................. -- 5,500 --
Amounts collected on surplus debentures receivable........ 750 -- 5,000
Capital contribution to subsidiary........................ (261) -- --
Payment for equity subsidiary acquired.................... (4,550) -- --
Proceeds from sales of fixed maturity investment
securities............................................. -- -- 1,053
Purchases of equity securities............................ (663) (6,289) (1,222)
Proceeds from sales of equity securities.................. 3,368 -- 4,502
Mortgage loans originated................................. (71) (74) --
Proceeds from sales of mortgage loans..................... -- -- 1,724
Purchases of property and equipment, net.................. (1,814) -- (219)
-------- -------- --------
Net cash provided (used) by investing
activities...................................... (3,241) (24,115) 10,838
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Notes payable issued...................................... -- 21,000 --
Repayments of notes payable............................... (506) (244) --
Debt issue costs.......................................... -- (737) --
Dividends paid............................................ (2,000) (2,000) (2,000)
-------- -------- --------
Net cash provided (used) by financing activities.......... (2,506) 18,019 (2,000)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents........ 4,713 (14,189) 13,299
Cash and cash equivalents at beginning of year.............. 546 14,735 1,436
-------- -------- --------
Cash and cash equivalents at end of year.................... $ 5,259 $ 546 $ 14,735
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during year for interest........................ $ 12,280 $ 10,432 $ 9,250
</TABLE>
See notes to condensed financial information
S-5
<PAGE> 69
SCHEDULE II
AMERICO LIFE, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
In 1996, the Company received a dividend totalling $15,673 representing a
50% interest in Argus. Subsequently, the Company received a dividend from Argus
consisting of $8,000 cash and a $1,500 note receivable from a related party.
The Company sold its interest in a subsidiary acquired in 1995 to a
wholly-owned subsidiary, in exchange for a surplus debenture for $38,000 and
cash of $5,500.
The accompanying condensed financial information should be read in
conjunction with the Consolidated Financial Statements and the accompanying
notes thereto in this Form 10-K.
S-6
<PAGE> 70
SCHEDULE IV
AMERICO LIFE, INC. AND SUBSIDIARIES
REINSURANCE
(DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
YEAR ENDED GROSS OTHER FROM OTHER NET ASSUMED
DECEMBER 31, AMOUNT COMPANIES COMPANIES AMOUNT TO NET
------------ ------ --------- ---------- ------ ----------
<S> <C> <C> <C> <C> <C>
1996
Insurance in force................ $23,125,887 $5,189,238 $4,804,462 $22,741,111 21.1%
=========== ========== ========== =========== =====
Premiums.......................... $ 174,910 $ 35,050 $ 25,742 $ 165,602 15.5%
=========== ========== ========== =========== =====
1995
Insurance in force................ $22,836,922 $4,564,600 $4,107,256 $22,379,578 18.4%
=========== ========== ========== =========== =====
Premiums.......................... $ 176,351 $ 41,224 $ 5,003 $ 140,130 3.6%
=========== ========== ========== =========== =====
1994
Insurance in force................ $22,604,899 $4,795,951 $ 386,004 $18,194,952 2.1%
=========== ========== ========== =========== =====
Premiums.......................... $ 165,479 $ 33,475 $ 2,221 $ 134,225 1.7%
=========== ========== ========== =========== =====
</TABLE>
S-7
<PAGE> 71
SCHEDULE V
AMERICO LIFE, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
ADDITIONS
------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
YEAR ENDED BEGINNING COST AND OTHER END OF
DECEMBER 31, OF PERIOD EXPENSES ACCOUNTS(1) DEDUCTIONS PERIOD
------------ ---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1996
Reserve for impairment of mortgage loans on
real estate.............................. $ 300 $ -- $ -- $ -- $ 300
Write-down for impairment of real estate... 120 -- -- 13 107
Allowance for receivables from agents...... 2,450 250 -- 577 2,123
------ ---- ---- ------ ------
Total............................ $2,870 $250 $ -- $ 590 $2,530
====== ==== ==== ====== ======
1995
Reserve for impairment of mortgage loans on
real estate.............................. $ 908 $ -- $ -- $ 608 $ 300
Write-down for impairment of real estate... 351 -- -- 231 120
Allowance for receivables from agents...... 2,467 195 -- 212 2,450
------ ---- ---- ------ ------
Total............................ $3,726 $195 $ -- $1,051 $2,870
====== ==== ==== ====== ======
1994
Reserve for impairment of mortgage loans on
real estate.............................. $ 908 $ -- $ -- $ -- $ 908
Write-down for impairment of real estate... 567 214 -- 430 351
Allowance for receivables from agents...... 2,178 505 242 458 2,467
Allowance for premium finance
receivables.............................. 1,485 -- -- 1,485 --
------ ---- ---- ------ ------
Total............................ $5,138 $719 $242 $2,373 $3,726
====== ==== ==== ====== ======
</TABLE>
- -------------------------
(1) Amounts transferred from other allowance accounts.
S-8
<PAGE> 1
STOCK PURCHASE AGREEMENT
Dated as of January 21, 1997
Between
FARMERS GROUP, INC.
and
GREAT SOUTHERN LIFE INSURANCE COMPANY
With Respect to all of the
Outstanding Capital Stock of
THE OHIO STATE LIFE INSURANCE COMPANY
and
INVESTORS GUARANTY LIFE INSURANCE COMPANY
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TABLE OF CONTENTS
TABLE OF CONTENTS
Page
ARTICLE I
DEFINITIONS
1.1 Definitions.............................................. 1
ARTICLE II
SALE OF SHARES AND CLOSING
2.1 Purchase and Sale ........................................ 10
2.2 Consideration ............................................ 10
2.3 Closing .................................................. 12
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE SELLER
3.1 Organization of Seller ................................. 13
3.2 Authority of Seller .................................... 13
3.3 Organization of the Companies .......................... 14
3.4 Capital Stock .......................................... 14
3.5 Subsidiaries ........................................... 14
3.6 Conflicts or Violations ................................ 14
3.7 SAP Statements ......................................... 15
3.8 GAAP Statements ........................................ 16
3.9 Reserves ............................................... 16
3.10 Absence of Changes ..................................... 17
3.11 Taxes .................................................. 18
3.12 Litigation.............................................. 18
3.13 Compliance With Laws ................................... 18
3.14 Benefit Plans and Employee Matters...................... 18
3.15 Properties.............................................. 19
3.16 Contracts............................................... 19
3.17 Licenses and Permits ................................... 21
3.18 Operations Insurance ................................... 21
3.19 Intercompany Liabilities ............................... 21
3.20 Bank Accounts .......................................... 22
3.21 Brokers ................................................ 22
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3.22 Environmental............................................... 22
3.23 Insurance and Annuity Business ............................. 23
3.24 Agents...................................................... 24
3.25 Actuarial Information ...................................... 25
3.26 Conduct of Business......................................... 25
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
4.1 Organization of the Purchaser ....................... 25
4.2 Authority of Purchaser .............................. 26
4.3 Conflicts or Violations ............................. 26
4.4 Litigation. 27
4.5 Purchase for Investment ............................. 27
4.6 Brokers ............................................. 27
4.7 Financial Capacity .................................. 27
ARTICLE V
COVENANTS OF THE SELLER
5.1 Regulatory and Other Approvals.......................... 27
5.2 HSR Filings............................................. 28
5.3 Investigation by the Purchaser ......................... 28
5.4 Conduct of Business .................................... 28
5.5 Financial Statements ................................... 30
5.6 Intercompany Liabilities ............................... 30
5.7 Resignations of Directors .............................. 31
5.8 Books and Records ...................................... 31
5.9 Notice and Cure ........................................ 31
5.10 Employee Matters ....................................... 31
5.11 Trademark Agreements ................................... 32
5.12 Intercompany Lease ..................................... 32
5.13 Intentionally Omitted................................... 32
5.14 Pension Reserve......................................... 32
5.15 No Churning............................................. 33
5.16 Transition Services..................................... 33
5.17 Purchase of Certain Assets.............................. 33
5.18 Assumption of Certain Litigation Matters................ 33
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ARTICLE VI
COVENANTS OF THE PURCHASER
6.1 Regulatory Approvals ............................ 34
6.2 HSR Filings...................................... 34
6.3 Non-Solicitation ................................ 34
6.4 Notice and Cure ................................. 35
6.5 Intercompany Liabilities ........................ 35
6.6 Employees........................................ 35
6.7 Confidentiality ................................. 37
6.8 Cooperation...................................... 37
ARTICLE VII
CONDITIONS TO OBLIGATIONS OF THE PURCHASER
7.1 Representations and Warranties ...................... 38
7.2 Performance.......................................... 38
7.3 Officer's Certificates .............................. 38
7.4 HSR Act Approval .................................... 38
7.5 No Injunction ....................................... 38
7.6 No Proceeding or Litigation ......................... 38
7.7 Consents, Authorizations, etc ....................... 39
7.8 No Adverse Change ................................... 39
7.9 Opinions of Counsel ................................. 39
ARTICLE VIII
CONDITIONS TO OBLIGATIONS OF THE SELLER
8.1 Representations and Warranties ...................... 40
8.2 Performance.......................................... 40
8.3 Officer's Certificates .............................. 40
8.4 HSR Act Approval .................................... 40
8.5 No Injunction ....................................... 40
8.6 No Proceeding or Litigation ......................... 40
8.7 Consents, Authorizations, etc ....................... 41
8.8 Opinion of Counsel .................................. 41
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ARTICLE IX
SURVIVAL OF PROVISIONS; REMEDIES
9.1 Survival ............................................... 41
9.2 Available Remedies ..................................... 42
ARTICLE X
INDEMNIFICATION
10.1 Tax Indemnification and Other Tax Matters .............. 42
10.2 Other Indemnification .................................. 46
10.3 Method of Asserting Claims ............................. 47
10.4 After-Tax Damages; Refunds ............................. 49
10.5 Claims Limitation ...................................... 49
ARTICLE XI
TERMINATION
11.1 Termination ............................................ 50
11.2 Effect of Termination .................................. 51
ARTICLE XII
NOTICES
12.1 Notices ................................................ 51
ARTICLE XIII
MISCELLANEOUS
13.1 Entire Agreement .................................. 53
13.2 Expenses .......................................... 53
13.3 Public Announcements .............................. 53
13.4 Confidentiality ................................... 53
13.5 Further Assurances ................................ 53
13.6 Waiver ............................................ 54
13.7 Amendment.......................................... 54
13.8 Counterparts ...................................... 54
13.9 No Third Party Beneficiaries ...................... 54
13.10 Governing Law ..................................... 55
13.11 Binding Effect .................................... 55
13.12 Assignment Limited ................................ 55
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13.13 Headings, Gender, etc ......................... 55
13.14 Severability .................................. 55
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EXHIBIT LIST
Exhibit A -- Form of Trademark Assignment Agreement
Exhibit B -- Form of Intercompany Lease
Exhibit C -- Intentionally Omitted
Exhibit D -- Transition Services Agreement
Exhibit E -- Opinion of Seller's Counsel
Exhibit F -- Opinion of Purchaser's Counsel
Exhibit G -- Description of OSL Building
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STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT ("Agreement") is made and
entered into as of January 21, 1997, by and between Farmers Group, Inc., a
Nevada corporation (the "Seller"), and Great Southern Life Insurance Company, a
Texas corporation (the "Purchaser").
RECITALS
WHEREAS, the Seller owns all of the issued and outstanding
capital stock of each of The Ohio State Life Insurance Company, an Ohio
corporation ("OSL"), and Investors Guaranty Life Insurance Company, a California
corporation ("IGL" and, together with OSL, the "Companies"); and
WHEREAS, the Seller desires to sell, and the Purchaser desires
to purchase, all of the issued and outstanding shares of capital stock of the
Companies upon the terms and subject to the conditions set forth in this
Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements set forth in this Agreement, and for other good and valuable consider
ation, the receipt and sufficiency of which are hereby acknowledged, the parties
hereto agree as follows:
ARTICLE I
DEFINITIONS
1.1 Definitions. The capitalized terms used in this Agreement and
not otherwise defined herein shall have the following meanings:
"Actual Net Income" shall mean, with respect to either or both of the
Companies, an amount equal to (i) the net gain from operations, calculated
in the same manner as line 31, page 4 of each Company's 1995 Annual
Statement, for the period from and including October 1, 1996 to and
including the Closing Date, based on a closing of the books of the Company or
the Companies, as the case may be, as of the close of business on the Closing
Date and calculated in accordance with SAP on an after-tax basis, which, for
this purpose, shall include any gain or loss on the transactions specified
in Section 5.14, minus (ii) any payments made or required to be made by the
Company or the Companies, as the case may be, in connection with
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Taxes attributable to the period from and including October 1, 1996 to and
including the Closing Date, but only to the extent the Taxes to which such
payments relate have not already been taken into account as a deduction in
computing the amount described in clause (i) above, plus (or minus) (iii) that
portion of net realized capital gains (or losses) calculated in the same manner
as line 32, page 4 of each Company's 1995 Annual Statement that is attributable
to the increase (or decrease) in market value of the Transferred Assets from
October 1, 1996 to the Closing Date; provided, however, that the computation of
Actual Net Income shall not take into account the excluded Taxes referred to in
the second sentence of Section 10.1(c).
"Affiliate" shall mean, with respect to any Person, any other
Person that directly, or indirectly through one or more intermediaries,
Controls, is Controlled by, or is under common Control with such Person.
"Agent" shall mean any current or former insurance agent,
general agent, managing general agent, broker, or other similarly situated
person with respect to either Company or of any organization with which either
Company has or had a marketing relationship.
"Annual Statement" shall mean any annual statement of a Company
filed with or submitted to the insurance regulatory authorities of the
state in which such Company is domiciled on a form or forms prescribed
or permitted by such authorities.
"Assigned Trademarks" shall mean the Seller's Assigned Trademarks and
the Companies' Assigned Trademarks.
"Assumed Litigation Matters" shall have the meaning ascribed thereto
in Section 5.18.
"Audit" shall mean any audit, assessment of Taxes, or other
examination by any Tax Authority, or any judicial or administrative
proceeding or appeal of such proceeding relating to Taxes.
"Benefit Plans" shall mean all Employee Pension Benefit Plans, all
Employee Welfare Benefit Plans, all stock bonus, stock ownership, stock
option, stock purchase, stock appreciation rights, phantom stock, and
other stock plans (whether qualified or non-qualified), and all other pension,
welfare, severance, retirement, bonus, deferred compensation, incentive
compensation, insurance (whether life, accident and health, or other and
whether key man, group, workers compensation,
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or other), profit sharing, disability, thrift, day care, legal services,
leave of absence, vacation, sick leave, layoff, and supplemental or excess
benefit plans, and all other written or unwritten benefit contracts, group or
individual arrangements, or procedures having the effect of a plan, whether
or not more than one person is covered, in each case, existing on or
before the Closing Date, under which the Seller or either of the Companies is
or may hereafter become obligated in any manner as an employer or obligated
to any current or former Agent (including without limitation obligations to
make contributions or other payments).
"Business" shall have the meaning ascribed to it in Section 3.23. .
"Business Day" shall mean a day other than Saturday, Sunday, or any day on
which the principal commercial banks located in California are authorized or
obligated to close under the laws of California.
"Claim Notice" shall mean written notification of a Third Party
Claim by an Indemnified Party to an Indemnifying Party pursuant to Section
10.3(a) hereof, enclosing a copy of all papers served, if any.
"Closing" shall mean the closing of the sale and purchase of the
Shares, as provided in Section 2.3 hereof.
"Closing Date" shall mean the second Business Day after the
satisfaction or waiver of all of the conditions to the obligations of the
parties set forth in Articles VII, and VIII hereof, or such other date as
the Purchaser and the Seller may mutually agree upon in writing.
"Closing Date Unrealized Gain" shall mean (i) the market value of the
Portfolio Stocks as of the Closing Date (which shall be equal to the price
paid for the Portfolio Stocks pursuant to Section 5.17), minus (ii) the
Companies' original cost of the Portfolio Stocks.
"Code" shall mean the Internal Revenue Code of 1986, as amended, and
the rules and regulations promulgated thereunder.
"commercially reasonable efforts" or "commercially reasonable steps,"
when used with respect to any party, shall mean the reasonable efforts of
such party without the requirement that such party incur any unanticipated (as
of the date hereof) out-of-pocket expenses, including the making of any
capital contribution, or
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incur any other unanticipated (as of the date hereof) burden or commence or
pursue litigation in any action, suit or proceeding, whether
administrative, civil or criminal.
"Companies" shall mean OSL and IGL.
"Companies' Assigned Trademarks" shall have the meaning ascribed to it
in Section 5.11.
"Company" shall mean any one of the Companies.
"Company Benefit Plans" shall mean all Benefit Plans other than Seller
Benefit Plans.
"Company Liabilities" shall have the meaning ascribed to it in Section
5.6(a).
"Confidentiality Agreement" shall mean the letter agreement, dated
October 2, 1996, by and between the Seller and the Purchaser.
"Consideration" shall have the meaning ascribed to it in Section
2.2(a).
"Consideration Adjustment" shall have the meaning ascribed to it in
Section 2.2(b).
"Consideration Adjustment Payment Date" shall have the meaning ascribed
to it in Section 2.2(d).
"Consideration Adjustment Statement" shall have the meaning ascribed to
it in Section 2.2(b).
"Control" (and its derivative terms "Controlled," "Controls," etc.)
shall mean the power and right to direct the management and policies of
another Person, whether by ownership of voting securities, the ability to
elect a majority of the board of directors or other managing board or
committee, management contract, or otherwise.
"Damages" shall mean any and all costs, damages, liabilities, fines,
fees, penalties, interest obligations, deficiencies, losses, and expenses
(including without limitation punitive, treble, or other exemplary or
extra-contractual damages, amounts paid in settlement, interest, court
costs, costs of investigation, reasonable fees and
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expenses of attorneys, accountants, actuaries, and other experts, and other
reasonable expenses of litigation or of any claim, default, or assessment).
"Disclosure Schedule" shall mean the Disclosure Schedule attached
hereto.
"Employee Pension Benefit Plan" shall mean each employee pension
benefit plan (whether or not insured), as defined in Section 3(2) of ERISA,
which is or was in existence on or before the Closing Date, and to which the
Seller or either of the Companies is or would hereafter become obligated
in any manner as an employer, including any similar plan covering any current
or former Agent.
"Employee Welfare Benefit Plan" shall mean each employee welfare
benefit plan (whether or not insured), as defined in Section 3(1) of ERISA,
which is or was in existence on or before the Closing Date, and to which the
Seller or either of the Companies is or would hereafter become obligated
in any manner as an employer, including any similar plan covering any current
or former Agent.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended (including without limitation any successor act), and
the rules and regulations promulgated thereunder.
"ERISA Affiliate" shall mean any Person under common control or a
member of a controlled group of corporations (as defined in Sections 414(b)
and (c) of the Code) with the Seller, the Companies or any of their
subsidiaries.
"Estimated Net Income" shall mean an amount equal to the Seller's
good faith estimate, as certified by the Seller's Chief Financial Officer on
the Closing Date, of the Companies' Actual Net Income.
"Existing Product" shall have the meaning ascribed thereto in Section
3.23.
"Existing Product Holders" shall have the meaning ascribed thereto
in Section 3.23.
"Existing Product Item" shall mean any failure of an Existing
Product to be accorded treatment under the Code that is no less favorable
than the tax treatment under the Code for which such Existing Product was
intended to qualify at the time of its issuance, other than as a result of
(i) changes to the Code which are effective after the Closing Date or (ii) a
ctions undertaken by, or omissions of, an Existing Product Holder that
are contrary to the provisions of an Existing Product.
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"Filing Date" shall have the meaning ascribed to it in Section 2.2(b).
"Financial Statements" shall mean the SAP Statements and the GAAP
Statements.
"Form 8023 Package" shall have the meaning ascribed to it in Section
10.1(g).
"GAAP" shall mean generally accepted accounting principles,
consistently applied throughout the specified period and in the immediately
prior comparable period.
"GAAP Statements" shall mean the financial statements of the Companies
delivered to the Purchaser pursuant to Section 3.8.
"Governmental Authority" shall mean any government or any agency,
bureau, board, commission, court, department,official, political subdivision,
tribunal or other instrumentality of any government, whether federal, state or
local, domestic or foreign.
"Hazardous Materials" shall mean any hazardous or toxic substances,
material or waste that is regulated by any federal authority or by any
state or local governmen tal authority where the substance, material or waste
is located.
"HSR Act" shall mean Section 7A of the Clayton Act (Title II of
the Hart- Scott-Rodino Antitrust Improvements Act of 1976), as amended
(including without limitation any successor act), and the rules and
regulations promulgated thereunder.
"IGL" shall mean Investors Guaranty Life Insurance Company, a
California corporation.
"IGL Shares" shall have the meaning ascribed to it in Section 3.4.
"Indemnified Party" shall mean a Person claiming indemnification under
Article X hereof.
"Indemnifying Party" shall mean a Person against whom claims of indem
nification are being asserted under Article X hereof.
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"Indemnity Notice" shall have the meaning ascribed to it in Section
10.3(c) hereof.
"Intercompany Lease" shall have the meaning ascribed to it in Section
5.12.
"Intercompany Liability Statement" shall have the meaning ascribed
to it in Section 5.6 hereof.
"Inter-Party Claim" shall have the meaning ascribed to it in Section
10.3(c).
"IRS" shall mean the United States Internal Revenue Service or any
successor agency.
"Lien" shall mean any mortgage, pledge, assessment, security
interest, lease, sublease, lien, adverse claim, levy, charge, option,
rights of others or restrictions (whether on voting, sale, transfer,
disposition or otherwise) or other encumbrance of any kind, whether imposed by
agreement, understanding, law or equity, or any conditional sale contract,
title retention contract, or other contract to give or to refrain from giving
any of the foregoing, in each case, other than Permitted Encumbrances.
"Material Adverse Effect" shall mean a material adverse effect on the
validity or enforceability of this Agreement, on the ability of the
Seller or the Purchaser to perform its obligations under this Agreement, or on
the business or condition of the Companies, taken together.
"Mediator" shall have the meaning ascribed to it in Section 2.2(c)
hereof.
"NAIC" shall mean the National Association of Insurance Commissioners.
"Order" shall mean any decree, injunction, judgment, order, ruling,
assessment or writ.
"OSL" shall mean The Ohio State Life Insurance Company, an Ohio
corporation.
"OSL Building" shall mean the property described on Exhibit G.
"OSL Shares" shall have the meaning ascribed to it in Section 3.4.
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"Permitted Encumbrances" shall mean the following: (i) Liens for
Taxes or assessments or other governmental charges or levies (a) that
are not yet delinquent, or (b) that are being contested in good faith
and have been adequately reserved for; (ii) pledges or deposits of the type
reflected in the Companies' 1995 Annual Statements on the Schedule of Special
Deposits; (iii) workers', mechanics', suppliers', carriers',
warehousemen's or other similar liens arising in the ordinary course of
business and securing obligations aggregating not in excess of $200,000 at
any time outstanding, not yet due and payable; and (iv) zoning
restrictions, easements, licenses, or other restrictions on the use of
real property or other minor irregularities in title (including leasehold
title) thereto, so long as the same do not materially impair the use,
value, or marketability of such real property, leases or leasehold
estates.
"Person" shall mean any natural person, corporation, general
partnership, limited partnership, proprietorship, trust, union, association,
court, tribunal, agency, government, department, commission,
self-regulatory organization, arbitrator, board, bureau, instrumentality,
or other entity, enterprise, authority, or business organiza tion.
"Portfolio Stocks" shall mean the Companies' common and preferred
stocks.
"Pre-Closing Straddle Period" shall mean with respect to any taxable
period that commences prior to the Closing Date, but ends on or after the
Closing Date, the portion of the taxable period that commences on the first
day of such taxable period and continues up to and including the Closing Date.
"Purchaser" shall mean Great Southern Life Insurance Company, a Texas
corporation.
"Quarterly Statement" shall mean any quarterly statement of a Company
filed with or submitted to the insurance regulatory authorities of the state
in which such Company is domiciled on a form or forms prescribed or
permitted by such authorities.
"Representative" shall mean, with respect to any Person, any director,
officer, employee, agent, advisor, counsel, accountant, actuary, lender
or other representative of such Person or of any Affiliate of such
Person or any Representative of any of the foregoing.
"Reserve Liabilities" shall have the meaning ascribed to it in Section
3.9.
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"Resolution Accountant" shall have the meaning ascribed to it in
Section 10.1(g) hereof.
"SAP" shall mean, with respect to any Company (or its SAP
Statements), the accounting practices required or permitted by the
National Association of Insurance Commissioners and the insurance regulatory
authorities of the state in which such Company is domiciled, consistently
applied throughout the specified period and in the immediately prior comparable
period.
"SAP Statements" shall mean the Annual Statements, the Quarterly
Statements, and other financial statements and presentations of the Companies
delivered to the Purchaser pursuant to Section 3.7 or Section 5.5 hereof.
"Securities Act" shall mean the Securities Act of 1933, as amended,
and the rules and regulations promulgated thereunder.
"Seller" shall mean Farmers Group, Inc., a Nevada corporation.
"Seller Benefit Plans" shall mean the Benefit Plans set forth in
Section 3.14 of the Disclosure Schedule under the heading "Seller Benefit
Plans."
"Seller Liabilities" shall have the meaning ascribed to it in Section
5.6(a).
"Seller's Assigned Trademarks" shall have the meaning ascribed to it in
Section 5.11.
"Seller's Notice of Objection" shall have the meaning ascribed to it in
Section 2.2(c).
"Services Agreement" shall have the meaning ascribed to it in Section
5.16.
"Shares" shall have the meaning ascribed to it in Section 3.4.
"subsidiary" shall mean, with respect to any Person, any
corporation with respect to which such Person, directly or indirectly
through one or more subsidiaries, owns more than 50% of the outstanding
shares of capital stock having generally the right to vote in the election of
directors.
"Tax" or "Taxes" shall mean all Federal, state, local and
foreign taxes, assessments, and governmental charges (whether imposed
directly or through
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withholdings), including any interest, penalties and additions to Tax applicable
thereto.
"Tax Authority" shall mean the Internal Revenue Service and any other
domestic or foreign governmental authority responsible for the
administration of any Taxes.
"Tax Claim" shall have the meaning ascribed to it in Section 10.1(h)
hereof.
"Tax Returns" shall mean returns, declarations, statements, reports,
schedules, forms and information returns and any amended Tax Return required to
be supplied to a taxing authority in respect of or relating to Taxes.
"Tax Sharing Agreement" shall mean the Tax Sharing Agreement among
the Seller and its subsidiaries provided to the Purchaser under cover of a
letter, dated the date hereof from the Seller to the Purchaser.
"Third Party Claim" shall have the meaning ascribed to it in Section
10.3(a).
"Trademark Agreement" shall have the meaning ascribed to it in Section
5.11.
"Transferred Assets" shall have the meaning ascribed to it in Section
5.17.
"WARN Act" shall have the meaning ascribed to it in Section 6.6.
ARTICLE II
SALE OF SHARES AND CLOSING
2.1 Purchase and Sale. The Seller agrees to sell to the Purchaser,
and the Purchaser agrees to purchase from the Seller, the Shares at the Closing
upon the terms and subject to the conditions set forth in this Agreement.
2.2 Consideration.
(a) The consideration for the OSL Shares and the IGL Shares
(the "Consideration") shall be the sum of (i) $330,085,815, plus (ii) an amount
equal to the Companies' Actual Net Income. The Consideration (calculated for
such purpose by assuming that the Companies' Actual Net Income is equal to the
Estimated Net
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Income), less the amount of any payments made by the Purchaser in respect
thereof concurrently with the execution of this Agreement (and any accrued
interest thereon), shall be payable by the Purchaser at the Closing by
wire transfer in immediately avail able federal funds to such bank and
account as the Seller may specify at least one Business Day prior to the
Closing Date.
(b) The Consideration shall be adjusted after the Closing Date
as follows: (i) if the Companies' Actual Net Income exceeds the Estimated Net
Income, the Purchaser shall pay the Seller an amount equal to such excess; (ii)
if the Estimated Net Income exceeds the Companies' Actual Net Income, the Seller
shall pay the Purchaser an amount equal to such excess; (iii) if the Closing
Date Unrealized Gain is greater than $13,133,646, then the Purchaser shall pay
the Seller an amount equal to the difference; and (iv) if the Closing Date
Unrealized Gain is less than $13,133,646, then the Seller shall pay the
Purchaser an amount equal to the difference; in each case, together with
interest thereon at an annual rate of 8%, accruing from the Closing Date to and
including the date of payment (collectively, the "Consideration Adjustment").
The Purchaser shall calculate the Companies' Actual Net Income and, as soon as
reasonably practicable, but in any event no later than the date (the "Filing
Date") on which both of the Companies have first filed with the insurance
regulatory authorities of the State of Ohio (in the case of OSL) and the State
of California (in the case of IGL) an Annual Statement or Quarterly Statement
that includes financial statements for a period that includes the Closing Date,
the Purchaser shall deliver to the Seller a statement (the "Consideration
Adjustment Statement") setting forth the Companies' Actual Net Income and the
difference between the Companies' Actual Net Income and the Estimated Net
Income, if any. After delivery of the Consideration Adjustment Statement, the
Purchaser shall, and shall cause the Companies to, provide the Seller with
reasonable access to the Companies' books and records sufficient to permit the
Seller to verify the Companies' Actual Net Income.
(c) In the event that the Seller believes that the Purchaser's
calculation of the Companies' Actual Net Income is incorrect, the Seller shall
have the right to challenge such determination in good faith by giving notice of
its objection in writing to the Purchaser within ten Business Days following
delivery of the Consideration Adjustment Statement, setting forth in
reasonable detail the basis for such objection and the Seller's calculation
of the Companies' Actual Net Income (the "Seller's Notice of Objection"). In
the event that the Seller and the Purchaser are unable to agree on the
resolution of such disagreement within ten Business Days following delivery
of the Seller's Notice of Objection to the Purchaser, the Seller and the
Purchaser shall resolve such disagreement in accordance with the following
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procedures. The Purchaser and the Seller shall each select an independent
certified public accountant within ten Business Days after delivery of the
Seller's Notice of Objection for the purpose of selecting a third
independent certified public accountant with a regional or national
accounting practice in the life insurance industry (the "Mediator"). Such
accountants shall mutually select the Mediator and give a written notice to
the Purchaser and the Seller identifying the Mediator, including a
written acceptance of such appointment from the Mediator, within twenty
Business Days after delivery of the Seller's Notice of Objection. The Mediator
shall not have performed services for either the Purchaser or the Seller
within the preceding three years and shall not have testified in any dispute
in which either the Purchaser or the Seller was involved as a party;
provided that the Purchaser and the Seller may waive such restriction in
writing if they mutually agree to such waiver. The Purchaser shall promptly
deliver to the Mediator the Consideration Adjustment Statement, and the
Seller shall promptly deliver to the Mediator the Seller's Notice of
Objection. The Mediator shall review the Consideration Adjustment Statement
and the Seller's Notice of Objection, and each party shall submit to the
Mediator all information reasonably requested by the Mediator to enable the
Mediator to independently resolve the issue which is the subject of the
objection by the Seller. The Mediator shall make its own determination of
the Companies' Actual Net Income, which may not be greater than the
Purchaser's calculation thereof and may not be less than the Seller's
calculation thereof. The Mediator shall issue a written report of its
determination in reasonable detail and shall deliver a copy of such report
to the Seller and the Purchaser within twenty Business Days following
the Mediator's receipt of the Seller's Notice of Objection. The
determination made by the Mediator shall be final and binding and may be
enforced by any court having jurisdiction. The costs of the Mediator's
determination shall be borne by the parties as determined by the Mediator to
be fair, just and equitable. Each party shall bear all costs associated with
its own appointed independent certified public accountant.
(d) The Consideration Adjustment, if any, shall be payable by
the Purchaser or the Seller, as the case may be, within 10 Business Days after
the final determination of the Consideration Adjustment as provided above (the
"Consideration Adjustment Payment Date"). Such payment shall be made by wire
transfer in
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immediately available federal funds to such bank and account as the party
entitled to receive such Consideration Adjustment payment may specify by written
notice received by the party obligated to make such Consideration Adjustment
payment at least one Business Day prior to the Consideration Adjustment Payment
Date.
2.3 Closing. Subject to the provisions of this Agreement, the
Closing shall take place at the offices of Skadden, Arps, Slate, Meagher & Flom
LLP, 300 South Grand Avenue, Los Angeles, California, at 10:00 a.m., local
time, on the Closing Date. At the Closing, the Seller shall assign and
transfer to the Purchaser good and valid title, and all other rights and
interests, in and to the Shares, free and clear of all Liens. To effect such
assignment and transfer, the Seller shall deliver or cause to be delivered to
the Purchaser certificates representing all of the Shares, accompanied by
duly executed blank stock powers or (at the request of the Purchaser) endorsed
in blank for transfer. The Seller shall execute and deliver to the Purchaser
the Shares and such documents and instruments as are required of the Seller
under the terms and provisions of this Agreement. All such certificates, stock
powers, documents, and instruments shall be in form and content reasonably
satisfactory to the Purchaser. The Purchaser shall pay the Consideration and
deliver such documents and instruments as are required of the Purchaser under
the terms and provisions of this Agreement. All such documents and
instruments shall be in form and content reasonably satisfactory to the
Seller.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE SELLER
The Seller hereby represents and warrants to the Purchaser as follows:
3.1 Organization of Seller. The Seller is a corporation duly
organized, validly existing, and in good standing under the laws of the State
of Nevada and has the requisite corporate power and corporate authority to
enter into this Agreement and to perform its obligations under this
Agreement. The Seller is duly licensed, qualified or admitted to do business
and is in good standing in all jurisdictions in which it is required to be
so licensed, qualified or admitted to do business by the laws thereof,
except such as would not have a Material Adverse Effect.
3.2 Authority of Seller. The execution and delivery of this
Agreement, the Trademark Agreement, the Intercompany Lease and the Services
Agreement by the Seller and the performance by the Seller of its obligations
under such agreements are within Seller's corporate powers and have been duly
and validly authorized by all necessary corporate action on the part of the
Seller. Each such agreement constitutes a valid and binding obligation of
the Seller and is enforceable against the Seller in accordance with its
terms, except to the extent that enforcement hereof may be limited by or
subject to applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws now or hereafter in effect affecting creditors' rights
generally and by general principles of equity (regardless of whether
enforcement is sought in equity or at law).
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3.3 Organization of the Companies. Each of the Companies is
(i) a corporation duly organized as a life insurance corporation, validly
existing, and in good standing under the laws of the State of Ohio (in the case
of OSL) or the State of California (in the case of IGL) and (ii) has all
corporate powers required to carry on its business as now conducted. Each of
the Companies is duly licensed, qualified or admitted to do business as an
insurer and is in good standing in all jurisdictions in which it is
required to be so licensed, qualified or admitted to do business by the laws
thereof, except such as would not have a Material Adverse Effect.
3.4 Capital Stock. The authorized capital stock of OSL consists
solely of 3,000,000 shares of common stock, par value $1.00 per share,
of which 1,997,990 shares are issued and outstanding (the "OSL Shares"). The
authorized capital stock of IGL consists solely of 8,500,000 shares of common
stock, par value $2.00 per share, of which 750,000 shares are issued and
outstanding (the "IGL Shares" and, together with the OSL Shares, the
"Shares"). The Shares have been duly authorized and validly issued, are
fully paid and nonassessable and free of preemptive rights and are owned
beneficially and of record by the Seller, free and clear of all Liens,
except as disclosed in the Disclosure Schedule, which Liens shall be
released at or prior to the Closing. Except as provided by this Agreement or
as disclosed in the Disclosure Schedule, there are no outstanding obligations,
securities, options, contracts or other rights that give any Person the right
to purchase or acquire any shares of capital stock of the Companies (or any
other interest therein).
3.5 Subsidiaries. Neither of the Companies has any subsidiaries.
3.6 Conflicts or Violations. Except as set forth in the
Disclosure Schedule, neither the execution and delivery of this Agreement by
the Seller, the consummation by the Seller of the transactions contemplated
hereby, nor the perfor mance by the Seller of its obligations hereunder will:
(a) subject to obtaining the approvals, authorizations
and clearances, and making the filings, contemplated by Sections 5.1, 5.2, 6.1
and 6.2 hereof prior to the Closing Date, violate any term or provision of
any law or any writ, judgment, decree, injunction, or similar order
applicable to the Seller or either of the Companies or require any action by
or in respect of, or filing with any governmental body, agency or official on
the part of the Seller;
(b) conflict with or result in a violation or breach of, or
constitute (with or without notice or lapse of time or both) a default under,
any of the terms,
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conditions or provisions of the Articles of Incorporation or Bylaws of the
Seller or either of the Companies; or
(c) result in a violation or breach of, or constitute (with or
without notice or lapse of time or both) a default under, or give rise to any
right of termination, cancellation or acceleration, or result in the creation of
any Lien under, any contract to which either of the Companies or the Seller is a
party or by which any of their assets or properties may be bound;
except, in each case, such as would not have a Material Adverse Effect;
provided, however, that to the extent that the accuracy of the representations
contained in paragraphs (a) and (c) of this Section 3.6 is affected by the
decision of the United States Supreme Court in John Hancock Mutual Life
Insurance Co. v. Harris Trust and Savings Bank, 114 S. Ct. 517 (1993), such
representations are made to the knowledge of the Seller.
3.7 SAP Statements. The Seller has previously delivered to the
Purchaser true and complete copies of the following SAP Statements:
(a) an Annual Statement of each of the Companies for each of
the years ended December 31, 1993, 1994 and 1995 (and the notes, exhibits and
schedules relating thereto and any affirmations and certifications filed
therewith);
(b) audited statements of admitted assets, liabilities, and
capital and surplus (statutory basis) of each of the Companies as of December
31, 1993, 1994 and 1995, and the related summaries of operations, statements of
capital and surplus and cash flow (statutory basis) for the years then ended,
together with the notes related thereto; and
(c) a Quarterly Statement of each of the Companies for the
nine- month period ended September 30, 1996 (and the exhibits and schedules
relating thereto).
Each such Annual Statement and Quarterly Statement complied in all material
respects with all applicable laws when so filed and was timely filed with all
required insurance regulatory authorities. No deficiencies, other than as set
forth in the Disclosure Schedule, have been asserted or are otherwise known by
the Seller with respect thereto. Each of the SAP Statements (and the exhibits
and schedules relating thereto), including, without limitation, each statement
of assets, liabilities, surplus and other funds (statutory basis) and each of
the summaries of operations, statements
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of capital and surplus and cash flow (statutory basis) contained in the SAP
Statements, was prepared in accordance with SAP applied on a consistent basis
(except for changes, if any, disclosed therein) and is complete in all
material respects, and each such Annual Statement and Quarterly Statement
fairly presents (in accordance with SAP) the financial condition of the
Company to which it relates as of the date thereof, or its results of
operations or cash flows, as the case may be, for and during the period
covered thereby.
3.8 GAAP Statements. The Seller has previously delivered to the
Purchaser the following GAAP Statements:
(a) an audited balance sheet of each of the Companies as of
Decem ber 31, 1993, 1994 and 1995, and the related audited statements of
operations, shareholders' equity, and cash flow for the years then ended,
together with the notes related thereto; and
(b) an unaudited balance sheet of each of the Companies as of
September 30, 1996, and the related unaudited statement of income and
shareholders' equity for the period then ended.
Each such GAAP Statement (and, in the case of the audited GAAP Statements, the
notes relating thereto) was prepared in accordance with GAAP applied on a
consistent basis (except for changes, if any, disclosed therein), and fairly
presents (in accordance with GAAP) the financial position of the Company to
which it relates as of the date thereof or the related results of operations,
shareholder's equity or cash flow (if included in such GAAP Statements) of the
Company to which it relates for and during the period covered thereby.
3.9 Reserves. Except as disclosed in the Disclosure Schedule,
all reserves and other liabilities with respect to insurance and annuities
and for claims and benefits incurred but not reported ("Reserve
Liabilities"), as established or reflected in the SAP Statements of each of
the Companies, have been determined in accordance with generally accepted
actuarial standards (as adopted by the Actuarial Standards Board and the NAIC,
including but not limited to Actuarial Guidelines as found in the Financial
Condition Examiners Handbook) consistently applied, are fairly stated in
accordance with sound actuarial principles, are based on actuarial
assumptions that are in accordance with those called for by the provisions of
the related insurance and annuity contracts and in the related reinsurance,
coinsurance and other similar contracts, meet the requirements of the
insurance laws and regulations of the State of Ohio (in the case of OSL) or the
State of California (in
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the case of IGL), and are at least as great as the minimum aggregate amounts
required for the conduct of business in any other states in which it is
licensed, and adequate provision for all such Reserve Liabilities has been
made (in accordance with SAP). Each of the Companies owns assets that
qualify as admitted assets under applicable laws in an amount at least equal
to such Company's Reserve Liabilities.
3.10 Absence of Changes. Except as disclosed in the Disclosure
Schedule or in the Financial Statements, or as contemplated in this
Agreement, since December 31, 1995, (a) there has not been, occurred, or
arisen any change in, or any event (including without limitation any
damage, destruction, or loss, whether or not covered by insurance),
condition, or state of facts of any character that, individually or in the
aggregate, has had or would reasonably be expected to have a Material Adverse
Effect, (b) the Companies have operated only in the ordinary course of
business consistent with past practice, and (c) without limiting the
generality of the foregoing, neither of the Companies has:
(i) declared, set aside or paid any dividend
or other distribution in respect of its capital stock, or redeemed,
purchased or otherwise acquired any of its capital stock;
(ii) created any Lien on or in any of its assets or
properties or assumed any Lien with respect to any of its assets or properties,
which Lien relates to liabilities that, individually or in the aggregate,
exceed $200,000;
(iii) incurred any liability for borrowed money that,
individu ally or in the aggregate, exceeds $200,000;
(iv) suffered any damage, destruction or loss
(whether or not covered by insurance) affecting any of its assets or
properties, which damage, destruction or loss, individually or in the
aggregate, exceeds $200,000;
(v) suffered the termination or lapse of, or
otherwise failed to preserve, any material license or permit;
(vi) amended its Articles of Incorporation or Bylaws;
(vii) entered into, amended or terminated any
reinsurance, coinsurance or other similar contract; or
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(viii) entered into any contract or agreement to take
any of the actions set forth in paragraphs (i) through (vii) of this Section
3.10.
3.11 Taxes. Except as disclosed in the Disclosure Schedule:
(a) all Federal and state income Tax Returns and
other material income Tax Returns required to be filed by or on behalf of OSL
and IGL have been filed, and all such returns are true, complete and
correct in all material respects;
(b) there are no Liens in respect of Taxes upon the
properties of OSL and IGL, except for Liens in respect of property
Taxes not yet delinquent; and
(c) neither OSL nor IGL is a party to, is bound by, or has
any obligation under any tax sharing contract, other than the Tax Sharing
Agreement.
3.12 Litigation. Except as disclosed in the Disclosure Schedule, there
are no actions, suits, investigations or proceedings pending or, to the
knowledge of the Seller, threatened, against the Seller or the Companies that,
individually or in the aggregate, would reasonably be expected to have a
Material Adverse Effect.
3.13 Compliance With Laws. Except as disclosed in the Disclosure
Schedule, neither of the Companies is in violation of any law or any writ,
judgment, decree, injunction or similar order applicable to it, except such as
would not reasonably be expected to have a Material Adverse Effect.
3.14 Benefit Plans and Employee Matters. The Disclosure Schedule sets
forth under the headings "Seller Benefit Plans" and "Company Benefit Plans" a
complete and correct list of all Seller Benefit Plans and Company Benefit
Plans, respectively, copies of which, including all amendments, summary plan
descriptions and any other written summaries or communications relating
thereto, have been made available to the Purchaser. Each of the Benefit Plans
has been administered in accordance with its terms and with all applicable
material provisions of ERISA, the Code and other applicable Federal and state
laws. Except as disclosed in the Disclosure Schedule, neither of the Companies
(a) has any liability under or in connection with any past or present Benefit
Plan maintained by, or contributed to by or on behalf of, the Seller or the
Companies that has not been, and will not have been as of the Closing, paid or
assumed by the Seller or an ERISA Affiliate of the Seller (other than the
Companies) which exceeds $100,000 in the aggregate, or (b) has any liability
direct or indirect to any employees or Agents of the Seller or any employees or
Agents of any Affiliate of the Seller (other than the Companies).
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Neither of the Companies is a party to or bound by any collective bargaining or
similar labor contract.
3.15 Properties. Except for the Transferred Assets, and as
disclosed in the Disclosure Schedule:
(a) each of the Companies has good, valid and marketable
title in fee simple to, or has a valid leasehold interest in, free and clear
of all Liens, all real property currently used in the conduct of its
business and operations;
(b) each of the Companies has good and marketable title
to, or has legally enforceable rights to use, all tangible personal property
that is (i) used in the conduct of its business and operations, other than
tangible personal property owned by the Seller or one of its Affiliates
(other than the Companies) which is set forth on the Disclosure Schedule, or
(ii) carried for value on its books and records, in each case, free and clear
of all Liens, and all such tangible personal property is, except for
reasonable wear and tear, in good operating condition and repair and is
suitable for its current uses; and
(c) each of the Companies has the right to use, free and
clear of any royalty or other payment obligations, claims of infringement or
alleged infringement, or other Liens, all marks, names, trademarks,
service marks, patents, patent rights, copyrights, trade names and service
marks and, to the Seller's knowledge, assumed names, unregistered logos and
trade secrets, that are used in the conduct of its business and operations
other than the Assigned Trademarks.
3.16 Contracts. The Disclosure Schedule sets forth a true and
complete list of each of the following contracts that are currently in
effect and to which either of the Companies is a party, or by which any of
the assets or properties of either of the Companies is bound:
(a) each agency or consultation contract that is
not terminable without penalty or other liability (other than liabilities
previously accrued thereunder) upon 90 days' or less notice;
(b) each contract containing any provision or
covenant limiting the ability of either of the Companies to engage in
any line of business or to compete with or to obtain products or services
from any Person or, to the knowledge of the Seller, limiting the ability
of any Person to compete with or to provide products or services to either of
the Companies;
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(c) each partnership, joint venture, profit-sharing, or
similar contract with any Person;
(d) each contract relating to (i) the borrowing of
money by either of the Companies or (ii) the direct or indirect guarantee by
either of the Companies of any obligation of any other Person for borrowed
money that, in either case, exceeds $200,000;
(e) each lease or sublease of real property used
in the business and operations of either of the Companies, and each lease,
sublease or rental or use contract for which either of the Companies is
liable, in each case, that (i) is not terminable by either of the Companies
without penalty or other liability (other than liabilities previously accrued
thereunder) upon 90 days' or less notice and (ii) requires annual payments by
the Companies of more than $200,000;
(f) each contract relating to the future
disposition or acquisition by either of the Companies of any assets or
properties of any Person or of any interest in any business enterprise (other
than the disposition or acquisition of investments in the ordinary course
of business and consistent with past practice) that involves consideration in
excess of $200,000;
(g) each contract to which the Seller or any Affiliate
of the Seller (other than the Companies) is a party (including, without
limitation, those relating to allocations of expenses, personnel, services, or
facilities);
(h) each assumption reinsurance (as the ceding or
assuming company), reinsurance, coinsurance or other similar contract
providing for the transfer or sharing of liabilities with respect to in-force
insurance business, and each trust agreement or other security agreement
related thereto, indicating, with respect to each such contract (by
reinsurer or coinsurer) or security agreement, the information required to be
disclosed in Schedule S of an Annual Statement;
(i) each contract or arrangement pursuant to which any
Person guaran tees an obligation of either of the Companies in excess of
$200,000, or pursuant to which either of the Companies guarantees any
obligation of another Person in excess of $200,000; and
(j) each contract not disclosed pursuant to the
foregoing clauses (a) through (i) that involves the payment or potential
payment, pursuant to the terms of such contract, by or to the Companies of
more than $200,000, or that is otherwise
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material to the business or condition of the Companies, other than an
insurance policy, annuity or other contract entered into in the ordinary
course of business.
