10-K
1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1993
For fiscal year ended
December 31, 1994 Commission File Number 0-15330
___________________________
AMVESTORS FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Kansas 48-1021516
____________________________ ____________________________________
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
415 Southwest 8th Avenue, Topeka, Kansas 66603
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (913) 232-6945
Securities registered pursuant to Section 12(g) of the Act:
Common Stock*
Title of class
*Report being filed pursuant to Section 13 of the act.
Indicate by check mark whether the registrant (2) 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 the 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 the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to the Form 10-K.
The aggregate market value (based upon the last sale price as quoted by
the New York Stock Exchange on March 17, 1995) of the shares held by
non-affiliates was approximately $100,780,000.
As of March 17, 1995, there were 10,035,609 shares of the
registrant's common stock, no par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Documents Form 10-K Reference
Proxy Statement - Annual Meeting of Part III, Items 10, 12 and 13
Stockholders to be held May 18, 1995
PART 1
Item 1. Description of Business
____________________________________
Item 1. (a) General Development of Business
__________________________________________________
AmVestors Financial Corporation (AmVestors or the company) is an
insurance holding company whose subsidiaries are American Investors Life
Insurance Company, Inc. (American), American Investors Sales Group, Inc.
(American Sales), AmVestors Investment Group, Inc. (AIG) and Omni-Tech
Medical, Inc. (Omni-Tech). AmVestors was incorporated in 1986 to serve as a
holding company for all of the common stock of American.
American specializes in the sale of annuity products throughout the
United States. Single premium deferred annuities ("SPDA") accounted for
approximately 78% of all premiums received by the company in 1994. Other
products offered include single premium immediate annuities ("SPIA") and
flexible premium deferred annuities ("FPDA"). As of December 31, 1994, the
company had total annuity contracts in force of $2.0 billion.
The company designs its products and directs its marketing efforts
towards the savings and retirement market. U.S. Census Bureau statistics
indicate that the pre-retirement segment of this market, ages 45 to 64,
("preretirement market") is the fastest growing age group in the country and
also project a 30% increase in the number of individuals in this age group
during the 1990s. Historically, the 50 and older age group has accounted for
over 80% of all annuity premiums received by the company and, to date, the
average premium received by it per annuity contract has been approximately
$22,000. The company continues to target this age group because management
believes that as this group ages, it will have an increasing interest in
saving for retirement, nursing home care and unanticipated medical costs.
The company seeks to make sales in the market for retirement savings
products by offering annuity products that meet the demands of agents and the
pre-retirement population. The company markets its annuity products through
independent