Neither of the Companies nor, to the knowledge of the Seller, any other party to
any contract set forth on the Disclosure Schedule pursuant to this Section 3.16,
is currently in violation, breach or default under any such contract or, with or
without notice or lapse of time or both, would be in violation or breach of or
default under any such contract, except such as would not have a Material
Adverse Effect.
3.17 Licenses and Permits. Except as disclosed in the
Disclosure Schedule, each of the Companies owns or holds all licenses,
franchises, permits, approvals, authorizations, exemptions,
classifications, certificates, registrations and similar documents or
instruments that are required for its business and operations.
3.18 Operations Insurance. The Disclosure Schedule sets forth a
true and complete list and description (including, without limitation, the
names of the insurers and coverage thereof) of all self insurance
programs (formal programs for the payment or absorption of losses) and all
casualty, liability, property, workers compensation, directors and
officers liability and other insurance contracts that insure the business
and operations of either of the Companies or affect or relate to the
ownership, use or operation of any of the Companies' assets or properties
and (a) that have been issued to the Companies or (b) that are held by the
Seller or by any Affiliate of the Seller (other than the Companies) for the
benefit of the Companies. All such insurance is in full force and effect. All
premiums due with respect to such insurance for all periods up to and
including the Closing Date will have been paid as of such date and no notice
of cancellation or termination has been received with respect to any such
policy. All such policies of insurance will remain in full force and effect
through the Closing Date; provided, however, that the policies referred to
in the foregoing clause (b) may be terminated, or otherwise cease to be in
full force and effect, as of the close of business on the Closing Date
3.19 Intercompany Liabilities. Except as reflected in the
Financial Statements or as disclosed in the Disclosure Schedule, or as
provided under Sec tion 10.1 of this Agreement, there are no liabilities,
contracts or commitments between either of the Companies, on the one
hand, and the Seller or any Affiliate of the Seller (other than the
Companies), on the other, except for liabilities arising under the Tax
Sharing Agreement and liabilities that have been incurred on a basis
consistent with past practice. Except as disclosed in the Disclosure
Schedule, since September 30, 1996, no such intercompany liabilities
have been paid, and no
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settlements of such intercompany liabilities have been made except
intercompany liabilities that have been paid or settled on a basis consistent
with past practice.
3.20 Bank Accounts. The Disclosure Schedule sets forth (a) a
true and complete list of the names and locations of all banks, trust
companies, securities brokers and other financial institutions at which
either of the Companies has an account or safe deposit box or maintains a
banking, custodial, trading or other similar relationship, and (b) a true
and complete list and description of each such account, box and
relationship, indicating, in each case, the account number and the names of
the employees authorized to transact business with respect thereto.
3.21 Brokers. Except as disclosed in the Disclosure Schedule,
all negotiations with respect to this Agreement and the transactions
contemplated hereby have been carried out by the Seller directly with the
Purchaser, without the intervention of any Person on behalf of the
Seller (other than Morgan Stanley & Co. Incorporated) in such manner as to
give rise to any valid claim by any Person against the Purchaser or the
Companies for a finder's fee, brokerage commission, or similar payment. Any
claims or obligations with respect to the items required to be set forth in
the Disclosure Schedule pursuant to this Section 3.21 (including the
fees and expenses of Morgan Stanley & Co. Incorporated) are the
responsibility of and shall be paid by the Seller.
3.22 Environmental. To the knowledge of the Companies, except as
disclosed in the Disclosure Schedule, or such as would not have a Material
Adverse Effect:
(a) there are no underground storage tanks located on the
real property currently owned by the Companies (as used in this Section, the
"real property"), in which any Hazardous Material is being stored, whether or
not any such tank is itself regulated, nor has there been any spill, disposal,
discharge or release of any Hazardous Material into, on, from or over that
real property or into surface or ground water on or under that real
property that would reasonably be expected to result in liability for the
Companies;
(b) there are no asbestos-containing materials or
lead-based paints incorporated into the buildings or interior improvements on
any of that real property, nor is there any electrical transformer owned by
either of the Companies that contains regulated levels of PCBs;
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(c) none of that real property has been or is used as a
treatment, storage or disposal ("TSD") facility, as defined and regulated under
the Resource Conservation and Recovery Act, 42 U.S.C. ss.ss. 6901 et seq.;
(d) there has not been on any of that real property any
prior use that would make applicable the notice or prior approval requirements
of any environmental statute or regulation as a result of this transaction,
of any action contemplated by this Agreement, or in the event of any
"change of control" resulting from this transaction; and
(e) neither of the Companies has disposed of, or
arranged for the transportation or disposal of "hazardous substances" as
defined by the Comprehensive Response Compensation and Liability Act of 1980,
as amended.
3.23 Insurance and Annuity Business.
(a) Except as disclosed in the Disclosure Schedule
or otherwise described in this Agreement, since the Seller acquired the
Companies, the Companies have not been involved in any type of business
activities other than the life insurance and annuity business (collectively,
the "Business").
(b) Except as disclosed in the Disclosure Schedule:
(i) no outstanding insurance or annuity
contract issued, reinsured or underwritten by either of the Companies
that is part of such Company's Business entitles the holder thereof or any
other person or entity to receive dividends, distributions or other benefits
based on the revenues or earnings of such Company or any other entity;
(ii) except for Existing Product Items (with
respect to which the Seller shall indemnify the Purchaser pursuant to
Section 10.1(k)), all currently outstanding insurance, annuity or
investment policies, plans or contracts, financial products,
employee benefit plans, individual retirement accounts, or any similar or
related policy, contract, plan or product, whether individual, group or
otherwise, included in the Business of OSL or IGL and issued, prior to the
Closing Date, by either Company as products having tax attributes under the
Code favorable to the purchaser, policyholder, or intended beneficiary
thereof (an "Existing Product") are eligible for tax treatment that is no less
favorable to such purchaser, policyholder, or beneficiary ("Existing Product
Holders") than the tax treatment under the Code for which such Existing Product
was intended to qualify at the time of its issuance,
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except for any failure to qualify for such treatment that results from (x)
changes to the Code which are effective after the Closing Date or (y)
actions undertaken by, or omissions of, an Existing Product Holder that are
contrary to the provisions of an Existing Prod uct;
(iii) all insurance policies or contracts,
including annuities, that are included in the Companies' respective
businesses and all certificates, forms, applications, advertising materials
and rates or rules are in compliance with all applicable laws and regulations
(other than compliance with tax laws and regulations which is covered by
(ii) immediately above), except where non-compliance would not have a
Material Adverse Effect on such Company; and
(iv) the insurance and annuity business of
each Company has been issued in conformity with such Company's
underwriting standards and, with respect to such business reinsured in
whole or in part, conforms to the standards agreed to with the reinsurer in
the related reinsurance, coinsurance or other similar contracts.
3.24 Agents. Except as disclosed in the Disclosure Schedule, with
respect to each Company:
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(a) each Agent of such Company, at the time such Agent
wrote, sold or produced the business of such Company, was duly licensed as an
insurance agent (for the type of business written, sold or produced by such
Agent) in the particular jurisdiction in which such Agent wrote, sold or
produced such business, except in isolated instances where the failure to
have such license would not have a Material Adverse Effect on such business;
(b) no Agent has, to the knowledge of the Seller or either
of the Companies, violated (or with or without notice or lapse of time or
both, would have violated) any term or provision of any law, regulation or
any writ, judgment, decree, injunction or similar order applicable to the
writing, sale or production of the business of such Company, except where such
violation would not have a Material Adverse Effect on such business; and
(c) all payments due to Agents with respect to each
Company's insurance or annuity business are described in the Agent
contracts, forms of each variant of such contracts have been provided to
the Purchaser by the Seller.
3.25 Actuarial Information. The Seller has previously delivered
to the Purchaser the report of the actuarial firm of Milliman & Robertson,
Inc. dated September 25, 1996, as amended, regarding the Companies'
businesses. The following information provided to Milliman & Robertson,
Inc. upon which such report was based was prepared in accordance with normal
practices in the life insurance industry and the Companies' past practices and
is consistent with the Companies' respective SAP statements: (i) information
about such policies in force, including amount of insurance, gross premiums,
cash values, statutory and tax reserve factors, policy benefits, and commission
rates; and (ii) information with respect to each Company's historical mortality
and persistency experience. The information provided to Milliman & Robertson,
Inc. with respect to inventory of each Company's life insurance and annuity
policies in force as of June 30, 1996 is accurate except for any inaccuracy
that would not result in a material adverse change in the matters presented in
such report.
3.26 Conduct of Business. Since September 30, 1996, except as
disclosed in the Disclosure Schedule, the Companies have conducted their
respective businesses in the ordinary course and consistent with past practice,
and without limiting the generality of the foregoing, have not, during such
period, engaged in any activity of the kind which is prohibited by Section
5.4, and have taken all affirmative actions of the kind that are required by
Section 5.4, except for any actions or activities prior to January 17, 1997
that would be prohibited by Section 5.4(j).
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
The Purchaser hereby represents and warrants to the Seller as follows:
4.1 Organization of the Purchaser. The Purchaser is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Texas and has the requisite corporate power and corporate
authority to enter into this Agreement and to perform its obligations under
this Agreement. The Purchaser is duly licensed, qualified or admitted to
do business and is in good standing in all jurisdictions in which it is
required to be so licensed, qualified or admitted to do business by the laws
thereof, except such as would not have a Material Adverse Effect.
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4.2 Authority of Purchaser. The execution and delivery of
this Agreement by the Purchaser and the performance by the Purchaser
of its obligations under this Agreement have been duly and validly
authorized by all necessary corporate action on the part of the
Purchaser. This Agreement constitutes a valid and binding obligation of the
Purchaser and is enforceable against the Purchaser in accordance with its
terms, except to the extent that enforcement hereof may be limited by or
subject to applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws now or hereafter in effect affecting creditors' rights
generally and by general principles of equity (regardless of whether
enforcement is sought in equity or at law).
4.3 Conflicts or Violations. Neither the execution and delivery of
this Agreement by the Purchaser, the consummation by the Purchaser
of the transactions contemplated hereby, nor the performance by the
Purchaser of its obligations hereunder will:
(a) subject to obtaining the approvals, authorizations
and clearances, and making the filings, contemplated by Sections 5.1 and
5.2 and Sections 6.1 and 6.2 hereof prior to the Closing Date, violate
any term or provision of any law or any writ, judgment, decree, injunction, or
similar order applicable to the Purchaser;
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(b) conflict with or result in a violation or breach of, or
constitute (with or without notice or lapse of time or both) a default under,
any of the terms, conditions, or provisions of the Articles or Certificate of
Incorporation, Bylaws or other organizational documents of the Purchaser; or
(c) result in a violation or breach of, or constitute (with
or without notice or lapse of time or both) a default under, or give rise to
any right of termination, cancellation, or acceleration, or result in the
creation of any Lien under, any contract to which the Purchaser is a party
or by which any of its assets or properties may be bound;
except, in each case, such as would not have a Material Adverse Effect;
provided, however, that to the extent that the accuracy of the representations
contained in paragraphs (a) and (c) of this Section 4.3 is affected by the
decision of the United States Supreme Court in John Hancock Mutual Life
Insurance Co. v. Harris Trust and Savings Bank, 114 S. Ct. 517 (1993), such
representations are made to the knowledge of the Purchaser.
4.4 Litigation. There are no actions, suits,
investigations or proceedings pending or, to the knowledge of the Purchaser,
threatened against the Purchaser that, individually or in the aggregate,
would reasonably be expected to have a Material Adverse Effect.
4.5 Purchase for Investment. The Shares to be acquired under the
terms of this Agreement will be acquired by the Purchaser for its own account
for the purpose of investment and not for the purpose of a "distribution,"
within the meaning of the Securities Act. The Purchaser will not transfer
or otherwise dispose of any of the Shares acquired by it, or any interest
therein, in any manner that would violate any provision of the Securities Act
or any applicable state securities law. The Purchaser agrees that the
certificates representing the Shares may bear legends to the effect
that the Shares have not been registered under the Securities Act or
state securities laws, and that no interest therein may be transferred or
otherwise disposed of in violation of the provisions thereof.
4.6 Brokers. All negotiations with respect to this Agreement
and the transactions contemplated hereby have been carried out by the Purchaser
directly with the Seller, without the intervention of any Person on
behalf of the Purchaser in such manner as to give rise to any valid claim
by any Person against the Seller, the
Companies or any of the Seller's subsidiaries for a finder's fee, brokerage
commis sion, or similar payment.
4.7 Financial Capacity. The Purchaser has the financial capacity to
consummate the transactions contemplated hereby, including, without limitation,
sufficient financing to pay the Consideration at the Closing, as well as all
other costs and expenses incurred by it in connection therewith. The Purchaser
has fully disclosed to the Seller its plan for financing the transactions
contemplated hereby.
ARTICLE V
COVENANTS OF THE SELLER
5.1 Regulatory and Other Approvals. The Seller shall, and shall cause
each of the Companies to, (a) take all commercially reasonable steps necessary
or desirable, and proceed diligently and in good faith and use all commercially
reasonable efforts to obtain, as promptly as practicable, all approvals required
by any applicable contract of the Seller or the Companies to consummate the
transactions contemplated hereby, (b) take all reasonable steps necessary or
desirable, and proceed diligently and in good faith and use best efforts to
obtain, as
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promptly as practicable, all approvals, authorizations and clearances of
governmental and regulatory authorities required of the Seller or the
Companies to permit the Seller to consummate the transactions contemplated
hereby, (c) provide such other information and communi cations to such
governmental and regulatory authorities as the Purchaser or such authorities
may reasonably request and (d) cooperate with the Purchaser in obtaining, as
promptly as practicable, all approvals, authorizations, and clearances of
govern mental or regulatory authorities and others required of the Purchaser
to consummate the transactions contemplated hereby, including, without
limitation, any required approvals of the insurance regulatory authorities of
the States of Ohio and California; provided, however, that in no case shall
the Seller be under any obligation pursuant to this Section 5.1 or Section 5.2
to incur costs or expenses or suffer conditions that, individually or in the
aggregate, are materially burdensome.
5.2 HSR Filings. The Seller shall (a) take promptly all actions
necessary to make the filings required of the Seller or its Affiliates under
the HSR Act, (b) comply at the earliest practicable date with any request
for additional information received by the Seller or its Affiliates from the
Federal Trade Commission or Antitrust Division of the Department of Justice
pursuant to the HSR Act, (c) cooperate with the Purchaser in connection with
the Purchaser's filings under the HSR Act and (d) request early termination of
the applicable waiting period.
5.3 Investigation by the Purchaser. Prior to the Closing, the Seller
shall provide, and shall cause the Companies to provide, to the Purchaser,
its lenders, and their respective counsel, accountants, actuaries and
other Representatives, access, upon reasonable notice and during normal
business hours, to employees of the Seller and the Companies, and to the
facilities, accountants, actuaries, assets, properties and books and
records of the Companies and shall furnish the Purchaser and such other
Persons during such period with all such information and data (including
without limitation copies of contracts and other books and records) concerning
the business and operations of the Companies as the Purchaser or any of such
other Persons may reasonably request, except to the extent that the
disclosure of any such information could result in the waiver of any
attorney-client privilege, in which event the Seller shall so advise the
Purchaser; provided, however, that all information disclosed to the Purchaser
and such other Persons pursuant hereto shall be subject to the terms of the
Confidentiality Agreement.
5.4 Conduct of Business. Except as otherwise provided in this Agreement
or as may be consented to in writing by the Purchaser, prior to the Closing,
the Seller shall cause each of the Companies to conduct its business only
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in the ordinary course and consistent with past practice, and, without
limiting the generality of the foregoing, the Seller shall cause each of the
Companies:
(a) to use all commercially reasonable efforts to (i)
preserve intact its present business organization, reputation and
policyholder or customer relations, (ii) keep available the services of
its key employees, agents, consultants and other similar representatives,
(iii) maintain all material licenses, qualifications and authorizations to
do business in each jurisdiction in which it is so licensed, qualified
or authorized, (iv) comply with all terms of all material contracts to which
it is a party or by which any of its assets or properties is or may be
bound, and (v) maintain all of its assets and properties in good working
order and condition, ordinary wear and tear excepted;
(b) to maintain its books and records in the usual manner and
consistent with past practice with no material changes in any underwriting,
investment, actuarial, financial reporting or accounting practice or policy;
(c) to prepare and file all Tax Returns required to be filed by
it prior to the Closing Date, and pay all Taxes indicated on such Tax
Returns or otherwise due and payable prior to the Closing Date, unless such
Taxes are being contested in good faith and adequate reserves have been
established on its books and records;
(d) to comply in all material respects with all laws applicable
to its business and operations;
(e) not to merge, consolidate or combine with any other Person,
or to liquidate, dissolve or reorganize;
(f) not to amend its Articles of Incorporation or Bylaws;
(g) not to issue any shares of its capital stock or other
equity securities or enter into any contract to issue any such shares or
other equity securities;
(h) not to pay any dividend or other distribution in
respect of its capital stock, or redeem, purchase or otherwise acquire any of
its capital stock (it being understood that payments made pursuant to the Tax
Sharing Agreement are not dividends or distributions);
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(i) not to incur any indebtedness for borrowed money
other than intercompany liabilities owed by the Companies to the Seller or an
Affiliate of the Seller that are incurred and paid in the ordinary course
of business and consistent with past practice; and
(j) to refrain from selling any investment assets, other than
cash and cash equivalents, except as consented to in writing by the Purchaser;
provided, however, that the receipt of principal payments on securities which
are made at the option of the issuer or are paid in accordance with their
terms shall not constitute a sale of assets.
5.5 Financial Statements. As promptly as practicable after an
Annual Statement or Quarterly Statement is filed by either of the Companies
after the date hereof and prior to the Closing Date, the Seller shall
deliver to the Purchaser a copy of such Annual Statement or Quarterly
Statement and a copy of the Companies' financial statements prepared in
accordance with GAAP for the same periods, which, in the case of the 1996
year-end statements, shall be audited.
<PAGE> 38
5.6 Intercompany Liabilities. (a) Prior to the Closing, the Seller shall
continue to provide services for, and enter into transactions with, the
Companies consistent with past practice. Except as otherwise specifically
provided herein or in the Trademark Agreements, the Intercompany Lease or the
Services Agreement, as of the Closing Date, the Seller shall terminate, and
shall cause its Affiliates to terminate, all contracts, arrangements and
transactions between either of the Companies, on one hand, and the Seller or any
Affiliate of the Seller (other than the Companies), on the other. At least ten
(10) days prior to the Closing Date, the Seller shall deliver to the Purchaser a
bona fide estimate of (i) all liabilities (the "Company Liabilities") owed by
the Companies to the Seller or any Affiliate of the Seller (other than the
Companies) as of the Closing Date, and (ii) all liabilities (the "Seller
Liabilities") owed by the Seller or any Affiliate of the Seller (other than the
Companies) to the Companies as of the Closing Date. Within 60 calendar days
after the Closing, the Seller shall deliver to the Purchaser a complete list and
description (the "Intercompany Liability Statement") in reasonable detail
(including dollar amounts) of the Company Liabilities and the Seller
Liabilities. If the Company Liabilities exceed the Seller Liabilities, within 30
calendar days of receipt of the Intercompany Liability Statement, the Purchaser
shall pay, or cause the Companies to pay, the amount of such excess, except as
otherwise provided under Section 10.1 of this Agreement. If the Seller
Liabilities exceed the Company Liabilities, within 30 calendar days of delivery
of the Intercompany Liability Statement, the Seller shall pay or cause its
Affiliates to pay, the amount of such excess.
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(b) In accordance with the provisions of the preceding paragraph, the
Seller shall cause the Tax Sharing Agreement to be terminated with respect to
the Companies as of the Closing Date. In addition, effective as of the Closing
Date: (i) Seller shall, and Seller shall cause each of its Affiliates other than
the Companies to, release each of the Companies from any and all further
liability and obligation to make any payments of any kind whatsoever to the
Seller or to any of such Affiliates under the Tax Sharing Agreement, other than
payments shown on the Intercompany Liability Statement; and (ii) each of the
Companies shall release the Seller and each of its Affiliates other than the
Companies from any and all further liability and obligation to make any payments
of any kind whatsoever to either of the Companies under the Tax Sharing
Agreement, other than any credits reflected on the Intercompany Liability
Statement. Each of the parties shall, and the Purchaser and the Seller shall
cause their Affiliates other than the Companies to, execute and deliver at the
Closing all documentation reasonably requested by the other to effectuate the
provisions of this paragraph. These provisions shall, notwithstanding any other
provisions in this Agreement, survive the Closing without limitation as to time.
5.7 Resignations of Directors. The Seller shall cause each member
of the Board of Directors of the Companies to tender, effective at the
Closing, his or her resignation from such Board of Directors.
5.8 Books and Records. After the Closing, the Seller shall deliver
to the Purchaser, or make available to the Purchaser copies of, all books and
records of the Companies in the possession of the Seller or any of its
Affiliates (other than the Companies).
5.9 Notice and Cure. Prior to the Closing, the Seller shall notify
the Purchaser promptly in writing of, and shall use all commercially
reasonable efforts to cure before the Closing, any event, transaction, or
circumstance occurring after the date of this Agreement that causes or
will cause any covenant or agreement of the Seller under this Agreement to be
breached, or that renders or will render untrue any representation or
warranty of the Seller contained in this Agreement as if the same were made
on or as of the Closing Date.
5.10 Employee Matters. From and after the Closing, each of the
Companies shall cease to be a participating employer under any of the
Seller Benefit Plans, in accordance with the terms of such plans, and the
Seller shall take all such action as is necessary, on its part, to
effect such cessation of participation and accrual. The Seller agrees that
such cessation shall not limit or adversely affect the
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future participation of retired or former employees or Agents of the
Companies (or of their "qualified beneficiaries") who have elected,
prior to, or as of, the Closing Date, (a) to participate in the Seller's
retiree health and life insurance plan(s), or (b) to continue group health
insurance coverage under the provisions of Section 4980B(f) of the Code
(commonly referred to as "COBRA"), and the Seller shall retain all, and
the Purchaser and the Companies shall have no, responsibility or
liability in connection therewith. Except as otherwise provided in Section
6.6, the Seller shall assume or retain, as the case may be, all liabilities
under the Seller Benefit Plans, including but not limited to benefits
accrued by employees, Agents and former employees and Agents of the Companies
prior to, or as of, the Closing Date. The Seller shall honor or cause its
insurance carriers to honor all claims for benefits by a current or
former employee or Agent of the Companies under any of the Seller Benefit
Plans that is an Employee Welfare Benefit Plan, with respect to claims
incurred prior to, or as of, the Closing Date.
5.11 Trademark Agreements. At or prior to the Closing, the Seller
shall enter into a Trademark Assignment Agreement, substantially in the form of
Exhibit A hereto (each, a "Trademark Agreement"), with each of the Companies,
providing for (a) the transfer to the Seller or its Affiliates of any and
all of such Company's rights in and to those names, marks, logos,
designs and other intellectual property associated with the Seller and its
Affiliates other than the Companies (in each case, the "Seller's Assigned
Trademarks"), and (b) the transfer to such Company of any and all of the
Seller's rights in and to those names, marks, logos, designs and other
intellectual property associated with such Company (in each case, the
"Companies' Assigned Trademarks").
5.12 Intercompany Lease. At or prior to the Closing, the Seller
shall cause F.I.G. Holding Company and OSL to enter into a lease relating to
office space in the OSL Building, substantially in the form of Exhibit B
hereto (the "Intercompany Lease").
5.13 Intentionally Omitted.
5.14 Pension Reserve. At or prior to the Closing, the Seller shall
cause each of the Companies to release the amount of its provision for
pension and other employee welfare obligations, as reflected on a
statement of admitted assets, liabilities and capital and surplus (statutory
basis) of each of the Companies as of the Closing Date prepared on the
same basis as the SAP Statements, to the extent that the liabilities and
obligations to which such provision relates have been or will be paid or
assumed by the Seller.
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5.15 No Churning. Neither the Seller nor any of its Affiliates shall
take any action after the date hereof intended to knowingly solicit or
induce exchanges or replacements of any policies of either of the Companies
which are in force or have been applied for prior to the close of business on
the Closing Date, or knowingly exchange or replace any of such policies.
5.16 Transition Services. At or prior to the Closing, the Seller
shall enter into a Transition Services Agreement, substantially in the form
of Exhibit D hereto (each, a "Services Agreement"), with each of the Companies.
5.17 Purchase of Certain Assets. Pursuant to agreements reasonably
acceptable to the Seller, the Seller shall purchase from the Companies the
following assets (collectively, the "Transferred Assets"): (i) immediately
after the Closing, all of the Portfolio Stocks for a price equal to their
respective fair market values as of the close of the markets as of the Closing
Date; (ii) immediately prior to the Closing, all of the Companies' real
property for a price equal to their respective statutory book values as of the
Closing Date; (iii) immediately prior to the Closing, all of the Companies'
mortgage loans on real estate at their amortized statutory book values at
the close of business as of the Closing Date; and (iv) immediately
prior to the Closing, all of the Companies' interests in the Northtowne
Apartments limited partnership and the Midwest Mezzanine Fund limited
partnership, in each case, at statutory book value as of the Closing Date.
5.18 Assumption of Certain Litigation Matters. After the Closing,
the Seller shall direct the defense and settlement of the Companies in the
following lawsuits: (i) Charton, Bermes, Rovenger v. OSL; (ii) Wright v. OSL;
(iii) OSL v. Morse Road Company; and (iv) OSL v. NDT Technology (collectively,
the "Assumed Litigation Matters"); and shall indemnify and hold harmless
the Companies from any costs or losses arising from such matters;
provided, however, that no compromise or settlement of the Assumed
Litigation Matters may be effected by the Seller without the Purchaser's
consent if such compromise or settlement involves relief other than monetary
damages paid by the Seller.
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ARTICLE VI
COVENANTS OF THE PURCHASER
6.1 Regulatory Approvals. The Purchaser shall (a) take all
commercially reasonable steps necessary or desirable, and proceed
diligently and in good faith and use all commercially reasonable efforts to
obtain, as promptly as practicable, all approvals required by any applicable
contract of the Purchaser or any of its Affiliates to consummate the
transactions contemplated hereby, (b) take all reasonable steps necessary or
desirable, and proceed diligently and in good faith and use best efforts to
obtain, as promptly as practicable, all approvals, authorizations and
clearances of governmental and regulatory authorities required of the
Purchaser to permit the Purchaser to consummate the transactions contemplated
hereby, including, without limitation, any required approvals of the
insurance regulatory authorities of the States of Ohio and California, (c)
provide such other information, communications and commitments to such
governmental and regulatory authorities as the Seller or such
authorities may reasonably request and (d) cooperate with the Seller and
the Companies (including, without limitation, providing the Seller and the
Companies with a reasonable opportunity to review any regulatory filings
and correspondence prior to their submission to the relevant regulatory
authorities, and the opportunity to participate in any meetings with regulatory
authorities) in obtaining, as promptly as practicable, all approvals,
authorizations and clearances of governmental or regulatory authorities
required of the Seller and the Companies to consummate the transactions
contemplated hereby.
6.2 HSR Filings. The Purchaser shall (a) take promptly all
actions necessary to make the filings required of the Purchaser or its
Affiliates under the HSR Act, (b) comply at the earliest practicable date
with any request for additional information received by the Purchaser or
any of its Affiliates from the Federal Trade Commission or Antitrust Division
of the Department of Justice pursuant to the HSR Act, (c) cooperate with the
Seller in connection with the Seller's filings under the HSR Act and (d)
request early termination of the applicable waiting period.
6.3 Non-Solicitation. Prior to the Closing Date and after any
termination of this Agreement prior to Closing, the Purchaser shall not, and
shall cause its present and future Affiliates not to, directly or indirectly,
utilize or attempt to utilize any information obtained from the Seller
or the Companies in connection with the transactions contemplated by
this Agreement, and not otherwise legally in the possession of the
Purchaser or the public, regarding the Companies or their policyholders
or customers (a) in any manner that might be competitive with the Companies
or (b) for the purpose of causing or attempting to cause (i) any
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policyhold er or customer to replace or terminate an insurance or annuity
contract or other investment or financial product issued, reinsured,
underwritten or sold by either of the Companies in whole or in part, with
products of any other Person at any time, (ii) any reinsurer to terminate any
reinsurance, coinsurance or other similar contract, or sever a relationship,
with either of the Companies at any time, or (iii) any agent (including
without limitation any insurance agent), consultant or other Representative of
either of the Companies to resign or sever a relationship with either of the
Companies at any time.
6.4 Notice and Cure. Prior to the Closing, the Purchaser shall
notify the Seller promptly in writing of, and shall use all commercially
reasonable efforts to cure before the Closing, any event, transaction or
circumstance occurring after the date of this Agreement that comes to the
attention of the Purchaser which causes or will cause any covenant or agreement
of the Purchaser under this Agreement to be breached, or that renders
or will render untrue any representation or warranty of the Purchaser
contained in this Agreement as if the same were made on or as of the Closing
Date.
6.5 Intercompany Liabilities. If the Company Liabilities exceed
the Seller Liabilities, within 30 calendar days of receipt of the Intercompany
Liability Statement, the Purchaser shall pay, or cause the Companies to
pay, the amount of such excess, except as otherwise provided under
Section 10.1 of this Agreement.
6.6 Employees.
(a) After the Closing Date, each of the Companies shall cease
to be a participating employer under the Seller Benefit Plans, in accordance
with the terms thereof, and the Purchaser shall, and shall cause the Companies
to, cooperate with the Seller and take all actions as are reasonably requested
by the Seller to effect such cessation of participation.
(b) As soon as practicable after the Closing Date, the
Purchaser shall take all steps as may be necessary to (i) cause the employee
welfare benefit plans (as such term is defined in ERISA ss. 3(1)) maintained by
the Purchaser to recognize the service rendered by employees and former
employees of the Companies prior to the Closing Date for purposes of determining
eligibility, vesting and benefit accrual to the extent such service would have
been recognized for such purposes under such plans had such service been
rendered directly to the Purchaser; (ii) waive any exclusions or limits for
preexisting conditions (except to the extent that any employee or former
employee of the Companies was subject to an exclusion or limit for a pre
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- -existing condition under an Employee Welfare Benefit Plan); and (iii) cause
the employee pension benefit plans (as such term is defined in ERISA ss. 3(2))
maintained by the Purchaser to recognize the service rendered by
employees and former employees of the Companies through the Closing Date for
purposes of determining eligibility and vesting (but not benefit accrual) to
the extent such service would have been recognized for such purposes under
such plans had such service been rendered directly to the Purchaser.
(c) The Purchaser shall indemnify and hold harmless the Seller
with respect to all liabilities and obligations whatsoever in connection with
claims made by or on behalf of the employees and former employees of the
Companies (including, without limitation, liabilities with respect to severance
pay, salary continuation, group health care continuation coverage and similar
obligations) relating to any termination or alleged termination of employment or
coverage after the Closing, other than those relating to liabilities under the
Seller Benefit Plans that are specifically assumed by the Seller pursuant to
Section 5.10.
(d) The Purchaser hereby assumes all liability for any
alleged failure to give, or cause the Companies to give, all notices required
by the U.S. Worker Adjustment and Retraining Notification Act of 1988, as
amended (the "WARN Act"), and any similar state law or regulation by reason of
events occurring after the Closing Date. The Purchaser shall indemnify and
hold harmless the Seller and its Affiliates with respect to any and all claims
asserted under the WARN Act or any similar state law or regulation
because of a "plant closing" or "mass layoff" with respect to the Companies
occurring after the Closing Date. For purposes of this Agreement, the Closing
Date shall be the "effective date" for purposes of the WARN Act.
(e) After the Closing, the Purchaser shall, or shall cause one
of its affiliates to, use reasonable efforts to employ persons employed by the
Companies as of the Closing Date with benefits and terms of employment
equivalent to those offered employees of the Purchaser as of such date and with
base compensation competitive with that provided to such employees as of such
date; provided, however, that nothing herein shall (i) alter the
employment-at-will status of any employee, or (ii) prohibit the Purchaser or its
affiliate from terminating any employee for cause or reducing the number of
employees of the Companies as a result of improved efficiencies resulting from
the implementation of new technology. After the Closing, the Purchaser intends
to cause one of its affiliates to employ and retain, at a minimum, employees of
the Companies in Columbus, Ohio engaged in sales, new business, policyowner
service, claims, billing, agency compensations, underwriting,
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commission accounting, and general accounting. After the Closing, if a position
held by any person employed by the Companies as of the Closing Date is
eliminated and a similar position is available with the Purchaser or one of
its affiliates, the Purchaser will use reasonable efforts to make such
position available to the person whose position has been eliminated if such
person otherwise satisfies the Purchaser's standards and qualifications for
such employment. If the Purchaser or one of its affiliates offers any of the
Companies' employees a position at a location outside of Columbus, Ohio, the
Purchaser shall, or shall cause such affiliate to, pay such employee's
reasonable relocation costs. After the Closing, the Purchaser shall, or
shall cause its affiliate to, make severance payments to the persons employed
by the Companies as of the Closing, consistent with the Purchaser's policies
in effect prior to the Closing.
6.7 Confidentiality. The Purchaser agrees that all information and data
obtained by the Purchaser or the Purchaser's Representatives from the Seller,
its Affiliates, and their employees, agents and Representatives shall be kept
confidential in accordance with the terms of the Confidentiality Agreement.
6.8 Cooperation. The Purchaser agrees that the Seller will direct the
defense and/or settlement of the Assumed Litigation Matters; provided, however
that no compromise or settlement of the Assumed Litigation Matters may be
effected by the Seller without the Purchaser's consent if such compromise or
settlement involves relief other than monetary damages paid by the Seller. The
Purchaser shall, and shall cause the Companies and their employees to, fully
cooperate with the Seller with respect to the Seller's defense of the Companies
in the Assumed Litigation Matters, including, without limitation, providing the
Purchaser with access to the Company's employees and records relating thereto.
The Purchaser shall not, and shall cause the Companies and their employees not
to, interfere with the Seller's defense or settlement of the Companies in the
Assumed Litigation Matters.
ARTICLE VII
CONDITIONS TO OBLIGATIONS OF THE PURCHASER
The obligation of the Purchaser to consummate the transactions
described in Article II of this Agreement are subject to the fulfillment, at or
before the Closing, of each of the following conditions (all or any of which may
be waived in whole or in part by the Purchaser):
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7.1 Representations and Warranties. The representations and warranties
of the Seller set forth in this Agreement shall be true and correct in all
material respects on and as of the Closing Date as though such
representations and warranties were made on and as of such date, except
for any breach of a representation or warranty resulting from any action
taken by the Seller or any of its Affiliates or any of their Representatives
that is required by, or contemplated under, this Agreement.
7.2 Performance. The Seller shall have performed or complied in all
material respects with all agreements, covenants, obligations and conditions
required by this Agreement to be so performed or complied with by the Seller at
or before the Closing.
7.3 Officer's Certificates. The Seller shall have delivered to the
Purchaser a certificate, dated the Closing Date, in form and substance
reasonably acceptable to the Purchaser and executed by the chief executive
officer, vice president of life insurance operations or senior vice president of
the Seller, certifying that the conditions set forth in Sections 7.1 and 7.2
have been satisfied and that, to the best of such officer's knowledge, the
conditions set forth in Sections 7.5, 7.6 and 7.8 have been satisfied, and
setting forth the amount of Estimated Net Income. In addition, the Seller
shall have delivered to the Purchaser a certificate, dated the Closing Date
and executed by the secretary or any assistant secretary of the Seller,
certifying that the Seller has duly and validly taken all corporate action
necessary to authorize its execution and delivery of this Agreement and its
performance of its obligations under this Agreement, and that the
resolutions (true and complete copies of which shall be attached to
the certificate) of the Board of Directors of the Seller with respect to
this Agreement and the transactions contemplated hereby have been duly and
validly adopted and are in full force and effect.
7.4 HSR Act Approval. All waiting periods applicable to this
Agreement and the transactions contemplated hereby under the HSR Act shall have
expired or been terminated.
7.5 No Injunction. There shall not be in effect on the Closing Date
any writ, judgment, injunction, decree or similar order of any court or
similar Person restraining, enjoining or otherwise preventing consummation of
any of the transac tions contemplated by this Agreement.
7.6 No Proceeding or Litigation. There shall not be instituted,
pending or, to the knowledge of the Seller and the Purchaser, threatened,
any action, suit, investigation, or other proceeding in, before or by
any court, governmental or
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regulatory authority or other Person to restrain, enjoin or otherwise
prevent consummation of any of the transactions contemplated by this
Agreement or to recover any Damages or obtain other relief as a result of
this Agreement or any of the transactions contemplated hereby or as a result
of any contract entered into in connection with or as a condition
precedent to the consummation hereof, which action, suit, investigation or
other proceeding would, in the reasonable opinion of the Purchaser, result in
a decision, ruling, or finding that, individually or in the aggregate, has or
would reasonably be expected to have a Material Adverse Effect. There shall
not be in effect on the Closing Date any voluntary or involuntary
bankruptcy, receivership, conservatorship or similar proceeding with
respect to the Seller or either of the Companies.
7.7 Consents, Authorizations, etc. All orders, consents, permits,
authorizations, approvals, and waivers of every Person necessary to permit the
Purchaser to perform its obligations under this Agreement and to consummate the
transactions contemplated hereby (including, without limitation, any requisite
action of the insurance regulatory authorities of the States of Ohio and
California, and any other insurance regulatory authorities which have
jurisdiction over thetransactions contemplated hereby) shall have been
obtained and shall be in full force and effect.
7.8 No Adverse Change. Since the date of the most recent Financial
State ments, except as disclosed in the Disclosure Schedule, there shall
not have been, occurred or arisen any change, event (including without
limitation any damage, destruction or loss, whether or not covered by
insurance), condition or state of facts that, individually or in the
aggregate, has or would reasonably be expected to have a Material Adverse
Effect.
7.9 Opinions of Counsel. The Seller shall have delivered to the
Purchaser an opinion, in form and substance reasonably acceptable to the
Purchaser, dated the Closing Date, of Jason L. Katz, Senior Vice President and
General Counsel of the Seller, or other counsel to the Seller reasonably
acceptable to the Purchaser, as to the matters set forth on Exhibit E hereto.
ARTICLE VIII
CONDITIONS TO OBLIGATIONS OF THE SELLER
The obligations of the Seller to consummate the transactions described
in Article II of this Agreement are subject to the fulfillment, at or before the
Closing, of each of the following conditions (all or any of which may be waived
in whole or in part by the Seller):
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8.1 Representations and Warranties. The representations and warranties
of the Purchaser set forth in this Agreement shall be true and correct in
all material respects on and as of the Closing Date as though such
representations and warranties were made on and as of such date.
8.2 Performance. The Purchaser shall have performed or complied in all
material respects with all agreements, covenants, obligations and conditions
required by this Agreement to be so performed or complied with by the Purchaser
at or before the Closing.
8.3 Officer's Certificates. The Purchaser shall have delivered to
the Seller a certificate, dated the Closing Date, in form and substance
reasonably acceptable to the Seller and executed by the chief executive
officer or chief financial officer of the Purchaser, certifying that the
conditions set forth in Sections 8.1 and 8.2 have been satisfied and that, to
the best of such officer's knowledge, the conditions set forth in Sections
8.5, 8.6 and 8.7 have been satisfied. In addition, the Purchaser shall
have delivered to the Seller a certificate, dated the Closing Date and
executed by the secretary or any assistant secretary of the Purchaser,
certifying that the Purchaser has duly and validly taken all corporate
action necessary to authorize its execution and delivery of this Agreement
and its performance of its obligations under this Agreement, and that any
required resolutions (true and complete copies of which shall be
attached to the certificate) of the board of directors of the Purchaser
with respect to this Agreement and the transactions contemplated hereby have
been duly and validly adopted and are in full force and effect.
8.4 HSR Act Approval. All waiting periods applicable to this
Agreement and the transactions contemplated hereby under the HSR Act shall have
expired or been terminated.
8.5 No Injunction. There shall not be in effect on the Closing Date
any writ, judgment, injunction, decree or similar order of any court or
similar Person restraining, enjoining or otherwise preventing consummation of
any of the transactions contemplated by this Agreement.
8.6 No Proceeding or Litigation. There shall not be instituted,
pending or, to the knowledge of the Purchaser or the Seller, threatened, any
action, suit, investigation or other proceeding in, before or by any court,
governmental or
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regulatory authority or other Person to restrain, enjoin or otherwise prevent
consummation of any of the transactions contemplated by this Agreement, or
to recover any Damages or obtain other relief as a result of this Agreement or
any of the transactions contemplated hereby or as a result of any contract
entered into in connection with or as a condition precedent to the consummation
hereof, which action, suit, investigation or other proceeding may, in the
reasonable opinion of the Seller, result in a decision, ruling,
or finding that individually or in the aggregate has or would reasonably be
expected to have a Material Adverse Effect. There shall not be in effect on
the Closing Date any voluntary or involuntary bankruptcy, receiver ship,
conservatorship or similar proceeding with respect to the Purchaser.
8.7 Consents, Authorizations, etc. All orders, consents, permits,
authorizations, approvals and waivers of every Person necessary to permit the
Seller to perform its obligations under this Agreement and to consummate the
transactions contemplated hereby shall have been obtained and shall be in full
force and effect.
8.8 Opinion of Counsel. Texas, Ohio and California counsel to the
Purchaser that are reasonably acceptable to the Seller shall have delivered to
the Seller an opinion, in form and substance reasonably acceptable to the
Seller, dated the Closing Date, as to the matters set forth on Exhibit F hereto.
ARTICLE IX
SURVIVAL OF PROVISIONS; REMEDIES
9.1 Survival. The representations, warranties, covenants and
agreements made by the Seller and the Purchaser in this Agreement, or in any
certificate delivered by the Seller or the Purchaser pursuant to Section 7.3
or Section 8.3 hereof shall survive the Closing:
(a) until the earlier of the third anniversary of the Closing
Date or the expiration of all applicable statutes of limitations (including all
periods of extension, whether automatic or permissive) in the case of (i) the
representations and warranties of the Seller set forth in Sections 3.1, 3.2,
3.3, 3.21 and 3.24 hereof, or in any certificate delivered pursuant to Section
7.3 hereof (to the extent such certificate refers to such Sections), (ii) the
representations and warranties of the Purchaser set forth in Article IV hereof,
or in any certificate delivered pursuant to Section 8.3 hereof, and (iii) the
indemnification provisions set forth in Article X hereof, except insofar as they
are applicable to Sections 3.4, 3.11 and 3.14;
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(b) until the first anniversary of the Closing Date in the
case of all representations and warranties of the Seller not specified in
Section 9.1(a) above or Section 9.1(c) below; and
(c) until the expiration of all applicable statutes of
limitations (including all periods of extension, whether automatic or
permissive) in the case of (i) the representations and warranties of the Seller
set forth in Sections 3.4, 3.11 and 3.14 hereof, or in any certificate delivered
pursuant to Section 7.3 hereof (to the extent such certificate refers to such
sections), (ii) the indemnification provisions set forth in Article X applicable
to such Sections, and (iii) the covenants and agreements set forth in Article V
and Article VI hereof.
If a Claim Notice or an Indemnity Notice is given in accordance with
Section 10.3 hereof before expiration of the applicable time period
referenced above, then (notwithstanding such time period) the representation,
warranty, covenant or agreement applicable to such claim shall survive
until, but only for purposes of, resolution of such claim. This Article IX
shall survive the Closing or the termination of this Agreement.
9.2 Available Remedies. The rights and remedies provided for in this
Agreement are cumulative and are not exclusive of any rights or remedies that
any party may otherwise have at law or in equity. The rights and remedies of any
party based upon, arising out of or otherwise in respect of any breach of any
representation, warranty, covenant or agreement contained in this Agreement
shall in no way be limited by the fact that the act, omission, occurrence or
other state of facts upon which any claim of any such breach is based may also
be the subject matter of any other representation, warranty, covenant or
agreement contained in this Agreement (or in any other agreement between the
parties) as to which there is no breach.
ARTICLE X
INDEMNIFICATION
10.1 Tax Indemnification and Other Tax Matters. Subject to the
provisions of Article IX hereof:
(a) The Seller shall be liable for, shall pay to the
appropriate Tax Authorities, and shall hold OSL and IGL and the Purchaser
harmless against, all Taxes and obligations under the Tax Sharing Agreement that
relate to any taxable period ending on or before the Closing Date. In
particular, the Seller shall be liable
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for, shall pay to the appropriate Tax Authorities, and shall hold OSL and
IGL and the Purchaser harmless against, all Taxes resulting from the
election under section 338(h)(10) of the Code which is agreed to be made
pursuant to Section 10.1(g) of this Agreement in respect of items of income
or gain that are properly reportable on the Tax Return of the Seller, OSL,
or IGL for the taxable period ending on, and includ ing, the Closing Date;
provided, however, that Taxes arising from or related to any such items of
income or gain that are properly reportable on the Tax Return of the
Purchaser, OSL or IGL for the taxable period commencing with the day
following the Closing Date shall be the liability of the Purchaser, OSL or
IGL, as the case may be, for which no indemnification from the Seller may be
sought under this Agreement.
(b) The Purchaser and the Company shall be liable for, shall
pay to the appropriate Tax Authorities, and shall hold the Seller harmless
against, all Taxes that relate to any taxable period that ends after the
Closing Date (including any taxable period that begins prior to the Closing
Date and ends after the Closing Date).
(c) Prior to or on the Closing Date, OSL and IGL shall
continue to make payments of Taxes to the Seller for the Pre-Closing Straddle
Period in amounts determined in a manner consistent with the Tax Sharing
Agreement. Such Tax payments shall not include any Taxes resulting from the
section 338(h)(10) election to be made pursuant to Section 10.1(g) of this
Agreement.
(d) The Seller and the Purchaser shall maintain all records
necessary to support the Tax Returns as filed for all Tax years until closed.
(e) In the event that OSL or IGL is, becomes entitled to, or
receives any refund of Taxes in respect any taxable period ending on or prior to
the Closing Date, (i) the Purchaser, OSL, IGL and the Seller shall cooperate
with each other and take all reasonable actions necessary to obtain such refund
and (ii) the amount thereof, plus any interest related thereto shall be the
property of (and paid over to) the Seller.
(f) The Seller shall be responsible for, prepare, and have
ultimate discretion with respect to, all Tax Returns required or permitted by
applicable law to be filed by OSL or IGL (or by the Seller on its behalf) with
respect to taxable periods ending on or before the Closing Date. The Purchaser,
OSL and IGL shall (i) cooperate with the Seller for the purpose of making any
election under applicable law to permit each of OSL and IGL to end at the end of
the Closing Date all taxable periods that have begun prior to the Closing Date
that have not otherwise ended and
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(ii) provide access to all relevant books and records for purposes of preparing
any Tax Returns in respect thereof.
(g) The Purchaser will make, in a timely manner, the election
pursuant to section 338(g) of the Code and the Purchaser and Seller will jointly
make, in a timely manner, the election pursuant to section 338(h)(10) of the
Code and comparable state tax provisions with respect to the purchase and sale
of Shares con templated by this Agreement. For purposes of determining the
purchase price under this Section 10.1(g), the liabilities of OSL and IGL shall
be equal to the amount of such liabilities for Federal income tax purposes as of
the Closing Date. The Purchaser shall have the initial responsibility for the
timely preparation of IRS Form 8023, and all supporting statements, schedules,
and required information applicable thereto (including an allocation of the
purchase price to the properties of OSL and IGL), and such Form 8023,
statements, schedules, and information (the "Form 8023 Package") shall be
submitted to the Seller for its review no later than 60 Business Days
following the Closing Date. Within 30 Business Days after the receipt by the
Seller of the Form 8023 Package, the Seller shall notify the Purchaser of
any objections or proposed changes. If the Seller has no objections or proposed
changes or if the Purchaser and the Seller agree on the resolution of all
objections or proposed changes, the Purchaser and Seller shall promptly file
Form 8023 and the relevant attachments with the IRS via certified mail with
return receipt requested. As soon as practicable thereafter, the Purchaser and
Seller shall furnish to each other a photocopy of such certificate of mailing
and return receipt. If the Seller and the Purchaser shall fail to reach an
agreement with respect to any objection or proposed change within 120 Business
Days following the Closing Date, then any disputed objection(s) or pro posed
change(s) shall be submitted for resolution to an impartial certified public
accounting firm of national reputation reasonably acceptable to the Purchaser
and the Seller (the "Resolution Accountant"). The Purchaser and the Seller shall
use reason able efforts to cause a report of the Resolution Accountant to be
rendered within 20 Business Days of its appointment, and the Resolution
Accountant's determination as to the appropriateness and extent of changes (if
any) to the Form 8023 Tax Package shall be final and binding. Immediately after
such determination, the Purchaser and Seller shall promptly file Form 8023 and
the relevant attachments with the IRS in accordance with the procedure described
above. The Purchaser and the Seller agree to file their respective tax returns,
reports, and forms, including IRS Form 8023, in a manner consistent with the
Form 8023 Package.
(h) The Purchaser, OSL or IGL shall promptly (i) notify the
Seller of the commencement of any Audit by any Tax Authority concerning any Tax
for
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which the Seller may be responsible under Section 10.1(a) of this Agreement
(a "Tax Claim") and (ii) furnish the Seller with copies of any correspondence
received from any Tax Authority related thereto. The Seller shall promptly (i)
notify the Purchaser, OSL or IGL of the commencement of any Audit by any Tax
Authority concerning any Tax for which the Purchaser, OSL or IGL may be
responsible under Section 10.1(b) of this Agreement and (ii) furnish the
Purchaser, OSL or IGL with copies of any correspondence received from any Tax
Authority related thereto; provided, however, that the failure of a party to
give prompt notice pursuant to this Section 10.1(h) shall not relieve the other
party from any indemnification obligations hereunder unless the failure to give
such notice jeopardizes the other party's ability to defend any claim arising
from or related to such Audit.
(i) The Seller may control the conduct of any Audit covered by
Section 10.1(h) for which it is responsible by having its personnel rather than
personnel of the Purchaser, OSL or IGL deal directly with the applicable Tax
Authority. At its election, the Seller may contest or settle any Tax
Claim in any legally permissible manner at its sole cost and expense and,
upon the Seller's payment of such Taxes to the relevant Tax Authority, may
sue for a refund thereof. The Seller shall control all correspondence,
responses, and proceedings related to any such contest or refund suit, and
may pursue or forego any administrative proceedings, appeals, or litigation in
respect of such Tax Claim. The Purchaser, OSL and IGL as appropriate, will
cooperate fully, provide access to all books and records, and will take all
lawful action in connection with such contest or refund suit as the Seller may
reasonably request. The Seller shall keep the Purchaser, OSL and IGL, as
appropriate, regularly apprised of the progress of any such contest or refund
suit. In the event that such contest or refund suit may reasonably be
expected to increase materially the liability of OSL or IGL for Taxes
described in Section 10.1(b) hereof, or increase the obligation of OSL or
IGL to make payments pursuant to Section 10.1(c) or (d) hereof, the Seller
shall consult with the Purchaser in good faith as to any considerations
that Purchaser may have regarding such contest or refund suit.
(j) In the event that the Seller does not elect to contest a
Tax Claim pursuant to Section 10.1(i) of this Agreement, the Purchaser, OSL or
IGL may (but shall not be required to) contest such claim for the account of the
Seller, in which case (i) the Seller shall have the right to review and approve
in advance any correspon dence or responses sent to any Tax Authority by or on
behalf of OSL or IGL with respect to any Tax Claim and to participate in any
subsequent administrative proceedings, appeals, and litigation, if any, and (ii)
the Purchaser, OSL and IGL, as appropriate, shall provide access to all relevant
books and records. The
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Purchaser, OSL and IGL, as appropriate, shall keep the Seller regularly
apprised of the of progress any such Audit. In the event that the Purchaser,
OSL or IGL elects to contest a Tax claim, the Purchaser, OSL and IGL shall
indemnify and hold harmless the Seller for any Tax liability in excess of the
amount of the Tax liability that would have arisen under the settlement that
the Seller was willing to accept.
(k) The Seller shall indemnify the Purchaser for, and hold the
Pur chaser and the Companies harmless against, any and all (A) payments made by
the Companies to Existing Product Holders in respect of costs or losses incurred
by such holders, and (B) increased Taxes of the Companies, but only to the
extent that such costs, losses, or increased Taxes result from an Existing
Product Item; provided, however, that the Seller shall have no obligation to
indemnify or hold harmless the Purchaser or the Companies unless the Seller is
permitted, during the period following the Closing Date, to (i) direct the
Purchaser and/or the Companies to amend or modify any Existing Product and
related computer programs, in the sole and absolute discretion of the Seller
in connection with any Existing Product Item or potential Existing
Product Item, (ii) review and approve any proposal made by the Purchaser or
the Companies to amend or modify any Existing Product and related computer
pro grams, which approval shall not be unreasonably withheld, (iii) represent
exclusively the interests of the Purchaser and the Companies in connection with
any Existing Product Item or potential Existing Product Item, and (iv)
respond, negotiate, litigate, settle, or otherwise manage any inquiry or
controversy, in the sole and absolute discretion of the Seller, in connection
with any Existing Product Item or potential Existing Product Item. The
Seller shall indemnify the Purchaser for, and hold the Purchaser and the
Companies harmless against, any costs or losses resulting from action
taken by the Purchaser or the Companies at the direction of the Seller
pursuant to this Section 10.1(k).
10.2 Other Indemnification.
(a) Subject to the provisions of Article IX and Sections 10.4
and 10.5 hereof, the Seller agrees to indemnify the Companies and the Purchaser
in respect of, and hold each of them harmless against:
(i) any and all Damages (other than Indemnification
for Taxes and Existing Product Items, which shall be governed solely by
Section 10.1 hereof) resulting from or relating to (A) any breach of any
representation or warranty in Article III or in any certificate delivered by
or for the Seller pursuant to Section 7.3 hereof, or (B) any failure of the
Seller to perform any covenant or agreement
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included in this Agreement and required to be performed by the Seller on or
prior to the Closing; and
(ii) any and all Damages resulting from a failure on
the part of the Seller to comply with the covenants or undertakings set forth
in Section 10.1 of this Agreement, provided that such failure does not
result from any act or omission on the part of the Purchaser or, after
the Closing Date, by the Companies:
(b) Subject to the provisions of Article IX and Sections 10.4
and 10.5 hereof, the Purchaser agrees to indemnify the Seller in respect of, and
hold the Seller harmless against:
(i) any and all Damages (other than Indemnification for
Taxes, which shall be governed solely by Section 10.1 hereof) resulting from
or relating to (A) any breach of any representation or warranty in
Article IV or in any certificate delivered by or for the Seller pursuant to
Section 8.3 hereof, or (B) any failure of the Purchaser to perform any
covenant or agreement included in this Agreement and required to be performed
by the Purchaser or, after the Closing Date, by the Companies; and
(ii) any and all Damages resulting from or relating to
liabilities or obligations of the Companies arising out of events or
circumstances occurring in their entirety after the Closing Date, other than
liabilities and obligations of the Companies to the Seller or any Affiliate
of the Seller (other than the Companies).
10.3 Method of Asserting Claims. All claims for indemnification by an
Indemnified Party under Section 10.2 hereof shall be asserted and resolved as
follows:
(a) Third Party Claims. If any claim or demand, or any
investigation or proceeding is commenced, for which an Indemnifying Party would
be liable for Damages to an Indemnified Party, is asserted against or sought to
be collected from such Indemnified Party by a Person other than a party hereto
or any Affiliate thereof (a "Third Party Claim"), the Indemnified Party shall
deliver a Claim Notice within 30 days of receipt by the Indemnified Party of a
written notice of claim or demand that constitutes a Third Party Claim and with
reasonable promptness with respect to any other Third Party Claim; provided,
however, no failure or delay in giving any such Claim Notice shall relieve the
Indemnifying Party of its obligations except, and only to the extent, that it is
prejudiced thereby. The Indemnifying Party shall give notice
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to the Indemnified Party within 30 days of receipt of a Claim Notice setting
forth whether the Indemnifying Party disputes its liability with respect to
matters covered by such Claim Notice and whether the Indemnifying
Party, at the sole cost and expense of the Indemnifying Party, desires to
assume the defense of the matters set forth in such Claim Notice. The
Indemnified Party may take any action it deems necessary to preserve its
rights prior to receipt of such response from the Indemnify ing Party but
shall not settle or proceed to final judgment with respect to such Third Party
Claim prior to the expiration of such 30 day period.
(b) Defense. The Indemnifying Party shall have the right to
direct, through counsel of its own choosing, the defense or settlement of any
action or proceeding brought against the Indemnified Party in respect of Third
Party Claims; provided, however, that the Indemnifying Party shall not settle
any matter without obtaining the Indemnified Party's prior consent thereto if
such settlement provides for any remedy other than the payment of money damages
or that does not provide for a full release of the Indemnified Party or,
regardless of the terms of such settlement, if the Indemnifying Party disputes
its liability with respect to the Third Party Claim. If the Indemnifying Party
elects to assume the defense of any such claim or proceed ing, the Indemnified
Party may participate in such defense at its own expense. If the Indemnifying
Party fails to defend or, after commencing or undertaking any such defense,
fails to prosecute or withdraws from such defense other than as a result of a
settlement, the Indemnified Party shall have the right to direct, at the
Indemnifying Party's sole cost and expense, through counsel of its own
choosing, the defense or settlement of any such action or proceeding;
provided, however, that if the Indemnified Party assumes the defense of any
such claim or proceeding pursuant to this Section 10.3 and proposes to
settle such claim or proceeding prior to a final judgment thereon or to
forego appeal with respect thereto, then the Indemnified Party shall
give the Indemnifying Party prompt written notice thereof and the
Indemnifying Party shall have the right to participate in and consent (which
consent shall not be unreasonably withheld) to the settlement or assume or
reassume the defense of such claim or proceeding. Notwithstanding the
foregoing provisions of this Section 10.3(b), if the Indemnifying Party
disputes its liability to the Indemnified Party and if such dispute is
resolved in favor of the Indemnifying Party by final, nonappealable order of
a court of competent jurisdiction, the Indemnifying Party shall not be
required to bear the costs and expenses of the Indemnified Party's defense
pursuant to this Section 10.3(b), and the Indemnified Party shall
reimburse the Indemnifying Party in full for all costs and expenses incurred
by the Indemnifying Party in con nection with such Third Party Claim. The
party directing the defense shall pursue such defense diligently and
promptly. The parties shall cooperate in the defense shall pursue such
defense diligently and promptly. The parties shall cooperate in
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the defense of all Third Party Claims. In connection with the defense of
any Third Party Claim, each party shall make available to the party
controlling such defense any books, records or other documents within its
control that are reasonably requested in the course of or necessary or
appropriate for such defense, provided appropriate arrangements are made to
safeguard the confidentiality of such materials.
(c) Claims Between the Parties and their Affiliates. If
the Indemnified Party has a claim against the Indemnifying Party that
does not involve a Third Party Claim (an "Inter-Party Claim"), the
Indemnified Party shall give written notice (the "Indemnity Notice") to the
Indemnifying Party with reasonable promptness of such claim, specifying
the nature, estimated amount and the specific basis for such claim. The
Indemnifying Party shall respond within 30 days of receipt of such notice of
an Inter-Party Claim. If the Indemnifying Party timely disputes such claim,
the Indemnified Party and the Indemnifying Party shall negotiate in good
faith to resolve such dispute. If not so resolved or if no timely response is
made, either party may pursue whatever remedies it may have.
10.4 After-Tax Damages; Refunds. With respect to the
indemnification agreements set forth in this Article X, the Seller and the
Purchaser agree that the amount of any payment shall be adjusted downward by
the tax benefit actually recognized in the year of payment or succeeding year
and upward by the tax cost actually incurred in the year of payment or
succeeding year by the party to be indemnified and such payment shall be
(i) promptly paid to the Indemnifying Party or offset against
indemnification payments then owed to the Indemnifying Party or (ii) in the
case of any payment due under Section 10.1, payable by either party 30
days after the "final determination" within the meaning of section 1313 of
the Code. Any payment (other than interest thereon) made under this
Agreement by the Seller to (or at the direction of) the Purchaser or the
Companies or by the Purchaser or the Compa nies to (or at the direction of)
the Seller shall be treated by all parties hereto for all purposes as an
adjustment to the purchase price set forth under Section 2.2 of this Agreement.
10.5 Claims Limitation.
(a) The Purchaser specifically agrees that the Seller shall
not have any liability or obligation for any Damages under this Agreement
unless: (i) the aggregate amount of all such Damages exceeds $2,000,000 and then
only for the amount of such Damages in excess of $1,000,000; and (ii) notice of
the claim for such Damages shall have been given to the Seller prior to the end
of the survival period for such claim.
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(b) The limitation contained in subsection (i) of Section
10.5(a) shall not apply to Damages arising under Sections 3.2, 3.4, 3.11, 3.14
or 10.1 of this Agreement.
(c) The Seller shall not be liable or obligated for any
Damages under this Agreement (other than in respect of Damages arising under
Section 3.4, 3.11, 3.14 or 10.1) that, together with all other Damages for which
the Seller is liable or obligated under this Agreement, exceed $60,000,000. The
Seller shall not be liable or obligated for any Damages under this Agreement as
a result of a breach of Section 3.4 or 3.14 that, together with all other
Damages for which the Seller is liable or obligated under this Agreement, exceed
the amount of the Consideration.
ARTICLE XI
TERMINATION
11.1 Termination. This Agreement may be terminated, and the transactions
contemplated hereby may be abandoned, upon notice by the terminating party to
the other party:
(a) at any time before the Closing, by mutual written agreement of the
Seller and the Purchaser; or
(b) at any time by the Seller in the event of any breach of any repre
sentation, warranty, covenant or agreement on the part of the Purchaser, or if
any representation of the Purchaser shall have become untrue, in either case,
such that the conditions set forth in Article VIII are incapable of being
satisfied by July 1, 1997;
(c) at any time by the Purchaser in the event of any breach of any
representation, warranty, covenant or agreement on the part of the Seller, or if
any representation of the Seller shall have become untrue, in either case, such
that the conditions set forth in Article VII are incapable of being satisfied by
July 1, 1997; and
(d) at any time after July 1, 1997, by the Seller or the Purchaser, if
the transactions contemplated by this Agreement have not been consummated on or
before such date and such failure to consummate is not caused by a breach of
this Agreement (or any representation, warranty, covenant or agreement included
herein) by the party electing to terminate pursuant to this clause (d).
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11.2 Effect of Termination. If this Agreement is validly terminated
pursuant to Section 11.1 hereof, this Agreement shall thereupon become null and
void, and there shall be no liability on the part of the Seller or the Purchaser
(or any of their respective employees, consultants, or other Representatives),
except that (a) the provisions of this Section and Sections 6.3, 6.7, and 13.4
hereof shall survive any such termination, and (b) any such termination shall be
without prejudice to any claim which either party may have against the other for
breach of any representation, warranty, covenant or agreement included in this
Agreement. All reasonable out-of-pocket expenses incurred in connection with
this Agreement and the transactions contemplated hereby by a non-breaching party
who terminates this Agreement pursuant to Section 11.1(b) or (c) shall be
reimbursed promptly by the breaching party. If this Agreement is terminated for
any reason, other than pursuant to Section 11.1(a) or 11.1(c), then, in addition
to, and without prejudice to, any claim that the Seller may have against
the Purchaser for breach of any representation, warranty, covenant or
agreement included in this Agreement, and without any offset or reduction
in respect of any claims by the Purchaser against the Seller, the Seller
shall be entitled to retain any funds paid by the Purchaser in respect of the
Consideration concurrently with the execution of this Agreement (and any
accrued interest thereon). If this Agreement is terminated pursuant to
Section 11.1(a) or 11.1(c), then the Seller shall promptly return to the
Purchaser any funds paid by the Purchaser in respect of the Consideration
concurrently with the execution of this Agreement (and any accrued
interest thereon).
ARTICLE XII
NOTICES
12.1 Notices. All notices and other communications under this Agreement
must be in writing and shall be deemed to have been duly given if delivered,
faxed or mailed, by certified mail, return receipt requested, first-class
postage prepaid, to the parties at the following addresses:
If to the Seller, to:
Farmers Group, Inc.
4680 Wilshire Boulevard
Los Angeles, California 90010
Attention: Anthony F. Gasich, Vice President Life Insurance
Operations, and Jason L. Katz, Senior Vice
President and General Counsel
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<PAGE> 60
Telephone: (213) 932-3200
Facsimile: (213) 964-8093
with a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
300 South Grand Avenue, Suite 3400
Los Angeles, California 90071
Attention: Joseph J. Giunta
Telephone: (213) 687-5000
Facsimile: (213) 687-5600
If to the Purchaser, to:
Great Southern Life Insurance Company
300 West 11th Street
Kansas City, Missouri 64105
Attention: Gary L. Muller, President
Telephone: (816) 391-2000
Facsimile: (816) 391-2018
with a copy to:
Lathrop & Gage L.C.
2345 Grand Boulevard
Kansas City, Missouri 64108-2684
Attention: Thomas M. Higgins, III
Telephone: (816) 292-2000
Facsimile: (816) 292-2001
All notices and other communications required or permitted under this Agreement
that are addressed as provided in this Article XII shall, if delivered
personally, be deemed given upon delivery, shall, if delivered by facsimile, be
deemed delivered when confirmed and shall, if delivered by mail in the manner
described above, be deemed given on the third Business Day after the day it is
deposited in a regular depository of the United States mail. Any party from time
to time may change its address for the purpose of notices to that party by
giving a similar notice specifying a new address, but no such notice shall be
deemed to have been given until it is actually received by the party sought to
be charged with the contents thereof.
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ARTICLE XIII
MISCELLANEOUS
13.1 Entire Agreement. This Agreement supersedes all prior discussions and
agreements between the parties with respect to the subject matter hereof, and
this Agreement (including the exhibits hereto and the Disclosure Schedule)
contains the sole and entire agreement between the parties hereto with respect
to the subject matter hereof.
13.2 Expenses. Except as otherwise expressly provided in this
Agreement (including without limitation as provided in Article X and Section
11.2 hereof), each of the Seller and the Purchaser shall pay its own costs
and expenses in connection with this Agreement and the transactions
contemplated hereby.
13.3 Public Announcements. At all times at or before the Closing, the
Seller and the Purchaser shall each consult with the other before issuing or
making any reports, statements or releases to the public with respect to this
Agreement or the transactions contemplated hereby, and shall use good faith
efforts to agree on the text of a joint public report, statement or release or
shall use good faith efforts to obtain the other party's approval of the text of
any public report, statement or release to be made solely on behalf of a party.
If the Seller and the Purchaser are unable to agree on or approve any such
public report, statement or release and such report, statement or release is, in
the opinion of legal counsel to a party, required by law or may be appropriate
in order to discharge such party's disclosure obligations, then such party may
make or issue the legally required report, statement or release. Any such
report, statement or release approved or permitted to be made pursuant to this
Section 13.3 may be disclosed or otherwise provided by the Seller or the
Purchaser to any Person, including, without limitation, to any employee or
customer of either party hereto and to any governmental or regulatory authority.
13.4 Confidentiality. The Seller and the Purchaser hereby acknowledge
and agree that the Confidentiality Agreement remains in full force and
effect, and all information and data provided by the Seller or any of its
Representatives to the Purchaser or any of its Representatives shall be subject
to the terms of the Confidentiality Agreement.
13.5 Further Assurances. The Seller and the Purchaser agree that,
from time to time after the Closing, upon the reasonable request of the
other, they shall cooperate, and shall cause their respective Affiliates to
cooperate, with each other to effect the orderly transition of the transfer
of the business and operations of the
53
<PAGE> 62
Companies to the Purchaser. Without limiting the generality of the foregoing,
(a) the Seller shall give, and shall cause its Affiliates to give,
representatives of the Purchaser reasonable access to all books and
records of the Seller and its Affiliates reasonably requested by the
Purchaser in the preparation of any post-Closing financial statements,
reports, or Tax Returns of the Companies or necessary for the Purchaser to
make any required filings or to respond to any audit or inquiry of any
governmental or regulatory body; and (b) the Purchaser shall give, and shall
cause its Affiliates to give, representatives of the Seller reasonable access
to all pre-Closing books and records of the Companies reasonably requested by
the Seller in the preparation of any post-Closing financial statements,
reports, or Tax Returns of the Seller or necessary for the Seller to make any
required filings or to respond to any audit or inquiry of any governmental or
regulatory body. After the Closing, the Seller and the Purchaser shall use
commercially reasonable efforts to cooperate with the other in connection
with any proceeding, investigation, examination, audit, action or other
similar matter relating to the Companies or their business or operations;
provided that the party requesting such cooperation shall reimburse the
other for any reasonable out-of-pocket expenses incurred in connection
therewith.
13.6 Waiver. Any term or condition of this Agreement may be waived at
any time by the party that is entitled to the benefit thereof; such waiver
must be in writing and must be executed by the chief executive officer,
president, executive vice president or other senior officer of such party. A
waiver on one occasion shall not be deemed to be a waiver of the same or any
other breach on a future occasion. All remedies, either under this
Agreement, or by law or otherwise afforded, shall be cumulative and not
alternative.
13.7 Amendment. This Agreement may be modified or amended only by a
writing duly executed by or on behalf of all parties hereto.
13.8 Counterparts. This Agreement may be executed simultaneously in
any number of counterparts, each of which shall be deemed an original, but
all of which shall constitute one and the same instrument.
13.9 No Third Party Beneficiaries. Except as specifically
provided in Article X, the terms and provisions of this Agreement are
intended solely for the benefit of the parties hereto and their respective
successors and assigns, and it is not the intention of the parties to confer
third-party beneficiary rights upon any other Person, including, without
limitation, any employee of the Seller or either of the Companies.
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<PAGE> 63
13.10 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of California applicable
to contracts executed and performed within the State of California,
without regard to principles of conflicts of laws.
13.11 Binding Effect. This Agreement is binding upon and shall inure
to the benefit of the parties and their respective successors and assignees.
13.12 Assignment Limited. Neither this Agreement nor any right
hereunder or part hereof may not be assigned by any party hereto without the
prior written consent of the other party hereto, which consent will not
be unreasonably withheld.
13.13 Headings, Gender, etc. The headings used in this Agreement have
been inserted for convenience and do not constitute matter to be
construed or interpreted in connection with this Agreement. Unless the
context of this Agreement otherwise requires, (a) words of any gender are
deemed to include each other gender; (b) words using the singular or plural
number also include the plural or singular number, respectively; (c) the
terms "hereof," "herein," "hereby," "hereto," and derivative or similar
words refer to this entire Agreement; (d) the terms "Article" or "Section"
refer to the specified Article or Section of this Agreement; and (e) all
references to "dollars" or "$" refer to currency of the United States of
America.
13.14 Severability. If any provision of this Agreement is held to be
illegal, invalid or unenforceable under any present or future law, and if the
rights or obligations of the Seller or the Purchaser under this Agreement shall
not be materially and adversely affected thereby, (a) such provision shall be
fully severable; (b) this Agreement shall be construed and enforced as if such
illegal, invalid or unenforceable provision had never comprised a part hereof;
(c) the remaining provisions of this Agreement shall remain in full force and
effect and shall not be affected by the illegal, invalid or unenforceable
provision or by its severance herefrom; and (d) in lieu of such illegal, invalid
or unenforceable provision, there shall be added automatically as a part of this
Agreement a legal, valid and enforceable provision as similar in terms to such
illegal, invalid or unenforceable provision as may be possible.
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<PAGE> 64
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered
by the duly authorized officers of each of the Seller and the Purchaser,
effective as of the date first written above.
FARMERS GROUP, INC.
By: /s/ Anthony Frank Gasich
--------------------------------------
Name: Anthony Frank Gasich
Title: Vice President Life Insurance
Operations
GREAT SOUTHERN LIFE INSURANCE
COMPANY
By: /s/ Gary L. Muller
---------------------------------------
Name: Gary L. Muller
Title: President
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<PAGE> 65
EXHIBIT A
ASSIGNMENT OF TRADE NAMES AND SERVICE MARKS
THIS ASSIGNMENT OF TRADE NAMES AND SERVICE MARKS (this
"Assignment"), is made and entered into as of _________, 1997, by and between
_______________________________, a _________ corporation (the "Company"), and
Farmers Group, Inc., a Nevada corporation (the "Seller"). Capitalized terms used
but not otherwise defined herein shall have the meanings set forth in the
Purchase Agreement (as defined below).
WHEREAS, pursuant to that certain Stock Pur chase Agreement,
dated as of January 21, 1997 (the "Pur chase Agreement"), by and between the
Seller and Great Southern Life Insurance Company (the "Purchaser"), the
Purchaser will acquire all of the outstanding capital stock of the Company (the
"Acquisition"); and
WHEREAS, in connection with the Acquisition, the Company and
the Seller desire to transfer certain rights and interests with respect to
certain trade names and service marks and related names, marks, logos and de
signs.
NOW, THEREFORE, for the sum of ten dollars ($10.00), and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged:
1. The Company hereby assigns and transfers to the Seller, its
successors, assigns or other legal representatives, without any representations
or warran ties whatsoever, whether express or implied by law or otherwise, all
of its right, title and interest in and to all trade names and service marks,
including, without limitation, those set forth on Schedule I hereto, but
excluding those set forth on Schedule II hereto, and all related names, marks,
logos and designs (collectively, the "Seller's Marks"), worldwide, together
with the good will of the business symbolized by the Seller's Marks, and all
income, royalties, damages and payments now or hereafter due or payable in
respect thereof, and in and to all causes of action (either in law or in
equity) and the right to sue, counterclaim and recover for past, present or
future infringement of the rights assigned to the Seller under this Assignment.
2. The Seller hereby assigns and transfers to the Company, its
successors, assigns or other legal representatives, without any representations
or
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warranties whatsoever, whether express or implied by law or otherwise, all
its right, title and interest in and to the trade names and service marks set
forth on Sched ule II hereto, and all related names, marks, logos and designs
(collectively, the "Company's Marks"), worldwide, together with the goodwill of
the business symbolized by the Company's Marks, and all income, royalties,
damages, and payments now or hereafter due or payable in respect thereto, and in
and to all causes of action (either in law or in equity) and the right to sue,
counterclaim, and recover for past, present, or future infringement of the
rights assigned to the Company under this Assignment.
3. Each of the Seller and the Company shall execute any papers
and perform such other proper acts as such party or its successors or assigns
may deem reason ably necessary to secure to the other party, or its successors
or assigns, the rights hereby assigned.
By: FARMERS GROUP, INC.
_______________________________
Name:
Title:
By: _______________________________
_______________________________
Name:
Title:
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SCHEDULE I
Farmers(R)
U.S. Serial No. 74/507/347
Reg. No. 1,899,192
Registered: 06/13/95
Expires: 06/13/2005
Farmers Credo(TM)
Farmers Insurance Group(R)
U.S. Serial No. 74/384,122
Reg. No. 1,821,673
Registered: 02/15/94
Expires: 02/14/2004
Farmers Insurance Group of Companies(R)
U.S. Serial No. 74-384,116
Reg. No. 1,821,672
Registered: 02/15/94
Expires: 02/15/04
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SCHEDULE II
If the Company is OSL:
OHIO STATE LIFE INSURANCE COMPANY(R)
U.S. Serial No. 74/536,232
Reg. No. 1,954,094
Registered: 01/02/96
Expires: 01/02/2006
OSL 2000(R)
U.S. Serial No. 74/553,786
Reg. No. 1,984,618
Registered: 07/02/96
Expires: 07/2/2006
OHIO STATE LIFE'S FLEX UL(TM)
U.S. Serial No. 74/552,355
Reg. No. Pending
Filed: 07/22/94
OHIO STATE LIFE'S FLEX UL 10(TM)
U.S. Serial No. 74/532,356
Reg. No. Pending
Filed: 07/22/94
OHIO STATE LIFE'S SECURITERM(TM)
U.S. Serial No. 75/166612
Reg. No. Pending
Filed: 09/16/96
OHIO STATE LIFE SEGMENTED CIRCLE DESIGN
U.S. Serial No. 73/517205
Reg. No. 1,355,788
Filed/Issued: 01/11/85 / 08/20/85
Expires: 08/20/95
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If the Company is IGL:
INVESTORS GUARANTY LIFE INSURANCE COMPANY(R)
U.S. Serial No. 74/536,231
Reg. No. 1,905,939
Registered: 07/18/95
Expires: 07/18/2005
INVESTORS GUARANTY LIFE INSURANCE COMPANY(R) & DESIGN
U.S. Serial No. 73/480,488
Reg. No. 1,335,890
Registered: 05/14/85
Expires: 05/14/95
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State of _________________
County of _______________
On ____________ before me, ___________________________________________________
personally appeared __________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
___ personally known to me -OR- ______ proved to me on the basis of
satisfactory evidence to be the
person(s) whose name(s) is/are
subscribed to the within instrument
and acknowledged to me that
he/she/they executed the same in
his/her/their authorized
capacity(ies), and that by
his/her/their signature(s) on the
instrument the per son(s) or the
entity upon behalf of which the
person(s) acted, executed the
instrument.
Witness my hand and official seal.
(SEAL) _______________________________________
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EXHIBIT B
LEASE AGREEMENT
Dated as of _____________, 1997
Between
F.I.G. HOLDING COMPANY,
A CALIFORNIA CORPORATION,
as Landlord,
and
THE OHIO STATE LIFE INSURANCE COMPANY,
AN OHIO CORPORATION,
as Tenant
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TABLE OF CONTENTS
Page
ARTICLE I
PREMISES, COMMON AREAS AND EQUIPMENT
1.1 Premises.....................................................
1.2 Common Areas; Access.........................................
1.3 Equipment........
1.4 Signage..........
ARTICLE II
TERM AND OPTIONS
2.1 Term........................................................
2.2 Options.....................................................
ARTICLE III
RENT
3.1 Payment of Base Rent........................................
3.2 Definition of Rent..........................................
3.3 Late Charges................................................
3.4 Termination-Advance Payments................................
ARTICLE IV
OPERATING EXPENSES
4.1 Payment of Operating Expenses...............................
4.2 Definition of Operating Expenses............................
4.3 Definition of Property Taxes................................
4.4 Definition of Tenant's Proportionate Share..................
ARTICLE V
SERVICES AND UTILITIES
5.1 Landlord's Obligations......................................
5.2 Tenant's Obligations........................................
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ARTICLE VI
USE; COMPLIANCE WITH LAWS
6.1 Use.......................................................
6.2 Compliance with Laws......................................
ARTICLE VII
MAINTENANCE, REPAIRS AND ALTERATIONS
7.1 Landlord's obligations....................................
7.2 Tenants' Obligations......................................
7.3 Alterations...............................................
7.4 Code Compliance...........................................
7.5 Tenant's FF&E.............................................
ARTICLE VIII
INSURANCE
8.1 Tenant's Required Coverage................................
8.2 Landlord's Required Coverage..............................
8.3 Insurers..................................................
8.4 Additional Insured........................................
8.5 Mutual Waiver of Subrogation Rights.......................
8.6 Indemnity.................................................
ARTICLE IX
DAMAGE OR DESTRUCTION
9.1 Damage or Destruction.....................................
9.2 Abatement of Rent; Compliance with Laws...................
ARTICLE X
CONDEMNATION
10.1 Takings...................................................
10.2 Partial Taking............................................
10.3 Rental Adjustment.........................................
10.4 Tenant's Claims...........................................
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ARTICLE XI
LIENS
11.1 Liens....................................................
ARTICLE XII
RIGHT TO CONTEST
12.1 Right to Contest.........................................
ARTICLE XIII
ASSIGNMENT AND SUBLETTING
13.1 Transfer.................................................
13.2 Permitted Transfers......................................
13.3 Assumption by Transferee.................................
ARTICLE XIV
DEFAULT
14.1 Events of Default........................................
14.2 Landlord's Remedies......................................
14.3 Landlord's Default.......................................
ARTICLE XV
INSPECTION
15.1 Inspection...............................................
ARTICLE XVI
SUBORDINATION; NONDISTURBANCE
16.1 Subordination............................................
16.2 Nondisturbance...........................................
ARTICLE XVII
HOLDOVER
17.1 Holdover.................................................
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<PAGE> 75
ARTICLE XVIII
ESTOPPEL CERTIFICATES
18.1 Estoppel Certificates....................................
ARTICLE XIX
NOTICE OF CHANGE IN OWNERSHIP
19.1 Notice of Change in Ownership............................
ARTICLE XX
MISCELLANEOUS PROVISIONS
20.1 Notice...................................................
20.2 Entire Agreement.........................................
20.3 Cumulative Remedies......................................
20.4 No Waiver................................................
20.5 Amendments...............................................
20.6 Quiet Enjoyment..........................................
20.7 No Third Party Beneficiary...............................
20.8 Successors and Assigns...................................
20.9 Governing Law............................................
20.10 Captions.................................................
20.11 Gender; Number...........................................
20.12 No Brokers...............................................
20.13 Counterparts.............................................
20.14 No Recording.............................................
20.15 Severability.............................................
20.16 Attorneys' Fees..........................................
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EXHIBIT LIST
Exhibit "A" -- The Legal Description of The Land
Exhibit "B" -- The Premises on The Base ment of The Building
Exhibit "C" -- The Premises on The First Floor of The Building
Exhibit "D" -- The Premises on The Third Floor of The Building
Exhibit "E" -- The Premises on The Fifth Floor of The Building
Exhibit "F" -- The Equipment on the Roof of the Building
Exhibit "G" -- The Equipment on the Top Floor of the Building
Exhibit "H" -- The Equipment on the Basement of the Building
Exhibit "I" -- Signage
Exhibit "J" -- Janitorial Services
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<PAGE> 77
LEASE AGREEMENT
THIS LEASE AGREEMENT ("Lease") is made and entered into as of
_________, 1997, by and between F.I.G. HOLDING COMPANY, a California corporation
("Landlord"), and THE OHIO STATE LIFE INSURANCE COMPANY, an Ohio corporation
("Tenant").
RECITALS
WHEREAS, Landlord is the owner of a fee simple interest in:
(i) that certain real property located in the City of Columbus, County of
Franklin, State of Ohio, as more particularly described on Exhibit "A" attached
hereto (the "Land"); and (ii) those certain improvements and fixtures located on
or in the Land, including, without limitation, that certain office building
commonly known as 2500 Farmers Drive (the "Building" and, together with the
Land, the "Project"); and
WHEREAS, Landlord desires to lease to Tenant, and Tenant
desires to lease from Landlord, among other things, a portion of the Building
upon and subject to the terms and conditions set forth herein.
AGREEMENT
NOW, THEREFORE, in consideration of the Rent (as hereinafter
defined), the mutual covenants and agreements set forth in this Lease and other
good and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, Landlord and Tenant hereby agree as follows:
ARTICLE I
PREMISES, COMMON AREAS AND EQUIPMENT
1.1 Premises. Landlord hereby leases to Tenant, and Tenant hereby
takes and hires from Landlord, upon and subject to the terms, covenants and
conditions set forth herein, the following property (collectively, the
"Premises"):
(a) that portion of the basement of the Build ing, as more
particularly set forth on Exhibit "B" attached hereto (the rentable square
footage of which shall, following the date hereof, (i) be determined by a
licensed architect in
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<PAGE> 78
accordance with BOMA standards and (ii) be confirmed in writing by the parties
hereto);
(b) that portion of the first (1st) floor of the Building, as
more particularly set forth on Exhibit "C" attached hereto (the rentable square
footage of which shall, following the date hereof, (i) be determined by a
licensed architect in accordance with BOMA standards and (ii) be confirmed in
writing by the parties hereto);
(c) that portion of the third (3rd) floor of the Building, as
more particularly set forth on Exhibit "D" attached hereto (the rentable square
footage of which shall, following the date hereof, (i) be determined by a
licensed architect in accordance with BOMA standards and (ii) be confirmed in
writing by the parties hereto); and
(d) that portion of the fifth (5th) floor of the Building, as
more particularly set forth on Exhibit "E" attached hereto (the rentable square
footage of which shall, following the date hereof, (i) be determined by a
licensed architect in accordance with BOMA standards and (ii) be confirmed in
writing by the parties hereto).
1.2 COMMON AREAS; ACCESS. During the Term, Landlord grants to Tenant
the non-exclusive right to use, in common with other tenants in the Building,
the following areas appurte nant to the Premises (collectively, the "Common
Areas"): (i) the common entrances, lobbies, rest rooms, kitchens, cafeterias,
elevators, fire escapes and other emergency exits, stairways and access ways,
loading docks, ramps, drives and platforms, and any passage ways and
serviceways thereto, and the common pipes, conduits, wires and equip ment
serving the Premises; (ii) common walkways and sidewalks necessary for access
to the Building; and (iii) three hundred twenty five (325) parking spaces.
Landlord reserves the right from time to time, without
unreasonable interference with Tenant's use of the Premises and/or unreasonable
diminution or interference with the Common Areas within or outside the Building,
to alter or relocate any common facilities, to expand the Building, and to
install, relocate, use, maintain, repair and replace pipes, ducts, conduits,
wires and appurtenant meters and equipment for service to portions of the Build
ing above the ceiling surfaces, below the floor surfaces, within the walls and
in the central core areas.
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1.3 EQUIPMENT. Tenant acknowledges that in order for Landlord to use
and enjoy that portion of the first (1st) floor of the Building that is not
part of the Premises (the "Data Center") as a computer center, Landlord must
retain access to certain environmental equipment for the operation of
Landlord's computers. Accordingly (and notwithstanding anything to the contrary
contained herein), during the Term, the parties hereby acknowledge and agree
that Landlord shall have the right to use (and have access to) the following
equipment (collectively, the "Equipment"):
(a) the water cooling systems and related equip ment located on that
portion of the roof of the Building as set forth on Exhibit "F" attached hereto;
(b) the condensers, pumps and related equipment located on that
portion of the top floor of the Building as set forth on Exhibit "G" attached
hereto;
(c) the pumps and related equipment located on that portion of the
basement of the Building as set forth on Exhibit "H" attached hereto; and
(d) the electrical wires, conduits, conduit switches and cables
located in any and all risers, vertical shafts and horizontal raceways of the
Building, that are used to connect any of the Equipment described in para
graphs (a), (b) and (c) above to the Data Center or to the uninterrupted power
supply system located at 2400 Farmer's Drive, Columbus, Ohio.
1.4 SIGNAGE. Landlord shall permit Tenant to post signs as set forth
on Exhibit "I" attached hereto.
ARTICLE II
TERM AND OPTIONS
2.1 TERM. The term of this Lease shall be for a period of three (3)
years (the "Term"), commencing on the date hereof (the "Commencement Date")
and, unless sooner terminated or extended as hereinafter provided, expiring on
the last day of the calendar month in which the third (3rd) year anniversary of
the Commencement Date occurs (the "Expira tion Date"); provided, however, that
Tenant shall have the option to terminate, effective as of the last day of the
calendar month in which the second (2nd) year anniversary of the Commencement
Date occurs (i.e., approximately two (2) years after the date hereof), that
portion of this Lease that relates to the Premises located on any one (1) floor
of the Building
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<PAGE> 80
(which floor shall be selected by Tenant), by delivering written notice of such
termination (including an identification of the floor to be terminated) to
Landlord not later than one hundred twenty (120) days prior to the expiration
of the last day of the calendar month in which the second (2nd) year
anniversary of the Commencement Date occurs, and in the event that Tenant
elects to terminate such portion, all Rent to be paid by Tenant to Landlord and
all parking spaces to be provided by Landlord to Tenant under the terms of this
Lease shall be proportionately reduced to reflect the reduction in the rentable
square footage of the Premises as a result of such termination.
2.2 OPTIONS. Tenant shall have six (6) consecutive options (each, an
"Option") to extend the Term for a two-year period (each an "Option Term") upon
and subject to all of the same terms and conditions hereof (and subject to the
Rent increase as set forth in Section 3.1 hereof). Tenant may elect to exercise
each Option and to extend the Term by delivering written notice of such
election to Landlord not later than one hundred twenty (120) days prior to the
Expiration Date then in effect, in which event the Term (and the Expiration
Date) shall be extended for two (2) years from and after the Expiration Date
then in effect. If Tenant fails to exercise an Option in accordance with the
terms hereof (thereby opting not to extend the Term of this Lease), then all
subsequent Options shall be cancelled and extinguished. Landlord and Tenant
hereby agree that as consideration for Tenant's exercising the first of the six
(6) Options, Landlord shall (i) replace the carpet in the Premises, at
Landlord's sole cost and expense, with new carpet of the same type and quality
as the carpet that exists in the Premises on the Commencement Date, (ii)
repaint all painted areas throughout the Premises, at Landlord's sole cost and
expense, using the same type and quality of paint as the paint that exists in
the Premises on the Commencement Date, and (iii) perform the above-mentioned
work within the first sixty (60) days of such Option Term.
ARTICLE III
RENT
3.1 Payment of Base Rent. Subject to the provisions of Article IX and
Article X hereof, Tenant shall pay to Land lord the sum of Fourteen Dollars
($14.00) per rentable square foot of the Premises per year ("Base Rent"),
one-twelfth (1/12) of which shall be payable, in advance, on or before the
first (1st) day of each calendar month during the Term. If the Term shall
commence on a day other than the first day of a calendar month or shall end on
a day other than the last day of a calendar month, then the Base Rent for the
first and/or last partial calendar
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<PAGE> 81
month of the Term, as the case may be, shall be prorated based on the actual
number of days elapsed in a 360 day year.
In the event that Tenant exercises its second (2nd) Option in
accordance with the terms hereof, the Base Rent during such second (2nd) Option
Term (and during the Option Term of any subsequently exercised Option) shall be
equal to the Market Rent (as hereinafter defined); pro vided, however, that in
no event shall the Base Rent for such Option Terms be less than Fourteen Dollars
($14.00) per rentable square foot of the Premises per year. As used herein, the
term "Market Rent" shall mean the fair market value per rentable square foot of
the Premises, taking into account all relevant factors, as determined by mutual
agreement of Landlord and Tenant. In the event that Landlord and Tenant are
unable to agree upon the Market Rent on or before the thirtieth (30th) day
following Landlord's receipt of Tenant's notice exercising the second (2nd)
Option, the matter shall be submitted to arbitration (in accordance with the
terms of the following paragraph) with each Arbitrator (as hereinafter defined)
being a member of the American Institute of Real Estate Appraisers (or any
successor association or body of comparable standing) and having been engaged in
the appraisal of commercial real estate situated in Franklin County, Ohio for a
period of not less than five (5) years immediately preceding his appointment.
In the event that arbitration is required pursuant to the
terms of the preceding paragraph, such arbitration shall be conducted by a
single arbitrator (an "Arbitrator") agreed upon by Landlord and Tenant within
ten (10) days of the commencement of the dispute. In the event that Landlord
and Tenant are unable to agree upon an Arbitrator within such period, each
party shall, within the next five (5) days, appoint an Arbitrator. The
appointed Arbitrators shall determine the Market Rent. In the event that the
Arbitrators are unable to agree upon the Market Rent within twenty (20)
days of their appointment, the Arbitrators shall appoint, within such twenty
(20) day period, a third Arbitrator, and the Market Rent shall be the average
of the determination prepared by said third Arbitrator and the determination
(prepared by either of the first two Arbitrators) which is closest in value to
(whether greater than or less than) the determination prepared by the third
Arbitrator. In the event that either party fails to appoint an Arbitrator in
accordance with the terms hereof, the decision of the other Arbitrator shall be
binding. In the event that the two Arbitrators ap pointed are unable to agree
upon the appointment of a third Arbitrator in accordance with the terms hereof,
then either party, acting on behalf of both, may request such appoint ment by
the [Presiding Judge of the Superior Court of the State of Ohio in and for the
County of Franklin]. In the event of the failure, refusal or inability of any
Arbitra tor to act, a new Arbitrator shall be appointed in his stead, which
appointment shall be made in the same manner as hereinbefore provided for the
appointment of such Arbitrator so failing, refusing, or unable to act. The fees
and expenses of the Arbitrators shall be borne as follows: (i) the fees and
expenses of a single Arbitrator shall be borne equally by Landlord and Tenant;
(ii) each party shall bear the fees and expenses of the Arbitrator appointed by
it; and (iii) the fees and expenses of the third Arbitrator (if any) shall be
borne equally by Landlord and Tenant (provided, however, that the Arbitra tors
may, in their discretion, award reasonable costs and fees to the prevailing
party). Any Arbitrator appointed pursuant to the terms of this paragraph shall
be a disin terested party and any arbitration proceedings shall be
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held in Franklin County, Ohio, in accordance with the rules then in effect of
the American Arbitration Association (or any successor association or body of
comparable standing) and this agreement to arbitrate shall be specifically
enforceable. Any award rendered by such arbitration shall be final and binding
on each of the parties and any judgment may be entered thereon in [the Superior
Court of Franklin County, Ohio] or any other court of competent jurisdiction.
3.2 DEFINITION OF RENT. All costs and expenses which Tenant assumes
or agrees to pay to Landlord under this Lease shall be deemed additional rent
(which, together with the Base Rent is sometimes referred to herein as the
"Rent"). The Rent shall be paid to Landlord at Landlord's address set forth in
Section 20.1 hereof, or to such other person or address as Landlord shall
designate to Tenant in writing from time to time, without any setoff,
deduction, abate ment, prior notice or demand except as otherwise spe cifically
provided in this Lease, in lawful money of the United States of America.
3.3 LATE CHARGES. Any Rent not paid by Tenant on or before the tenth
(10th) business day following the day that such Rent is due hereunder shall
bear interest from the date due to the date of payment at the rate of twelve
percent (12%) per annum (but in no event in excess of the maximum rate
permitted by law).
3.4 TERMINATION-ADVANCE PAYMENTS. Upon termination of this Lease
pursuant to Article IX or Article X hereof, an equitable adjustment shall be
made concerning advance Rent and any advance payments made by Tenant to
Landlord.
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ARTICLE IV
OPERATING EXPENSES
4.1 PAYMENT OF OPERATING EXPENSES. In the event that the Operating
Expenses (as hereinafter defined) for any calendar year during the Term exceed
the Operating Expenses for the 1997 calendar year (the "Base Year"), Tenant
shall pay to Landlord, in addition to the Base Rent and all other payments due
under this Lease, an amount equal to Tenant's Proportionate Share (as
hereinafter defined) of the Excess Expenses (as hereinafter defined) in
accordance with the provisions of this Article IV.
4.2 DEFINITION OF OPERATING EXPENSES. (a) The term "Operat ing
Expenses" shall mean the reasonable costs and expenses incurred by Landlord in
connection with the operation, maintenance, repair and ownership of the
Building that are properly allocable to the Premises, as determined in accor
dance with generally accepted accounting principles, consistently applied,
including, without limitation, the following costs and expenses: (1) salaries,
wages, bonuses and other compensation of all persons at or below the level of
Building manager employed full time in the performance of duties directly
connected with the operation, repair, or maintenance of the Building
("Landlord's Employees") (including, without limitation, engineers, janitors,
painters, floor waxers, window washers, security, and gardeners), but
excluding persons performing services not uniformly available to or performed
for substantially all of the tenants of the Project; (2) payroll, social securi
ty, workers' compensation, unemployment and similar taxes with respect to
Landlord's Employees, and the cost of providing disability or other benefits
imposed by law or otherwise, with respect to Landlord's Employees; (3) uniforms
(including the cleaning, replacement and pressing thereof) provided to
Landlord's Employees; (4) premiums and other charges incurred by Landlord with
respect to fire, other casualty, rent and liability insur ance, any other
insurance as is deemed necessary or advisable in the reasonable judgment of
Landlord and, after the Base Year, costs of repairing an insured casualty to
the extent of the deductible amount under the applicable insurance policy
(provided that such deductible amount shall not exceed $25,000 for the Building
each year); (5) water charges and sewer rents or fees; (6) license, permit and
inspection fees; (7) sales, use and excise taxes on goods and services
purchased by Landlord in connection with the operation, maintenance or repair
of the Building and Building systems and equipment; (8) the actual cost of
management of the Project, whether managed by Landlord or an independent
contractor, in an amount not to exceed 3% of Landlord's gross rental revenues
from the Building; (9) non-capital repairs to and physical maintenance of the
Building, including Building systems and appurtenances thereto and normal
repairs;
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(10) janitorial, window cleaning, guard, extermination, water treatment,
rubbish removal, plumbing and other services and inspection or service
contracts for elevator, electrical, mechanical and other Building equipment and
systems or as may otherwise be necessary or proper for the operation or
maintenance of the Building; (11) supplies, tools, materials, and equip ment
used in connection with the operation, maintenance or repair of the Building;
(12) reasonable accounting, legal and other professional fees and
expenses; (13) painting the exterior or the public or Common Areas of the
Building and the cost of maintaining the sidewalks, landscaping and other
Common Areas of the Building; (14) all costs and expenses for electricity,
chilled water, air conditioning, water for heating, gas, fuel, steam, heat,
lights, power and other energy related utilities required in connection with
the operation, maintenance and repair of the Building; (15) the cost of
furniture, draperies, carpeting, landscap ing and other customary and ordinary
items of personal property (excluding paintings, sculptures and other works of
art) provided by Landlord for use in the Common Areas of the Building, such
costs to be amortized over the useful life thereof; and (16) subject to the
limitation set forth in Section 4.3(b) hereof, Property Taxes (as hereinafter
defined). No particular item of expense shall be included in the calculation of
Operating Expenses more than once.
(b) Notwithstanding anything to the contrary contained herein,
Operating Expenses shall not include the following: (i) depreciation on the
Building or equipment or systems therein; (ii) debt service (including, without
limitation, interest, principal, points, amortization, commissions or fees);
(iii) rental under any ground or underlying lease; (iv) attorneys' fees, charges
and disbursements and other costs and expenses incurred in connection with lease
negotiations with prospective Building tenants or any disputes with Building
tenants; (v) the cost of any repairs, improvements, alterations or equipment
which would be properly classified as capital expenditures according to
generally accepted accounting principles and practices; (vi) the cost (including
permits, licenses and inspection fees) of decorating, improving for tenant
occupancy, renovating, painting or redecorating portions of the Building to be
demised to tenants; (vii) wages, salaries or other compensation paid to any
executive employees of Landlord or of Landlord's agents above the function of
Building manager; (viii) advertising and promotional expenditures; (ix) real
estate broker's or other leasing commissions or costs; (x) penalties or other
costs incurred due to a violation by Landlord, as deter mined by written
admission, stipulation, final judgment or arbitration award, of any of the terms
and conditions of this Lease or any other lease relating to the Building, except
to the extent that such costs reflect costs that would have been incurred by
Landlord absent such violation; (xi) repairs and other work occasioned by any
uninsured casualty and, subject to the provisions of item (4) in Section 4.2(a)
above, any insured casualty, to the extent that Landlord
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is reimbursed by insurance proceeds, and other work paid from insurance or
condemnation proceeds; (xii) costs, penalties or fines arising from Landlord's
violation of any applicable governmental rule or authority except to the extent
that such costs reflect costs that would have been incurred by Landlord absent
such violation; (xiii) all direct costs of refinancing, selling or exchang ing
the Building or any interest therein, including broker's commissions,
attorneys' fees, charges and dis bursements and closing costs; (xiv) Landlord's
general corporate office overhead and administrative expenses (which shall not
be deemed to include the management fee provided for in item (8) of Section
4.2(a) above); (xv) all costs associated with the presence, abatement,
removal and monitoring of any asbestos, chlorofluorocarbons or hazard ous
materials and any abatement or removal activities in connection therewith;
(xvi) any expense for which Landlord is actually directly reimbursed by a
tenant or other party; (xvii) amounts paid to affiliates of Landlord for
materials or services to the extent that the cost of such materials or services
is in excess of the normal range of costs for similar materials or services
under normal circumstances (taking into account the market factors in effect on
the date any relevant contracts were negotiated) in comparable buildings;
(xviii) all costs of services or other benefits made available without separate
charge to other tenants of the Building, which services or benefits are not
made available without separate charge to Tenant; (xix) the excess cost portion
of all services or other benefits provided to other tenants of the Building in
substantially greater quantities (on a per square foot basis) or at a
substantially greater cost (on a per square foot basis) than provided to
Tenant; (xx) all costs of correcting defects in the initial construction of the
Building; (xxi) costs for utilities for which any tenant of the Building
directly contracts with a utility company; (xxii) all costs to the extent
arising from the gross negligence or willful misconduct of Landlord or its
employees or agents; (xxiii) all costs arising from Landlord's charitable or
political contributions; (xxiv) all costs of purchasing or leasing sculpture,
paint ings or other objects of art; and (xxv) all costs to construct, operate
and maintain any additions to the Building made subsequent to the date of this
Lease.
(c) Landlord hereby agrees that the Operating Expenses shall
not be a profit center for Landlord. Operating Expenses are intended to be "net"
only and, therefore, should be reduced by the amount of any insurance or
warranty reimbursement or recovery, other reimbursement, recoupment, payment,
discount, credit, reduction, allowance or the like received by Landlord or its
agent in respect of such Operating Expenses. Landlord shall promptly, diligently
and actively pursue any and all insurance, warranty or other claims relating to
costs that are included in Operating Expenses. In no event shall Landlord be
entitled to a reimbursement (under this Section 4.2 and comparable paragraphs of
other tenants' leases) (i) from
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tenants of the Building for Operating Expenses in excess of one hundred percent
(100%) of the cost actually incurred therefor in any applicable calendar year,
or (ii) from Tenant for an amount in excess of the Tenant's Proportion ate
Share of the cost actually incurred for any Operating Expense in any applicable
calendar year. Notwithstanding anything to the contrary contained in this
Section 4.2, to the extent that a portion of any item of Operating
Expense is attributable to any building or business other than the Building,
only that portion of the cost of such item allocable to the Building shall be
included as an Operating Expense, provided that such includable portion when
added to all other portions of such item shall not exceed 100% of the cost of
such item.
4.3 DEFINITION OF PROPERTY TAXES. As used herein, the term "Property
Taxes" shall include: all taxes, assessments, water and sewer charges and other
similar governmental charges levied on or attributable to the Project or its
operation, including, without limitation, (a) real property taxes or
assessments levied or assessed against the Project, (b) assessments or charges
levied or assessed against the Project by any redevelopment agency, and
(c) any tax measured by gross rentals received from the leasing of the Premises
or the Project (other than excess profits taxes, franchise taxes, gift taxes,
transfer taxes, capital stock taxes, inheritance and succession taxes, estate
taxes, federal and state income taxes, and other taxes applied or measured by
Landlord's general net income, as opposed to rents, receipts or income
attributable to opera tions at the Premises). Property Taxes shall not include
interest and/or penalties assessed as a result of any late payment.
4.4 DEFINITION OF TENANT'S PROPORTIONATE SHARE. As used herein, the
term "Tenant's Proportionate Share" shall mean a frac tion, the numerator of
which is equal to the rentable square feet of the Premises (which number shall,
following the date hereof, (i) be determined by a licensed architect in accor
dance with BOMA standards and (ii) be confirmed in writing by the parties
hereto) and the denominator of which is equal to the rentable square feet of
the Project (which number shall, following the date hereof, (a) be determined
by a licensed architect in accordance with BOMA standards and (b) be confirmed
in writing by the parties hereto). Tenant's Proportionate Share of Operating
Expenses shall be payable by Tenant to Landlord as follows:
(a) Beginning with the calendar year following the Base Year
and for each calendar year thereafter (each, a "Comparison Year"), Tenant shall
pay to Landlord, in the manner and at the times provided in subparagraphs (b)
and (c) below, an amount equal to Tenant's Proportionate Share multiplied by the
amount by which Operating Expenses in curred by Landlord in the Comparison Year
exceed
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Operating Expenses incurred by Landlord in the Base Year. This excess is
referred to herein as the "Excess Expenses."
(b) On or before the fifth (5th) business day prior to the
expiration of the Base Year and each Compar ison Year during the Term, Landlord
shall deliver to Tenant a notice setting forth Landlord's reasonable estimate
of the amount of Tenant's Proportionate Share of Excess Ex penses payable
during such Comparison Year (such amount being referred to herein as the
"Estimated Excess Expense Amount"). On the first day of each calendar month
during the Term, Tenant shall pay to Landlord an amount equal to one-twelfth
(1/12) of the Estimated Excess Expense Amount then in effect. It is the
intention hereunder to estimate on annual basis the amount of Tenant's
Proportionate Share of Excess Expenses for each Comparison Year, and then to
make an adjustment in the following year, as provided in subparagraph (c)
below, based on the actual Operating Expenses incurred for such Comparison Year.
(c) On or before March 15 of each Comparison Year after the
first Comparison Year, Landlord shall deliver to Tenant a statement (the "Annual
Statement") setting forth actual Operating Expenses for the immediately
preceding Comparison Year, together with a reasonably detailed breakdown of
Operating Expenses incurred in such Comparison Year. If Tenant's Proportionate
Share of the actual Excess Expenses for the immediately preceding Com parison
Year exceeds the aggregate amount of monthly pay ments of the Estimated Excess
Expense Amount made by Tenant for such Comparison Year, then Tenant shall pay
Landlord the amount of such deficiency within thirty (30) days of the receipt of
the Annual Statement. If the aggregate amount of the monthly payments of the
Estimated Excess Expense Amount made by Tenant for such Comparison Year exceeds
Tenant's Proportionate Share of the actual Excess Expenses for such Comparison
Year, then Landlord shall (i) credit against Tenant's ensuing monthly
installments of additional rent for the remainder of such Comparison Year an
amount equal to such deficiency until the credit is ex hausted and (ii) not
later than five (5) business days prior to each calendar month in which such
credit is due, deliver to Tenant a credit statement setting forth the amount of
the credit to be applied to additional rent in such calendar month and the
amount of additional rent, if any, payable in such month. If a credit is due
from Land lord to Tenant on the Expiration Date, then Landlord shall pay Tenant
the amount of the credit within thirty (30) days following the Expiration Date.
The obligations of Tenant and Landlord to make payments required under this
Section 4.4 shall survive the Expiration Date.
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(d) Tenant's Proportionate Share of Excess Expenses in any
Comparison Year having less than 360 days shall be appropriately prorated.
(e) Tenant (or Tenant's designee or consultant) shall have the
right after reasonable notice and at reason able times to inspect and audit
Landlord's accounting records at Landlord's accounting office and if, after such
inspection, Tenant still disputes the amount of Tenant's Proportionate Share of
Excess Expenses, a certification as to the proper amount shall be made by an
independent Big 6 certified public accountant. Tenant agrees to pay the cost of
such certification unless it is determined that Land lord's original statement
overstated Tenant's Proportionate Share of Excess Expenses by more than five
percent (5%), in which event Landlord shall pay the cost of such certifica tion
and the costs of Tenant's inspection or audit.
ARTICLE V
SERVICES AND UTILITIES
5.1 LANDLORD'S OBLIGATIONS. (a) Subject to the provisions of this
Lease, including, without limitation, subparagraph (b) below and the
limitations and restrictions imposed by applicable laws and government and
utility company regula tions, Landlord shall, at its sole cost and expense: (i)
furnish or cause to be furnished to the Building twenty-four (24) hours a day,
during each day of the Term, electricity suitable for the intended use of the
Premises, hot and cold running water, scavenger and recycling service, and
elevator service; (ii) provide to the Premises window washing service for
exterior windows and those janitorial services set forth on Exhibit "J"
attached hereto and made a part hereof; (iii) maintain and keep
lighted the Common Areas in the Building; and (iv) provide heating, ventilation
and air conditioning ("HVAC") to the Premises on all business days starting no
later than 7:00 a.m. and ending no earlier than 6:00 p.m. Any HVAC required by
Tenant for any days and hours other than those in the preceding sentence shall
be provided to the Pre mises, upon reasonable notice by Tenant to Landlord, and
Tenant shall pay the actual costs to Landlord of providing such HVAC as such
costs are established from time to time, within five (5) business days of
receipt of an invoice from Landlord therefor. Landlord represents, warrants,
cove nants and agrees that throughout the Term and any extension thereof, said
electrical capacity shall not be reduced, and may be increased, as reasonably
requested by Tenant, in order to sustain Tenant's intended use of the Premises;
provided, however, that any costs relating to such increase shall be incurred
and paid by Tenant. Notwithstanding anything to the contrary contained herein,
Landlord shall (if reasonably possible) deliver to Tenant written notice of any
intended interruption (including, without
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limitation any cessation or diminution) in the electricity or water supply
affecting the Premises, within a reasonable period prior to such interruption.
(b) As used herein, "Essential Services" shall mean (i)
ingress and egress to the Building (including, without limitation, emergency
exits), the Premises, the rest rooms in the Building and the Building's parking
area; (ii) HVAC; (iii) life safety systems; (iv) mechanical systems; (v)
plumbing and waste disposal systems; and (vi) electrical systems.
Notwithstanding the provisions of subparagraph (a) above, if any of the
Building equipment or machinery should cease to function properly, or should
any other event occur which results in the cessation or diminu tion of
Essential Services (hereinafter "Service Interrup tion"), Landlord shall
use its reasonable efforts to repair or remedy the Service Interruption as soon
as possible. In the event that Landlord has been notified of such Service
Interruption and Landlord has not repaired or remedied, or taken reasonable
action to repair or remedy, a Service Interruption within twenty-four (24)
hours after the date of occurrence and such Service Interruption is not caused
by an "Event of Force Majeure" (as hereinafter defined), Tenant shall (a) be
entitled to an abatement of Rent from the date of the commencement of such
Service Interruption to the later of (1) the date on which Landlord takes
reasonable action to repair or remedy such Service Inter ruption or (2) the
date on which this Lease is terminated by Tenant, if Tenant elects to terminate
this Lease as hereinafter provided, and (b) have the right, but not the
obligation, to cure said Service Interruption and deduct Tenant's cost thereof
from the next installment or install ments of Rent becoming due. In the event
that (x) Landlord has been notified of such Service Interruption, (y) such
Service Interruption has not been repaired or remedied on or before the tenth
(10th) day after the date on which Landlord receives such notice (for any
reason other than an Event of Force Majeure) and (z) such Service Interruption
can be reasonably repaired or remedied within such period, Tenant shall have
the right, but not the obligation, to terminate this Lease effective as of such
tenth (10th) day, provided that in the event that Tenant does elect to
terminate this Lease, Tenant shall have up to ninety (90) days following such
termination to relocate its personal property, equipment, computers and FF&E
located within the Premises. Tenant shall be responsible for the payment of
Rent for the period of time that its personal property, equipment, computers
and FF&E remain located within the Premises. Commencing on the date on which
Tenant is entitled to an abatement of Rent as set forth in this Section 5.1,
Tenant may, in addition, maintain an action in equity for specific performance.
Nothing herein shall prevent Tenant from defending against a suit filed by
Landlord for non-payment of Rent on the grounds of con structive eviction. As
used herein, the term "Event of Force Majeure" shall mean any event beyond
Landlord's control,
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including, without limitation, an act of God, governmental, regulatory or
judicial authority, war, blockade, insurrection, riot, labor dispute, or
casualty.
(c) Landlord shall, at Landlord's expense, install a separate
electric meter or sub-meter (subject to utility company requirements) in order
to measure electric ity consumed by Tenant on the Premises.
5.2 TENANT'S OBLIGATIONS. (a) Tenant shall pay for, prior to
delinquency, all telephone and other materials and services not expressly the
obligation of Landlord that are furnished to or used on or about the Premises
during the Term or any Option Term.
(b) In addition to Base Rent, Tenant shall pay for all
electricity utilized by Tenant at the Premises, as measured by a separate meter
respecting the Premises.
ARTICLE VI
USE; COMPLIANCE WITH LAWS
6.1 Use. Tenant shall be entitled to use the Premises for general
office operations. Landlord shall cooperate with Tenant in securing from any
public authority any permits or licenses that may be required by Tenant for the
conduct and operation of Tenant's business or for the proper use of the
Premises. Tenant shall not use or occupy, or permit the use or occupancy of,
all or any portion of the Premises for any unlawful purpose.
6.2 Compliance with Laws. Subject to Tenant's Right to Contest (as
hereinafter defined), Tenant shall comply with, and if necessary make all such
alterations so that the Premises is in compliance with, all laws, ordinances,
rules and regulations of all governmental authorities applicable thereto and to
the use thereof ("Legal Requirements"), other than (a) structural changes to
the Building and (b) compliance for which Landlord is expressly responsible
under this Lease.
ARTICLE VII
MAINTENANCE, REPAIRS AND ALTERATIONS
7.1 Landlord's Obligations. Landlord shall maintain in good order,
condition and repair the Building, all mechanical and utility systems, Common
Areas and all other portions of the Premises, except to the extent that Tenant
is obligated
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to maintain the Premises pursuant to the terms of this Lease, including, without
limitation, Section 7.2 hereof. Except as otherwise expressly provided herein,
Landlord shall complete all repairs within thirty (30) days of the date on which
Landlord is notified or becomes aware of the need to make such repairs;
provided, however, that if the nature of a repair is such that it cannot
reasonably be completed within such thirty (30) day period, then Landlord shall
not be in default of its obligations under this Section 7.1 if Landlord
commences the repair in question within such thirty (30) day period and
thereafter dili gently pursues the repair to completion.
7.2 TENANT'S OBLIGATIONS. Except for services furnished by Landlord
pursuant to this Article VII, Tenant, at Tenant's sole cost and expense, shall
maintain the Premises in good order, condition and repair, including, without
limitation, the interior surfaces of the ceilings, walls and floors, all doors,
interior windows, fixtures and special items in excess of Building standard
furnishings and equipment installed by or for the benefit of or at the expense
of Tenant.
7.3 ALTERATIONS. Tenant, at its sole cost and expense, may make any
non-structural changes and alterations to the Premises as Tenant shall
reasonably deem necessary or desirable without the approval of Landlord. Tenant
shall not make structural changes or alterations to the Premises without the
prior written consent of Landlord. As used herein, "Alterations" shall mean any
change or alterations to be made to the Premises by Tenant. Landlord agrees to
join in the application for, and execute all instruments necessary to obtain,
any permits, licenses or authoriza tions in connection with Alterations which
are permitted herein or to which Landlord has consented. Upon the termination
of this Lease and Tenant's relocation of its personal property, equipment,
computers and FF&E within ninety (90) days following such termination in
accordance with the terms hereof (including, without limitation, Tenant's
payment of Rent for the period of time that its personal property, equipment,
computers and FF&E remain located within the Premises), Tenant shall surrender
the Premises to Landlord in the condition that existed on the Commencement Date
(ordinary wear and tear, repairs and replacements required to be made pursuant
to this Lease, loss by fire, casualty, condemnation, and alterations, additions
and improvements herein permitted, all excepted).
7.4 Code Compliance. All work done in connection with any
maintenance, repair, Restoration (as hereinafter defined) and/or Alterations
shall be done in a good and workmanlike manner and in compliance with any and
all Legal Require ments, including, without limitation, applicable building
codes, ordinances, rules and regulations.
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7.5 Tenant's FF&E. All furniture, fixtures, equipment and property of
any nature that may be installed or placed in or upon the Premises by Tenant
(collectively, "FF&E") shall remain the property of Tenant. FF&E may be
relocated within the Premises by the Tenant with Landlord's consent, which
shall not be unreasonably withheld. Landlord hereby waives any right it may now
or hereafter have in the FF&E. Tenant may assign, lien, encumber, mortgage or
create a security interest in or upon the FF&E without the consent of Landlord
and may remove the FF&E at any time during the Term. Upon the request of
Tenant, Landlord agrees to provide Tenant, within ten (10) days of such
request, a written waiver, in form reasonably satisfactory to Tenant,
evidencing Landlord's waiver of any rights it may have in the FF&E.
ARTICLE VIII
INSURANCE
6.1 Tenant's Required Coverage. At all times during the Term, Tenant
shall, at its expense, maintain or cause to be main tained insurance as set
forth in this Article VIII:
(a) all-risk property insurance (including fire, smoke, explosion,
vandalism and malicious mischief) cover ing loss or damage to the FF&E and
other property located at the Premises, in the amount of full replacement value
thereof; provided that Tenant shall be required to maintain insurance for
tornado, collapse and flood only to the extent that such insurance is
customarily carried for comparable Premises in the area and is available at
commer cially reasonable rates and terms;
(b) commercial general liability insurance against claims for
personal injury or death and property damage occurring upon, in or about the
Premises, in the sum of $5,000,000 combined single limit per occurrence and
$10,000,000 all-inclusive umbrella coverage; and
(c) workers' compensation insurance as required by state law with
respect to Tenant's employees.
8.2 Landlord's Required Coverage. At all times during the Term,
Landlord shall, at its expense, maintain or cause to be maintained insurance as
set forth in this Article VIII:
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(a) all-risk property insurance (including fire, smoke,
explosion, vandalism and malicious mischief) cover ing loss or damage to the
Building, in the amount of full replacement value thereof, with a deductible
provision, if any, that does not materially exceed that which prudent,
efficient operators of comparable first-class high-rise office buildings in the
area surrounding the Project would carry from time-to-time in the exercise of
reasonable busi ness judgment; and
(b) commercial general liability insurance with amounts of
coverage Landlord deems appropriate in its good faith business judgment, but in
no event less than $10,000,000 in coverage.
8.3 INSURERS. All insurance provided for under this Lease shall be
effected under valid and enforceable policies issued by insurers of recognized
responsibility who are licensed to do business in the State of Ohio. Such insur
ance may be carried by either party as part of a blanket coverage for all real
property owned or leased by such party.
8.4 ADDITIONAL INSURED. All policies of insurance required to be
obtained by either party pursuant to Sections 8.1 (a), 8.1 (b), 8.2 (a) and 8.2
(b) hereof shall (a) name such party as the insured thereunder, (b) provide
that all insurance proceeds thereunder shall be payable to such party, (c) name
the other party as an additional insured (provided, however, that Landlord's
all risk policy described in Section 8.2 hereof shall not name Tenant as an
additional insured), and (d) contain an endorsement requiring thirty (30) days'
prior written notice from the insurer to the other party before cancellation or
modifica tion thereof. The loss, if any, under the insurance policies required
to be obtained by either party pursuant to Sections 8.1 (a), 8.1 (b), 8.2 (a)
and 8.2 (b) hereof, shall be adjusted with the insurers, or their
authorized representatives, by such insured party.
8.5 Mutual Waiver of Subrogation Rights. Notwithstanding anything to
the contrary contained in this Lease, each party hereto hereby releases the
other respective party and the respective partners, shareholders, agents,
employees, officers, directors and authorized representatives of such released
party, from any claims such releasing party may have for damage to the
Building, the Premises or any of such releasing party's fixtures, personal
property, improvements and alterations in or about the Premises, the Building
or the Land that is caused by or results from risks insured against under any
fire and extended coverage insurance policies actually carried by such
releasing party or deemed to be carried by such releasing party. For purposes
of this Section 8.5, Tenant and Landlord shall be deemed to be carrying any of
the insurance policies required pursuant to Sections 8.1
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and 8.2 hereof but not actually carried by Tenant or Landlord. Each party
hereto shall cause each such fire and extended coverage insurance policy
obtained by it to provide that the insurance company waives all rights of
recovery by way of subrogation against the other respective party and the
other aforesaid released parties in connection with any matter covered by such
policy.
8.6 Indemnity. Tenant shall indemnify, defend and hold Land lord
harmless from and against any and all liabilities, fines, claims, demands,
actions, costs and expenses (including, without limitation, reasonable
attorneys' fees, charges and disbursements), which may be imposed upon or
incurred by or asserted against Landlord by the occurrence of any accident or
injury, including death or damage to person and property, in or about the
Premises during the Term, unless arising as a result of the gross negligence or
willful acts or omissions of Landlord or any agent of Landlord.
ARTICLE IX
DAMAGE OR DESTRUCTION
9.1 Damage or Destruction. If all or a portion of the Premises is
damaged by fire or other casualty, or if the Building is so damaged that access
to or use and occupancy of the Premises is materially impaired (any such fire
or other casualty to the Premises or Building is hereinafter referred to as
"Damage"), Landlord shall within ten (10) business days after the occurrence of
the Damage give Tenant notice of Landlord's reasonable estimate of the time
required to repair such Damage (the "Damage Estimate"). If the Damage Estimate
is ninety (90) days or less, then Landlord shall repair the Damage (such repair
being referred to herein as a "Restoration") and this Lease shall remain in
full force and effect. If the Damage Estimate is more than ninety (90) days,
Landlord, at its option exercised by written notice to Tenant (such a notice
being referred to herein as "Landlord's Notice") within thirty (30) days of the
date of the Damage, shall either (a) repair the Damage, in which event this
Lease shall continue in full force and effect, or (b) if the Premises is
damaged to such an extent that Tenant is prevented from operating its business
at the Premises substantially in the manner in which such business was
conducted prior to the occurrence of such Damage, terminate this Lease
effective as of the date specified by Landlord in Landlord's Notice, which date
shall be not less than thirty (30) days nor more than sixty (60) days after the
date such Landlord's Notice is given. If the Damage Estimate is more than
ninety (90) days, and Landlord elects to repair the Damage or fails to deliver
Landlord's Notice within the time period required hereunder, then Tenant may
(by delivering written notice to
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Landlord within thirty (30) days after Tenant receives the Damage Estimate)
choose, in Tenant's sole and absolute discretion, to terminate this Lease
effective as of the date of such Damage. In the event that neither party elects
to terminate this Lease pursuant to this Section 9.1, and Landlord fails to
substantially complete its repair of the Damage within thirty (30) days after
the expiration of the time period set forth in the Damage Estimate (which
period shall be extended to the extent of any delays caused by Tenant or Events
of Force Majeure), then Tenant may terminate this Lease by delivering written
notice thereof to Landlord. Notwithstanding anything to the contrary in this
Section 9.1, Landlord shall not termi nate this Lease as a result of a fire or
casualty, unless it also exercises any comparable rights to terminate the
leases of all tenants in the Building that are similarly affected by the fire
or casualty. In the event that this Lease is terminated pursuant to the
provisions of this Section 9.1, Tenant shall have up to ninety (90) days
following such termination to relocate its personal property, equipment,
computers and FF&E located within the Premises. Tenant shall be responsible for
the payment of Rent for the period of time that its personal property,
equipment, computers and FF&E remain located within the Premises.
Notwithstanding anything to the contrary contained herein, if the remaining
Term of this Lease following the restoration of any Damage shall be less than
(i) one (1) year, or (ii) three (3) times as long as the restoration period,
Landlord or Tenant may, at its option, elect to terminate this Lease by
delivering written notice of such election to the other party within twenty
(20) business days following the date of the casualty; provided, however, that
a termination by Landlord in connection with a casualty near the end of the
Term as set forth above shall not be effective in the event that (a) the Damage
affects less than 25% of the Building, (b) Tenant then has, or would with the
passage of time have, the right to extend the Term of this Lease pursuant to an
Option, and (c) Tenant notifies Landlord in writing, within twenty (20)
business days following Tenant's receipt of Landlord's termination notice, that
Tenant is exercising such Option, in which case Landlord shall be obligated to
repair and restore the Building in accordance with the terms of this Section
9.1.
9.2 Abatement of Rent; Compliance with Laws. During the period that
the Premises or any portion thereof is rendered unusable by Damage and/or
Restoration, (a) the Rent due hereunder shall be proportionately reduced based
upon the extent to which the Damage and/or Restoration prevents Tenant from
conducting its business at the Premises in the manner in which such business
was conducted prior to the occurrence of such Damage, and (b) notwithstanding
anything to the contrary in Section 6.2 hereof, Landlord shall be solely and
exclusively responsible for correcting any non-compliance with Legal
Requirements resulting from or arising in connection with such Damage and/or
Restoration.
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ARTICLE X
CONDEMNATION
10.1 Takings. If at any time during the Term, (a) all, or any
portion, of the Premises shall be taken or condemned (a "Taking") for a public
or quasi-public use or purpose by any competent authority by the exercise of
the right of condemnation or eminent domain, and (b) the Taking involves a
material part of the Premises such that the remainder of the Premises shall be
deemed unsuitable or insufficient for Tenant's use, either party shall have the
right at its option to terminate this Lease as of the date possession is taken
by the condemning authority, by written notice to the other party within thirty
(30) days after such Taking, and the parties shall be relieved of further
obligations under this Lease, provided that the conditions precedent to a
party's right to terminate this Lease are satisfied as provided in Section 10.2
below. In the event that this Lease is terminated pursuant to the provisions of
this Section 10.1, Tenant shall have up to ninety (90) days following such
termination to relocate its personal property, equipment, computers and FF&E
located within the Premises. Tenant shall be responsible for the payment of
Rent for the period of time that its personal property, equipment, computers
and FF&E remain located within the Premises. In the event that this Lease is
not so terminat ed, then Landlord agrees to the extent of applicable proceeds
to restore the Premises to a complete unit of like quality and character as
existed prior to the Taking, as soon as reasonably possible.
Landlord shall be entitled to and shall receive from the
condemning authority the portion of the award with respect to such Taking
relating to Landlord's estate in the Premises and Tenant shall be entitled to
and shall receive from the condemning authority the portion of the award with
respect to such Taking relating to Tenant's estate in the Premises; provided,
however, that Tenant's award shall be limited to:
(a) an amount for the cost of removal or relocation of Tenant's
property or business; and
(b) an amount for damages for cessation or interruption of Tenant's
business.
10.2 PARTIAL TAKING. In the event of a partial Taking of the Premises
or the Building, Landlord shall have the right to terminate this Lease only if
the part of the Premises or the Building taken is a material part of the
Premises or Building and Tenant shall have the election to terminate this Lease
only if (a) the
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part of the Premises taken is a material part of the Premises which renders the
remainder of the Premises reasonably unsuitable for the continued conduct of
Tenant's business at the Premises or (b) if the loss of use of the part of the
Building taken materially impairs Tenant's use of the Premises. A partial
Taking of the Premises includes a temporary Taking of six months or more.
Notwithstanding anything to the contrary in this Article X, Landlord shall not
terminate this Lease as a result of a Taking, unless it also exercises any
comparable rights to terminate the leases of all tenants in the Building that
are similarly affected by the taking.
10.3 RENTAL ADJUSTMENT. If this Lease is not terminated pursuant to
Section 10.1 hereof, the Rent payable by Tenant for the balance of the Term
shall be equitably and proportionately reduced from the date of such Taking.
Except to the extent that Tenant may be prevented from so doing pursuant to the
terms of the order of the condemning authority, Tenant otherwise shall perform
and observe all of the terms, covenants, conditions and obligations of this
Lease on the part of Tenant to be performed and observed.
10.4 Tenant's Claims. Nothing contained in this Lease shall be
construed to preclude Tenant from prosecuting any claim directly against,
and/or recovering directly from, the condemning authority in any condemnation
proceeding for loss of business, depreciation or damages to and/or cost of
removal or the value of, stock and/or trade fixtures, furniture and other
personal property belonging to Tenant, and for relocation and moving expenses.
ARTICLE XI
LIENS
Subject to Tenant's Right to Contest, Tenant shall not suffer
or permit any lien or encumbrance of any kind or nature whatsoever, including,
without limitation, any mechanics' and materialmen's liens or charges by reason
of any work, labor, services or materials supplied to Tenant or anyone holding
an interest in the Premises through Tenant, to be filed against the Project, the
Premises or Landlord's leasehold interest therein. If any such liens shall be
filed against the Premises in violation of this Article XI, Tenant shall, within
a reasonable period of time, but in no event more than ninety (90) days after
notice of the filing thereof, cause the same to be discharged of record by
payment, deposit, bond, order of a court of competent jurisdiction or otherwise.
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ARTICLE XII
RIGHT TO CONTEST
Tenant, at its sole expense, may contest ("Right to Contest"), by
appropriate legal proceedings conducted in good faith and with due diligence,
the amount or validity or application, in whole or in part, of any Legal
Require ment or liens, provided that: (a) the commencement of such proceedings
shall suspend the collection of any such con tested amounts from Landlord and
from the Premises; (b) neither the Premises nor any Rent therefrom nor any part
thereof or interest therein would be in any immediate danger of being sold,
foreclosed, forfeited, attached or lost; (c) in the case of a Legal
Requirement, Landlord would not be in any immediate danger of civil or criminal
liability for failure to comply therewith pending the outcome of such
proceedings; and (d) if such contest be finally resolved against Tenant, Tenant
shall promptly pay the amount required to be paid, together with all interest
and penalties accrued thereon, and/or comply with any applicable Legal
Requirement, as applicable. Landlord, at Tenant's expense, shall execute and
deliver to Tenant such authorizations and other documents as may reasonably be
required in any such contest.
ARTICLE XIII ASSIGNMENT AND SUBLETTING
13.1 Transfer. Except as otherwise expressly provided herein, Tenant
shall not assign, convey, sublease, or otherwise transfer ("Transfer") this
Lease or any interest therein, without the prior written consent of Landlord,
which consent shall not be unreasonably withheld or delayed. It shall not be
deemed unreasonable for Landlord to take into account the net worth of the
proposed transferee vis-a-vis the net worth of Tenant in Landlord's
consideration of such consent. It is understood and agreed that in the event
that Landlord fails to consent to or disapprove any Transfer in writing within
thirty (30) days of Tenant's written request for Landlord's consent to such
Transfer, then Landlord shall be deemed to have consented to such Transfer.
13.2 Permitted Transfers. Notwithstanding anything to the contrary
contained herein, Landlord's consent shall not be required for any of the
following Transfers provided that such transferee's or assignee's net worth and
financial capability is equal to or exceeds that of Tenant:
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(a) any Transfer to any person or entity controlling, controlled by,
or under common control with, Tenant;
(b) any Transfer as a result of a merger, consolidation or
reorganization of Tenant; or
(c) any Transfer to any person or entity acquiring all or
substantially all of the business, assets or voting stock of Tenant.
13.3 ASSUMPTION BY TRANSFEREE. Upon each Transfer, each and every
transferee, whether as transferee or as successor-in-interest of any
transferee, shall be liable for the payment of Rent and for the performance of
all of the covenants, agreements, terms and provisions of this Lease on
Tenant's part to be performed during the Term. Tenant shall deliver or cause to
be delivered to Landlord a duplicate original copy of the instrument of
Transfer, if applicable, which instrument shall contain an assumption by the
transferee of the obligations of Tenant hereunder. Provided that such
transferee or assignee assumes all of Tenant's obligations under this Lease,
any consent by Landlord to any Transfer of this Lease, and any other permitted
Transfer, shall constitute a release of Tenant from liability for the full
performance by it of the provisions of this Lease and all of Tenant's
obligations hereunder shall cease and terminate upon such Transfer.
ARTICLE XIV
DEFAULT
14.1 EVENTS OF DEFAULT. The occurrence of any of the following shall
constitute an event of default by Tenant (each, an "Event of Default") under
this Lease:
(a) The failure by Tenant to make any payment of Rent or any
other payment required to be made by Tenant hereunder, as and when due, where
such failure shall continue for a period of ten (10) business days after writ
ten notice thereof from Landlord;
(b) The failure by Tenant to observe or perform any of the
other covenants or provisions of this Lease where such failure shall continue
for a period of thirty (30) days after written notice thereof from Landlord
(unless such failure cannot reasonably be cured within said thirty (30) day
period and Tenant shall have
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commenced to cure said failure within said thirty (30) day period and continues
to prosecute such cure with due diligence);
(c) If any execution or attachment shall be levied against all
or substantially all of Tenant's assets, and such execution or attachment shall
not be stayed, set aside, bonded or discharged within ninety (90) days after the
same shall have been levied;
(d) If an order, judgment or decree shall be entered by any
court of competent jurisdiction approving a petition seeking a reorganization of
Tenant or the appoint ment of a receiver of all or substantially all of Tenant's
assets, and such order, judgment or decree shall continue unstayed and in effect
for a period of ninety (90) days after the same shall have been entered; or
(e) If an involuntary case is commenced against Tenant by the
filing of a petition under any chapter of the Federal bankruptcy code or under
any law other state or Federal governing bankruptcy or insolvency and an order
for relief is entered therein or the petition is not dismissed within ninety
(90) days after the filing of such petition.
14.2 LANDLORD'S REMEDIES. Upon the occurrence of an Event of Default,
Landlord, in addition to any other rights it may have at law or in equity,
shall have the following rights:
(a) to serve a written notice upon Tenant that Landlord elects to
terminate this Lease upon a specified date not less than thirty (30) days from
the date after the serving of such notice and, unless such Event of Default
shall be remedied prior to the termination date set forth in such notice, this
Lease shall terminate on the date specified in such notice and Tenant shall
surrender possession of the Premises to Landlord. In the event that Landlord
terminates this Lease pursuant to this Section 14.2(a), Landlord shall be
entitled to recover from Tenant damages incurred by Landlord by reason of
Tenant's default, including, but not limited to:
(i) the worth, at the time of award, of the unpaid Rent
that has been earned at the time of the termination of this Lease;
(ii) the worth, at the time of award, of the amount by
which the unpaid Rent that would have been earned after the date of
termination of this Lease until the time of award exceeds
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the amount of the loss of Rent that Tenant proves could be reasonably
avoided;
(iii) the worth, at the time of award, of the amount by
which the unpaid Rent for the balance of the stated term hereof after the
time of award exceeds the amount of the loss of Rent that Tenant proves
could be reasonably avoided; and
(iv) any other amount necessary to compensate Landlord for
the detriment proximately caused by Tenant's default, including, but not
limited to, the cost of recovering the Premises, preparing and altering the
Premises for reletting and all other reasonable costs and expenses of
reletting; or
(b) to maintain Tenant's right to possession in which case
this Lease shall continue in effect whether or not Tenant shall have abandoned
the Premises. In such event Landlord shall be entitled to enforce all of Land
lord's rights and remedies under this Lease, including the right to recover the
Rent as it becomes due hereunder.
"The worth, at the time of award," as used in Sections 14.2(a)(i) and
(ii) hereof, is to be computed by allowing interest at the rate of ten percent
(10%) per annum. "The worth, at the time of award," as used in Section
14.2(a)(iii) hereof, is to be computed by discount ing the applicable amount at
the discount rate of the Federal Reserve Bank of San Francisco at the time of
the award, plus one percent (1%). Nothing contained in this Section 14.2 shall
limit Landlord's right to exercise any remedy available to Landlord at law or
in equity in an Event of Default by Tenant under this Lease.
14.3 LANDLORD'S DEFAULT. Landlord shall not be in default in the
performance of any obligation required to be performed under this Lease unless
Landlord has failed to perform such obligation within thirty (30) days after
the date on which Landlord receives notice from Tenant specifying in detail
Landlord's failure to perform; provided, however, that if the nature of
Landlord's obligation is such that more than thirty (30) days are required for
its performance, Landlord shall not be deemed in default if it shall commence
such performance within thirty (30) days and thereafter dili gently pursue the
same to completion. If Landlord does not cure the default, Tenant may exercise
all rights and remedies available to Tenant at law or in equity.
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ARTICLE XV
INSPECTION
Landlord and its representatives shall have the right to enter
into and upon the Premises or any part thereof at reasonable hours, after seven
(7) business days' prior written notice to Tenant (provided that Landlord is
accompanied at all times by Tenant or Tenant's agent or representative), for the
purpose of (a) inspecting the Premises to confirm that Tenant is in compliance
with its obligations under this Lease, (b) showing the Premises to prospective
purchasers of the Project, and (c) at any time within one (1) month prior to
the Expiration Date, for the purpose of showing the Premises to prospective
tenants; provided, however, that if Tenant does not have any further Options,
then Landlord may show the Premises to prospective tenants at any time within
two (2) months prior to the Expiration Date.
ARTICLE XVI
SUBORDINATION; NONDISTURBANCE
16.1 SUBORDINATION. This Lease, at Landlord's option, shall be
subordinate to any ground lease, mortgage, deed of trust, or any other
hypothecation or security (collective ly, "Security Devices") now or hereafter
placed by Landlord upon the Project and to any and all advances made on the
security thereof and to all renewals, modifications, consolidations,
replacements and extensions thereof. Notwithstanding such subordination,
Tenant's right to quiet possession of the Premises shall not be disturbed if
Tenant is not in default and so long as Tenant shall pay Rent and observe and
perform all of the provisions of this Lease, unless this Lease is otherwise
terminated pursuant to its terms. If any mortgagee, trustee or ground lessor
shall elect to have this Lease prior to the lien of its mortgage, deed of trust
or ground lease, and shall give written notice thereof to Tenant, this Lease
shall be deemed prior to such mortgage, deed of trust, or ground lease, whether
this Lease is dated prior or subsequent to the date of said mortgage, deed of
trust or ground lease, or the date of recording thereof.
16.2 NONDISTURBANCE. Notwithstanding anything to the contrary
contained herein, with respect to Security Devices entered into by Landlord
after the execution of this Lease, Tenant's subordination of this Lease shall
be subject to and conditioned upon Tenant's receipt of written assurances from
the lenders under such Security Devices, in form and substance reasonably
satisfactory to Tenant, that Tenant's possession and this Lease will not be
disturbed so long as Tenant is not in breach hereof and attorns to the record
owner of the Premises.
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ARTICLE XVII
HOLDOVER
If Tenant remains in possession of the Premises or any part
thereof after the expiration of the Term of this Lease (as it may be extended),
such occupancy shall be a tenancy from month to month upon the same terms and
provisions as this Lease; provided, however, that Basic Rent shall be an amount
equal to 125% of the Basic Rent which was due immediately prior to the
expiration of the Term of this Lease.
ARTICLE XVIII
ESTOPPEL CERTIFICATES
Tenant agrees, at any time and from time to time upon not less
than twenty (20) days' prior written notice by Landlord, to execute, acknowledge
and deliver to Landlord a statement in writing certifying that this Lease is
unmodified and in full force and effect (or if there have been modifications,
that the Lease is in full force and effect as modified and stating the
modifications), the dates to which Rent has been paid, and stating whether
Landlord is in default in performing any term, covenant, agreement, condition or
limitation contained in this Lease, it being intended that any such statement
delivered pursuant to this Article XVIII may be relied upon by Land lord, any
prospective purchaser of fee title in and to the Premises, or any mortgagee or
prospective mortgagee, but reliance on such statement may not extend to any
default as to which Tenant shall have no actual knowledge.
ARTICLE XIX
NOTICE OF CHANGE IN OWNERSHIP
Landlord agrees to deliver to Tenant written notice of any change in
the ownership of the Building, on or before the thirtieth (30th) day prior to
such change in ownership.
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ARTICLE XX
MISCELLANEOUS PROVISIONS
1Notice. All notices and other communications under this Lease must be in
writing and shall be deemed to have been duly given if delivered, telecopied or
mailed, by certified mail, return receipt requested, first-class postage
prepaid, to the parties at the following addresses:
If to Landlord: F.I.G. Holding Company
4680 Wilshire Boulevard
Los Angeles, California 90010
Attention:
Jason L. Katz, Senior Vice President and General
Counsel, Laszlo Heredy, Vice President,
Investments, and Patrick Miller, Real Estate
Investment Manager
Telephone: (213) 932-3200
Telecopy: (213) 964-8093
With a Copy To: F.I.G. Holding Company
4700 Wilshire Boulevard
Los Angeles, California 90010
Attention: Carmen Tosto, Vice President of Data Center
Operations
Telephone: (213) 930-4010
Telecopy: (213) 964-8746
If to Tenant: The Ohio State Life Insurance Company
c/o Great Southern Life Insurance Company
300 West 11th Street
Kansas City, Missouri 64105
Attention: Gary L. Muller, President
Telephone: (816) 391-2000
Telecopy: (816) 391-2018
All notices and other communications required or permitted
under this Lease that are addressed as provided in this Article XX shall, if
delivered personally, be deemed given upon delivery, shall, if delivered by
telecopy, be deemed delivered when confirmed and shall, if delivered by mail in
the manner described above, be deemed given on the third business day after the
day it is deposited in a regular depository of the United States mail. Any party
from time to time may change its address for the purpose of notices to that
party by giving a
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similar notice specifying a new address, but no such notice shall be deemed to
have been given until it is actually received by the party sought to be charged
with the contents thereof.
20.2 ENTIRE AGREEMENT. This Lease supersedes all prior discus sions
and agreements between the parties with respect to the subject matter hereof,
and this Lease (including the exhibits attached hereto) contains the sole and
entire agreement between the parties hereto with respect to the subject matter
hereof.
20.3 CUMULATIVE REMEDIES. The specified remedies to which Landlord or
Tenant may resort under the terms of this Lease are cumulative and are not
intended to be exclusive of any other remedies or means of redress to which
Landlord or Tenant, as the case may be, may be lawfully entitled in case of any
breach, or threatened breach by Landlord or Tenant of any provisions of this
Lease.
20.4 NO WAIVER. Except as otherwise expressly provided here in, the
failure of Landlord or Tenant to insist in any one or more cases upon the
strict performance of any of the covenants of this Lease shall not be construed
as a waiver or relinquishment for the future of such covenant. A receipt by
Landlord of Rent with knowledge of the breach of any covenant hereof shall not
be deemed a waiver of such breach. No waiver by Landlord or Tenant of any
provision of this Lease shall be deemed to have been made unless ex pressed in
writing and signed by Landlord or Tenant, as the case may be.
20.5 AMENDMENTS. This Lease shall not be amended or modified except
by an agreement in writing executed by both Landlord and Tenant.
20.6 QUIET ENJOYMENT. Landlord covenants, agrees and warrants that
Tenant, upon paying the Rent and all other charges herein provided for and upon
observing and keeping all of the covenants, agreements and provisions of this
Lease on its part to be observed and kept, shall peaceably and quietly hold,
occupy and enjoy the Premises during the Term without hindrance or molestation
by or from anyone claiming by, through or under Landlord.
20.7 No Third Party Beneficiary. The terms and provisions of this
Lease are intended solely for the benefit of the parties hereto and their
respective successors or assigns, and it is not the intention of the parties to
confer third-party beneficiary rights upon any other person.
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20.8 SUCCESSORS AND ASSIGNS. This Lease shall be binding upon and
inure to the benefit of Landlord and Tenant, their respective heirs,
executors, administrators, successors and assigns.
20.9 GOVERNING LAW. This Lease shall be governed by and construed in
accordance with the laws of the State of Ohio.
20.10 CAPTIONS. The captions of this Lease are for convenience and
reference only and in no way define or limit the scope or intent of this Lease,
nor in any way affect this Lease.
20.11 Gender; Number. Words of any gender in this Lease shall be held
to include any other gender, and words in the singular number shall be held to
include the plural when the sense so requires. The word "person" shall mean a
corporation, partnership, trust or other entity, as the case may be.
20.12 NO BROKERS. Tenant and Landlord each represent to the other that
they have not dealt with any broker in regard to the execution of this Lease
and agree to defend, indemnify and hold each other harmless for any claims
which arise as a result of the breach of the foregoing represen tation.
20.13 COUNTERPARTS. This Lease may be executed simultaneously in any
number of counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
20.14 NO RECORDING. Neither party may record this Lease or any short
form of this Lease without the prior written consent of the other party (which
consent may be withheld in such party's sole and absolute discretion).
20.15 SEVERABILITY. If any term or provision of this Lease or the
application thereof to any person or circumstance shall to any extent be
invalid or unenforceable, the remainder of this Lease, or the application of
such term or provision to persons or circumstances other than those as to which
it is invalid or unenforceable, shall not be affected thereby, and each term
and provision of this Lease shall be valid and enforced to the fullest extent
permitted by law.
20.16 ATTORNEYS' FEES. In the event of any litigation between Landlord
and Tenant alleging a breach of this Lease by the other party, the losing party
shall pay to the prevailing party its costs of litigation including reasonable
attor neys' fees, charges and disbursements.
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IN WITNESS WHEREOF, the parties hereto have duly executed this
Lease as of the day and year first above written.
LANDLORD:
F.I.G. HOLDING COMPANY,
a California corporation
By: ________________________________
Name:
Its:
By: ________________________________
Name:
Its:
TENANT:
THE OHIO STATE LIFE INSURANCE
COMPANY, an Ohio corporation
By: ________________________________
Name:
Its:
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EXHIBIT A
THE LEGAL DESCRIPTION OF THE LAND
B-38
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EXHIBIT B
THE PREMISES ON THE BASEMENT OF THE BUILDING
B-39
<PAGE> 110
EXHIBIT C
THE PREMISES ON THE FIRST FLOOR OF THE BUILDING
B-40
<PAGE> 111
EXHIBIT D
THE PREMISES ON THE THIRD FLOOR OF THE BUILDING
B-41
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EXHIBIT E
THE PREMISES ON THE FIFTH FLOOR OF THE BUILDING
B-42
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EXHIBIT F
THE EQUIPMENT ON THE ROOF OF THE BUILDING
B-43
<PAGE> 114
EXHIBIT G
THE EQUIPMENT ON THE TOP FLOOR OF THE BUILDING
B-44
<PAGE> 115
EXHIBIT H
THE EQUIPMENT ON THE BASEMENT OF THE BUILDING
B-45
<PAGE> 116
EXHIBIT I
SIGNAGE
B-46
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EXHIBIT J
JANITORIAL SERVICES
B-47
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EXHIBIT D
TRANSITION SERVICES AGREEMENT
Dated as of _______ ___, 1997
Between
FARMERS GROUP, INC.
and
_____________________________
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TABLE OF CONTENTS
Page
ARTICLE I
ADMINISTRATIVE SERVICES
1.1 Transition Period Services............................ 1
1.2 Post-Transition Period................................ 2
1.3 Settlements........................................... 2
ARTICLE II
PERFORMANCE STANDARDS
2.1 Performance and Quality............................... 2
2.2 Reliance on Company Employees......................... 2
2.3 Modification of Service Level ........................ 3
ARTICLE III
TRANSITION ASSISTANCE
3.1 Transfer of Administration............................ 3
3.2 Systems Transfer...................................... 3
ARTICLE IV
COST OF SERVICES AND EXPENSES
4.1 Service Fees.......................................... 4
4.3 Taxes................................................. 4
ARTICLE V
RELATIONSHIP OF THE PARTIES
5.1 Relationship of the Parties........................... 4
5.2 Non-Solicitation of Employees ........................ 4
D-i
ARTICLE VI
RECORD RETENTION AND MAINTENANCE
6.1 Record Retention and Maintenance...................... 5
ARTICLE VII
ACCESS TO PREMISES, BOOKS AND RECORDS
7.1 Access to Premises, Books and Records................. 5
ARTICLE VIII
BANKING ARRANGEMENTS
8.1 Deposit and Disbursement Accounts..................... 5
8.2 Deposits and Disbursements............................ 5
8.3 Approved Disbursements................................ 5
8.4 Insufficient Funds.................................... 6
8.5 Account Ownership and Earnings........................ 6
ARTICLE IX
INDEMNIFICATION
9.1 Indemnification by the Company........................ 6
9.2 Indemnification by the Servicer....................... 6
9.3 Survival of Indemnification Provisions................ 7
ARTICLE X
MISCELLANEOUS
10.1 Confidentiality...................................... 7
10.2 Notices.............................................. 7
10.3 Entire Agreement..................................... 9
10.4 Waiver............................................... 9
10.5 Amendment............................................ 9
10.6 Counterparts......................................... 9
10.7 Third Party Beneficiary.............................. 9
10.8 Governing Law........................................ 9
D-ii
10.9 Binding Effect....................................... 9
10.10 Assignment Limited.................................. 9
10.11 Headings, Gender, etc............................... 9
10.12 Severability....................................... 10
SCHEDULES
Schedule A -- SERVICES
Schedule B -- COMPUTER SYSTEMS AND SOFTWARE
Schedule C -- FEE SCHEDULE
Schedule D -- AUTHORIZED EMPLOYEES
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TRANSITION SERVICES AGREEMENT
THIS TRANSITION SERVICES AGREEMENT (this "Agree ment"), is made and
entered into as of _______ __, 1996, by and between
________________________, a _________ corpora tion (the "Company"), and Farmers
Group, Inc., a Nevada corporation (the "Servicer"). Capitalized terms used but
not otherwise defined herein shall have the meanings set forth in the Purchase
Agreement (as defined below).
RECITALS
WHEREAS, pursuant to that certain Stock Purchase Agreement,
dated as of January 21, 1997 (the "Purchase Agreement"), by and between Farmers
Group, Inc., a Nevada corporation (the "Seller"), and Great Southern Life
Insurance Company (the "Purchaser"), the Purchaser will acquire all of the
outstanding capital stock of the Company (the "Acquisition");
WHEREAS, in connection with the Acquisition, the Purchaser has
requested that the Servicer provide the Company with certain services during a
transitional period following the Acquisition relating to the policies issued by
the Company prior to the Closing Date along with any new policies under contract
forms for such policies adopted prior to the Closing Date issued by the Company
after the execution of this Agreement (collectively, the "Insurance Policies");
and
WHEREAS, the Servicer and the Company wish to set forth in
this Agreement their respective obligations in connection with the
administration, data processing, servicing, claims payment, policy management
and support of the Insurance Policies.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth in this Agreement, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
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ARTICLE I
ADMINISTRATIVE SERVICES
1.1 TRANSITION PERIOD SERVICES. Subject to obtaining the consents,
licenses and approvals referred to in Section 3.2, on the terms and conditions
set forth herein, during the Transition Period (as defined below), the Servicer
shall, either directly or by agreement with certain of its Affiliates, provide
to the Company the services summarized in Schedule A, and such modified or
additional services as may be agreed upon by the Company and the Servicer from
time to time and set forth in a written amendment to this Agreement
(collectively, the "Services"). The "Transition Period" shall begin on the
Closing Date and end on the earliest of (i) the last day of the ninth month
after the Closing Date, (ii) the last day of the month ending at least 30 days
after the date on which the Company provides written notice to the Servicer
notifying the Servicer of the Company's termination of this Agreement, or (iii)
a date specified by mutual written consent of the parties hereto. Upon at least
fourteen (14) days notice to the Servicer, the Company may direct the Servicer
to cease performing a specified function or functions or the Services performed
by identified person nel.
1.2 POST-TRANSITION PERIOD. After the Transition Period, the
Servicer shall forward to the Company, at the address specified in Section 10.2,
any premiums, correspon dence, claims, inquiries or other matters received by it
after the Transition Period which relate to the Insurance Policies, and shall
refer all telephone calls regarding the Insurance Policies to the Company at the
telephone number set forth in Section 10.2.
1.3 SETTLEMENTS. The Servicer shall not, without the Company's
prior written consent, enter into any settlement with respect to, or compromise,
on behalf of the Company, any claim or demand against, or any cost, liabil ity
or expense of, the Company arising out of or relating to any of the Insurance
Policies (other than on terms expressly provided for in any such Insurance
Policies), all such settlements being reserved to the Company's exclusive
jurisdiction.
ARTICLE II
PERFORMANCE STANDARDS
2.1 PERFORMANCE AND QUALITY. The Servicer shall perform the
Services in conformity with practices and procedures used by the Servicer, and
of the same quality as provided by the Servicer and its Affiliates, 30 days
prior to the date hereof. The Servicer shall, to the extent feasible, modify
such practices and
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procedures to the extent necessary (a) to comply with any consents, licenses or
approvals obtained pursuant to Section 3.2, (b) to avoid a breach or
violation of any proprietary licensing, confidentiality or similar agreement to
which the Systems (as defined below) are subject, and (c) to comply with
changes in such laws and regulations as are applicable to the Services which
become effective during the Transition Period, in each case, at the Company's
cost. In providing the Services, the Servicer may, but shall not be obligated
to, conclusively rely on advice of counsel provided by the Company.
2.2 RELIANCE ON COMPANY EMPLOYEES. The Company agrees that, to the
extent the Servicer's performance of the Services is dependent on the
performance of functions or services or the provision of accurate information
by the Company, the Servicer shall have no obligation to perform such Services
and shall not have any liability to the Company with respect thereto,
including, without limita tion, any liability under Section 9.2 hereof, unless
and until the Company performs such functions or services or provides such
information.
2.3 MODIFICATION OF SERVICE LEVEL. The Servicer shall increase or
decrease the output of Services or resources dedicated to providing the
Services above or below that specified in Section 2.1 above, upon mutual
consent of the Servicer and the Company at modified fees mutually agreed upon.
Further, the Company understands and agrees that the Servicer may provide
similar services to its Affiliates pursuant to a disaster recovery plan and
that, in the event of a disaster, services provided under this Agreement may be
curtailed or suspended for up to thirty (30) days, in accordance with policies
of the Servicer in effect prior to the Acquisition.
ARTICLE III
TRANSITION ASSISTANCE
3.1 TRANSFER OF ADMINISTRATION. During the Transition Period, the
Servicer shall cooperate with the Company and use commercially reasonable
efforts (as defined in the Purchase Agreement) to effect an orderly transfer of
administration as rapidly and smoothly as possible at the business locations
specified by the Company. The Company shall reimburse the Servicer for all
travel costs associ ated therewith which have been approved in writing in
advance by the Company.
3.2 SYSTEMS TRANSFER. The Company and the Servicer acknowledge that
the Services may require the Servicer to use computer systems and software that
are subject to proprietary licensing and confidentiality agreements. A list of
such
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computer systems and software is set forth on Schedule B (the "Systems"). Each
of the Servicer and the Company agrees to use commercially reasonable efforts
to obtain all consents, licenses and approvals with respect to its Systems that
are necessary or desirable for the Servicer to perform the Services or other
obligations hereunder; provided that the Company shall pay any expense,
including the Servicer's internal expenses, involved in obtaining or attempting
to obtain any such consents and licenses. The Company shall also pay any
expense, Taxes, fines, penalties or damages incurred by the Servicer as a
result of any inadvertent failure by the Company to obtain necessary consents
or licenses. In connection with the Services and the transfer or conversion of
the Insurance Policies data from any such Systems, the Company agrees to enter
into nondisclosure agreements with the Servicer's licensors listed on Schedule
B, if any, that are necessary to transfer data to the Company during or at the
end of the Transition Period. The Servicer makes no representation as to the
accuracy or adequacy of its Systems.
ARTICLE IV
COST OF SERVICES AND EXPENSES
4.1 SERVICE FEES. Upon receipt of an invoice from the Servicer
with respect to the Services, the Company shall, within 5 Business Days, pay to
the Servicer the fees set forth on Schedule C (the "Service Fees") for the
Services specified in such invoice as having been provided under this Agreement.
The Servicer shall not invoice the Company more frequently than once a month. At
the Com pany's request, the Servicer shall provide the Company with appropriate
documentation evidencing the provision of such invoiced Services.
4.2 TAXES. Except as otherwise provided in the Purchase Agreement,
the Company shall be liable for (i) any Taxes attributable or related to the
Insurance Policies or the operations of the Company in respect of the
Transition Period and (ii) any Taxes imposed upon the Servicer in the course of
rendering the Services (other than Taxes imposed on the basis of net income in
respect of the Service Fees received by the Servicer). The Company shall
promptly reimburse the Servicer for any such Taxes paid directly by the
Servicer.
ARTICLE V
RELATIONSHIP OF THE PARTIES
5.1 RELATIONSHIP OF THE PARTIES. Nothing con tained in this
Agreement shall be construed to create any relationship of partnership or joint
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venture between the Servicer and the Company, and neither the Company nor the
Servicer shall represent to any third party that any relationship other than as
described in this Agreement exists. The parties agree that in acting pursuant
to this Agreement, the Servicer is acting as the agent of the Company.
5.2 NON-SOLICITATION OF EMPLOYEES. The Company shall not, and shall
cause its Affiliates not to, directly or indirectly, solicit any Person who is
an employee of the Servicer or any of its Affiliates to become an employee of
the Company or any of its Affiliates without the prior written consent of the
Servicer.
ARTICLE VI
RECORD RETENTION AND MAINTENANCE
6.1 RECORD RETENTION AND MAINTENANCE. During the Transition Period,
the Servicer shall hold, maintain and safeguard the books, records and other
data and support materials of the Company, including, without limitation,
files, input materials, reports and forms, that are received, computed,
developed or used pursuant to this Agreement, with the same standard of care
that the Servicer holds, maintains and safeguards its own books, records, data
and support materials.
ARTICLE VII
ACCESS TO PREMISES, BOOKS AND RECORDS
7.1 ACCESS TO PREMISES, BOOKS AND RECORDS. At any time during regular
business hours, upon reasonable notice, the Servicer shall provide the Company
and its representa tives and Affiliates with access to the books and records of
the Company in the possession of the Servicer that are used in connection with
the Services; provided that such access does not unreasonably disrupt the
Servicer's operations.
ARTICLE VIII
BANKING ARRANGEMENTS
8.1 DEPOSIT AND DISBURSEMENT ACCOUNTS. During the Transition Period,
the Servicer shall utilize the deposit and disbursement accounts of the Company
in accordance with the written instructions of the Company.
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8.2 DEPOSITS AND DISBURSEMENTS. All funds col lected by the Servicer
on behalf of the Company in connec tion with the Insurance Policies during the
Transition Period shall be promptly deposited in the appropriate accounts as
the Servicer receives said funds.
8.3 APPROVED DISBURSEMENTS. DURING the Transition Period, the
Company shall authorize the employees of the Servicer set forth on Schedule D
and, from time to time, in the Company's sole discretion, additional designated
employees of the Servicer, to make the following disburse ments relating to the
Insurance Policies from the Company's accounts in a timely manner pursuant to
the terms and conditions of this Agreement: all benefits, claims, loans, cash
surrenders, premium refunds and any other contractual benefits, claims or
obligations and insurance agent compensation required to be paid by the Company
pursuant to the Insurance Policies and amounts approved by the Company as
payable for reinsurance, and such other expenses as may be mutually agreed by
the parties (collectively, the "Approved Disbursements").
8.4 INSUFFICIENT FUNDS. In the event that, at any time, the amounts
in the applicable Company accounts are insufficient to cover the Approved
Disbursements, the Company shall, promptly upon receipt of written notice from
the Servicer, by means of a wire transfer of immediately available funds, pay
into the appropriate disbursement accounts such amounts as may be necessary to
eliminate such insufficiency.
8.5 ACCOUNT OWNERSHIP AND EARNINGS. The Company and the Servicer
acknowledge and agree that the balances in all of the Company's accounts and
the income derived therefrom, shall be owned solely by the Company, and the
Company and the Servicer agree that interest earned on funds in such accounts
shall be credited to such accounts.
ARTICLE IX
INDEMNIFICATION
9.1 Indemnification by the Company. The Company shall indemnify and
hold the Servicer, its Affiliates and their officers, directors, employees,
agents and subagents, harmless against any Damages (which, for purposes of this
Section 9.1, shall include any Taxes for which the Company is responsible
pursuant to Section 4.2 hereof) resulting from: (i) any action taken by the
Servicer, its Affiliates, or any of their officers, directors, employees,
agents or sub-agents in good faith and in compliance with the terms of this
Agreement; (ii) the
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negligence, miscon duct or bad faith of the Company, its Affiliates and their
officers, directors, employees, agents and sub-agents; and (iii) any act
done or suffered by the Servicer in connec tion with its performance under this
Agreement in reliance upon any instruction, order or other instrument given or
executed by the Company.
9.2 INDEMNIFICATION BY THE SERVICER. The Servicer shall indemnify
and hold the Company, its Affiliates and their officers, directors, employees,
agents and sub-agents harmless against any Damages resulting from the
Servicer's wilful refusal or wilful failure to comply with the terms of this
Agreement, or which arise out of the Servicer's gross negligence or wilful
misconduct, provided, however, that the Servicer shall be without liability to
the Company if such act, error, omission or conduct was in accordance, in whole
or part, with express instructions from the Company received by the Servicer or
as provided in Section 2.3 hereof. In no event shall the Servicer have any
liability to the Company or its Affiliates under this Agreement, including this
Section 9.2, for any Damages resulting from the inaccuracy or inadequacy of the
Servicer's Systems. The Servicer's obligations under this Article shall not, in
the aggregate, exceed the total fees paid to the Servicer under this Agreement.
9.3 SURVIVAL OF INDEMNIFICATION PROVISIONS. The obligations under
Section 9.1 and Section 9.2 of this Agreement shall survive for a period of
twelve (12) months from the date of termination or expiration of the Transi
tion Period; provided, however, that any obligation of the Company to provide
indemnification under this Agreement for Taxes shall continue until the
expiration of all applicable statutory periods of limitations.
ARTICLE X
MISCELLANEOUS
10.1 CONFIDENTIALITY. Each of the Servicer and the Company shall hold,
and shall cause its Affiliates and their respective employees, consultants and
other agents and representatives to hold, in strict confidence, unless
compelled to disclose by judicial or administrative process or other
requirements of law, all documents and confiden tial or proprietary information
concerning the other party furnished to it by the other party or such other
party's employees, consultants, agents or representatives in connection with
this Agreement or the transactions contem plated hereby, except to the extent
that such documents or information are (a) previously lawfully known by the
party receiving such documents or information, or (b) in the public domain
through no fault of such receiving party or any of its Affiliates or
representatives, or (c) acquired by or obtained from a source not bound
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by, or in breach of, the terms of this Agreement or any confidentiality agree
ment. Each party hereto shall not disclose or otherwise provide any such
documents or confidential or proprietary information to any other Person,
except to its auditors, actuaries, attorneys, financial advisors and other
consul tants and advisors who need such documents or information in connection
with this Agreement or the Purchase Agreement or the transactions contemplated
hereby or thereby, and the parties hereto agree to cause each of the foregoing
to be subject to and bound by the confidentiality provisions hereof.
2 Notices. All notices and other communications under this
Agreement must be in writing and shall be deemed to have been duly given if
delivered, telecopied or mailed by certified mail, return receipt requested,
first-class postage prepaid, to the parties at the following addresses:
If to the Company to:
______________________________
______________________________
______________________________
Attn:
Telephone: (614)
Telecopier: (614)
With a copy to:
______________________________
______________________________
______________________________
Attn:
Telephone: (614)
Telecopier: (614)
If to the Servicer to:
Farmers Group, Inc.
4680 Wilshire Boulevard
Los Angeles, California 90010
Attn: Anthony Gasich, Vice President Life Insurance Operations and
Jason L. Katz, Senior Vice President and General Counsel
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Telephone: (213) 932-3200
Telecopier: (213) 964-8093
With a copy to:
Skadden, Arps, Slate, Meagher & Flom
300 South Grand Avenue, Suite 3400
Los Angeles, California 90071
Attn: Joseph J. Giunta
Telephone: (213) 687-5000
Telecopier: (213) 686-5600
All notices and other communications required or permitted under this Agreement
that are addressed as provided in this Section 10.2 shall, if delivered
personally, be deemed given upon delivery, shall, if delivered by telecopy, be
deemed delivered when confirmed and shall, if delivered by mail in the manner
described above, be deemed given on the third Business Day after the day it is
deposited in a regular depository of the United States mail. Any party from time
to time may change its address for the purposes of notices to that party by
giving a similar notice specifying a new address, but no such notice shall be
deemed to have been given until it is actually received by the party sought to
be charged with the contents thereof.
10.3 ENTIRE AGREEMENT. This Agreement supersedes all prior discussions
and agreements between the parties with respect to the subject matter hereof,
and this Agreement (including the Schedules hereto) contains the sole and
entire agreement between the parties hereto with respect to the subject matter
hereof.
10.4 WAIVER. Any term or condition of this Agreement may be waived at
any time by the party that is entitled to the benefit thereof. Such waiver must
be in writing and must be executed by a duly authorized officer of such party.
A waiver on one occasion shall not be deemed to be a waiver of the same or any
other breach on a future occasion. All remedies, either under this Agreement,
or by law or otherwise afforded, shall be cumulative and not alternative.
10.5 AMENDMENT. This Agreement may be modified or amended only by a
writing duly executed by or on behalf of each of the parties hereto.
10.6 COUNTERPARTS. This Agreement may be executed simultaneously in any
number of counterparts, each of which shall be deemed an original, but all of
which shall constitute one and the same instrument.
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10.7 THIRD PARTY BENEFICIARY. The terms and provi sions of this
Agreement are intended solely for the benefit of the parties hereto and their
respective successors and permitted assigns, and it is not the intention of the
parties to confer third party beneficiary rights upon any other Person, except
as expressly provided herein.
10.8 GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of California applicable to contracts
executed and performed within the State of California, without regard to
principles of conflicts of laws.
10.9 Binding Effect. This Agreement is binding upon and shall inure
to the benefit of the parties and their respective successors and assignees.
10.10 ASSIGNMENT LIMITED. This Agreement and the rights and duties
hereunder shall not be assignable by either party hereto except upon prior
written consent of the other party and any attempted assignment without such
consent shall be void.
10.11 HEADINGS, GENDER, ETC. The headings used in this Agreement have
been inserted for convenience and do not constitute matter to be construed or
interpreted in connection with this Agreement. Unless the context of this
Agreement otherwise requires, (a) words of any gender are deemed to include
each other gender, (b) words using the singular or plural number also include
the plural or singular number, respectively, (c) the terms "hereof", "herein",
"hereby", "hereto", and derivative or similar words refer to this entire
Agreement, (d) the term "Arti cle" or "Section" refers to the specified Article
or Section of this Agreement, (e) the term "Schedule" refers to the specified
Schedule attached to this Agreement, and (f) all references to "dollars" or "$"
refer to currency of the United States of America.
10.12 SEVERABILITY. If any provision of this Agreement is held to
be illegal, invalid, or unenforceable under any present or future law, and if
the rights or obligations of the Company or the Servicer under this Agreement
will not be materially and adversely affected thereby, (a) such provision shall
be fully severable, (b) this Agreement shall be construed and enforced as if
such illegal, invalid, or unenforceable provision had never comprised a part
hereof, and (c) the remaining provisions of this Agreement shall remain in full
force and effect and shall not be affected by the illegal, invalid or unenforce
able provision or by its severance herefrom, and (d) in lieu of such illegal,
invalid or unenforceable provision, there shall be added automatically as a part
of this Agreement a legal, valid and
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enforceable provisions as similar in terms to such illegal, invalid or
unenforceable provision as may be possible.
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IN WITNESS WHEREOF, this Agreement has been duly executed by
the duly authorized officers of each of the Company and the Servicer, effective
as of the date first written above.
________________________________
By: ____________________________
Name:_______________________
Title:______________________
FARMERS GROUP, INC.
By: ____________________________
Name:_______________________
Title:______________________
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SCHEDULE A
SERVICES
During the Transition Period, the Servicer shall perform the following
services performed by it for the Company as of a date 30 days prior to the
Closing Date and relating to the Insurance Policies:
1. Maintenance of agent and policyholder electronic data processing
records consistent with prior practices of the Servicer to support the
administration of the Insurance Policies, subject to obtaining necessary
consents and licenses from the Company's and the Servicer's licensors
identified on Schedule 3.2.
2. Maintenance of proper accounting systems and banking and
reinsurance activities consistent with prior practices of the Servicer to
support the policies being administered. During the Transition Period, the
Servicer shall not be responsible for any cash management, invest ment
management, trading and related accounting for the Company.
3. Provision of data for use in preparing statutory financial
reporting information for the Company, on a basis consistent with prior
practices of the Servicer with respect to the Company, no later than the 25th
day following the end of each calendar quarter.
4. Consistent with prior practices of the Servicer with respect to the
Company, the Servicer shall use commercially reasonable efforts to provide the
Company with (a) data to be used in preparing GAAP financial reporting
information for each calendar quarter, not later than the 15th calendar day
following the end of such calendar quarter, and (b) data to be used in
determining the Company's estimated earnings for each calendar month, not later
than the 10th calendar day following the end of such month.
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SCHEDULE B
COMPUTER SYSTEMS AND SOFTWARE
[To Come]
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SCHEDULE C
FEE SCHEDULE
A base fee of $100,000 per month, subject to adjust ment, on the
anniversary of the Closing Date, in proportion to any increase in the consumer
price index from the Closing Date through such anniversary.
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SCHEDULE D
AUTHORIZED EMPLOYEES
[To Come]
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EXHIBIT E
OPINION OF SELLER'S COUNSEL
Jason L. Katz, Senior Vice President and General Counsel of the Seller,
or other counsel for the Seller reasonably acceptable to the Purchaser, will
deliver an opinion, which shall be subject to customary assumptions, exceptions
and conditions, and in reliance on certificates or advice of governmental
authorities, representatives of the Companies, the Seller and others, covering
the matters set forth below:
1. Each of the Seller and the Companies (a) is a corporation validly
existing and in good standing under the laws of the jurisdiction of its
incorporation and has the corporate power to own its properties and conduct its
business as conducted at the Closing Date, and (b) is duly qualified or
licensed to do business as a foreign corpora tion and, in the case of the
Companies, as a foreign life insurance company, and is in good standing under
the laws of the jurisdictions in which it conducts business or is required to
hold a license to transact insurance as of the Closing Date.
2. The Seller has the corporate power and corporate authority to
execute and deliver the Agreement, the Trademark Agreements, the Intercompany
Lease and the Services Agreements (collectively, the "Transaction Documents")
and perform its obligations thereunder. The execution and delivery of the
Transaction Documents by the Seller, and the consummation by the Seller of the
transac tions contemplated thereby, have been duly authorized by all necessary
corporate action by the Seller. The Transac tion Documents have been duly
executed and delivered by the Seller.
3. The Transaction Documents constitute the valid and binding
obligations of the Seller, enforceable against the Seller in accordance with
its terms (subject to typical bankruptcy exceptions).
4. Neither the execution and delivery of the Transaction Documents by
the Seller, nor the consummation of the transactions contemplated thereby, will
violate, conflict with or constitute a breach by the Seller or the Companies of
(a) their respective Articles of Incorporation or Bylaws, (b) material
agreements to which any of them is a party (subject to the obtaining of
necessary consents, as specified), (c) any law which in the experience of such
counsel, is normally applicable to transactions of the type contemplated by the
Transaction Documents, (d) any judg ment, decree or award known to such counsel
by which the Seller or the
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Companies or any of their respective assets, is bound, or (e) result in the
imposition of any Lien against any asset of the Companies.
5. The authorized capital stock of each of the Companies is as set
forth in Section 3.4 of the Agreement. The Shares have been duly authorized and
validly issued, are fully paid and nonassessable and are owned of record and,
to the knowledge of such counsel, beneficially by the Seller.
6. Upon payment for and delivery of the Shares with all necessary
endorsements in accordance with the terms of the Agreement, and assuming the
Purchaser is acquiring the Shares in good faith without notice of any adverse
claim, the Purchaser will be the owner of the Shares, free and clear of any
adverse claim.
7. No consents, approvals, authorizations, registra tions,
declarations or filings with any Governmental Authority (as defined) which, in
the experience of such counsel, have jurisdiction over transactions of the type
contemplated by the Agreement, are required in connection with the execution,
delivery and performance of the Transaction Documents by the Seller, other than
such as have been obtained, given or made.
8. There is no action, suit, investigation or proceeding pending or,
to the knowledge of such counsel, threatened against the Seller or either
Company or any property or rights of the Seller or either Company by or before
any court, arbitrator or administrative or govern mental body that has had or
would reasonably be expected to have a material adverse effect on the validity,
binding effect or enforceability of the Transaction Documents, or the ability
of the Seller or either Company to perform its obligations under the
Transaction Documents.
Such counsel's opinions shall be limited to the laws of the States of
California, Ohio and Nevada and the Federal laws of the United States of
America to the extent specifically referred to in such opinion.
E-2
<PAGE> 138
EXHIBIT F
OPINION OF PURCHASER'S COUNSEL
Texas, California and Ohio counsel to the Purchaser reasonably
acceptable to the Seller will deliver an opinion, subject to customary
assumptions, exceptions and conditions, and in reliance on certificates or
advice of governmental authorities, representatives of the Purchaser and
others, covering the matters set forth below:
1. The Purchaser is a corporation duly organized, validly existing
and in good standing under the laws of the jurisdiction of its incorporation.
The Purchaser has all requisite corporate power and corporate authority to
execute and deliver the Agreement, the Trademark Agree ments, the Intercompany
Lease and the Services Agreements (collectively, the "Transaction Documents"),
and to perform its obligations thereunder.
2. The execution and delivery by the Purchaser of the Transaction
Documents, and the consummation by the Purchaser of the transactions
contemplated by the Transac tion Documents have been duly authorized by all
necessary corporate action by the Purchaser. The Transaction Documents have
been duly executed and delivered by the Purchaser.
3. The Transaction Documents constitute the legally valid and binding
obligations of the Purchaser, enforceable against it in accordance with its
terms (subject to typical bankruptcy-type exceptions).
4. Neither the execution and delivery by the Purchaser of the
Transaction Documents, nor the consumma tion of the transactions contemplated
thereby, will violate, conflict with or constitute a breach by the Purchaser of
the charter, bylaws or other organizational document of the Purchaser, or any
judgment, award or decree by which the Purchaser is bound.
5. No consents, approvals, authorizations, registra tions,
declarations or filings with any Governmental Authority are required by the
Purchaser in connection with the due execution, delivery and performance by the
Pur chaser of the Agreement, except for such as have been obtained given or
made.
6. There is no action, suit, investigation or proceeding pending or,
to the knowledge of such counsel, threatened against the Purchaser or any
property or rights of the Purchaser by or before any court, arbitrator or
administrative or
F-1
<PAGE> 139
governmental body that has had or would reasonably be expected to have a
material adverse effect on the validity, binding effect or enforceability of
the Transaction Documents, or the ability of the Purchaser to perform its
obligations under the Transaction Documents.
F-2
<PAGE> 140
EXHIBIT G
DEFINITION OF OSL BUILDING
The term "OSL Building" shall mean, collec tively, the Land, the
Improvements, and the balance of the Real Property (each as hereinafter
defined).
As used herein, the following terms shall have the following meanings:
1. The term "Land" shall mean that certain real property located in
the City of Columbus, County of Franklin, State of Ohio, as more particularly
described on Schedule "1" attached thereto.
2. The term "Improvements" shall mean all buildings, improvements,
structures and fixtures now or hereafter located on or in the Land, including,
without limitation, those certain buildings and structures com monly known as
2500 Farmer's Drive, Columbus, Ohio.E
3. The term "Real Property" shall mean, collectively, (i) the Land,
(ii) the Improvements, (iii) all apparatus, equipment and appliances used in
connec tion with the operation or occupancy of the Land and the Improvements
(such as heating, air conditioning or me chanical systems and facilities used
to provide any utility services, refrigeration, ventilation, waste disposal or
other services) and now or hereafter located on or in the Land or the
Improvements, and (iv) all of the rights, privileges and easements appurtenant
to or used in connection with the Land and the Improvements, including, without
limitation, all minerals, oil, gas and other hydrocarbon substances, all
development rights, air rights, water, water rights, waste water capacity and
water stock relating to the Land, all strips and gores, all of Seller's right,
title and interest in and to any streets, alleys, easements, rights-of-way,
public ways, or other rights appurtenant, adjacent or connected to the Land.
G-1
<PAGE> 141
SCHEDULE 1
LEGAL DESCRIPTION OF LAND
G-2
<PAGE> 1
AUTOMATIC COINSURANCE
REINSURANCE AGREEMENT
THE OHIO STATE LIFE INSURANCE COMPANY
Columbus, Ohio
<PAGE> 2
AUTOMATIC COINSURANCE REINSURANCE AGREEMENT
Schedule
1. Reinsured: The Ohio State Life Insurance Company
2. Address: Columbus, Ohio
3. Effective date: The date the stock of the Reinsured is purchased
by the Retrocessionaire.
4. Policies:
(a) All individual insurance policies written by the Reinsured.
(b) All group insurance policies written by the Reinsured.
(c) All annuity plans (whether group or individual) written by the
Reinsured.
(d) All riders issued with or added later to the above described
contracts.
(e) All of the above described business written by other insurers
and assumed by the Reinsured (whether through reinsurance
or direct assumption).
5. Reinsurance: 100%
6. Initial consideration (all values as of effective date of this agreement)
computed as follows:
(a) The Reinsured's policy reserves from Annual Statement Exhibits 8,
9, and 10; plus
(b) the claim liabilities pertaining to the policies; plus
(c) the advance premiums applicable to the policies; minus
(d) the net due and deferred premiums applicable to the policies; plus
(e) the miscellaneous reserves and liabilities applicable to the
policies; and less
(f) the policy loans; and less
2
<PAGE> 3
(g) the miscellaneous assets applicable to the policies.
7. Ceding commission: $133,000,000, minus the ceding commission pertaining
to the Investors Guaranty Treaty.
8. Expense commission: The amount indicated by Exhibit A, attached to and
made a part of this agreement.
The agreement of which this Schedule is a part is hereby executed in duplicate
by the parties hereto.
THE OHIO STATE LIFE EMPLOYERS REASSURANCE
INSURANCE COMPANY CORPORATION
By: By: /s/ James D. Maughn
------------------------------- -------------------------------------
Title: Title: /s/ Ex. Vice Pres. and Actuary
---------------------------- ----------------------------------
Date: Date: /s/ January 21, 1997
----------------------------- -----------------------------------
By: By: /s/ Robert D. Parmley
------------------------------- -------------------------------------
Title: Title: /s/ Ass't Gen Counsel
---------------------------- ----------------------------------
Date: Date: /s/ January 21, 1997
----------------------------- -----------------------------------
3
<PAGE> 4
AUTOMATIC COINSURANCE REINSURANCE AGREEMENT
Employers Reassurance Corporation
of
Overland Park, Kansas
(hereinafter called the Corporation)
agrees with the Reinsured named in the Schedule made a part hereof, in
consideration of the mutual covenants hereinafter contained, as follows:
ARTICLE I
APPLICATION OF AGREEMENT. This agreement applies to loss which is retained by
the Reinsured pertaining to the insurance policies and riders described in Item
4 of the Schedule becoming effective before, on and after the effective date of
this agreement (hereinafter called policies or policy) and which is paid by the
Reinsured on or after the effective date of this agreement.
ARTICLE II
ENTIRE AGREEMENT. This agreement shall constitute the entire agreement between
the parties with respect to the business being reinsured hereunder. There are no
other understandings between the parties other than as expressed in this
agreement. Any change or modification to this agreement shall be null and void
unless made by amendment to this agreement and signed by both parties.
ARTICLE III
REINSURANCE. The Corporation will indemnify the Reinsured against the
percentage specified in Schedule Item 5 of loss to which this agreement applies.
ARTICLE IV
RECAPTURE. The Reinsured does not have any rights to recapture the policies.
4
<PAGE> 5
ARTICLE V
PRODUCER COMMISSION. The Corporation is obligated to the Reinsured for the
commissions paid by the Reinsured to its producers of the policies.
ARTICLE VI
DEFINITIONS. The word "policies" means the insurance forms described in the
Schedule and includes conditional receipts pertaining thereto and conversions,
reinstatements and exchanges thereof.
The word "loss" shall mean only such amounts as are actually paid by the
Reinsured for benefits afforded under the policies, in settlement of claims for
benefits under the policies, or in satisfaction of judgments for benefits under
the policies; provided that, in the event of the insolvency of the Reinsured,
"loss" shall mean the amount of policy benefits which the Reinsured has incurred
or is liable for, and payment by the Corporation shall be made to the
liquidator, receiver or other statutory successor of the Reinsured in accordance
with the provisions of the Insolvency Clause attached to and made a part of this
agreement. The word "loss" shall include life insurance proceeds payable by
reason of death which remain unpaid because of the nature of the settlement
option selected. The word "loss" includes cash values paid by the Reinsured
because of policy surrenders. The word "loss" shall not include:
(1) claim expenses;
(2) salaries paid to employees of the Reinsured;
(3) any amount paid by the Reinsured for punitive, exemplary or
compensatory damages arising out of the conduct of the Reinsured in the
investigation, trial or settlement of any claim or failure to pay or
delay in payment of any benefits under any policy; provided that, this
subparagraph (3) shall not apply if the Corporation has, in advance of
any such conduct by the Reinsured, counseled with the Reinsured and
concurred in the Reinsured's course of conduct;
(4) any statutory penalty imposed upon the Reinsured on account of any
unfair trade practice or any unfair claim practice;
(5) amounts collected under other reinsurance.
The term "claim expenses" shall mean statutory interest payable on insurance
proceeds, court costs, interest upon judgments, and allocated investigation,
adjustment
5
<PAGE> 6
and legal expenses, but the term "claim expenses" shall not include salaries
paid to employees of the Reinsured.
Claims shall be deemed to be "incurred" on the date when:
(a) the death occurs as respects life coverage;
(b) the disability commences, as respects waiver of premium coverage;
(c) the accident takes place, as respects accidental death coverage.
The word "exchange" means that an insurance contract reinsured hereunder is
traded for another plan of equal or smaller face amount, without requirement for
full evidence of insurability.
The term "other reinsurance" means those contracts entered into by the Reinsured
with insurance or reinsurance companies other than the Corporation which
reinsure the policies.
"Miscellaneous reserves and liabilities" means the sum of the following:
(a) due or accrued agent commissions;
(b) premiums due or accrued on other reinsurance;
(d) premium suspense.
"Miscellaneous assets" means the amounts recoverable under other reinsurance.
The term "Investors Guaranty Treaty" means the Automatic Coinsurance Reinsurance
Agreement, which has the same effective date as this agreement, between the
Corporation and Investors Guaranty Life Insurance Company.
The term "Escrow Account" means the funds pertaining to this agreement and the
Investors Guaranty Treaty received and held by COMMERCE BANK, N.A. of Kansas
City, Missouri ("Commerce Bank") pursuant to its Escrow Agreement (Ohio
State/Investors Guaranty Business) with the Corporation and the
Retrocessionaire).
The word "Retrocessionaire" means Great Southern Life Insurance Company, which
is the Corporation's reinsurer for the policies.
6
<PAGE> 7
ARTICLE VII
INITIAL CONSIDERATION. On the effective date of this agreement, the Reinsured
shall deposit to Commerce Bank assets equal to the the Reinsured's estimate of
the initial consideration indicated in Item 6 of the Schedule, minus the ceding
commission indicated in Item 7 of the Schedule. Thirty days after the effective
date of this agreement, the Reinsured shall pay to the Corporation the amount by
which the estimate is less than actual, with interest thereon, or the
Corporation shall pay to the Reinsured the amount by which the estimate is more
than actual, with interest thereon.
ARTICLE VIII
REINSURANCE PREMIUM. The Reinsured shall pay to the Corporation a reinsurance
premium equal to the insurance premium collected by the Reinsured on and after
the effective date of this agreement pertaining to the policies, minus the
reinsurance premium paid to other carriers, and minus the expense commission
indicated in Item 8 of the Schedule.
ARTICLE IX
POLICY LOANS. The Corporation shall be obligated to the Reinsured for the policy
loan increases, minus the amount of uncapitalized policy loan interest (the net
result of which is hereinafter referred to as policy loan increase). The
Reinsured shall be obligated to the Corporation for the policy loan decreases,
plus the amount of uncapitalized policy loan interest (the net result of which
is hereinafter referred to as policy loan decrease).
ARTICLE X
INVESTMENTS. The Escrow Account assets shall be invested in accordance with the
investment guidelines contained in Exhibit B, attached to and made a part of
this agreement.
7
<PAGE> 8
ARTICLE XI
INTEREST. Interest rates credited by the Reinsured on the policies shall be
determined in accordance with the procedures contained in Exhibit C, attached to
and made a part of this agreement.
ARTICLE XII
REPORTING, ACCOUNTING AND SETTLEMENTS. Within 25 days after the end of each
calendar quarter, the Reinsured or its administrator shall furnish to the
Corporation a report (in a form satisfactory to the Corporation) showing the
following information:
(a) Amounts owed Corporation:
(1) Reinsurance premium applicable to insurance premium collected
during quarter;
(2) Policy loan decrease during quarter;
(3) Increase during quarter in miscellaneous reserves and
liabilities;
(4) Decrease during quarter in miscellaneous assets;
(b) Amounts owed Reinsured:
(1) loss paid under the policies during the quarter;
(2) expense commission;
(3) policy loan increase during quarter;
(4) producer commission for the quarter;
(5) Decrease during quarter in miscellaneous reserves and
liabilities;
(6) Increase during quarter in miscellaneous assets;
(c) Balance due Corporation or Reinsured.
Any balance due the Corporation shall be deposited to the Escrow Account within
30 days after the end of the calendar quarter involved. Any balance due the
Reinsured shall be paid by the Corporation to an account designated by the
Reinsured within 30 days after the end of the calendar quarter involved.
The Reinsured and the Corporation each agree to pay interest to the other on
amounts not paid within the time periods required within this article,
calculated using the one month LIBOR rate.
8
<PAGE> 9
The Reinsured's report for the third calendar quarter of each calendar year
shall include:
(1) a summary listing showing all policies in force;
(2) the detailed information required with respect to the policies by the
Exhibit of Life Insurance in the Corporation's Annual Statement;
(3) the aggregate reserve information required with respect to the policies
by the Corporation's actuarial opinion and by the other exhibits of the
Corporation's Annual Statement.
ARTICLE XIII
CLAIMS. The Reinsured agrees that it will cause to be investigated and paid,
settled or defended all claims arising under the policies. Except as respects
damages to which this agreement may apply by virtue of subparagraph (3) of the
definition of loss, the claim decisions of the Reinsured (or of its
administrator) shall be binding upon the Corporation.
The Corporation shall have the right, at its own expense, to participate jointly
with the Reinsured (or its administrator) in the investigation, adjustment or
defense of any claim.
The Corporation has no obligation to indemnify the Reinsured for any claim
expenses paid by the Reinsured with respect to the policies.
9
<PAGE> 10
ARTICLE XIV
ADMINISTRATION OF INSURANCE. The Corporation shall have no authority or
responsibility to administer the insurance provided by the policies.
ARTICLE XV
INSPECTION OF RECORDS. The Corporation may inspect the records of the
Reinsured pertaining to the policies at any time during the normal business
hours of the Reinsured.
ARTICLE XVI
OFFSET. The Reinsured or the Corporation may offset any balance due from one
party to the other under this agreement.
ARTICLE XVII
INSOLVENCY CLAUSE. The attached Insolvency Clause is hereby made a part of
this agreement.
ARTICLE XVIII
ASSIGNMENTS AND CHANGES OF INTEREST. No assignment or change of the Reinsured's
interest hereunder, whether voluntary or involuntary and whether by merger or
reinsurance of its entire business with another company or otherwise, shall be
binding upon the Corporation, provided that, this article does not apply to:
(a) The Corporation's assignment of its interests and liabilities as the
reinsurer to the Retrocessionaire, but only with respect to those
policies on which the Retrocessionaire is not named as the direct
insurer;
(b) The Reinsured's assignment of its rights and duties as the ceding
company to the Retrocessionaire, but only with respect to those
policies on which the Retrocessionaire is named as the direct insurer.
10
<PAGE> 11
ARTICLE XIX
ENFORCEABILITY. This agreement has been duly executed by each of the parties
hereto and constitutes a binding and enforceable agreement of each such party.
ARTICLE XX
TERMINATION. This agreement shall remain in force until terminated by mutual
consent or by either party giving to the other party not less than 90 days
advance notice, by registered mail or express delivery service, stating the
termination date.
This agreement does not apply with respect to policies issued by the Reinsured
to become effective on or after the termination date of this agreement.
The reinsurance afforded by this agreement applicable to each policy issued by
the Reinsured to become effective prior to or during the term of this agreement
shall continue to apply thereto until the policy naturally expires.
IN WITNESS WHEREOF, the parties hereto have signed this agreement on the
Schedule Page.
11
<PAGE> 12
INSOLVENCY CLAUSE
The ceding insurer and the reinsurer agree that, in the event of the
insolvency of the ceding insurer, as to all reinsurance made, ceded, renewed or
otherwise becoming effective after the effective date of this agreement, the
reinsurance shall be payable by the reinsurer on the basis of the amount of
liability of the ceding insurer under the contract or contracts reinsured,
without diminution because of the insolvency of the ceding insurer; furthermore,
that such amount shall be paid directly to the ceding insurer or its liquidator,
receiver or other statutory successor.
It is understood and agreed, however, that the obligations of the
ceding company as set forth in the reinsurance contract, including, among
others, the duty to investigate, settle and defend all claims arising under
policies with respect to which reinsurance is afforded by this agreement, shall
remain unimpaired and unaffected by the insolvency of the ceding insurer and
shall be assumed by the liquidator, receiver or statutory successor of the
ceding insurer in the liquidation or receivership proceeding and that such
liquidator, receiver or statutory successor shall give written notice to the
reinsurer of the pendency of a claim against the ceding insurer on the policy
reinsured within a reasonable time after such claim is filed in the insolvency
proceeding and that during the pendency of such claim the reinsurer may
investigate such claim and interpose, at its own expense, in the proceeding
where such claim is to be adjudicated, any defense or defenses which it may deem
available to the ceding insurer, its liquidator, receiver or statutory
successor. The expense thus incurred by the reinsurer shall be chargeable,
subject to court approval, against the insolvent ceding insurer as part of the
expense of liquidation to the extent of a proportionate share of the benefit
which may accrue to the ceding insurer solely as the result of the defense
undertaken or asserted by the reinsurer.
Where two or more reinsurers are involved in the same claim and a
majority in interest elect to interpose a defense to such claim, the expense
shall be apportioned in accordance with the terms of this reinsurance agreement
as though such expense had been incurred by the ceding insurer.
Nothing hereinabove set forth in this insolvency clause shall in
anywise change the relationship or status of the parties hereto, to wit, that of
ceding insurer and reinsurer, nor enlarge the obligations of either party to
each other, except as specifically hereinabove provided, to wit, to pay the
statutory successor on the basis of the amount of liability of the ceding
insurer under the contract or contracts reinsured, rather than on the basis of
the actual amount of loss (dividends) paid by the liquidator, receiver or
statutory successor to allowed claimants, nor shall anything in this insolvency
clause in any manner create any obligations or establish any rights against the
reinsurer in favor of any third parties or any persons not parties to this
reinsurance contract.
12
<PAGE> 13
EXHIBIT A
EXPENSE COMMISSION
OHIO STATE
Percent of
Per Policy Premium
Deferred Annuities $8.75 per quarter --
ManuLife Annuities $17.50 per quarter --
Universal Life $12.50 per quarter 2.5%
Traditional Life
- Premium Paying $8.75 per quarter 2.5%
- Paid Up $5.00 per quarter --
Deposit Funds -- --
<PAGE> 14
EXHIBIT B
INVESTMENT OBJECTIVES
The primary objectives are:
1) Preservation of principal (capital).
2) Maximize the potential value of the portfolio with a focus on
maintaining and increasing future investment income streams.
INVESTMENT CONSTRAINTS
1) Conservative and stable investment philosophy with primary emphasis on
balancing credit and interest rate risk.
2.) Focus on well-structured securities (non-callable corporates, CMO's
with stable average lives, current or discount coupon pass-throughs) to
reduce reinvestment risk and improve price performance. Investment in
high risk or volatile derivative securities (e.g. inverse floaters) are
not considered part of the overall investment strategy.
3) Investments are made with the intent of being held long term. The
portfolio will not be actively/aggressively managed based on anticipated
interest rate and/or spread changes. Any restructuring of the portfolio
will be performed in conjunction with the overall asset/liability
management process.
4) The portfolio will be structured with the goal of matching the assets
with the expected liability cash flows. The structure of the assets
will be regularly monitored considering interest rate and expected
prepayment rate changes. Asset/liability studies are completed at least
annually, or more frequently if warranted. The results of these studies
play an integral role in the durational aspects of securities purchased.
5) Maintain a high quality/liquid investment portfolio to satisfy both
existing and prospective cash flow needs.
14
<PAGE> 15
INVESTMENT GUIDELINES AND LIMITATIONS
The following guidelines will be utilized in developing and managing the
portfolio:
1) MATURITY STRUCTURE:
The targeted average life for the The maturity distribution of the
portfolio is a range of 6-13 years. portfolio will be a function of
expected liability cash flows,
and the term structure of
interest rates.
2) SECTOR ALLOCATION:
Target
Expected Percentage
Sector Range Allocation
------ -------- ----------
U.S. Governments: 0-25% --%
Corporate Bonds: 45-85 55
Asset-Backed Securities (ABS): 5-20 20
Mortgage-Backed Securities (MBS): 15-45 25
--
Total 100%
3) RATINGS GUIDELINES:
a) Corporate Bonds:
Expected
Expected Percentage
Rating Category Range of Corporates
-------------- -------- -------------
AAA & AA 5-25% 10%
A 40-75 65
BBB 15-25 25
--
100%
===
For any corporate bonds rated both Baa-3/BBB by Moody's and Standard & Poor's
respectively, Employer's Re will be notified prior to their purchase.
Subsequent to the transaction, written approval will be obtained from
Employer's Re for all Baa-3/BBB- bonds acquired.
15
<PAGE> 16
b) Mortgage-Backed Securities:
MBS holdings will generally involve government agency or
government sponsored agency (FNMA and FHLMC) collateral, or AAA
rated collateral. No more than 20% of the total portfolio will
be backed by non-agency collateral.
c) Below Investment Grade Securities (BIG):
BIG bonds are not considered part of the overall investment
strategy. However, any bond purchased as an investment grade
security which is subsequently downgraded to a BIG rating will
be reevaluated at that time. If the risk of default is
considered low, the bond may be retained. Any BIG bonds
retained will be regularly monitored and reevaluated. The total
amount of BIG bonds to be retained cannot exceed 5% of total
investments.
d) Asset-Backed Securities:
ABS investments should be rated AA or AAA by one of the major
rating agencies. No more than 20% of ABS holdings can be rated
AA.
Expected Target
Range Allocation
----- ----------
AAA 80-100% 100%
AA 0-20 --
4) HOLDING LIMITATIONS:
a) Industry Concentration:
Corporate bond holdings are limited to no more than 20% in any
one industry.
b) Company Concentration:
The maximum amount to be invested in any one company or
organization is as follows:
16
<PAGE> 17
Maximum Amount
Invested
Rating Category (In Million)
--------------- ------------
AAA $15
AA 15
A 12
BBB 8
c) Individual MBS concentration.
The maximum amount to be invested in any one agency collateral
security is $25 million. For a non-agency collateral security,
the maximum amount is $10 million (rated AAA).
d) Individual ABS Concentration:
The maximum amount to be invested in any one ABS security is as
follows:
Maximum Amount
Invested
Rating Category (In Millions)
--------------- -------------
AAA $10
AA 5
5. Any security which is outside the scope of these guidelines can
be invested in, if mutually agreed upon by both organizations.
17
<PAGE> 18
Exhibit C
Interest Rate Crediting Process
1. Objective. The objective of this process is to assure that credited
rates are established so as to meet required spread targets.
2. Expected Gross Interest Rate. The expected gross interest rate for a
block of business is determined by blending current yields on the
investment portfolio of assets underlying the block of business
together with expected new money for minimal new and reinvestment cash
flow. The blending will be based on cash flow for the period under
review and will take into consideration funds due for reinvestment and
interest income.
Current yields should include the effect of realized statutory capital
gains and losses. New money assumptions shall consider these investment
guidelines in respect of quality, duration and type of assets.
An example is shown in the following Table 1:
Table 1
Expected Gross Interest Rate
Volume Rate
Investment Portfolio 800 8.5%
Reinvestment Portfolio 100 8.0%
New Money 100 8.0%
Average 1,000 8.4%
3. Expected Net Interest Rate. The expected net interest rate for a block
of business is determined by subtracting from the gross rate charges
for investment expenses and risks.
Charges for investment expenses cover the cost of investment expenses
(including transaction costs) per the Services Agreement described in
Numbered Paragraph 3 of this agreement.
Charges for risk should take into consideration the default and option
risks (as agreed upon) relating to the portfolio assets underlying the
block of business.
An example is shown in the following Table 2:
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<PAGE> 19
Table 2
Expected Net Interest Rate
Expected Gross Rate 8.4%
Less: Investment Expenses 0.25%
And less: Investment Risks 0.2%
Expected Net Rate 7.95%
4. Target Credited Rate. To determine the target credited rate, the
required spread must be subtracted from the expected net investment
rate. The required spread varies by plan and by duration within plan.
The target credited rate may be modified for marketing reasons provided
that adjustments are offsetting in the aggregate. Antiselection in
favor of artificially high rates will be considered in this process.
An example is shown in the following Table 3:
Table 3
Target Credited Rate
Life Annuity
Expected Net Rate 7.95% 7.95%
Less: Required Spread 1.5% 1.75%
Calculated Credited Rate 6.45% 6.20%
Marketing Adjustments 0.4% -0.10%
(Assuming 80% annuities)
Target Credited Rate 6.85% 6.10%
5. Working Range. If currently credited interest rates are outside of the
defined working range of plus or minus 25 basis points of target rates,
then no action is required (but action may be taken) until the
cumulative shortfall exceeds $750,000.
6. Actions. If currently credited interest rates are outside the defined
working range of target rates, then action is required. Three courses
of action are possible:
a. Adjust credited rates;
b. Adjust reinsurance and retrocession allowances;
19
<PAGE> 20
c. Do nothing, which is not acceptable after cumulative shortfall
exceeds $750,000.
Considerations in this decision are:
1. The objective stated above;
2. Competition and marketing issues;
3. Previous deficiencies and sufficiencies in credited rates
(relative to target rates);
4. Expected trends in future credited rates;
5. The magnitude of the contemplated adjustments.
20
<PAGE> 1
AUTOMATIC COINSURANCE
REINSURANCE AGREEMENT
INVESTORS GUARANTY LIFE INSURANCE COMPANY
A California corporation with executive offices in
Columbus, Ohio
<PAGE> 2
AUTOMATIC COINSURANCE REINSURANCE AGREEMENT
Schedule
1. Reinsured: Investors Guaranty Life Insurance Company
2. Address: A California corporation with executive offices in
Columbus, Ohio
3. Effective date: The date the stock of the Reinsured is purchased by the
Retrocessionaire.
4. Policies:
(a) All individual insurance policies written by the Reinsured.
(b) All group insurance policies written by the Reinsured.
(c) All annuity plans (whether group or individual) written by the
Reinsured.
(d) All riders issued with or added later to the above described
contracts.
5. Reinsurance: 100%
6. Initial consideration (all values as of effective date of this agreement)
computed as follows:
(a) The Reinsured's policy reserves from Annual Statement Exhibits
8, 9, and 10; plus
(b) the claim liabilities pertaining to the policies; plus
(c) the advance premiums applicable to the policies; minus
(d) the net due and deferred premiums applicable to the policies;
plus
(e) the miscellaneous reserves and liabilities applicable to the
policies; and less
(f) the policy loans; and less
2
<PAGE> 3
(g) the miscellaneous assets applicable to the policies.
7. Ceding commission: $133,000,000, minus the ceding commission pertaining
to the Ohio State Treaty.
8. Expense commission: The amount indicated by Exhibit A, attached to and
made a part of this agreement.
The agreement of which this Schedule is a part is hereby executed in duplicate
by the parties hereto.
INVESTORS GUARANTY LIFE EMPLOYERS REASSURANCE
INSURANCE COMPANY CORPORATION
By: By: /s/ James D. Maughn
-------------------------------- ------------------------------------
Title: Title: /s/ Ex. Vice Pres. and Actuary
----------------------------- ---------------------------------
Date: Date: /s/ January 21, 1997
------------------------------ ----------------------------------
By: By: /s/ Robert D. Parmley
-------------------------------- ------------------------------------
Title: Title: /s/ Ass't Gen Counsel
----------------------------- ---------------------------------
Date: Date: /s/ January 21, 1997
------------------------------ ----------------------------------
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<PAGE> 4
AUTOMATIC COINSURANCE REINSURANCE AGREEMENT
Employers Reassurance Corporation
of
Overland Park, Kansas
(hereinafter called the Corporation)
agrees with the Reinsured named in the Schedule made a part hereof, in
consideration of the mutual covenants hereinafter contained, as follows:
ARTICLE I
APPLICATION OF AGREEMENT. This agreement applies to loss which is retained by
the Reinsured pertaining to the insurance policies and riders described in Item
4 of the Schedule becoming effective before, on and after the effective date of
this agreement (hereinafter called policies or policy) and which is paid by the
Reinsured on or after the effective date of this agreement.
ARTICLE II
ENTIRE AGREEMENT. This agreement shall constitute the entire agreement between
the parties with respect to the business being reinsured hereunder. There are no
other understandings between the parties other than as expressed in this
agreement. Any change or modification to this agreement shall be null and void
unless made by amendment to this agreement and signed by both parties.
ARTICLE III
REINSURANCE. The Corporation will indemnify the Reinsured against the
percentage specified in Schedule Item 5 of loss to which this agreement applies.
ARTICLE IV
RECAPTURE. The Reinsured does not have any rights to recapture the policies.
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ARTICLE V
PRODUCER COMMISSION. The Corporation is obligated to the Reinsured for the
commissions paid by the Reinsured to its producers of the policies.
ARTICLE VI
DEFINITIONS. The word "policies" means the insurance forms described in the
Schedule and includes conditional receipts pertaining thereto and conversions,
reinstatements and exchanges thereof.
The word "loss" shall mean only such amounts as are actually paid by the
Reinsured for benefits afforded under the policies, in settlement of claims for
benefits under the policies, or in satisfaction of judgments for benefits under
the policies; provided that, in the event of the insolvency of the Reinsured,
"loss" shall mean the amount of policy benefits which the Reinsured has incurred
or is liable for, and payment by the Corporation shall be made to the
liquidator, receiver or other statutory successor of the Reinsured in accordance
with the provisions of the Insolvency Clause attached to and made a part of this
agreement. The word "loss" shall include life insurance proceeds payable by
reason of death which remain unpaid because of the nature of the settlement
option selected. The word "loss" includes cash values paid by the Reinsured
because of policy surrenders. The word "loss" shall not include:
(1) claim expenses;
(2) salaries paid to employees of the Reinsured;
(3) any amount paid by the Reinsured for punitive, exemplary or compensatory
damages arising out of the conduct of the Reinsured in the investigation,
trial or settlement of any claim or failure to pay or delay in payment of
any benefits under any policy; provided that, this subparagraph (3) shall
not apply if the Corporation has, in advance of any such conduct by the
Reinsured, counseled with the Reinsured and concurred in the Reinsured's
course of conduct;
(4) any statutory penalty imposed upon the Reinsured on account of any unfair
trade practice or any unfair claim practice;
(5) amounts collected under other reinsurance.
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<PAGE> 6
The term "claim expenses" shall mean statutory interest payable on insurance
proceeds, court costs, interest upon judgments, and allocated investigation,
adjustment and legal expenses, but the term "claim expenses" shall not include
salaries paid to employees of the Reinsured.
Claims shall be deemed to be "incurred" on the date when:
(a) the death occurs as respects life coverage;
(b) the disability commences, as respects waiver of premium coverage;
(c) the accident takes place, as respects accidental death coverage.
The word "exchange" means that an insurance contract reinsured hereunder is
traded for another plan of equal or smaller face amount, without requirement for
full evidence of insurability.
The term "other reinsurance" means those contracts entered into by the Reinsured
with insurance or reinsurance companies other than the Corporation which
reinsure the policies.
"Miscellaneous reserves and liabilities" means the sum of the following:
(a) due or accrued agent commissions;
(b) premiums due or accrued on other reinsurance;
(d) premium suspense.
"Miscellaneous assets" means the amounts recoverable under other reinsurance.
The term "Ohio State Treaty" means the Automatic Coinsurance Reinsurance
Agreement, which has the same effective date as this agreement, between the
Corporation and The Ohio State Life Insurance Company.
The term "Escrow Account" means the funds pertaining to this agreement and the
Ohio State Treaty received and held by COMMERCE BANK, N.A. of Kansas City,
Missouri ("Commerce Bank") pursuant to its Escrow Agreement (Ohio
State/Investors Guaranty Business) with the Corporation and the
Retrocessionaire).
The word "Retrocessionaire" means Great Southern Life Insurance Company, which
is the Corporation's reinsurer for the policies.
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ARTICLE VII
INITIAL CONSIDERATION. On the effective date of this agreement, the Reinsured
shall deposit to Commerce Bank assets equal to the Reinsured's estimate of the
initial consideration indicated in Item 6 of the Schedule, minus the ceding
commission indicated in Item 7 of the Schedule. Thirty days after the effective
date of this agreement, the Reinsured shall pay to the Corporation the amount by
which the estimate is less than actual, with interest thereon, or the
Corporation shall pay to the Reinsured the amount by which the estimate is more
than actual, with interest thereon.
ARTICLE VIII
REINSURANCE PREMIUM. The Reinsured shall pay to the Corporation a reinsurance
premium equal to the insurance premium collected by the Reinsured on and after
the effective date of this agreement pertaining to the policies, minus the
reinsurance premium paid to other carriers, and minus the expense commission
indicated in Item 8 of the Schedule.
ARTICLE IX
POLICY LOANS. The Corporation shall be obligated to the Reinsured for the policy
loan increases, minus the amount of uncapitalized policy loan interest (the net
result of which is hereinafter referred to as policy loan increase). The
Reinsured shall be obligated to the Corporation for the policy loan decreases,
plus the amount of uncapitalized policy loan interest (the net result of which
is hereinafter referred to as policy loan decrease).
ARTICLE X
INVESTMENTS. The Escrow Account assets shall be invested in accordance with the
investment guidelines contained in Exhibit B, attached to and made a part of
this agreement.
ARTICLE XI
INTEREST. Interest rates credited by the Reinsured on the policies shall be
determined in accordance with the procedures contained in Exhibit C, attached to
and made a part of this agreement.
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<PAGE> 8
ARTICLE XII
REPORTING, ACCOUNTING AND SETTLEMENTS. Within 25 days after the end of each
calendar quarter, the Reinsured or its administrator shall furnish to the
Corporation a report (in a form satisfactory to the Corporation) showing the
following information:
(a) Amounts owed Corporation:
(1) Reinsurance premium applicable to insurance premium collected
during quarter;
(2) Policy loan decrease during quarter;
(3) Increase during quarter in miscellaneous reserves and
liabilities;
(4) Decrease during quarter in miscellaneous assets;
(b) Amounts owed Reinsured:
(1) loss paid under the policies during the quarter;
(2) expense commission;
(3) policy loan increase during quarter;
(4) producer commission for the quarter;
(5) Decrease during quarter in miscellaneous reserves and
liabilities;
(6) Increase during quarter in miscellaneous assets;
(c) Balance due Corporation or Reinsured.
Any balance due the Corporation shall be deposited to the Escrow Account within
30 days after the end of the calendar quarter involved. Any balance due the
Reinsured shall be paid by the Corporation to an account designated by the
Reinsured within 30 days after the end of the calendar quarter involved.
The Reinsured and the Corporation each agree to pay interest to the other on
amounts not paid within the time periods required within this article,
calculated using the one month LIBOR rate.
The Reinsured's report for the third calendar quarter of each calendar year
shall include:
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<PAGE> 9
(1) a summary listing showing all policies in force;
(2) the detailed information required with respect to the policies
by the Exhibit of Life Insurance in the Corporation's Annual Statement;
(3) the aggregate reserve information required with respect to the
policies by the Corporation's actuarial opinion and by the other exhibits
of the Corporation's Annual Statement.
ARTICLE XIII
CLAIMS. The Reinsured agrees that it will cause to be investigated and paid,
settled or defended all claims arising under the policies. Except as respects
damages to which this agreement may apply by virtue of subparagraph (3) of the
definition of loss, the claim decisions of the Reinsured (or of its
administrator) shall be binding upon the Corporation.
The Corporation shall have the right, at its own expense, to participate jointly
with the Reinsured (or its administrator)in the investigation, adjustment or
defense of any claim.
The Corporation has no obligation to indemnify the Reinsured for any claim
expenses paid by the Reinsured with respect to the policies.
ARTICLE XIV
ADMINISTRATION OF INSURANCE. The Corporation shall have no authority or
responsibility to administer the insurance provided by the policies.
ARTICLE XV
INSPECTION OF RECORDS. The Corporation may inspect the records of the Reinsured
pertaining to the policies at any time during the normal business hours of the
Reinsured.
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<PAGE> 10
ARTICLE XVI
OFFSET. The Reinsured or the Corporation may offset any balance due from one
party to the other under this agreement.
ARTICLE XVII
INSOLVENCY CLAUSE. The attached Insolvency Clause is hereby made a part of this
agreement.
ARTICLE XVIII
ASSIGNMENTS AND CHANGES OF INTEREST. No assignment or change of the Reinsured's
interest hereunder, whether voluntary or involuntary and whether by merger or
reinsurance of its entire business with another company or otherwise, shall be
binding upon the Corporation, provided that, this article does not apply to:
(a) The Corporation's assignment of its interests and liabilities
as the reinsurer to the Retrocessionaire, but only with respect to those
policies on which the Retrocessionaire is not named as the direct insurer;
(b) The Reinsured's assignment of its rights and duties as the
ceding company to the Retrocessionaire, but only with respect to those
policies on which the Retrocessionaire is named as the direct insurer.
ARTICLE XIX
ENFORCEABILITY. This agreement has been duly executed by each of the parties
hereto and constitutes a binding and enforceable agreement of each such party.
ARTICLE XX
TERMINATION. This agreement shall remain in force until terminated by mutual
consent or by either party giving to the other party not less than 90 days
advance notice, by registered mail or express delivery service, stating the
termination date.
This agreement does not apply with respect to policies issued by the Reinsured
to become effective on or after the termination date of this agreement.
10
<PAGE> 11
The reinsurance afforded by this agreement applicable to each policy issued by
the Reinsured to become effective prior to or during the term of this agreement
shall continue to apply thereto until the policy naturally expires.
IN WITNESS WHEREOF, the parties hereto have signed this agreement on the
Schedule Page.
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INSOLVENCY CLAUSE
The portion of any risk or obligation assumed by the reinsurer, when
such portion is ascertained, shall be payable on demand of the ceding insurer at
the same time an the ceding insurer shall pay its not retained portion of such
risk or obligation, with reasonable provision for verification before payment,
and the reinsurance shall be payable by the reinsurer, on the basis of the
liability of the ceding insurer under the contract or contracts reinsured
without diminution because of the insolvency of the ceding insurer. In the event
of insolvency and the appointment of a conservator, liquidator or statutory
successor of the ceding company, such portion shall be payable to such
conservator, liquidator or statutory successor immediately upon demand, with
reasonable provision for verification, on the basis of claims allowed against
the insolvent company by any court of competent jurisdiction or by any
conservator, liquidator, or statutory successor of the company having authority
to allow such claims, without diminution because of such insolvency or because
such conservator, liquidator or statutory successor has failed to pay all or a
portion of any claims. Payments by the reinsurer as above set forth shall be
made directly to the ceding insurer or to its conservator, liquidator or
statutory successor, except where the contract of insurance or reinsurance
specifically provides another payee of such reinsurance in the event of the
insolvency of the coding insurer.
The conservator, liquidator or statutory successor of a ceding insurer
shall give written notice of the pendency of a claim against the ceding insurer
indicating the policy or bond reinsured, within a reasonable time after such
claim is filed and the reinsurer may interpose, at its own expense, in the
proceeding where such claim is to be adjudicated, any defense or defenses which
it may deem available to the coding company or its conservator, liquidator or
statutory successor. The expense thus incurred by the reinsurer shall be payable
subject to court approval out of the estate of the insolvent ceding insurer as
part of the expense of conservation or liquidation to the extent of a
proportionate share of the benefit which may accrue to the ceding insurer in
conservation or liquidation, solely as a result of the defense undertaken by the
reinsurer.
The original insured or policyholder shall not have any rights against
the reinsurer which are not specifically set forth in the contract of
reinsurance, or in a specific agreement between the reinsurer and the original
insured or policyholder.
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EXHIBIT A
Expense Commission
INVESTORS GUARANTY LIFE
Expense Commission:
Percent of
Per Policy Premium
Deferred Annuities $8.75 per quarter --
Life Insurance $8.75 per quarter 2.5%
Deposit Funds -- --
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EXHIBIT B
INVESTMENT OBJECTIVES
The primary objectives are:
1) Preservation of principal (capital).
2) Maximize the potential value of the portfolio with a focus on
maintaining and increasing future investment income streams.
INVESTMENT CONSTRAINTS
1) Conservative and stable investment philosophy with primary emphasis on
balancing credit and interest rate risk.
2) Focus an well-structured securities (non-callable corporates, CMO's
with stable average lives, current or discount coupon pass-throughs) to
reduce reinvestment risk and improve price performance. Investment in
high risk or volatile derivative securities (e.g. inverse floaters) are
not considered part of the overall investment strategy.
3) Investments are made with the intent of being held long term. The
portfolio will not be actively/aggressively managed based on
anticipated interest rate and/or spread changes. Any restructuring of
the portfolio will be performed in conjunction with the overall
asset/liability management process.
4) The portfolio will be structured with the goal of matching the assets
with the expected liability cash flows. The structure of the assets
will be regularly monitored considering interest rate and expected
prepayment rate changes. Asset/liability studies are completed at least
annually, or more frequently if warranted. The results of these studies
play an integral role in the durational aspects of securities
purchased.
5) Maintain a high quality/liquid investment portfolio to satisfy both
existing and prospective cash flow needs.
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<PAGE> 15
INVESTMENT GUIDELINES AND LIMITATIONS
The following guidelines will be utilized in developing and managing the
portfolio:
1) Maturity Structure:
The targeted average life for the The maturity distribution of the
portfolio is a range of 6-13 years. portfolio will be a function of
expected liability cash flows, and
the term structure of interest
rates.
2) Sector Allocation: Target
Expected Percentage
Sector Range Allocation
U.S. Governments 0-25% - %
Corporate Bonds 45-85 55
Asset-Backed Securities (ABS): 5-20 20
Mortgage-Backed Securities (MBS): 15-45 25
--
Total MBS 100%
===
3) Ratings Guidelines:
a) Corporate Bonds:
Expected
Expected Percentage
Rating Category Range of Corporates
AAA & AA 5-15% 10%
A 40-75 65
BBB 15-25 25
--
100 %
For any corporate bonds rated both Baa-3/BBB by Moody's and Standard & Poor's
respectively, Employer's Re will be notified prior to their purchase. Subsequent
to the transaction, written approval will be obtained from Employer's Re for all
Baa-3/BBB- bonds acquired.
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<PAGE> 16
b) Mortgage-Backed Securities:
MBS holdings will generally involve government agency, government
sponsored agency (FNMA and FHLMC), or AAA rated collateral. No
more than 20% of the total portfolio will be backed by non-agency
collateral.
c) Below Investment Grade Securities (BIG):
BIG bonds are not considered part of the overall investment
strategy. However, any bond purchased as an investment grade
security which is subsequently downgraded to a BIG rating will be
reevaluated at that time. If the risk of default is considered
low, the bond may be retained. Any BIG bonds retained will be
regularly monitored and reevaluated. The total amount of BIG bonds
to be retained cannot exceed 5% of total investments.
d) Asset-Backed Securities:
ABS investments should generally be rated AA or AAA by one of the
major rating agencies. No more than 20% of ABS holdings can be
rated below AA.
Expected Target
Range Allocation
AAA 80-100% 100%
AA 0-20 __
4) Holding limitations:
a) Industry Concentration:
Corporate bond holdings are limited to no more than 20% in any one
industry.
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b) Company Concentration:
The maximum amount to be invested in any one company or
organization is as follows:
Maximum Amount
Invested
Rating Category (In Million)
AAA $15
AA 15
A 12
BBB 8
c) Individual MBS concentration:
The maximum amount to be invested in any one agency collateral
security is $25 million. For a non-agency collateral security,
the maximum amount is $10 million (rated AAA).
d) Individual ABS Concentration:
The maximum amount to be invested in any one ABS security is
as follows:
Maximum Amount
Invested
Rating Category (In Million)
AAA $10
AA 5
5) Any security which is outside the scope of these guidelines can be
invested in, if mutually agreed upon by both organizations.
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EXHIBIT C
Interest Rate Crediting Process
1. Objective. The objective of this process is to assure that credited
rates are established so as to meet required spread targets.
2. Expected Gross Interest Rate. The expected gross interest rate for a
block of business is determined by blending current yields on the
investment portfolio of assets underlying the block of business
together with expected new money for minimal new and reinvestment cash
flow. The blending will be based on cash flow for the period under
review and will take into consideration funds due for reinvestment and
interest income.
Current yields should include the effect of realized statutory capital
gains and losses. New money assumptions shall consider these investment
guidelines in respect of quality, duration and type of assets.
An example is shown in the following Table 1:
Table 1
Expected Gross Interest Rate
Volume Rate
Investment Portfolio 800 8.5%
Reinvestment Portfolio 100 8.0%
New Money 100 8.0%
Average 1,000 8.4%
3. Expected Net Interest Rate. The expected net interest rate for a block
of business is determined by subtracting from the gross rate charges
for investment expenses and risks.
Charges for investment expenses cover the cost of investment expenses
(including transaction costs) per the Services Agreement described in
Numbered Paragraph 3 of this agreement.
Charges for risk should take into consideration the default and option
risks (as agreed upon) relating to the portfolio assets underlying the
block of business.
An example is shown in the following Table 2:
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Table 2
Expected Net Interest Rate
Expected Gross Rate 8.4%
Less: Investment Expenses 0.25%
And less: Investment Risks 0.2%
Expected Net Rate 7.95%
4. Target Credited Rate. To determine the target credited rate, the
required spread must be subtracted from the expected net investment
rate. The required spread varies by plan and by duration within plan.
The target credited rate may be modified for marketing reasons provided
that adjustments are offsetting in the aggregate. Antiselection in
favor of artificially high rates will be considered in this process.
An example is shown in the following Table 3:
Table 3
Target Credited Rate
Life Annuity
Expected Net Rate 7.95% 7.95%
Less: Required Spread 1.5% 1.75%
Calculated Credited Rate 6.45% 6.20%
Marketing Adjustments 0.4% -0.10%
(Assuming 80% annuities)
Target Credited Rate 6.85% 6.10%
5. Working Range. If currently credited interest rates are outside of the
defined working range of plus or minus 25 basis points of target rates, then
no action is required (but action may be taken) until the cumulative
shortfall exceeds $750,000.
6. Actions. If currently credited interest rates are outside the defined
working range of target rates, then action is required. Three courses of
action are possible:
a. Adjust credited rates;
b. Adjust reinsurance and retrocession allowances;
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c. Do nothing, which is not acceptable after cumulative shortfall exceeds
$750,000.
Considerations in this decision are:
1. The objective stated above;
2. Competition and marketing issues;
3. Previous deficiencies and sufficiencies in credited rates (relative to
target rates);
4. Expected trends in future credited rates;
5. The magnitude of the contemplated adjustments.
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EXHIBIT 10.22(c)
MODIFIED COINSURANCE RETROCESSION AGREEMENT
(Ohio State Business)
The effective date of the Treaty
GREAT SOUTHERN LIFE INSURANCE COMPANY
a Texas corporation with executive offices in
Kansas City, Missouri
<PAGE> 2
MODIFIED COINSURANCE RETROCESSION AGREEMENT
(Ohio State Business)
Entered into between
GREAT SOUTHERN LIFE INSURANCE COMPANY
a Texas corporation with executive offices in
Kansas City, Missouri
(hereinafter called the Company)
and
EMPLOYERS REASSURANCE CORPORATION
of
Overland Park, Kansas
(hereinafter called the Corporation)
EFFECTIVE DATE: The effective date of the Treaty
In consideration of the mutual covenants hereinafter contained, the parties
hereto do hereby agree as follows:
ARTICLE I.
APPLICATION OF AGREEMENT. This agreement applies to the reinsurance
agreement described in the following Schedule (herein referred to as Treaty).
Treaty Schedule
Automatic Coinsurance Reinsurance Agreement between the Corporation
and The Ohio State Life Insurance Company.
Except where otherwise indicated herein, the words and terms in this agreement
shall have the same meaning as given in the Treaty.
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<PAGE> 3
ARTICLE II.
RETROCESSION. As hereinafter more specifically indicated, the Corporation will
cede and the Company shall accept a 70% quota share (herein called the Company's
quota share) of certain of the Corporation's interests and liabilities under the
Treaty.
ARTICLE III.
LOSS AND MISCELLANEOUS OBLIGATIONS. The Company is obligated
to the Corporation for the Company's quota share of loss paid by the Corporation
under the Treaty. The Company is also obligated to the Corporation for the the
Company's quota share of payments on miscellaneous reserves and libilities made
by the Corporation under the Treaty (hereinafter called miscellaneous obligation
payments).
ARTICLE IV.
PRODUCER COMMISSIONS. The Company is obligated to the Corporation for the
Company's quota share of producer commissions paid by the Corporation under the
Treaty.
ARTICLE V.
POLICY LOANS. The Company is obligated to the Corporation for the Company's
quota share of policy loan increases. The Corporation is obligated to the
Company for the Company's quota share of policy loan decreases.
ARTICLE VI.
INITIAL CONSIDERATION. The Corporation is obligated to the Company for the
Company's quota share of initial consideration under the Treaty. The Company is
obligated to the Corporation for the Company's quota share of ceding commission
under the Treaty
ARTICLE VII.
RETROCESSION PREMIUM. The Corporation is obligated to the Company for the
Company's quota share of the reinsurance premium under the Treaty. The Company
is obligated to the Corporation for the Company's quota share of the expense
commission under the Treaty.
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ARTICLE VIII.
ESCROW. The Escrow Account defined in Article VI of the Treaty is referred to
in this agreement as the Escrow. Ownership of all Escrow assets shall remain
with the Corporation.
The Corporation will deposit to the Escrow all payments pertaining to the
Treaty received by the Corporation from the original ceding insurer. The
Corporation will also deposit to Escrow all payments pertaining to this
agreement received by the Corporation from the Company. The Corporation will
withdraw from Escrow all payments pertaining to the Treaty made by
the Corporation to the original ceding insurer. The Corporation will
also withdraw from Escrow all payments pertaining to this agreement made
by the Corporation to the Company.
As of the effective date, Escrow assets shall be valued in accordance with
statutory accounting practices which have been prescribed or are permitted by
the National Association of Insurance Commissioners. After the effective date,
no change will be made to the asset valuation practices unless required by
Kansas law, Kansas insurance regulation or by the Kansas Insurance Department.
ARTICLE IX.
RESERVE TRANSFER. The Company shall be obligated to the Corporation as indicated
below for the Company's quota share of the following items applicable to the
Treaty as of the effective date of this agreement:
1. the policy reserves; plus
2. miscellaneous reserves and liabilities; minus
3. miscellaneous assets; and minus
4. the ceding commission under the Treaty; and minus
5. the policy loans.
At the end of each calendar quarter after the effective date, the Company shall
owe the Corporation the increase during the quarter or the Corporation shall owe
the Company the decrease during the quarter in the Company's quota share of the
sum of the policy reserves and miscellaneous reserves.
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ARTICLE X.
INTEREST. At the end of each calendar quarter after the effective date, the
Corporation shall owe the Company simple interest, at the rate earned by the
Escrow, on the Company's quota share of average policy reserves, plus the
Company's quota share of the average miscellaneous reserves and liabilities,
minus the Company's quota share of the average miscellaneous assets, all
pertaining to the quarter.
"Average" means the amount of the identified item at the beginning of the period
involved, plus the amount of the identified item at the end of the same period,
divided by 2.
At the end of each calendar quarter after the effective date, the Corporation
shall owe the Company the Company's quota share of the interest on the policy
loans for the quarter.
ARTICLE XI.
RISK ALLOWANCE. The Company shall pay to the Corporation a quarterly risk
allowance pertaining to the Treaty in an amount equal to one-fourth of 1.26% of
the amount at the beginning of each calendar quarter by which "X" exceeds the
Escrow value, where:
X = the policy reserves, plus the miscellaneous
reserves and liabilities, minus the miscellaneous
assets, and minus the policy loans.
For purposes of the preceding calculation, the Corporation's cumulative
withdrawals of its 30% quota share of the statutory profits, and interest
thereon, from the Escrow Account, in accordance with the second paragraph of
Section 2 of the Escrow Agreement, shall be added back into the Escrow value.
If the risk allowance is more than the excess of Article XII Credits over
Article XII Charges, the risk allowance will be reduced to the amount of such
excess. The risk allowance is not payable with respect to any quarter for which
Article XII Charges exceed Article XII Credits.
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<PAGE> 6
ARTICLE XII.
EXPERIENCE REFUND. At the end of each accounting period, the Company shall be
obligated to the Corporation for an experience refund equal to the percentage
hereinafter indicated of the amount, if any, by which the sum of the Company's
quota share of the following Credits for the period exceeds the sum of the
Company's quota share of the following Charges for the period.
CREDITS
1. This agreement's retrocession premium for the period.
2. The policy loans at the beginning of the period.
3. The miscellaneous assets at the end of the period.
4. The policy reserves and the miscellaneous reserves and liabilities at
the beginning of the period.
5. Interest per Article X for the period.
CHARGES
1. Producer commission for the period.
2. Expense commission plus expense allowance for the period.
3. Policy loss incurred during the period.
4. Miscellaneous obligation payments made during the period.
5. Policy loans at the end of the period.
6. The miscellaneous assets at the beginning of the period.
7. Policy reserves and the miscellaneous reserves and liabilities at the
end of the period.
8. The deficit, if any, at the end of the preceding period, including
interest thereon.
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The first accounting period shall commence on the effective date and end on the
last day of the calendar quarter in which the effective date occurs. Thereafter,
"accounting period" means each calendar quarter.
As respects each accounting period, "deficit" means the excess of the preceding
Charges over the preceding Credits.
The percentage referred to in the first paragraph of this article shall be 100%
for each accounting period prior to and including the one in which the Escrow
Value exceeds "X" (as defined in Article XI), and shall be 7% thereafter.
ARTICLE XIII.
REPORTING, ACCOUNTING AND SETTLEMENT. Within 25 days after the Corporation
receives the original ceding insurer's report for each accounting period, the
Corporation shall furnish to the Company a report (in a form satisfactory to the
Company) showing the following information for the same period:
A. The following amounts due the Company:
1. Initial consideration (first period only);
2. Retrocession premium;
3. Policy loan decrease;
4. Reserve transfer decrease;
5. Interest per Article X;
B. The following amounts due the Corporation:
1. Initial reserve transfer;
2. Reinsurance losses paid;
3. Producer commission;
4. Expense commission plus expense allowance;
5. Policy loan increase;
6. Experience refund;
7. Risk allowance;
8. Miscellaneous obligation payments;
9. Reserve transfer increase;
C. Balance due Company or Corporation.
D. The change in the policy reserves and miscellaneous reserves and
liabilities.
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E. The change in miscellaneous assets.
If the amount shown in subparagraph C is due the Company, the Corporation's
payment thereof shall accompany the report. If the amount shown in subparagraph
C is due the Corporation, the Company shall make its payment thereof to the
Corporation within 25 days after receiving the report.
The Company and the Corporation each agree to pay the other simple interest, at
the rate earned by the Escrow, on all amounts due and not remitted within 60
days after the end of any accounting period.
The report for the third calendar quarter of each calendar year shall include
the information pertaining to the policies which is necessary for preparing the
Company's Annual Statement. The report for the fourth calendar quarter of each
calendar year shall include the original ceding insurer's cash flow analysis of
the policies which is sufficient for the Company's use in preparing its
actuarial opinion.
ARTICLE XIV.
CLAIMS. The Company will abide by the claim handling decisions of the original
ceding insurer.
ARTICLE XV.
INSPECTION OF RECORDS. The Company may inspect the records of the
Corporation pertaining to the Treaty.
ARTICLE XVI.
INSOLVENCY CLAUSE. The Insolvency Clause attached to this agreement is hereby
made a part of this agreement.
ARTICLE XVII.
ASSIGNMENTS AND CHANGES OF INTEREST. No assignment or change of the
Corporation's interest hereunder, whether voluntary or involuntary and whether
by merger or reinsurance of its entire business with another insurer or
otherwise, shall be binding upon the Company.
8
<PAGE> 9
ARTICLE XVIII.
OFFSET. The Corporation or the Company may offset any balance, whether on
account of premiums, commissions, loss or claim expenses due from one party to
the other under this agreement or under any other reinsurance agreement
heretofore or hereafter entered into between the Corporation and the Company,
whether acting as ceding company or assuming reinsurer.
ARTICLE XIX.
ENTIRE AGREEMENT. This agreement shall constitute the entire agreement between
the parties with respect to the business being reinsured hereunder. There are no
other understandings between the parties other than as expressed in this
agreement. Any change or modification to this agreement shall be null and void
unless made by amendment to this agreement and signed by both parties.
ARTICLE XX.
RECAPTURE. The Company has no obligation to allow the Corporation to recapture
the policies.
ARTICLE XXI.
CONVERSION. Four years after the effective date of this agreement, the Company
shall have the right to convert this agreement from modified coinsurance to
coinsurance by paying to the Corporation the amount by which the Company's quota
share of the policy reserves exceeds the Company's quota share of the Escrow
Account value. Promptly after receipt of said payment, the Corporation shall
cause to be released to the Company from Escrow the Company's quota share of the
Escrow Account value.
For purposes of the preceding calculation, the Corporation's cumulative
withdrawals of its 30% quota share of the statutory profits, and interest
thereon, from the Escrow Account, in accordance with the second paragraph of
Section 2 of the Escrow Agreement, shall be added back into the Escrow value.
ARTICLE XXII.
ENFORCEABILITY. This agreement has been duly executed by each of the parties
hereto and constitutes a binding and enforceable agreement of each such party.
9
<PAGE> 10
ARTICLE XXIII.
TERMINATION. Either party shall have the right to terminate this agreement with
respect to new business by giving to the other party not less than 90 days
advance notice, by registered mail or express delivery service, stating the
first day of any calendar quarter which shall be the termination date.
This agreement does not apply to policies issued to become effective on or after
the termination date.
If the Company does not permit recapture, the retrocession afforded by this
agreement applicable to each policy issued by the original ceding insurer to
become effective prior to the termination date of this agreement shall continue
to apply thereto until the policy naturally expires.
IN WITNESS WHEREOF, the parties hereto have caused this agreement to be executed
in duplicate.
EMPLOYERS REASSURANCE GREAT SOUTHERN LIFE
CORPORATION INSURANCE COMPANY
By: /s/ James D. Maughn By: /s/ Gary E. Jenkins
------------------------------------- -------------------------------
Title: /s/ Ex. Vice Pres. and Actuary Title: /s/ Sr. Vice President
---------------------------------- ----------------------------
Date: /s/ January 21, 1997 Date: /s/ January 21, 1997
----------------------------------- -----------------------------
By: /s/ Robert D. Parmley By: /s/ Donna H. Kinnaird
------------------------------------- -------------------------------
Title: /s/ Ass't Gen Counsel Title: /s/ Sr. Vice President
---------------------------------- ----------------------------
Date: /s/ January 21, 1997 Date: /s/ January 21, 1997
----------------------------------- -----------------------------
10
<PAGE> 11
INSOLVENCY CLAUSE
The ceding insurer and the reinsurer agree that, in the event of the in
solvency of the ceding insurer, as to all reinsurance made, ceded, renewed or
otherwise becoming effective after the effective date of this agreement, the
reinsurance shall be payable by the reinsurer on the basis of the amount of
liability of the ceding insurer under the contract or contracts reinsured,
without diminution because of the insolvency of the ceding insurer; furthermore,
that such amount shall be paid directly to the ceding insurer or its liquidator,
receiver or other statutory successor.
It is understood and agreed, however, that the obligations of the
ceding company as set forth in the reinsurance contract, including, among
others, the duty to investigate, settle and defend all claims arising under
policies with respect to which reinsurance is afforded by this agreement, shall
remain unimpaired and unaffected by the insolvency of the ceding insurer and
shall be assumed by the liquidator, receiver or statutory successor of the
ceding insurer in the liquidation or receivership proceeding and that such
liquidator, receiver or statutory successor shall give written notice to the
reinsurer of the pendency of a claim against the ceding insurer on the policy
reinsured within a reasonable time after such claim is filed in the insolvency
proceeding and that during the pendency of such claim the reinsurer may
investigate such claim and interpose, at its own expense, in the proceeding
where such claim is to be adjudicated, any defense or defenses which it may deem
available to the ceding insurer, its liquidator, receiver or statutory
successor. The expense thus incurred by the reinsurer shall be chargeable,
subject to court approval, against the insolvent ceding insurer as part of the
expense of liquidation to the extent of a proportionate share of the benefit
which may accrue to the ceding insurer solely as the result of the defense
undertaken or asserted by the reinsurer.
Where two or more reinsurers are involved in the same claim and a
majority in interest elect to interpose a defense to such claim, the expense
shall be apportioned in accordance with the terms of this reinsurance agreement
as though such expense had been incurred by the ceding insurer.
Nothing hereinabove set forth in this insolvency clause shall in
anywise change the relationship or status of the parties hereto, to wit, that of
ceding insurer and reinsurer, nor enlarge the obligations of either party to
each other, except as specifically hereinabove provided, to wit, to pay the
statutory successor on the basis of the amount of liability of the ceding
insurer under the contract or contracts reinsured, rather than on the basis of
the actual amount of loss (dividends) paid by the liquidator, receiver or
statutory successor to allowed claimants, nor shall anything in this insolvency
clause in any manner create any obligations or establish any rights against the
reinsurer in favor of any third parties or any persons not parties to this
reinsurance contract.
<PAGE> 1
EXHIBIT 10.22(d)
MODIFIED COINSURANCE RETROCESSION AGREEMENT
(Investors Guaranty Business)
The effective date of the Treaty
GREAT SOUTHERN LIFE INSURANCE COMPANY
a Texas corporation with executive offices in
Kansas City, Missouri
<PAGE> 2
MODIFIED COINSURANCE RETROCESSION AGREEMENT
(Investors Guaranty Business)
Entered into between
GREAT SOUTHERN LIFE INSURANCE COMPANY
a Texas corporation with executive offices in
Kansas City, Missouri
(hereinafter called the Company)
and
EMPLOYERS REASSURANCE CORPORATION
of
Overland Park, Kansas
(hereinafter called the Corporation)
EFFECTIVE DATE: The effective date of the Treaty
In consideration of the mutual covenants hereinafter contained, the parties
hereto do hereby agree as follows:
ARTICLE I
APPLICATION OF AGREEMENT. This agreement applies to the reinsurance
agreement described in the following Schedule (herein referred to as Treaty).
Treaty Schedule
Automatic Coinsurance Reinsurance Agreement between the Corporation
and Investors Guaranty Life Insurance Company.
Except where otherwise indicated herein, the words and terms in this agreement
shall have the same meaning as given in the Treaty.
<PAGE> 3
ARTICLE II
RETROCESSION. As hereinafter more specifically indicated, the Corporation will
cede and the Company shall accept a 70% quota share (herein called the Company's
quota share) of certain of the Corporation's interests and liabilities under the
Treaty.
ARTICLE III
LOSS AND MISCELLANEOUS OBLIGATIONS. The Company is obligated to the Corporation
for the Company's quota share of loss paid by the Corporation under the Treaty.
The Company is also obligated to the Corporation for the Company's quota share
of payments on miscellaneous reserves and liabilities made by the Corporation
under the Treaty (hereinafter called miscellaneous obligation payments).
ARTICLE IV
PRODUCER COMMISSIONS. The Company is obligated to the Corporation for the
Company's quota share of producer commissions paid by the Corporation under the
Treaty.
ARTICLE V
POLICY LOANS. The Company is obligated to the Corporation for the Company's
quota share of policy loan increases. The Corporation is obligated to the
Company for the Company's quota share of policy loan decreases.
ARTICLE VI
INITIAL CONSIDERATION. The Corporation is obligated to the Company for the
Company's quota share of initial consideration under the Treaty. The Company is
obligated to the Corporation for the Company's quota share of ceding commission
under the Treaty.
ARTICLE VII
RETROCESSION PREMIUM. The Corporation is obligated to the Company for the
Company's quota share of the reinsurance premium under the Treaty. The Company
is
2
<PAGE> 4
obligated to the Corporation for the Company's quota share of the expense
commission under the Treaty.
ARTICLE VIII
ESCROW. The Escrow Account defined in Article VI of the Treaty is referred to in
this agreement as the Escrow. Ownership of all Escrow assets shall remain with
the Corporation. The Corporation will deposit to the Escrow all payments
pertaining to the Treaty received by the Corporation from the original ceding
insurer. The Corporation will also deposit to Escrow all payments pertaining to
this agreement received by the Corporation from the Company. The Corporation
will withdraw from Escrow all payments pertaining to the Treaty made by the
Corporation to the original ceding insurer. The Corporation will also withdraw
from Escrow all payments pertaining to this agreement made by the Corporation to
the Company.
As of the effective date, Escrow assets shall be valued in accordance with
statutory accounting practices which have been prescribed or are permitted by
the National Association of Insurance Commissioners. After the effective date,
no change will be made to the asset valuation practices unless required by
Kansas law, Kansas insurance regulation or by the Kansas Insurance Department.
ARTICLE IX
RESERVE TRANSFER. The Company shall be obligated to the Corporation as indicated
below for the Company's quota share of the following items applicable to the
Treaty as of the effective date of this agreement:
1. the policy reserves; plus
2. miscellaneous reserves and liabilities; minus
3. miscellaneous assets; and minus
4. the ceding commission under the Treaty; and minus
5. the policy loans
At the end of each calendar quarter after the effective date, the Company shall
owe the Corporation the increase during the quarter or the Corporation shall owe
the Company the decrease during the quarter in the Company's quota share of the
sum of the policy reserves and miscellaneous reserves.
3
<PAGE> 5
ARTICLE X
INTEREST. At the end of each calendar quarter after the effective date, the
Corporation shall owe the Company simple interest, at the rate earned by the
Escrow, on the Company's quota share of average policy reserves, plus the
Company's quota share of the average miscellaneous reserves and liabilities,
minus the Company's quota share of the average miscellaneous assets, all
pertaining to the quarter.
"Average" means the amount of the identified item at the beginning of the period
involved, plus the amount of the identified item at the end of the same period,
divided by 2.
At the end of each calendar quarter after the effective date, the Corporation
shall owe the Company the Company's quota share of the interest on the policy
loans for the quarter.
ARTICLE XI
RISK ALLOWANCE. The Company shall pay to the Corporation a quarterly risk
allowance pertaining to the Treaty in an amount equal to one-fourth of 1.26% of
the amount at the beginning of each calendar quarter by which "X" exceeds the
Escrow value, where:
X = the policy reserves, plus the miscellaneous reserves and
liabilities, minus the miscellaneous assets, and minus the
policy loans.
For purposes of the preceding calculation, the Corporation's cumulative
withdrawals of its 30% quota share of the statutory profits, and interest
thereon, from the Escrow Account, in accordance with the second paragraph of
Section 2 of the Escrow Agreement, shall be added back into the Escrow value.
If the risk allowance is more than the excess of Article XII Credits over
Article XII Charges, the risk allowance will be reduced to the amount of such
excess. The risk allowance is not payable with respect to any quarter for which
Article XII Charges exceed Article XII Credits.
ARTICLE XII
EXPERIENCE REFUND. At the end of each accounting period, the Company shall
be obligated to the Corporation for an experience refund equal to the percentage
hereinafter indicated of the amount, if any, by which the sum of the Company's
quota
4
<PAGE> 6
share of the following Credits for the period exceeds the sum of the Company's
quota share of the following Charges for the period.
Credits
1. This agreement's retrocession premium for the period.
2. The policy loans at the beginning of the period.
3. The miscellaneous assets at the end of the period.
4. The policy reserves and the miscellaneous reserves and
liabilities at the beginning of the period.
5. Interest per Article X for the period.
Charges
1. Producer commission for the period.
2. Expense commission plus expense allowance for the period.
3. Policy loss incurred during the period.
4. Miscellaneous obligation payments made during the period.
5. Policy loans at the end of the period.
6. The miscellaneous assets at the beginning of the period.
7. Policy reserves and the miscellaneous reserves and liabilities
at the end of the period.
8. The deficit, if any, at the end of the preceding period,
including interest thereon.
The first accounting period shall commence on the effective date and end on the
last day of the calendar quarter in which the effective date occurs. Thereafter,
"accounting period" means each calendar quarter.
As respects each accounting period, "deficit" means the excess of the preceding
Charges over the preceding Credits.
5
<PAGE> 7
The percentage referred to in the first paragraph of this article shall be 100%
for each accounting period prior to and including the one in which the Escrow
Value exceeds "X" (as defined in Article XI), and shall be 7% thereafter.
ARTICLE XIII
REPORTING, ACCOUNTING AND SETTLEMENT. Within 25 days after the
Corporation receives the original ceding insurer's report for each accounting
period, the Corporation shall furnish to the Company a report (in a form
satisfactory to the Company) showing the following information for the same
period:
A. The following amounts due the Company:
1. Initial consideration (first period only);
2. Retrocession premium;
3. Policy loan decrease;
4. Reserve transfer decrease;
5. Interest per Article X;
B. The following amounts due the Corporation:
1. Initial reserve transfer;
2. Reinsurance losses paid;
3. Producer commission;
4. Expense commission plus expense allowance;
5. Policy loan increase;
6. Experience refund;
7. Risk allowance;
8. Miscellaneous obligation payments;
9. Reserve transfer increase;
C. Balance due Company or Corporation.
D. The change in the policy reserves and miscellaneous reserves and
liabilities.
E. The change in miscellaneous assets.
If the amount shown in subparagraph C is due the Company, the Corporation's
payment thereof shall accompany the report. If the amount shown in subparagraph
C is due the Corporation, the Company shall make its payment thereof to the
Corporation within 25 days after receiving the report.
6
<PAGE> 8
The Company and the Corporation each agree to pay the other simple interest, at
the rate earned by the Escrow, on all amounts due and not remitted within 60
days after the end of any accounting period.
The report for the third calendar quarter of each calendar year shall include
the information pertaining to the policies which is necessary for preparing the
Company's Annual Statement. The report for the fourth calendar quarter of each
calendar year shall include the original ceding insurer's cash flow analysis of
the policies which is sufficient for the Company's use in preparing its
actuarial opinion.
ARTICLE XIV
CLAIMS. The Company will abide by the claim handling decisions of the original
ceding insurer.
ARTICLE XV
INSPECTION OF RECORDS. The Company may inspect the records of the
Corporation pertaining to the Treaty.
ARTICLE XVI
INSOLVENCY CLAUSE. The Insolvency Clause attached to this agreement is hereby
made a part of this agreement.
ARTICLE XVII
ASSIGNMENTS AND CHANGES OF INTEREST. No assignment or change of the
Corporation's interest hereunder, whether voluntary or involuntary and whether
by merger or reinsurance of its entire business with another insurer or
otherwise, shall be binding upon the Company.
ARTICLE XVIII
OFFSET. The Corporation or the Company may offset any balance, whether on
account of premiums, commissions, loss or claim expenses due from one party to
the other under this agreement or under any other reinsurance agreement
heretofore or
7
<PAGE> 9
hereafter entered into between the Corporation and the Company, whether acting
as ceding company or assuming reinsurer.
ARTICLE XIX
ENTIRE AGREEMENT. This agreement shall constitute the entire agreement between
the parties with respect to the business being reinsured hereunder. There are no
other understandings between the parties other than as expressed in this
agreement. Any change or modification to this agreement shall be null and void
unless made by amendment to this agreement and signed by both parties.
ARTICLE XX
RECAPTURE. The Company has no obligation to allow the Corporation to recapture
the policies.
ARTICLE XXI
CONVERSION. Four years after the effective date of this agreement, the Company
shall have the right to convert this agreement from modified coinsurance to
coinsurance by paying to the Corporation the amount by which the Company's quota
share of the policy reserves exceeds the Company's quota share of the Escrow
Account value. Promptly after receipt of said payment, the Corporation shall
cause to be released to the Company from Escrow the Company's quota share of the
Escrow Account value.
For purposes of the preceding calculation, the Corporation's cumulative
withdrawals of its 30% quota share of the statutory profits, and interest
thereon, from the Escrow Account, in accordance with the second paragraph of
Section 2 of the Escrow Agreement, shall be added back into the Escrow value.
ARTICLE XXII
ENFORCEABILITY. This agreement has been duly executed by each of the parties
hereto and constitutes a binding and enforceable agreement of each such party.
8
<PAGE> 10
ARTICLE XXIII
TERMINATION. Either party shall have the right to terminate this agreement with
respect to new business by giving to the other party not less than 90 days
advance notice, by registered mail or express delivery service, stating the
first day of any calendar quarter which shall be the termination date.
This agreement does not apply to policies issued to become effective on or after
the termination date.
If the Company does not permit recapture, the retrocession afforded by this
agreement applicable to each policy issued by the original ceding insurer to
become effective prior to the termination date of this agreement shall continue
to apply thereto until the policy naturally expires.
IN WITNESS WHEREOF, the parties hereto have caused this agreement to be executed
in duplicate.
EMPLOYERS REASSURANCE GREAT SOUTHERN LIFE
CORPORATION INSURANCE COMPANY
By: /s/ James D. Maughn By: /s/ Donna H. Kinnaird
-------------------------------------- ------------------------------
Title: /s/ Ex. Vice Pres. and Actuary Title: /s/ Sr. Vice President
----------------------------------- ---------------------------
Date: /s/ January 21, 1997 Date: /s/ January 21, 1997
------------------------------------ ----------------------------
By: /s/ Robert D. Parmley By: /s/ Gary E. Jenkins
-------------------------------------- ------------------------------
Title: /s/ Ass't Gen Counsel Title: /s/ Sr. Vice President
----------------------------------- ---------------------------
Date: /s/ January 21, 1997 Date: /s/ January 21, 1997
------------------------------------ ----------------------------
9
<PAGE> 11
INSOLVENCY CLAUSE
The ceding insurer and the reinsurer agree that, in the event of the
insolvency of the ceding insurer, as to all reinsurance made, ceded, renewed or
otherwise becoming effective after the effective date of this agreement, the
reinsurance shall be payable by the reinsurer on the basis of the amount of
liability of the ceding insurer under the contract or contracts reinsured,
without diminution because of the insolvency of the ceding insurer; furthermore,
that such amount shall be paid directly to the ceding insurer or its liquidator,
receiver or other statutory successor.
It is understood and agreed, however, that the obligations of the
ceding company as set forth in the reinsurance contract, including, among
others, the duty to investigate, settle and defend all claims arising under
policies with respect to which reinsurance is afforded by this agreement, shall
remain unimpaired and unaffected by the insolvency of the ceding insurer and
shall be assumed by the liquidator, receiver or statutory successor of the
ceding insurer in the liquidation or receivership proceeding and that such
liquidator, receiver or statutory successor shall give written notice to the
reinsurer of the pendency of a claim against the ceding insurer on the policy
reinsured within a reasonable time after such claim is filed in the insolvency
proceeding and that during the pendency of such claim the reinsurer may
investigate such claim and interpose, at its own expense, in the proceeding
where such claim is to be adjudicated, any defense or defenses which it may deem
available to the ceding insurer, its liquidator, receiver or statutory
successor. The expense thus incurred by the reinsurer shall be chargeable,
subject to court approval, against the insolvent ceding insurer as part of the
expense of liquidation to the extent of a proportionate share of the benefit
which may accrue to the ceding insurer solely as the result of the defense
undertaken or asserted by the reinsurers
Where two or more reinsurers are involved in the same claim and a
majority in interest elect to interpose a defense to such claim, the expense
shall be apportioned in accordance with the terms of this reinsurance agreement
as though such expense had been incurred by the ceding insurer.
Nothing hereinabove set forth in this insolvency clause shall in anyway
change the relationship or status of the parties hereto, to wit, that of ceding
insurer and reinsurers nor enlarge the obligations of either party to each
other, except as specifically hereinabove provided, to wit, to pay the statutory
successor on the basis of the amount of liability of the ceding insurer under
the contract or contracts reinsured, rather than on the basis of the actual
amount of loss (dividends) paid by the liquidator, receiver or statutory
successor to allowed claimants, nor shall anything in this insolvency clause in
any manner create any obligations or establish any rights against the reinsurer
in favor of any third parties or any persons not parties to this reinsurance
contract.
10
<PAGE> 1
EXHIBIT 10.22(E)
ESCROW AGREEMENT
(Ohio State/Investors Guaranty Business)
GREAT SOUTHERN LIFE INSURANCE COMPANY
a Texas corporation with executive offices in
Kansas City, Missouri
<PAGE> 2
ESCROW AGREEMENT
(Ohio State/Investors Guaranty Business)
Entered into between
COMMERCE BANK, N.A.
of
Kansas City, Missouri
(hereinafter to referred to as Bank)
and
EMPLOYERS REASSURANCE CORPORATION
of
Overland Park, Kansas
(hereinafter called the Corporation)
and
GREAT SOUTHERN LIFE INSURANCE COMPANY
a Texas corporation with executive offices in
Kansas City, Missouri
(hereinafter called the Company)
EFFECTIVE DATE: The date the stock of either The Ohio State Life
Insurance Company or Investors Guaranty Life Insurance Company is
purchased by the Company
In consideration of the mutual covenants hereinafter contained, the parties
hereto do hereby agree as follows:
SECTION 1
SUBJECT AGREEMENTS. This agreement pertains to the:
(a) Coinsurance Reinsurance Agreement between the Corporation and The Ohio
State Life Insurance Company (hereinafter called the Ohio State Treaty);
(b) and to the Coinsurance Reinsurance Agreement between the Corporation and
Investors Guaranty Life Insurance Company (hereinafter called the Investors
Guaranty Treaty);
<PAGE> 3
(c) and to the Modified Coinsurance Retrocession Agreement (Ohio State Plans)
between the Company and the Corporation (hereinafter called the Ohio State
Mod-Co Contract);
(d) and to the Modified Coinsurance Retrocession Agreement (Investors Guaranty
Plans) between the Company and the Corporation (hereinafter called the
Investors Guaranty Mod-Co Contract).
A copy of the Ohio State Treaty is attached to and made a part of this agreement
as Exhibit A.
A copy of the Investors Guaranty Treaty is attached to and made a part of this
agreement as Exhibit B.
A copy of the Ohio State Mod-Co Contract is attached to and made a part of this
agreement as Exhibit C.
A copy of the Investors Guaranty Mod-Co Contract is attached to and made a part
of this agreement as Exhibit D.
SECTION 2
DEPOSITS AND WITHDRAWALS. All deposits and withdrawals from this account shall
be made by the Corporation in accordance with Article VIII of the Ohio State
Mod-Co Contract and Article VIII of the Investors Guaranty Mod-Co Contract, but
the Bank shall have no responsibility for deciding when the deposits or
withdrawals are to be made or for determining the required amounts thereof or
for determining whether the assets are of a type which are acceptable to the
Corporation.
The Corporation has the right to withdraw not more than 30% of the statutory
profits, including interest thereon, derived from the business described in
Section 1. The Corporation is not required to apply the withdrawals permitted by
this paragraph to the business described in Section 1.
SECTION 3
REPORTS. The Bank shall furnish to the Corporation, the Company and to Americo
Life, Inc., 1055 Broadway, Kansas City, Missouri 64105 (hereinafter called
Americo) monthly reports of the assets held by the Bank with respect to this
agreement (hereinafter called assets). Each report shall show all deposits,
withdrawals, substitutions and a listing of assets as of the end of the month.
2
<PAGE> 4
SECTION 4
CHARGES. All fees charged by the Bank for the services provided with respect to
this agreement shall be deducted from the assets' earnings, provided that, if
the earnings of the assets are insufficient, the Company shall be obligated for
the fees charged by the Bank with respect to this agreement.
SECTION 5
OWNERSHIP. The assets shall remain the property of the Corporation until
released to the Company in accordance with Section 6.
SECTION 6
RELEASE OF ASSETS. On termination of this agreement, the Bank shall transfer to
the Company all of the assets held by the Bank with respect to this agreement.
SECTION 7
INVESTMENT DIRECTION. The Bank shall accept instructions from Americo regarding
investment of the assets, including sale of those assets deposited by the
Corporation and purchase of others. The Bank may, without the consent of
Americo, but with written notice to Americo, upon the call or maturity of any
asset, withdraw it, as long as the proceeds thereof are deposited back to the
Corporation's account pertaining to this agreement.
SECTION 8
INSPECTION. After giving the Bank at least three business days advance written
notice, the Corporation or the Company shall have the right to inspect the
assets during the business hours of the Bank.
SECTION 9
ASSIGNMENT. It is understood and agreed that none of the parties to this
agreement will assign or attempt to assign their interest herein or any part of
it.
3
<PAGE> 5
SECTION 10
BANK DUTIES. (a) Acceptance of Assets. The Bank shall not accept any asset for
deposit (other than cash) unless the asset is issued or registered in such form
that it is readily negotiable to the Bank - i.e., the assets shall be either
issued in "bearer" form, issued or registered in the name of the Bank or its
nominee for the benefit of the Corporation. All securities, other than cash,
deposited by the Corporation shall:
(1) be free and clear of all encumbrances; and
(2) be fully negotiable or in such form that the Bank may sell,
transfer or otherwise deposit the same without any additional
signature or agreement from the Corporation.
(b) Collection of Interest and Dividends: Voting Rights. The Bank is hereby
authorized, without prior notice to the Corporation or Americo, to
demand payment of and collect all interest or dividends on the assets
and the Bank shall deposit all of such interest or dividends collected
to the principal of the Corporation's account pertaining to this
agreement. The Bank shall have the full and unqualified right to vote
and execute consents with respect to any shares of stock comprising the
assets.
(c) Obligations. The Bank agrees to hold and disburse the various assets in
accordance with the provisions expressed herein.
(d) Responsibilities. The Bank shall be liable as a depository only with its
duties being only those specifically provided herein and which are
ministerial in nature and not discretionary. The Bank shall not be liable
for any mistake of fact or error in judgment, or for any act or failure to
act of any kind taken in good faith and believed by it to be authorized or
within the rights or powers conferred by this agreement, unless there be
shown willful misconduct or gross negligence.
The Bank shall not be responsible for the sufficiency or accuracy of the
form, execution or validity of the documents or items deposited hereunder,
nor for any description of property or other matter noted therein. It
shall not be liable for default by any party hereto because of such
party's failure to perform, and shall have no responsibility to seek
performance by any party; nor shall it be liable for the outlawing of any
rights under any statutes of limitation in respect to any documents or
items deposited.
The Bank shall not be liable for collection items until the proceeds of
the same in actual cash have been received. The Bank shall not be liable
for interest on any deposit of money. The Bank shall not be liable in any
respect on account of
4
<PAGE> 6
identity, authority or rights of persons executing or delivering, or
purporting to execute or deliver, any document or item, and may rely
absolutely and be fully protected in acting upon any item, document or
other writing believed by it to be authentic in performing its duties
hereunder. The Bank may, as a condition to the disbursement of money or
property, require from the payee or recipient a receipt therefor, and,
upon final payment or distribution, require a release from any liability
arising out of its execution or performance of this agreement.
The Bank shall be entitled to consult with and engage the services of
legal counsel of its choice with respect to any matter pertaining to this
agreement and shall be entitled to reimbursement for the reasonable costs
and expenses of such legal counsel. The Bank shall be entitled to
compensation in accordance with Exhibit C attached to and made a part of
this agreement.
In accepting any funds, securities or documents delivered hereunder, it is
agreed and understood that, in the event of disagreement between the
parties to this agreement, or persons claiming under them, or any of them,
the Bank reserves the right to hold all money, securities and property in
its possession, and all papers in connection with or concerning this
agreement, until a mutual agreement has been reached between all of said
parties, or until delivery is made to court in any interpleader action, or
until as otherwise authorized by final judgment or decree.
The Bank, in the administration of this agreement, is to be bound solely
by the express provisions herein, and such further written and signed
directions, including facsimile instructions, as Americo or the
appropriate party or parties may, under the conditions herein provided,
deliver to the Bank.
(e) Resignation or Removal. The Bank may at any time resign from, and
terminate its capacity hereunder by delivery of written notice or
resignation, effective not less than thirty (30) days after receipt by
both the Corporation and the Company. The Bank may be removed by the
Corporation by delivery to the Bank and the Company of a written notice of
removal, effective not less than thirty (30) days after receipt by the
Bank and the Company of the notice. However, no such resignation by the
Bank shall be effective until a successor to the Bank shall have been
duly appointed as provided in this agreement and all the assets have
been duly transferred to the successor. The Bank, upon receipt of such
notice, shall undertake to obtain the agreement of a qualified
successor depository, agreeable to the Company. Upon the Bank's
delivery of the assets to the qualified successor depository, along
with a closing statement showing all activities from the last
report, the Bank shall be discharged of further responsibilities
hereunder.
5
<PAGE> 7
(f) Release of Information. The Bank shall respond to any and all reasonable
requests for information concerning the assets by either of the other
parties to this agreement or from Americo.
SECTION 11
ENFORCEABILITY. This agreement has been duly executed by each of the parties
hereto and constitutes a binding and enforceable agreement of each such party.
SECTION 12
TERMINATION. Unless sooner terminated by mutual consent of the Corporation and
the Company (in which case the stipulation of termination shall specify whether
the Corporation or the Company is to receive the assets), this agreement shall
remain in force until the Corporation shall have no liability under the:
(1) Ohio State Treaty (either to Ohio State Life Insurance Company
or to the Company as assignee of Ohio State Life Insurance
Company pursuant to subparagraph (b) of Article XVIII of said
Treaty);
(2) or under the Investors Guaranty Treaty (either to Investors
Guaranty Life Insurance Company or to the Company as assignee
of Investors Guaranty Life Insurance Company pursuant to
subparagraph (b) of Article XVIII of said Treaty).
IN WITNESS WHEREOF, the parties hereto have caused this agreement to be
executed in triplicate.
EMPLOYERS REASSURANCE EMPLOYERS REASSURANCE
CORPORATION CORPORATION
By: /s/ Gary E. Jenkinss By: /s/ James D. Maughn
--------------------------------- ----------------------------------
Title: /s/Sr. Vice President Title: /s/Exec. Vice Pres. and Actuary
------------------------------- --------------------------------
Date: /s/ January 21, 1997 Date: /s/ January 21, 1997
------------------------------- --------------------------------
By: /s/Mark Fallon By: /s/Robert D. Parmley
--------------------------------- ----------------------------------
Title: /s/ Sr. Vice President Title: /s/ Asst. Gen Counsel
Date: /s/ January 21, 1997 Date: /s/ January 21, 1997
------------------------------- --------------------------------
COMMERCE BANK, N.A.
By: /s/
----------------------------------
Title:
-------------------------------
Date:
-------------------------------
<PAGE> 8
COMMERCE BANK, N.A.
Date January 21, 1997 By: /s/
-------------------------------- ----------------------------------
Title:
-------------------------------
Date:
-------------------------------
<PAGE> 1
EXHIBIT 10.22(F)
INVESTMENT MANAGEMENT AGREEMENT
(Ohio State Business)
AMERICO LIFE, INC.
Kansas City, Missouri
<PAGE> 2
INVESTMENT MANAGEMENT AGREEMENT
(Ohio State Business)
THIS AGREEMENT, dated as of the _____ date of ____________, 1997, by and between
AMERICO LIFE, INC., having its principal place of business at 1005 Broadway,
Kansas City, Missouri 64105 (herein "Americo"), and Employers Reassurance
Corporation, having its principal place of business at 5200 Metcalf, Overland
Park, Kansas 66201 (herein "Client").
In consideration of the promises set forth in this Agreement, Americo and Client
agree as follows:
1. AUTHORIZATION AS INVESTMENT ADVISOR.
Subject to the terms and conditions set forth herein, Client hereby
designates and appoints Americo as investment adviser for the cash and
securities listed on Exhibit A, attached to and made a part of this
Agreement. This appointment also applies to such other cash and
securities as shall be subsequently contained in Client's account by
reason of purchases, sales, exchanges, withdrawals, additions or
otherwise. Americo shall have full authority and discretion to supervise
the management of said cash and securities, including, without
limitation, authority and discretion to select, purchase and sell
securities and to determine timing and means of execution for such
selection, sales or purchases, as deemed by Americo to be in the best
interest of Client, all however subject to the guidelines contained in
Exhibit B, attached to and made a part of this agreement, and the
interest rate crediting process, which is also contained in Exhibit B.
2. REPORTS.
Americo shall prepare and deliver to Client periodic reports which
shall list all assets in Client's account.
3. ADVISORY FEES. Client shall pay Americo an advisory fee equal to
fifteen basis points per year on the assets described in Exhibit A.
4. TERM OF AGREEMENT.
This Agreement shall be effective as of the date of this Agreement. If
not sooner terminated by mutual consent of the parties hereto, this
agreement shall remain in force until the Great Southern Life Insurance
Company shall have no
<PAGE> 3
INVESTMENT MAGAGEMENT AGREEMENT 2
further liability under its Modified Coinsurance Retrocession
Agreement (Ohio State Business) with the Client.
5. LIMITATION ON LIABILITY.
Except for negligence or malfeasance, or violation of applicable law,
neither Americo nor any of its employees or partners (or any officers,
directors or employees of its partners) shall be liable hereunder for any
action performed or omitted to be performed or for any errors of judgment
in connection with Americo's services rendered under this Agreement. The
federal securities laws impose liabilities under certain circumstances on
persons who act in good faith and, therefore, nothing herein shall in any
way constitute a waiver or limitation of any rights which Client may have
under any federal securities laws.
6. NO ASSIGNMENT.
This Agreement and the rights and obligations hereunder shall not be
subject to assignment, as that term is defined in the Investment Advisers
Act of 1940, by Americo except with the written consent of Client.
7. SELECTION OF BROKERS.
Where Americo places orders for the execution of transactions, Americo
may select such brokers and dealers for execution on such markets and at
such process or commission rates as Americo determines in its good faith
judgment to be in the best interests of Client. Americo may take into
consideration in the selection of such brokers and dealers not only the
available prices and rates of brokerage commissions, but also other
relevant factors (such as, without limitation, execution capabilities and
the value of its ongoing relationship with such brokers and dealers)
without having to demonstrate that such factors are of a direct benefit
to Client.
8. CUSTODIANSHIP OF CASH AND SECURITIES.
Under no circumstances shall Americo act as custodian for or hold
Client's cash and securities. Americo may issue instructions to the
custodian as may be appropriate in connection with the transactions
initiated by Americo hereunder. Client may authorize the custodian to pay
Americo the fees billed pursuant to the Agreement upon presentment of
such bills or statements to said custodian.
<PAGE> 4
INVESTMENT MAGAGEMENT AGREEMENT 3
9. NON-REGISTRATION AS INVESTMENT ADVISOR.
The Client acknowledges that Americo is not registered as an investment
adviser under the Investment Advisers Act of 1940.
10. AUTHORIZATION.
Client represents that (a) the execution of and performance
contemplated under this Agreement do not and will not violate or
abridge any obligation or duty of Client, (b) this Agreement has been
authorized by appropriate action and when executed and delivered will
be binding upon the Client in accordance with its terms, and (c) Client
will deliver to Americo such evidence of such authority as Americo may
reasonably require, either by way of a certified resolution or
otherwise.
11. Notification Regarding Change in Personnel.
Americo shall notify Client of any change subsequent to the date of
this Agreement in personnel responsible for the Client's assets. Such
notification shall be made in writing within 20 business days after
such change.
12. Counterparts.
This Agreement may be executed in two or more counterparts each of
which shall be deemed an original.
13. Enforceability.
This Agreement has been duly executed by each of the parties hereto and
constitutes a binding and enforceable agreement of each such party.
<PAGE> 5
INVESTMENT MAGAGEMENT AGREEMENT 4
IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year
above written.
AMERICO: AMERICO LIFE, INC.
By: /s/ Mark Fallon
-------------------------------
CLIENT: EMPLOYERS REASSURANCE
CORPORATION
By: /s/ James D. Maughn
-------------------------------
EXHIBIT A
Cash and Securities
The assets pertaining to the Automatic Coinsurance Reinsurance Agreement
between the Client and The Ohio State Life Insurance Company.
The assets pertaining to the Modified Coinsurance Retrocession Agreement (Ohio
State Business) between Great Southern Life Insurance Company and the Client.
<PAGE> 6
EXHIBIT B
AMERICO LIFE, INC.
INVESTMENT OBJECTIVES, STRATEGIES & GUIDELINES
INVESTMENT OBJECTIVES
The primary objectives are:
1) Preservation of principal (capital).
2) Maximize the potential value of the portfolio with a focus on
maintaining and increasing future investment income streams.
INVESTMENT CONSTRAINTS
The overall stategies for managing this block of assets includes:
1) Conservative and stable investment philosophy with primary emphasis on
balancing credit and interest rate risk.
2) Focus an well-structured securities (non-callable corporates, CMO's
with stable average lives, current or discount coupon pass-throughs) to
reduce reinvestment risk and improve price performance. Investment in
high risk or volatile derivative securities (e.g. inverse floaters) are
not considered part of the overall investment strategy.
3) Investments are made with the intent of being held long term. The
portfolio will not be actively/aggressively managed based on
anticipated interest rate and/or spread changes. Any restructuring of
the portfolio will be performed in conjunction with the overall
asset/liability management process.
4) The portfolio will be structured with the goal of matching the assets
with the expected liability cash flows. The structure of the assets
will be regularly monitored considering interest rate and expected
prepayment rate changes. Asset/liability studies are completed at least
annually, or more frequently if warranted. The results of these studies
play an integral role in the durational aspects of securities
purchased.
5) Maintain a high quality/liquid investment portfolio to satisfy both
existing and prospective cash flow needs.
<PAGE> 7
INVESTMENT GUIDELINES AND LIMITATIONS
The following guidelines will be utilized in developing and managing the
portfolio:
1) Maturity Structure: Target
Expected Percentage
Maturity/Average Life Range Allocation
Short-term less than 1 year 2-7 % 5%
3-6 years (5 yrs. avg.) 20-35 30
7-12 years (10 yrs. avg.) 10-25 15
13-22 years (17 yrs. avg.) 30-50 40
23-30 years (28 yrs. avg.) 5-15 % 10
--
100%
2) Sector Allocation: Target
Expected Percentage
Sector Range Allocation
U.S. Governments 0-5% - %
Corporate Bonds 45-75 55
Asset-Backed Securities (ABS):
- Non-call structure 5-25 15
- Prepayment risk 0-10 5
-
Total ABS 20
Mortgage-Backed Securities (MBS):
- Pass-throughs 10-20 10
- CMO's 10-25 15
--
Total MBS 25
Total 100%
3) Ratings Guidelines:
a) Corporate Bonds:
Expected Expected
Expected Percentage Percentage
Rating Category Range of Corporates of Portfolio
AAA 0-5% -% - %
<PAGE> 8
AA 5-20 10 5.5
A 50-75 70 38.5
BBB 15-25 20 11.0
-- ----
100 % 55.0 %
=== ====
For any corporate bonds rated both Baa-3/BBB- by Moody's and Standard & Poor's
respectively, Employer's Re will be notified prior to their purchase. Subsequent
to the transaction, written approval will be obtained from Employer's Re for all
Baa-3/BBB- bonds acquired.
b) Mortgage-Backed Securities:
MBS holdings will generally involve government agency or
government sponsored agency (FNMA and FHLMC) collateral. No more
than 15% of MBS investments will be backed by non-agency
collateral. Any non-agency MBS securities must be rated AA or AAA
by one of the major rating agencies.
c) Below Investment Grade Securities (BIG):
BIG bonds are not considered part of the overall investment
strategy. However, any bond purchased as an investment grade
security which is subsequently downgraded to a BIG rating will be
reevaluated at that time. If the risk of default is considered
low, the bond may be retained. Any BIG bonds retained will be
regularly monitored and reevaluated. The total amount of BIG bonds
to be retained cannot exceed 5% of total investments.
d) Asset-Backed Securities:
ABS investments should generally be rated AA or AAA by one of the
major rating agencies. No more than 15% of ABS holdings can be
rated below AA. All ABS's must have an investment grade rating.
4) Holding limitations:
Industry Concentration - corporate bond holdings are limited to no more
than 15% in any one industry.
Company Concentration - the maximum amount to be invested in any one
company or organization is as follows:
<PAGE> 9
Maximum Amount
Invested
Rating Category (In Million)
AAA $12
AA 12
A 10
BBB 6
Individual MBS concentration - the maximum amount to be invested in any
one agency collateral security is $20 million. For a non-agency
collateral security, the maximum amount is $5 million.
5. Any security which is outside the scope of these guidelines can be
invested in, if mutually agreed upon by both organizations.
<PAGE> 10
EXHIBIT B (Continued)
Interest Rate Crediting Process
1. Objective. The objective of this process is to assure that credited
rates are established so as to meet required spread targets.
2. Expected Gross Interest Rate. The expected gross interest rate for a
block of business is determined by blending current yields on the
investment portfolio of assets underlying the block of business
together with expected new money for minimal new and reinvestment cash
flow. The blending will be based on cash flow for the period under
review and will take into consideration funds due for reinvestment and
interest income.
Current yields should include the effect of realized statutory capital
gains and losses. New money assumptions shall consider these investment
guidelines in respect of quality, duration and type of assets.
An example is shown in the following Table 1:
Table 1
Expected Gross Interest Rate
Volume Rate
Investment Portfolio 800 8.5%
Reinvestment Portfolio 100 8.0%
New Money 100 8.0%
Average 1,000 8.4%
3. Expected Net Interest Rate. The expected net interest rate for a block
of business is determined by subtracting from the gross rate charges
for investment expenses and risks.
Charges for investment expenses cover the cost of investment expenses
(including transaction costs) per the Services Agreement described in
Numbered Paragraph 3 of this agreement.
Charges for risk should take into consideration the default and option
risks (as agreed upon) relating to the portfolio assets underlying the
block of business.
An example is shown in the following Table 2:
<PAGE> 11
Table 2
Expected Net Interest Rate
Expected Gross Rate 8.4%
Less: Investment Expenses 0.25%
And less: Investment Risks 0.2%
Expected Net Rate 7.95%
4. Target Credited Rate. To determine the target credited rate, the
required spread must be subtracted from the expected net investment
rate. The required spread varies by plan and by duration within plan.
The target credited rate may be modified for marketing reasons provided
that adjustments are offsetting in the aggregate. Antiselection in
favor of artificially high rates will be considered in this process.
An example is shown in the following Table 3:
Table 3
Target Credited Rate
Life Annuity
Expected Net Rate 7.95% 7.95%
Less: Required Spread 1.5% 1.75%
Calculated Credited Rate 6.45% 6.20%
Marketing Adjustments 0.4% -0.10%
(Assuming 80% annuities)
Target Credited Rate 6.85% 6.10%
5. Working Range. If currently credited interest rates are outside of the
defined working range of plus or minus 25 basis points of target rates,
then no action is required (but action may be taken) until the
cumulative shortfall exceeds $750,000.
6. Actions. If currently credited interest rates are outside the defined
working range of target rates, then action is required. Three courses
of action are possible:
a. Adjust credited rates;
b. Adjust reinsurance and retrocession allowances;
<PAGE> 12
c. Do nothing, which is not acceptable after cumulative shortfall
exceeds $750,000.
Considerations in this decision are:
1. The objective stated above;
2. Competition and marketing issues;
3. Previous deficiencies and sufficiencies in credited rates
(relative to target rates);
4. Expected trends in future credited rates;
5. The magnitude of the contemplated adjustments.
<PAGE> 1
EXHIBIT 10.22(G)
INVESTMENT MANAGEMENT AGREEMENT
(Investors Guaranty Business)
AMERICO LIFE, INC.
Kansas City, Missouri
<PAGE> 2
INVESTMENT MANAGEMENT AGREEMENT
(Investors Guaranty Business)
THIS AGREEMENT, dated as of the ___ day of __________, 1997, by and
between AMERICO LIFE, INC., having its principal place of business at 1005
Broadway, Kansas City, Missouri 64105 (herein "Americo"), and Employers
Reassurance Corporation, having its principal place of business at 5200 Metcalf,
Overland Park,
Kansas 66201 (herein "Client").
In consideration of the promises set forth in this Agreement, Americo
and Client agree as follows:
1. Authorization As Investment Advisor.
Subject to the terms and conditions set forth herein, Client hereby
designates and appoints Americo as investment adviser for the cash and
securities listed on Exhibit A, attached to and made a part of this Agreement.
This appointment also applies to such other cash and securities as shall be
subsequently contained in Client's account by reason of purchases, sales,
exchanges, withdrawals, additions or otherwise. Americo shall have full
authority and discretion to supervise the management of said cash and
securities, including, without limitation, authority and discretion to select,
purchase and sell securities and to determine timing and means of execution for
such selection, sales or purchases, as deemed by Americo to be in the best
interest of Client, all however subject to the guidelines contained in Exhibit
B, attached to and made a part of this agreement, and the interest rate
crediting process, which is also contained in Exhibit B.
2. Reports.
Americo shall prepare and deliver to Client periodic reports which
shall list all assets in Client's account.
3. Advisory Fees.
Client shall pay Americo an advisory fee equal to fifteen basis points
per year on the assets described in Exhibit A.
4. Term of Agreement.
This Agreement shall be effective as of the date of this Agreement. If
not sooner terminated by mutual consent of the parties hereto, this agreement
shall remain in force until the Great Southern Life Insurance Company shall have
no further liability
<PAGE> 3
INVESTMENT MANAGEMENT AGREEMENT PAGE 2
under its Modified Coinsurance Retrocession Agreement (Investors Guaranty
Business) with the Client.
5. LIMITATION ON LIABILITY.
Except for negligence or malfeasance, or violation of applicable law,
neither Americo nor any of its employees or partners (or any officers, directors
or employees of its partners) shall be liable hereunder for any action performed
or omitted to be performed or for any errors of judgment in connection with
Americo's services rendered under this Agreement. The federal securities laws
impose liabilities under certain circumstances on persons who act in good faith
and, therefore, nothing herein shall in any way constitute a waiver or
limitation of any rights which Client may have under any federal securities
laws.
6. NO ASSIGNMENT.
This Agreement and the rights and obligations hereunder shall not be
subject to assignment, as that term is defined in the Investment Advisers Act of
1940, by Americo except with the written consent of Client.
7. SELECTION OF BROKERS.
Where Americo places orders for the execution of transactions, Americo
may select such brokers and dealers for execution on such markets and at such
process or commission rates as Americo determines in its good faith judgment to
be in the best interests of Client. Americo may take into consideration in the
selection of such brokers and dealers not only the available prices and rates of
brokerage commissions, but also other relevant factors (such as, without
limitation, execution capabilities and the value of its ongoing relationship
with such brokers and dealers) without having to demonstrate that such factors
are of a direct benefit to Client.
8. CUSTODIANSHIP OF CASH AND SECURITIES.
Under no circumstances shall Americo act as custodian for or hold
Client's cash and securities. Americo may issue instructions to the custodian as
may be appropriate in connection with the transactions initiated by Americo
hereunder. Client may authorize the custodian to pay Americo the fees billed
pursuant to the Agreement upon presentment of such bills or statements to said
custodian.
9. NON-REGISTRATION AS INVESTMENT ADVISOR.
<PAGE> 4
INVESTMENT MANAGEMENT AGREEMENT PAGE 3
The Client acknowledges that Americo is not registered as an investment
adviser under the Investment Advisers Act of 1940.
10. AUTHORIZATION.
Client represents that (a) the execution of and performance
contemplated under this Agreement do not and will not violate or abridge any
obligation or duty of Client, (b) this Agreement has been authorized by
appropriate action and when executed and delivered will be binding upon the
Client in accordance with its terms, and (c) Client will deliver to Americo such
evidence of such authority as Americo may reasonably require, either by way of a
certified resolution or otherwise.
11. NOTIFICATION REGARDING CHANGE IN PERSONNEL.
Americo shall notify Client of any change subsequent to the date of
this Agreement in personnel responsible for the Client's assets. Such
notification shall be made in writing within 20 business days after such change.
12. COUNTERPARTS.
This Agreement may be executed in two or more counterparts each of
which shall be deemed an original.
13. ENFORCEABILITY.
This Agreement has been duly executed by each of the parties hereto and
constitutes a binding and enforceable agreement of each such party.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year
above written.
AMERICO: AMERICO LIFE, INC.
By: /s/ Mark Fallon
---------------------------
CLIENT: EMPLOYERS REASSURANCE
CORPORATION
By: /s/
----------------------------
<PAGE> 5
EXHIBIT B
AMERICO LIFE, INC.
INVESTMENT OBJECTIVES, STRATEGIES & GUIDELINES
INVESTMENT OBJECTIVES
The primary objectives are:
1) Preservation of principal (capital).
2) Maximize the potential value of the portfolio with a focus on
maintaining and increasing future investment income streams.
INVESTMENT CONSTRAINTS
The overall stategies for managing this block of assets includes:
1) Conservative and stable investment philosophy with primary emphasis on
balancing credit and interest rate risk.
2) Focus an well-structured securities (non-callable corporates, CMO's
with stable average lives, current or discount coupon pass-throughs) to
reduce reinvestment risk and improve price performance. Investment in
high risk or volatile derivative securities (e.g. inverse floaters) are
not considered part of the overall investment strategy.
3) Investments are made with the intent of being held long term. The
portfolio will not be actively/aggressively managed based on
anticipated interest rate and/or spread changes. Any restructuring of
the portfolio will be performed in conjunction with the overall
asset/liability management process.
4) The portfolio will be structured with the goal of matching the assets
with the expected liability cash flows. The structure of the assets
will be regularly monitored considering interest rate and expected
prepayment rate changes. Asset/liability studies are completed at least
annually, or more frequently if warranted. The results of these studies
play an integral role in the durational aspects of securities
purchased.
5) Maintain a high quality/liquid investment portfolio to satisfy both
existing and prospective cash flow needs.
10
<PAGE> 6
EXHIBIT A
Cash and Securities
The assets pertaining to the Automatic Coinsurance Reinsurance Agreement between
the Client and Investors Guaranty Life Insurance Company.
The assets pertaining to the Modified Coinsurance Retrocession Agreement
(Investors Guaranty Business) between Great Southern Life Insurance Company and
the Client.
<PAGE> 7
EXHIBIT B
AMERICO LIFE, INC.
INVESTMENT OBJECTIVES, STRATEGIES & GUIDELINES
INVESTMENT OBJECTIVES
The primary objectives are:
1) Preservation of principal (capital).
2) Maximize the potential value of the portfolio with a focus on
maintaining and increasing future investment income streams.
INVESTMENT CONSTRAINTS
The overall stategies for managing this block of assets includes:
1) Conservative and stable investment philosophy with primary emphasis on
balancing credit and interest rate risk.
2) Focus an well-structured securities (non-callable corporates, CMO's
with stable average lives, current or discount coupon pass-throughs) to
reduce reinvestment risk and improve price performance. Investment in
high risk or volatile derivative securities (e.g. inverse floaters) are
not considered part of the overall investment strategy.
3) Investments are made with the intent of being held long term. The
portfolio will not be actively/aggressively managed based on
anticipated interest rate and/or spread changes. Any restructuring of
the portfolio will be performed in conjunction with the overall
asset/liability management process.
4) The portfolio will be structured with the goal of matching the assets
with the expected liability cash flows. The structure of the assets
will be regularly monitored considering interest rate and expected
prepayment rate changes. Asset/liability studies are completed at least
annually, or more frequently if warranted. The results of these studies
play an integral role in the durational aspects of securities
purchased.
5) Maintain a high quality/liquid investment portfolio to satisfy both
existing and prospective cash flow needs.
10
<PAGE> 8
INVESTMENT GUIDELINES AND LIMITATIONS
The following guidelines will be utilized in developing and managing the
portfolio:
1) Maturity Structure: Target
Expected Percentage
Maturity/Average Life Range Allocation
Short-term less than 1 year 2-7% 5%
3-6 years (5 yrs. avg.) 20-35 30
7-12 years (10 yrs. avg.) 10-25 15
13-22 years (17 yrs. avg.) 30-50 40
23-30 years (28 yrs. avg.) 5-15% 10
--
100%
2) Sector Allocation: Target
Expected Percentage
Sector Range Allocation
U.S. Governments 0-5% -%
Corporate Bonds 45-75 55
Asset-Backed Securities (ABS):
- Non-call structure 5-25 15
- Prepayment risk 0-10 5
-
Total ABS 20
Mortgage-Backed Securities (MBS):
- Pass-throughs 10-20 10
- CMO's 10-25 15
--
Total MBS 25
Total 100%
3) Ratings Guidelines:
a) Corporate Bonds:
Expected Expected
Expected Percentage Percentage
Rating Category Range of Corporates of Portfolio
AAA 0-5% -% -%
AA 5-20 10 5.5
A 50-75 70 38.5
BBB 15-25 20 11.0
-- ----
100% 55.0%
=== ====
<PAGE> 9
For any corporate bonds rated both Baa-3/BBB- by Moody's and Standard & Poor's
respectively, Employer's Re will be notified prior to their purchase. Subsequent
to the transaction, written approval will be obtained from Employer's Re for all
Baa-3/BBB- bonds acquired.
b) Mortgage-Backed Securities:
MBS holdings will generally involve government agency or
government sponsored agency (FNMA and FHLMC) collateral. No more
than 15% of MBS investments will be backed by non-agency
collateral. Any non-agency MBS securities must be rated AA or AAA
by one of the major rating agencies.
c) Below Investment Grade Securities (BIG):
BIG bonds are not considered part of the overall investment
strategy. However, any bond purchased as an investment grade
security which is subsequently downgraded to a BIG rating will be
reevaluated at that time. If the risk of default is considered
low, the bond may be retained. Any BIG bonds retained will be
regularly monitored and reevaluated. The total amount of BIG bonds
to be retained cannot exceed 5% of total investments.
d) Asset-Backed Securities:
ABS investments should generally be rated AA or AAA by one of the
major rating agencies. No more than 15% of ABS holdings can be
rated below AA. All ABS's must have an investment grade rating.
4) Holding limitations:
Industry Concentration - corporate bond holdings are limited to no more
than 15% in any one industry.
Company Concentration - the maximum amount to be invested in any one
company or organization is as follows:
Maximum Amount
Invested
Rating Category (In Million)
AAA $12
AA 12
A 10
BBB 6
<PAGE> 10
Individual MBS concentration - the maximum amount to be invested in any
one agency collateral security is $20 million. For a non-agency
collateral security, the maximum amount is $5 million.
5. Any security which is outside the scope of these guidelines can be
invested in, if mutually agreed upon by both organizations.
<PAGE> 11
EXHIBIT B (Continued)
Interest Rate Crediting Process
1. Objective. The objective of this process is to assure that credited
rates are established so as to meet required spread targets.
2. Expected Gross Interest Rate. The expected gross interest rate for a
block of business is determined by blending current yields on the
investment portfolio of assets underlying the block of business
together with expected new money for minimal new and reinvestment cash
flow. The blending will be based on cash flow for the period under
review and will take into consideration funds due for reinvestment and
interest income.
Current yields should include the effect of realized statutory capital
gains and losses. New money assumptions shall consider these investment
guidelines in respect of quality, duration and type of assets.
An example is shown in the following Table 1:
Table 1
Expected Gross Interest Rate
Volume Rate
Investment Portfolio 800 8.5%
Reinvestment Portfolio 100 8.0%
New Money 100 8.0%
Average 1,000 8.4%
3. Expected Net Interest Rate. The expected net interest rate for a block
of business is determined by subtracting from the gross rate charges
for investment expenses and risks.
Charges for investment expenses cover the cost of investment expenses
(including transaction costs) per the Services Agreement described in
Numbered Paragraph 3 of this agreement.
Charges for risk should take into consideration the default and option
risks (as agreed upon) relating to the portfolio assets underlying the
block of business.
An example is shown in the following Table 2:
<PAGE> 12
Table 2
Expected Net Interest Rate
Expected Gross Rate 8.4%
Less: Investment Expenses 0.25%
And less: Investment Risks 0.2%
Expected Net Rate 7.95%
4. Target Credited Rate. To determine the target credited rate, the
required spread must be subtracted from the expected net investment
rate. The required spread varies by plan and by duration within plan.
The target credited rate may be modified for marketing reasons provided
that adjustments are offsetting in the aggregate. Antiselection in
favor of artificially high rates will be considered in this process.
An example is shown in the following Table 3:
Table 3
Target Credited Rate
Life Annuity
Expected Net Rate 7.95% 7.95%
Less: Required Spread 1.5% 1.75%
Calculated Credited Rate 6.45% 6.20%
Marketing Adjustments 0.4% -0.10%
(Assuming 80% annuities)
Target Credited Rate 6.85% 6.10%
5. Working Range. If currently credited interest rates are outside of the
defined working range of plus or minus 25 basis points of target rates,
then no action is required (but action may be taken) until the
cumulative shortfall exceeds $750,000.
6. Actions. If currently credited interest rates are outside the defined
working range of target rates, then action is required. Three courses
of action are possible:
a. Adjust credited rates;
b. Adjust reinsurance and retrocession allowances;
<PAGE> 13
c. Do nothing, which is not acceptable after cumulative shortfall
exceeds $750,000.
Considerations in this decision are:
1. The objective stated above;
2. Competition and marketing issues;
3. Previous deficiencies and sufficiencies in credited rates
(relative to target rates);
4. Expected trends in future credited rates;
5. The magnitude of the contemplated adjustments.
<PAGE> 1
EXHIBIT 4.2(c)
[Execution Copy]
AMENDED AND RESTATED CREDIT AGREEMENT
Amended and Restated Credit Agreement dated as of July 6,
1995, amended and restated as of December 27, 1996, between AMERICO LIFE, INC.,
a corporation duly organized and validly existing under the laws of the State
of Missouri (together with its successors and assigns, the "Company"); each of
the banks that is a signatory hereto (together with its successors and assigns,
individually, a "Bank" and, collectively, the "Banks"); and THE CHASE MANHATTAN
BANK, as administrative agent for the Banks (in such capacity, together with
its successors in such capacity, the "Administrative Agent").
W I T N E S S E T H:
WHEREAS, the Company, the Banks and the Administrative Agent
are party to a Credit Agreement dated as of July 6, 1995 (as heretofore
amended, the "Existing Credit Agreement"); and
WHEREAS, the parties hereto desire to amend and restate the
Existing Credit Agreement to, among other things, extend the Revolving Credit
Commitment Termination Date (as defined in the Existing Credit Agreement), the
Final Maturity Date (as defined in the Existing Credit Agreement) and amend
certain covenants;
NOW, THEREFORE, the parties hereto agree to amend the Existing
Credit Agreement as set forth herein and to restate the Existing Credit
Agreement to read in its entirety as set forth in the Existing Credit
Agreement, which is incorporated herein by reference, with the amendments
specified in Section 2 below:
Section 1. Definitions. Capitalized terms used but not
otherwise defined herein have the meanings given them in the Existing Credit
Agreement.
Section 2. Amendments. Subject to Section 4 hereof, the
Existing Credit Agreement is hereby amended as follows:
A. General. References in the Existing Credit Agreement to
the Credit Agreement (including indirect references) shall be deemed to be
references to the Existing Credit Agreement as amended and restated hereby. In
addition, (i) each reference in the Existing Credit Agreement to "The Chase
Manhattan Bank (National Association)" is amended to read "The Chase Manhattan
Bank", (ii) each reference in the Existing Credit Agreement to "Chase
Securities, Inc." is amended to read "Chase Securities Inc.", (iii) each
reference in the Existing Credit Agreement to "at account number
NYAO-DI-900-9-000002 maintained by the Administrative Agent with Chase at the
Principal Office" is amended to read "at an account designated by the
Administrative Agent" and (iv) the reference in the definition of "Adjusted
Fixed Charges" and the definition of "Cash Flow Dividend Amount"
Amended and Restated Credit Agreement
<PAGE> 2
-2-
in Section 1.01 of the Existing Credit Agreement to the "Company" shall mean
the Company and Americo Services, Inc. as though they are a single entity.
B. Definitions. The following definitions in Section 1.01 of
the Existing Credit Agreement are amended to read in their entirety as follows:
"Affiliate Advances" shall have the meaning assigned to such
term in Section 8.09 hereof.
"Amendment Effective Date" shall mean the date upon which the
conditions specified in Section 4 of the Amended and Restated Credit
Agreement shall have been satisfied.
"Disposition Proceeds" shall mean, with respect to any
Disposition (the "Current Disposition"), (i) if the sum of the after-
tax net gain realized from all Dispositions occurring on or after the
date of the Amendment Effective Date (including the Current
Disposition) is not more than 10% of Net Worth as at the last day of
the fiscal quarter preceding the date of the Current Disposition, the
lesser of (a) the Proceeds thereof and (b) the after-tax net gain (if
any) realized from the Current Disposition and (ii) in all other
cases, the Proceeds thereof.
"Final Maturity Date" shall mean the Quarterly Date falling on
or nearest to the date six years after the Amendment Effective Date.
"Person" shall mean any individual, corporation, company,
voluntary association, partnership, limited partnership, joint
venture, trust, unincorporated organization, limited liability
company, other business entity or government (or any agency,
instrumentality or political subdivision thereof).
"Principal Office" shall mean the principal office of Chase,
located on the date hereof at 270 Park Avenue, New York, New York
10017.
"Principal Payment Dates" shall mean six alternate (every
other) Quarterly Dates commencing with the Quarterly Date falling on
or nearest to the date six months after the Revolving Credit
Commitment Termination Date and ending with the Final Maturity Date.
"Revolving Credit Commitment Termination Date" shall mean the
Quarterly Date falling on or nearest to the date three years after the
Amendment Effective Date.
C. Repayment of Loans The reference in Section 3.01 of the
Existing Credit Agreement to "eight" is hereby amended to read "six".
Amended and Restated Credit Agreement
<PAGE> 3
- 3 -
D. Mandatory Commitment Reductions and Prepayments. Section
3.03(b)(i) of the Existing Credit Agreement is hereby amended to read in its
entirety as follows:
"(i) Dispositions. Without limiting the obligations of the
Company to obtain the consent of the Majority Banks for any
Disposition not otherwise permitted under this Agreement, as
promptly as practicable after the end of each fiscal year
but in no event later than March 15 of the subsequent fiscal
year, the amount of the Commitments shall be reduced by,
and/or the Company shall prepay the Loans in, an amount
equal to the aggregate amount of any Disposition Proceeds
(other than Disposition Proceeds arising from (w)
Dispositions by GSSW Limited Partnership, (x) Dispositions
of ownership interests in GSSW Limited Partnership, (y)
Dispositions of capital stock of Loyalty Life Insurance
Company and (z) Dispositions of partnership interests (or of
their underlying properties) previously held by GSSW Limited
Partnership and transferred to the Company in connection
with the redemption of its ownership interests in GSSW
Limited Partnership) received by the Company or any of its
Subsidiaries during such fiscal year (rounded upward to the
nearest $1000)."
E. Prohibition of Fundamental Changes. Section 8.05 of the
Existing Credit Agreement is amended by deleting "and" at the end of clause (d)
thereof, substituting "; and" for the period at the end of clause (e) thereof
and inserting new clause (f) immediately after clause (e) thereof, to read as
follows:
"(f) the Company and its Subsidiaries may Dispose of (x)
ownership interests in GSSW Limited Partnership, (y) capital stock of
Loyalty Life Insurance Company and (z) capital stock of VLIC."
F. Investments. Section 8.08 of the Existing Credit
Agreement is amended as follows:
(1) clause (c) thereof is amended to read in its entirety as
follows:
"(c) Investments in Below Investment Grade Debt Instruments,
in shares of common and preferred stock, in limited partnership
interests in limited partnerships and limited liability partnerships
and in membership interests in limited liability companies (excluding
Investments permitted by Section 8.08(e)), so long as the aggregate
fair market value of all such Investments in Below Investment Grade
Debt Instruments, together with the aggregate book value of all such
Investments in shares of common and preferred stock, partnership
interests in limited partnerships and limited liability partnerships
and in membership interests in limited liability companies and the
aggregate fair market value of all interests in real property held by
the Company or any of its Subsidiaries, does not exceed 110% of Net
Worth as at the last day of the fiscal quarter of the Company most
recently ended;"
(2) clause (e) thereof is amended to read in its entirety as
follows:
Amended and Restated Credit Agreement
<PAGE> 4
- 4 -
"(e) Investments in Subsidiaries of the Company, in Argus
Health Systems, Inc., in College Insurance Group, Inc., in Hereford
LLP (which owns the Hereford Building, Kansas City, Missouri) and in
Investments held by Argus Health Systems, Inc. on December 23, 1996
and dividended by Argus Health Systems, Inc. to the Company or any of
its Subsidiaries; or Investments by any of the Insurance Companies
(other than United Fidelity) in limited partnership interests issued,
and in limited partnership interests and membership interests in
limited liability companies that have been distributed, by GSSW
Limited Partnership in an aggregate amount not to exceed $35,000,000;
(3) by deleting "and" at the end of clause (i) thereof,
inserting "and" at the end of clause (j) thereof and inserting clause
(k) immediately after clause (j), to read as follows:
"(k) additional Investments (other than Investments in
Volatile Derivative Instruments) up to but not exceeding $25,000,000
in the aggregate; provided that, Investments in any one Person and its
Subsidiaries and Affiliates shall not exceed $2,500,000 in the
aggregate;"
G. Dividend Payments. Section 8.09 of the Existing Credit
Agreement is amended by inserting the following sentence immediately following
the first two sentences of Section 8.09 thereof:
"Notwithstanding the forgoing, the Company may make loans and/or
advances to FHC and its Subsidiaries (" Affiliate Advances"); provided that the
aggregate amount of Dividend Payments made in any fiscal year pursuant to the
first two sentences of this Section 8.09, plus the aggregate amount of
Affiliate Advances made during such fiscal year, minus the aggregate amount of
Affiliate Advances repaid during such fiscal year, may not exceed an aggregate
amount equal to the Dividend Payments that may be made in such fiscal year
pursuant to the first two sentences of this Section 8.09."
H. Transactions with Affiliates Section 8.18 of the Existing
Credit Agreement is amended by deleting "or" at the end of clause (c) thereof,
inserting "or" at the end of subsection (d) thereof and inserting new clause
(e) to read as follows:
"(e) make Affiliate Advances except to the extent permitted
under Section 8.09 hereof;"
I. Certain Obligations Respecting Subsidiaries. Section 8.19
of the Existing Credit Agreement is amended by adding the following at the end
thereof:
"Notwithstanding the foregoing provisions of this Section 8.19, the
Company and its Subsidiaries may Dispose of (x) ownership interests in
GSSW Limited Partnership, (y) capital stock of Loyalty Life Insurance
Company and (z) capital stock of VLIC."
Amended and Restated Credit Agreement
<PAGE> 5
- 5 -
J. Modifications of Certain Documents. Section 8.20 of the
Existing Credit Agreement is amended by adding the following at the end
thereof:
"Notwithstanding the foregoing provisions of this Section 8.20 the
Company and its Subsidiaries may prepay any of the Surplus Relief
Reinsurance Contracts listed in Schedule 6 in an aggregate amount per
fiscal year up to but not exceeding the lesser of (i) $5,000,000 and
(ii) the Cash Flow Dividend Amount for such fiscal year, it being
understood that any such prepayment will not affect the amount of
Dividend Payments that may be made under Section 8.09 hereof."
K. Amendment to Exhibit E, Schedule 3 and Schedule 7.
Exhibit E, Schedule 3 and Schedule 7 to the Existing Credit Agreement are
hereby deleted in their entirety and replaced by Exhibit A, Exhibit B and
Exhibit C, respectively, attached hereto.
L. Amendment to Exhibit F. Exhibit F to the Existing Credit
Agreement is hereby amended by substituting "Amended and Restated Credit
Agreement dated as of July 6, 1995, amended and restated as of December 27,
1996" for "Credit Agreement dated as of July 6, 1995".
Section 3. Representations and Warranties. The Company
hereby represents and warrants to the Banks and the Administrative Agent that
the representations and warranties set forth in Section 7 of the Existing
Credit Agreement are, on the date hereof, and will be, on the date the
amendments contemplated by Section 2 hereof become effective, true and complete
as if made on and as of each such date and as if each reference in such
representations and warranties to the Credit Agreement included reference to
such agreement as amended by this Amended and Restated Credit Agreement.
Section 4. Conditions Precedent. The amendment and
restatement of the Existing Credit Agreement contemplated hereby is subject to
the conditions precedent that counterparts of this Amended and Restated Credit
Agreement, shall have been duly executed and delivered by the Company, each of
the Banks and the Administrative Agent and FHC shall have executed and
delivered its consent hereto as provided on the signature pages hereof.
Section 5. Confirmation of Security. The Company hereby
agrees references in the Security Agreement to the Credit Agreement (including
indirect references) shall be deemed to be references to the Amended and
Restated Credit Agreement.
Section 6. Notices. The Applicable Lending Office and
initial address for notices under this Amended and Restated Credit Agreement
for each Bank is specified in the administrative questionnaire heretofore
returned by such Lender to the Administrative Agent.
Section 7. Miscellaneous. Except as herein provided, the
Existing Credit Agreement shall remain unchanged and in full force and effect.
This Amended
Amended and Restated Credit Agreement
<PAGE> 6
- 6 -
and Restated Credit Agreement may be executed in any number of counterparts,
all of which taken together shall constitute one and the same amendatory
instrument and any of the parties hereto may execute this Amended and Restated
Credit Agreement by signing any such counterpart and sending the same by
telecopier, mail messenger or courier to the Administrative Agent or counsel to
the Administrative Agent. This Amended and Restated Credit Agreement shall be
governed by, and construed in accordance with, the law of the State of New
York.
Amended and Restated Credit Agreement
<PAGE> 7
- 7 -
IN WITNESS WHEREOF, the parties hereto have caused this
Amended and Restated Credit Agreement to be duly executed as of the day and
year first above written.
AMERICO LIFE, INC.
By______________________________
Title:
Amended and Restated Credit Agreement
<PAGE> 8
- 8 -
THE BANKS
THE BANK OF NEW YORK
By_________________________________
Title:
BANK ONE, TEXAS, N.A.
By_________________________________
Title:
THE CHASE MANHATTAN BANK
By_________________________________
Title:
COMMERCE BANK, N.A.
By_________________________________
Title:
FIRST BANK NATIONAL ASSOCIATION
By_________________________________
Title:
FIRST UNION NATIONAL BANK
OF NORTH CAROLINA
By_________________________________
Title:
Amended and Restated Credit Agreement
<PAGE> 9
- 9 -
FLEET NATIONAL BANK
By_________________________________
Title:
Amended and Restated Credit Agreement
<PAGE> 10
- 10 -
THE ADMINISTRATIVE AGENT
THE CHASE MANHATTAN BANK,
as Administrative Agent
By_________________________________
Title:
Amended and Restated Credit Agreement
<PAGE> 11
- 11 -
CONSENT
By its signature below, FHC agrees references in the Negative
Pledge Agreement to the Credit Agreement (including indirect references) shall
be deemed to be references to the Amended and Restated Credit Agreement.
FINANCIAL HOLDING CORPORATION
By_________________________________
Title:
Amended and Restated Credit Agreement
<PAGE> 12
EXHIBIT A
[Form of Compliance Certificate]
COMPLIANCE CERTIFICATE
[Date]
Re: Amended and Restated Credit Agreement dated as of July 6,
1995, amended and restated as of December 27, 1996 (the
"Credit Agreement"), between AMERICO Life, Inc. (the
"Company"), the lenders named therein, and The Chase Manhattan
Bank, as Administrative Agent
This Certificate is delivered pursuant to Section 8.01 of the
Credit Agreement. Terms used but not defined herein have the respective
meanings given to such terms in the Credit Agreement. This Certificate is
delivered with respect to the fiscal period of the Company ended
______________, 199__.
Annex 1 hereto sets forth, on and as of such date,
calculations necessary to determine whether the Company is in compliance with
Sections 8.08(c), 8.08(d), 8.08(e), 8.08(g), 8.08(k) and 8.09 through 8.15 of
the Credit Agreement as at, or for the relevant period ended on, said date.
Except as expressly identified on said Annex, the Company is in compliance with
said Sections. All references to Sections in said Annex are to Sections of the
Credit Agreement.
IN WITNESS WHEREOF, I have delivered this Certificate to the
Administrative Agent and the Banks in my capacity as _________________ of the
Company on this ______ day of ____________, 199__.
______________________________
Name:
Compliance Certificate
<PAGE> 13
ANNEX 1
AMERICO LIFE, INC.
COMPLIANCE CERTIFICATE
Fiscal Period Ended __________, 199__
(the "Reference Date")
<TABLE>
<S> <C>
SECTION 8.08(c)
(A) Aggregate fair market value, on the Reference Date, of $__________
all Investments in Below Investment Grade Debt
Instruments
(B) Aggregate book value, on the Reference Date, of all $__________
Investments in shares of common and preferred stock, in
limited partnership interests in limited partnerships and
limited liability partnerships and in membership
interests in limited liability companies (excluding
Investments permitted by Section 8.08(e) of the Credit
Agreement)
(C) Aggregate fair market value, on the Reference Date, of $_________
all interests in real property held by the Company or any
of its Subsidiaries
(D) Sum of (A), (B) and (C) $_________
(E) 110% of Net Worth on the Reference Date $_________
SECTION 8.08(d)
(A) Aggregate amount, on the Reference Date, of Investments $__________
in mortgage loans
</TABLE>
<PAGE> 14
- 2 -
<TABLE>
<S> <C>
(B) Aggregate book value, on the Reference Date, of all $__________
Investments on the Reference Date in debt and equity
securities issued by any Person whose assets consist
principally of mortgage loans (unless the obligations of
such Person are fully guaranteed by the United States
of America or any instrumentality thereof)
(C) Sum of (A) and (B) $_________
(D) Aggregate book value, on the Reference Date, of the $_________
investment portfolio of the Company and its Subsidiaries
(determined on a consolidated basis in accordance with
GAAP), together with the aggregate amount of cash and
accrued investment income as of the Reference Date
(E) 30% of (D) $________
SECTION 8.08(e)
(A) Aggregate amount, on the Reference Date, of Investments $_________
by any of the Insurance Companies (other than United
Fidelity) in limited partnership interests issued, and in
limited partnership interests and membership interests in
limited liability companies that have been distributed,
by GSSW Limited Partnership
SECTION 8.08(g)
(A) Aggregate net book value, on the Reference Date, of $________
Investments in Z Bonds and PAC II instruments entered
into by the Company and/or any of its Subsidiaries
(B) Invested Assets of United Fidelity (determined on a $________
consolidated basis) on the Reference Date
(C) 25% of (B) $________
</TABLE>
Annex 1 to Compliance Certificate
<PAGE> 15
- 3 -
<TABLE>
<S> <C>
(D) Aggregate notional amount, on the Reference Date, of $________
Investments in "swap agreements" (within the meaning
given to such term in Section 101(53B) of the United
States Bankruptcy Code) entered into by the Company
and/or any of its Subsidiaries
(E) Aggregate net book value, on the Reference Date, of $________
Investments in all other Volatile Derivative Instruments
entered into by the Company and/or any of its
Subsidiaries
(F) Surplus, on the Reference Date, of Great Southern Life $________
Insurance Company
(G) 25% of (F) $________
SECTION 8.08(k)
(A) Aggregate amount of additional Investments (other than $________
Investments in Volatile Derivative Instruments)
SECTION 8.09
(A) Cash Flow Dividend Amount on the Reference Date $________
(B) Carry-Over Amount on the Reference Date $________
(C) Aggregate amount of Dividend Payments made during the $________
portion of the fiscal year of the Company ended on the
Reference Date
(D) Sum of (A) and (B) $________
(E) Management Fee Base Amount on the Reference Date $________
(F) Sum of (B), (E) and $7,500,000 $________
</TABLE>
Annex 1 to Compliance Certificate
<PAGE> 16
- 4 -
<TABLE>
<S> <C>
(G) Consolidated Adjusted Surplus on the date of the making $________
or declaration of any Dividend Payment, the making or
declaration of which occurred during the period from but
not including the immediately preceding Reference Date to
and including the Reference Date
(H) Affiliate Advances during the portion of the fiscal year $________
of the Company ended on the Reference Date
(I) Aggregate amount of Dividend Payments made during the $________
portion of the fiscal year of the Company ended on the
Reference Date pursuant to the first two sentences of
Section 8.09
(J) Affiliate Advances repaid during the portion of the $________
fiscal year of the Company ended on the Reference Date
(K) Sum of (H) and (I) minus (J) $________
(L) Aggregate amount of the Lifetime Dividend Amount $________
distributed during the period from and including the
Closing Date to and including the Reference Date
SECTION 8.10
(A) Total Indebtedness on the Reference Date $________
(B) Net Worth on the Reference Date $________
(C) Consolidated Leverage Ratio on the Reference Date equals ___ to 1
the ratio of (A) to (B)
</TABLE>
Annex 1 to Compliance Certificate
<PAGE> 17
- 4 -
<TABLE>
<S> <C>
SECTION 8.11
(A) Total Adjusted Capital (as defined by the NAIC) of each $________
Insurance Company on the Reference Date
(B) Authorized Control Level Risk-Based Capital (as defined $________
by the NAIC) for such Insurance Company on the Reference
Date
(C) Risk-Based Capital Ratio for such Insurance Company on ___ to 1
the Reference Date equals the ratio of (A) to (B)
SECTION 8.12
(A) Adjusted Consolidated Statutory Earnings on the Reference $_________
Date
(B) Adjusted Fixed Charges on the Reference Date $_________
(C) Adjusted Consolidated Statutory Earnings to Adjusted ___ to 1
Fixed Charges Ratio on the Reference Date equals the
ratio of (A) to (B)
SECTION 8.13
(A) Aggregate amount of Capital Expenditures made during the $_________
portion of the fiscal year of the Company ended on the
Reference Date
(B) Aggregate amount of Capital Expenditures made during the $_________
period from and including the date of the Credit
Agreement to and including the Reference Date
SECTION 8.14 [To be calculated on any Reference Date that is the last day of any fiscal year of the
Company]
</TABLE>
<PAGE> 18
<TABLE>
<S> <C>
(A) Surplus of United Fidelity and its Subsidiaries on the $_________
Reference Date
(B) AVR of United Fidelity and its Subsidiaries on the $_________
Reference Date
(C) Sum of (A) and (B) $_________
(D) the amount of Outstanding Surplus Relief for United $_________
Fidelity and its Subsidiaries on the Reference Date
(E) (C) minus (D) $_________
SECTION 8.15
(A) Outstanding Surplus Relief, on the Reference Date, under $_________
additional Surplus Relief Reinsurance Contracts in
respect of the book of business of United Fidelity and
its Subsidiaries
(B) Outstanding Surplus Relief, on the Reference Date, under $_________
additional Surplus Relief Reinsurance Contracts in
respect of the business of VLIC
</TABLE>
Annex 1 to Compliance Certificate
<PAGE> 19
EXHIBIT B
Schedule 3 to the Credit Agreement
Subsidiaries and Investments
[To be completed by the Company]
Schedule 3
<PAGE> 20
EXHIBIT C
[To be completed by the Company]
<PAGE> 1
EXHIBIT 4.2(d)
AMENDMENT NO. 1
AMENDMENT NO. 1 dated as of February 26, 1997, between AMERICO LIFE,
INC., a corporation duly organized and validly existing under the laws of the
State of Missouri (together with its successors and assigns, the "Company");
each of the banks that is a signatory hereto (individually, a "Bank" and,
collectively, the "Banks"); and THE CHASE MANHATTAN BANK, as administrative
agent for the Banks (in such capacity, together with its successors in such
capacity, the "Administrative Agent").
The Company, the Banks and the Administrative Agent are party to an
Amended and Restated Credit Agreement dated as of July 6, 1995, amended and
restated as of December 27, 1996 (the "Credit Agreement"). The parties hereto
desire to amend the Credit Agreement in certain respects, and accordingly the
parties hereto agree as follows:
Section 1. Definitions. Capitalized terms used but not otherwise
defined herein have the meanings given them in the Credit Agreement.
Section 2. Amendments. Subject to Section 4 hereof, but effective
as of the date hereof, the Credit Agreement shall be amended as follows:
2.01. Section 1.01 of the Credit Agreement shall be amended by
adding the following new definitions (to the extent not already included in
said Section 1.01) and inserting the same in the appropriate alphabetical
locations and amending in their entirety the following definitions (to the
extent already included in said Section 1.01), as follows:
"Additional Acquisition" shall mean any transaction, or any series
of related transactions, consummated after the date of this Agreement
(other than the Acquisition, the KL Transactions and the OSL/IGL
Transactions), by which the Company and/or one or more of its Subsidiaries
(in one transaction or as the most recent transaction in a series of
related transactions) (a) acquires any block of business or going business
or all or substantially all of the Property of any Person (or division or
operating unit thereof), whether through purchase of assets, merger or
otherwise, (b) directly or indirectly acquires control of at least a
majority (in number of votes) of the securities of a corporation which
have ordinary voting power for the election of directors or (c) directly
or indirectly acquires control of a 50% or more ownership interest in any
partnership, joint venture (including a joint venture in corporate form)
or other non-corporate business entity.
"OSL/IGL Transactions" shall mean the transactions contemplated by
the Stock Purchase Agreement dated as of January 21, 1997 (the "GSLIC
Stock Purchase Agreement") between Farmers Group, Inc. ("Farmers") and
Great Southern Life Insurance Company ("GSLIC"), and related agreements,
including (a) the acquisition by GSLIC from Farmers of all of the
outstanding capital stock of each of The Ohio State Life Insurance
Company, an Ohio corporation ("OSL") and Investors Guaranty Life Insurance
Company, a California corporation ("IGL" and, together with OSL,
"OSL/IGL") for the sum of approximately $330,000,000 plus an amount equal
to the
Amendment No. 1
<PAGE> 2
- 2 -
Actual Net Income of OSL and IGL (as defined in the GSLIC Stock Purchase
Agreement), (b) the purchase by Farmers from OSL/IGL of the Transferred
Assets (as defined in Section 5.17 of the GSLIC Stock Purchase Agreement),
(c) certain reinsurance arrangements between each of OSL and IGL and
Employers Reassurance Corporation, a Kansas corporation ("ERC"), pursuant
to which ERC will reinsure on a 100% coinsurance basis (subject to
existing reinsurance agreements) all of the insurance and annuity business
of OSL and IGL, as described in the letter agreement dated January 21,
1997 between ERC and GSLIC, (d) certain retrocession agreements between
ERC and GSLIC pursuant to which GSLIC will reinsure (subject to existing
reinsurance agreements) on a 70% modified coinsurance basis, the insurance
and annuity business of OSL and IGL, and (e) ERC will place the assets
received from OSL and IGL pursuant to the transactions referred to in (c)
in escrow for the benefit of GSLIC to secure ERC's obligations to GSLIC
arising in connection with the transactions referred to in (d).
2.02. Section 3.03(b)(i) of the Credit Agreement is hereby amended
to read in its entirety as follows:
"(i) Dispositions. Without limiting the obligations of the Company
to obtain the consent of the Majority Banks for any Disposition not
otherwise permitted under this Agreement, as promptly as practicable after
the end of each fiscal year but in no event later than March 15 of the
subsequent fiscal year, the amount of the Commitments shall be reduced by,
and/or the Company shall prepay the Loans in, an amount equal to the
aggregate amount of any Disposition Proceeds (other than Disposition
Proceeds arising from (v) Dispositions by GSSW Limited Partnership, (w)
Dispositions of ownership interests in GSSW Limited Partnership, (x)
Dispositions of capital stock of Loyalty Life Insurance Company, (y)
Dispositions of partnership interests (or of their underlying properties)
previously held by GSSW Limited Partnership and transferred to the Company
in connection with the redemption of its ownership interests in GSSW
Limited Partnership and (z) Dispositions related to the OSL/IGL
Transactions) received by the Company or any of its Subsidiaries during
such fiscal year in excess of $3,000,000 (rounded upward to the nearest
$1000)."
2.03. Section 8.05 of the Credit Agreement is amended by deleting
"and" at the end of clause (e) thereof, substituting "; and" for the period at
the end of clause (f) thereof and inserting new clause (g) immediately after
clause (f) thereof, to read as follows:
"(g) the Company and its Subsidiaries may consummate the OSL/IGL
Transactions;"
2.04. The last sentence of Section 8.08 of the Credit Agreement is
amended by adding at the end thereof the following:
"or (C) Investments contemplated by the OSL/IGL Transaction."
Amendment No. 1
<PAGE> 3
- 3 -
2.05. The proviso in Section 8.15 of the Credit Agreement is
amended in its entirety to read as follows:
"provided that the Company will not, and will not permit any of the
Subsidiaries of the Company to, Guarantee obligations of any Subsidiary of
the Company under any Surplus Relief Reinsurance Contract."
Section 3. Representations and Warranties. The Company hereby
represents and warrants to the Banks and the Administrative Agent that the
representations and warranties set forth in Section 7 of the Credit Agreement
are true and complete on the date hereof as if made on and as of the date
hereof and as if each reference in such representations and warranties to the
Credit Agreement included reference to this Amendment No. 1.
Section 4. Conditions Precedent. As provided in Section 2 above,
the amendments to the Credit Agreement set forth in said Section 2 shall become
effective as of the date hereof, subject to the conditions precedent that
counterparts of this Amendment No. 1, shall have been duly executed and
delivered by the Company, each of the Banks and the Administrative Agent and
FHC shall have executed and delivered its consent hereto as provided on the
signature pages hereof.
Section 5. Miscellaneous. Except as herein provided, the Credit
Agreement shall remain unchanged and in full force and effect. This Amendment
No. 1 may be executed in any number of counterparts, all of which taken
together shall constitute one and the same amendatory instrument and any of the
parties hereto may execute this Amendment No. 1 by signing any such counterpart
and sending the same by telecopier, mail messenger or courier to the
Administrative Agent or counsel to the Administrative Agent. This Amendment
No. 1 shall be governed by, and construed in accordance with, the law of the
State of New York.
Amendment No. 1
<PAGE> 4
- 4 -
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
No. 1 to be duly executed as of the day and year first above written.
AMERICO LIFE, INC.
By______________________________
Title:
Amendment No. 1
<PAGE> 5
- 5 -
THE BANKS
THE BANK OF NEW YORK
By_________________________________
Title:
BANK ONE, TEXAS, N.A.
By_________________________________
Title:
THE CHASE MANHATTAN BANK
By_________________________________
Title:
COMMERCE BANK, N.A.
By_________________________________
Title:
FIRST BANK NATIONAL ASSOCIATION
By_________________________________
Title:
FIRST UNION NATIONAL BANK
OF NORTH CAROLINA
By_________________________________
Title:
Amendment No. 1
<PAGE> 6
- 6 -
FLEET NATIONAL BANK
By_________________________________
Title:
Amendment No. 1
<PAGE> 7
- 7 -
THE ADMINISTRATIVE AGENT
THE CHASE MANHATTAN BANK,
as Administrative Agent
By_________________________________
Title:
Amendment No. 1
<PAGE> 8
- 8 -
CONSENT
By its signature below, FHC consents to the forgoing Amendment No. 1.
FINANCIAL HOLDING CORPORATION
By_________________________________
Title:
Amendment No. 1
<PAGE> 1
EXHIBIT 10.22(a)
AGREEMENT TO REDEEM PARTNERSHIP INTEREST
This Agreement to Redeem Partnership Interest ("AGREEMENT") is made as of
December 30, 1996 by Great Southern Life Insurance Company, a Texas corporation
("WITHDRAWING PARTNER"); GSSW Limited Partnership, a Texas limited partnership
("PARTNERSHIP"); and Southwestern Life Insurance Company, a Texas corporation
("SOUTHWESTERN"), and BGFRTS, L.C., a Texas limited liability company
("BGFRTS") (Southwestern and BGFRTS collectively "CONTINUING PARTNERS"). In
consideration of the acknowledgments and agreements set out herein the parties
agree as follows.
Acknowledgments. Withdrawing Partner and Continuing Partners formed
Partnership pursuant to that certain Limited Partnership Agreement of GSSW
Limited Partnership dated as of June 9, 1992, which agreement has been restated
and amended from time to time (as restated and amended the "PARTNERSHIP
AGREEMENT"). All terms used in this Agreement that are not defined herein
shall have the meanings given to them in the Partnership Agreement.
The parties have agreed that Withdrawing Partner's entire right, title,
and interest in Partnership (the "REDEEMED INTEREST") shall be retired and
redeemed by Partnership and Withdrawing Partner shall withdraw from
Partnership, all as set forth herein.
Retirement and Redemption. The Redeemed Interest shall be retired and
redeemed by Partnership effective as of the close of business on the date of
this Agreement (the "EFFECTIVE TIME").
Transfer of Redeemed Interest by Withdrawing Partner. Withdrawing
Partner hereby sells, assigns, transfers, conveys, and delivers the Redeemed
Interest to Partnership and withdraws from Partnership. This Agreement itself
constitutes a document of assignment and withdrawal. Accordingly, no further
documentation or action is needed or shall be required in order to make
Withdrawing Partner's sale, assignment, transfer, conveyance, and delivery of
the Redeemed Interest to Partnership, or its withdrawal from Partnership,
effective, but Withdrawing Partner shall execute, acknowledge, and deliver all
further documents which Partnership may reasonably deem necessary or
appropriate to effect such sale, assignment, transfer, conveyance, and
delivery.
Withdrawing Partner represents and warrants to Partnership that
Withdrawing Partner has full legal right, power, and authority to execute this
Agreement and to sell, assign, transfer, convey, and deliver the Redeemed
Interest to Partnership as described in paragraph 3(a) and that the Redeemed
Interest is free and clear of any and all claims, liens, security interests,
and encumbrances whatsoever. Withdrawing Partner shall warrant and defend
Partnership's title to the Redeemed Interest against the lawful claims and
demands of all persons whomsoever.
Consideration for Redeemed Interest. Partnership contemporaneously
herewith has distributed $22,148,558 in cash to Withdrawing
Partner as partial consideration for the Redeemed Interest. Withdrawing
Partner hereby acknowledges receipt of this distribution.
<PAGE> 2
Partnership hereby sells, assigns, transfers, conveys, and delivers to
Withdrawing Partner the following limited partnership interests (each a
"LIMITED PARTNERSHIP INTEREST" and collectively the "LIMITED PARTNERSHIP
INTERESTS") as the balance of the consideration for the Redeemed Interest:
Partnership's entire right, title, and interest in GSSW - REO Westwood
Arlington L.P., a Texas limited partnership; Partnership's entire right,
title, and interest in GSSW - REO Briarwood L.P., a Texas limited partnership;
Partnership's entire right, title, and interest in GSSW - Westwood Baytown
L.P., a Texas limited partnership; Partnership's entire right, title, and
interest in Dickinson Arms - REO L.P., a Texas limited partnership;
Partnership's entire right, title, and interest in Riverdale Square - REO L.P.,
a Texas limited partnership; Partnership's entire right, title, and interest
in GSSW - REO Land L.P., a Texas limited partnership; (vii) Partnership's
entire right, title, and interest in Windrush - REO, L.P., a Texas limited
partnership; and (viii) Partnership's entire right, title, and interest in GSSW
- - REO Landmark, Limited Partnership, a Texas limited partnership (each of such
limited partnerships a "LIMITED PARTNERSHIP"). This Agreement itself
constitutes a document of assignment. Accordingly, no further documentation or
action is needed or shall be required in order to make effective Partnership's
sale, assignment, transfer, conveyance, and delivery of the Limited Partnership
Interests to Withdrawing Partner, but Partnership and either or both Continuing
Partners shall each execute, acknowledge, and deliver all further documents
which Withdrawing Partner may reasonably deem necessary or appropriate to
effect such sale, assignment, transfer, conveyance, and delivery.
Additional Provisions Regarding Limited Partnership Interests.
Partnership, and Continuing Partners acting on behalf of Partnership, shall
cause Withdrawing Partner to be admitted to each Limited Partnership as a
substituted limited partner with respect to the Limited Partnership Interest
hereby acquired by Withdrawing Partner in such Limited Partnership.
Withdrawing Partner shall and hereby does assume Partnership's position and
agree to discharge Partnership's responsibilities as a limited partner in each
such partnership with respect to its Limited Partnership Interest in such
partnership. Each Limited Partnership's income, gain, loss, deduction, and
other items shall be allocated as between Partnership and Withdrawing Partner
for the fiscal year of the Limited Partnerships ending December 31, 1996 on the
basis of an interim closing of the books and not upon a proration of such items
for the entire fiscal year.
Partnership and each of Continuing Partners represents and warrants to
Withdrawing Partner that Partnership has full legal right, power, and authority
to execute this Agreement and to sell, assign, transfer, convey, and deliver
the Limited Partnership Interests to Withdrawing Partner as described in
paragraph 4(b) and that each of the Limited Partnership Interests is free and
clear of any and all claims, liens, security interests, and encumbrances
whatsoever. Partnership and each of Continuing
<PAGE> 3
Partners shall warrant and defend Withdrawing Partner's title to the Limited
Partnership Interests against the lawful claims and demands of all persons
whomsoever.
Effect of Retirement, Redemption, and Withdrawal. The parties, and in
particular each of Continuing Partners, agrees that Partnership shall continue
and not be dissolved or terminated because of the retirement and redemption of
the Redeemed Interest or the withdrawal from Partnership of Withdrawing
Partner. Partnership shall file on a timely basis with any appropriate
governmental authorities any amendments to Partnership's certificate of limited
partnership or other documents relating to the retirement and redemption of the
Redeemed Interest or the withdrawal from Partnership of Withdrawing Partner
that may be required by, or appropriate under, the Act or other applicable law.
Withdrawing Partner's distributive share of Partnership's income, gain,
loss, deduction, and other items for the fiscal year of Partnership ending
December 31, 1996 shall be determined on the basis of an interim closing of the
books of the Partnership as of the Effective Time and shall not be based upon a
proration of such items for the entire fiscal year.
Any provisions of the Partnership Agreement that are inconsistent with
this Agreement or that prohibit any of the transactions described herein are
hereby waived. As among the parties, Withdrawing Partner is hereby relieved of
all further duties and obligations imposed on it by the Partnership Agreement.
Partnership shall, however, after the Effective Time and as if Withdrawing
Partner were then still a Partner of Partnership: furnish to Withdrawing
Partner financial statements and tax returns for the fiscal year of Partnership
ending December 31, 1996 pursuant to paragraphs 6.3 and 6.4 of the Partnership
Agreement; and permit Withdrawing Partner to have reasonable access to
Partnership's books and records for such fiscal year pursuant to paragraph 6.2
of the Partnership Agreement.
Miscellaneous. Withdrawing Partner shall pay its own legal fees and
other expenses, and the reasonable legal fees of the other parties hereto,
incurred in connection with the execution and delivery of this Agreement and
the consummation of the transactions described herein.
This Agreement shall be binding upon, inure to the benefit of, and be
enforceable by the parties hereto and their respective successors and assigns.
This Agreement shall be governed by the laws of Missouri; provided, to the
extent that any of the provisions of this Agreement would but for this proviso
be governed by the Act, then the Act shall to such extent govern the
application of such provisions. In the event any one or more of the provisions
contained in this Agreement or any application thereof shall be invalid,
illegal, or unenforceable in any respect, the validity, legality, and
enforceability of the remaining provisions of this Agreement or any other
application thereof shall not in any way be affected or impaired thereby. The
application of any provisions of this Agreement may be waived by the party or
parties entitled to the benefit thereof; provided, no delay or failure on the
part
3
<PAGE> 4
of any party hereto in exercising any rights hereunder, and no partial or
single exercise thereof, shall constitute a waiver of any other rights
hereunder. This Agreement represents the entire agreement of all of the
persons bound hereby and supersedes all prior understandings or agreements,
oral or written, among all or any of such persons with respect to the matters
described herein.
The parties hereto have executed this Agreement effective as of the date
set forth above to evidence their intent that it be a binding contract.
GREAT SOUTHERN LIFE INSURANCE COMPANY
By: /s/ Michael A. Merriman
Michael A. Merriman
Chairman of the Board
SOUTHWESTERN LIFE INSURANCE COMPANY
By: /s/ Glenn H. Gettier, Jr.
Glenn H. Gettier, Jr.
President
BGFRTS, L.C.
By: SOUTHWESTERN LIFE INSURANCE
COMPANY
By: /s/ Glenn H. Gettier, Jr.
Glenn H. Gettier, Jr.
President
3
<PAGE> 1
EXHIBIT 10.22(b)
AGREEMENT REGARDING PURCHASE, SALE,
AND ASSIGNMENT OF MEMBERSHIP INTEREST
This Agreement Regarding Purchase, Sale, and Assignment of Membership
Interest ("AGREEMENT") is made as of December 30, 1996 by Great Southern Life
Insurance Company, a Texas corporation ("GSL"), Southwestern Financial Services
Corporation, a Delaware corporation ("BUYER"), and Southwestern Life Insurance
Company, a Texas corporation ("SWL"). In consideration of the acknowledgments
and agreements set out herein the parties agree as follows.
1. Acknowledgments. GSL is a Member of BGFRTS, L.C., a Texas limited
liability company ("BGFRTS") formed, organized, and existing pursuant to
Articles of Organization filed with the Secretary of State of Texas on May 1,
1992, as amended, and Regulations adopted by BGFRTS' Members on May 1, 1992, as
amended (the "REGULATIONS"). All terms used in this Agreement that are not
defined herein shall have the meanings given to them in the Regulations.
2. GSL is the sole owner of 500 Share Interests in BGFRTS (the
"TRANSFERRED INTERESTS"). GSL desires to sell to Buyer, and Buyer desires to
buy from GSL, all of GSL's right, title, and interest in the Transferred
Interests.
3. Sale of Transferred Interests.(a)GSL hereby sells, assigns, transfers,
conveys, and delivers to Buyer the Transferred Interests. This Agreement
itself constitutes a document of assignment. Accordingly, no further
documentation or action is needed or shall be required in order to make
effective GSL's sale, assignment, transfer, conveyance, and delivery to Buyer
of the Transferred Interests. However, GSL shall execute, acknowledge, and
deliver all further documents which Buyer may reasonably deem necessary or
appropriate to effect such sale, assignment, transfer, conveyance, and
delivery.
(b) SWL consents to the sale, assignment, transfer, conveyance, and
delivery effected pursuant to paragraph 2(a). Buyer shall and hereby does
assume GSL's position and agree to discharge GSL's responsibilities as a Member
of BGFRTS with respect to the Transferred Interests.
Consideration for Transferred Interests. Buyer contemporaneously herewith
has paid $480,000 in cash to GSL as consideration for the Transferred
Interests. GSL hereby acknowledges receipt of this payment.
Additional Provisions Regarding Transferred Interests. GSL represents
and warrants to Buyer that GSL has full legal right, power, and authority to
execute this Agreement and to sell, assign, transfer, convey, and deliver the
Transferred Interests to Buyer as described in paragraph 2(a) and that the
Transferred Interests are free and clear of any and all claims, liens, security
interests, and encumbrances whatsoever. GSL shall warrant and defend Buyer's
title to the Transferred Interests against the lawful claims and demands of all
persons whomsoever.
<PAGE> 2
GSL expressly disclaims any warranties regarding the Transferred Interests
or BGFRTS, except as expressly set forth in paragraph 4(a) above.
Effect of Sale and Purchase. The parties intend that BGFRTS shall
continue and not be dissolved or terminated because of the sale and purchase of
the Transferred Interests that is effected by this Agreement (but the members
of BGFRTS may cause the dissolution or termination of BGFRTS at any time after
the sale and purchase of the Transferred Interests is effective). GSL shall
cooperate with Buyer in filing on a timely basis with any appropriate
governmental authorities any amendments to the BGFRTS' Articles of Organization
or other documents relating to the transfer of the Transferred Interests that
may be required by, or appropriate under, any applicable law.
GSL's distributive share of BGFRTS' income, gain, loss, deduction, and
other items for the fiscal year of BGFRTS ending December 31, 1996 shall be
determined on the basis of an interim closing of the books of BGFRTS as of the
close of business on the date hereof and shall not be based upon a proration of
such items for the entire fiscal year.
Miscellaneous. GSL shall pay its own legal fees and other expenses, and
the reasonable legal fees of the other parties hereto, incurred in connection
with the execution and delivery of this Agreement and the consummation of the
transactions described herein.
This Agreement shall be binding upon, inure to the benefit of, and be
enforceable by the parties hereto and their respective successors and assigns.
This Agreement shall be governed by the laws of Missouri. In the event any one
or more of the provisions contained in this Agreement or any application
thereof shall be invalid, illegal, or unenforceable in any respect, the
validity, legality, and enforceability of the remaining provisions of this
Agreement or any other application thereof shall not in any way be affected or
impaired thereby. The application of any provisions of this Agreement may be
waived by the party or parties entitled to the benefit thereof; provided, no
delay or failure on the part of any party hereto in exercising any rights
hereunder, and no partial or single exercise thereof, shall constitute a waiver
of any other rights hereunder. This Agreement represents the entire agreement
of all of the persons bound hereby and supersedes all prior understandings or
agreements, oral or written, among all or any of such persons with respect to
the matters described herein.
The parties hereto have executed this Agreement effective as of the date
set forth above to evidence their intent that it be a binding contract.
<PAGE> 3
GREAT SOUTHERN LIFE INSURANCE COMPANY
By: /s/ Michael A. Merriman
Michael A. Merriman
Chairman of the Board
SOUTHWESTERN FINANCIAL SERVICES
CORPORATION
By: /s/ Glenn H. Gettier, Jr.
Glenn H. Gettier, Jr.
President
SOUTHWESTERN LIFE INSURANCE COMPANY
By: /s/ Glenn H. Gettier, Jr.
Glenn H. Gettier, Jr.
President
<PAGE> 1
EXHIBIT 10.22(c)
AGREEMENT REGARDING PURCHASE AND
SALE OF GENERAL PARTNERSHIP INTERESTS
This Agreement Regarding Purchase and Sale of General Partnership
Interests ("AGREEMENT") is made as of December 30, 1996 by Americo Services,
Inc., a Missouri corporation ("AMERICO"), and GSSW - REO Ownership Corporation,
a Texas corporation ("OWNERSHIP CORP."). In consideration of the
acknowledgments and agreements set out herein the parties agree as follows.
Acknowledgments. Ownership Corp. is the sole general partner in the
"Limited Partnerships" (as defined below). Ownership Corp. desires to sell to
Americo, and Americo desires to buy from Ownership Corp., all of Ownership
Corp.'s right, title, and interest as a general partner in each of the Limited
Partnerships.
Sale of General Partnership Interests. Ownership Corp. hereby sells,
assigns, transfers, conveys, and delivers to Americo the following general
partnership interests (each a "GENERAL PARTNERSHIP INTEREST" and collectively
the "GENERAL PARTNERSHIP INTERESTS"): Ownership Corp.'s entire right, title,
and interest in GSSW - REO Westwood Arlington L.P., a Texas limited
partnership; Ownership Corp.'s entire right, title, and interest in GSSW - REO
Briarwood L.P., a Texas limited partnership; Ownership Corp.'s entire right,
title, and interest in GSSW - Westwood Baytown L.P., a Texas limited
partnership; Ownership Corp.'s entire right, title, and interest in Dickinson
Arms - REO L.P., a Texas limited partnership; Ownership Corp.'s entire right,
title, and interest in Riverdale Square - REO L.P., a Texas limited
partnership; Ownership Corp.'s entire right, title, and interest in GSSW - REO
Land L.P., a Texas limited partnership; Ownership Corp.'s entire right, title,
and interest in Windrush - REO, L.P., a Texas limited partnership; and (viii)
Ownership Corp.'s entire right, title, and interest in GSSW - REO Landmark,
Limited Partnership, a Texas limited partnership (each of such limited
partnerships a "LIMITED PARTNERSHIP" and collectively the "LIMITED
PARTNERSHIPS").
This Agreement itself constitutes a document of assignment. Accordingly,
no further documentation or action is needed or shall be required in order to
make effective Ownership Corp.'s sale, assignment, transfer, conveyance, and
delivery to Americo of the General Partnership Interests. However, Ownership
Corp. shall execute, acknowledge, and deliver all further documents which
Americo may reasonably deem necessary or appropriate to effect such sale,
assignment, transfer, conveyance, and delivery.
Consideration for General Partnership Interests. Americo
contemporaneously herewith has paid $260,000 in cash to Ownership Corp. as
consideration for the General Partnership Interests. Ownership Corp. hereby
acknowledges receipt of this payment.
Additional Provisions Regarding General Partnership Interests. Ownership
Corp. shall cause Americo to be admitted to each Limited Partnership as a
substituted general partner with respect to the General Partnership Interest
hereby acquired by Americo in such Limited Partner
<PAGE> 2
- -ship. Americo shall and hereby does assume Ownership Corp.'s position and
agree to discharge Ownership Corp.'s responsibilities as a general partner in
each such Limited Partnership with respect to its General Partnership
Interest in such partnership.
Ownership Corp. represents and warrants to Americo that Ownership Corp.
has full legal right, power, and authority to execute this Agreement and to
sell, assign, transfer, convey, and deliver the General Partnership Interests
to Americo as described in paragraph 2(a) and that the General Partnership
Interests are free and clear of any and all claims, liens, security interests,
and encumbrances whatsoever. Ownership Corp. shall warrant and defend
Americo's title to the General Partnership Interests against the lawful claims
and demands of all persons whomsoever.
Ownership Corp. expressly disclaims any warranties regarding the General
Partnership Interests or the Limited Partnerships, except as expressly set
forth in this Agreement.
Effect of Sale and Purchase. The parties intend that each Limited
Partnership shall continue and not be dissolved or terminated because of the
sale and purchase of the General Partnership Interest in such partnership that
is effected by this Agreement. Ownership Corp. shall cooperate with Americo in
filing on a timely basis with any appropriate governmental authorities any
amendments to the Limited Partnerships' certificates of limited partnership or
other documents relating to the transfer of any of the General Partnership
Interests that may be required by, or appropriate under, any applicable law.
Ownership Corp.'s distributive share of each Limited Partnership's income,
gain, loss, deduction, and other items for the fiscal year of the Limited
Partnerships ending December 31, 1996 shall be determined on the basis of an
interim closing of the books of the Limited Partnerships and shall not be based
upon a proration of such items for the entire fiscal year.
Miscellaneous. Americo shall pay its own legal fees and other expenses,
and the reasonable legal fees of Ownership Corp., incurred in connection with
the execution and delivery of this Agreement and the consummation of the
transactions described herein.
This Agreement shall be binding upon, inure to the benefit of, and be
enforceable by the parties hereto and their respective successors and assigns.
This Agreement shall be governed by the laws of Missouri. In the event any one
or more of the provisions contained in this Agreement or any application
thereof shall be invalid, illegal, or unenforceable in any respect, the
validity, legality, and enforceability of the remaining provisions of this
Agreement or any other application thereof shall not in any way be affected or
impaired thereby. The application of any provisions of this Agreement may be
waived by the party or parties entitled to the benefit thereof; provided, no
delay or failure on the part of any party hereto in exercising any rights
hereunder, and no partial or single exercise thereof, shall constitute a waiver
of any other
2
<PAGE> 3
rights hereunder. This Agreement represents the entire agreement of all of
the persons bound hereby and supersedes all prior understandings or agreements,
oral or written, among all or any of such persons with respect to the matters
described herein.
The parties hereto have executed this Agreement effective as of the date
set forth above to evidence their intent that it be a binding contract.
AMERICO SERVICES, INC.
By: /s/ Michael Merriman
Michael A. Merriman
Chairman of the Board
GSSW - REO OWNERSHIP CORPORA-TION
By: /s/ Michael Merriman
Michael A. Merriman
President
3
<PAGE> 1
EXHIBIT 21
LIST OF SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
<S> <C>
WHOLLY-OWNED SUBSIDIARIES:
Americo Services, Inc..................................... Missouri
United Fidelity Life Insurance Company.................... Texas
Great Southern Life Insurance Company..................... Texas
The College Life Insurance Company of America............. Texas
Loyalty Life Insurance Company............................ Texas
National Farmers Union Life Insurance Company............. Texas
The Victory Life Insurance Company........................ Kansas
50%-OWNED SUBSIDIARIES:
Argus Health Systems, Inc................................. Delaware
Hereford LLP.............................................. Missouri
College Insurance Group................................... Missouri
Financial Assurance Incorporated.......................... Texas
Annuity Service Corporation............................... Texas
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 670,274
<DEBT-CARRYING-VALUE> 857,451
<DEBT-MARKET-VALUE> 847,832
<EQUITIES> 48,262
<MORTGAGE> 184,326
<REAL-ESTATE> 22,417
<TOTAL-INVEST> 2,018,852
<CASH> 96,069
<RECOVER-REINSURE> 3,247
<DEFERRED-ACQUISITION> 72,438
<TOTAL-ASSETS> 2,830,710
<POLICY-LOSSES> 2,148,504
<UNEARNED-PREMIUMS> 32,128
<POLICY-OTHER> 30,959
<POLICY-HOLDER-FUNDS> 81,442
<NOTES-PAYABLE> 133,312
0
0
<COMMON> 10
<OTHER-SE> 207,012
<TOTAL-LIABILITY-AND-EQUITY> 2,830,710
165,602
<INVESTMENT-INCOME> 186,725
<INVESTMENT-GAINS> 15,705
<OTHER-INCOME> 3,567
<BENEFITS> 218,659
<UNDERWRITING-AMORTIZATION> 3,326
<UNDERWRITING-OTHER> 56,703
<INCOME-PRETAX> 40,787
<INCOME-TAX> 13,513
<INCOME-CONTINUING> 27,274
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,274
<EPS-PRIMARY> 2,727.40
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
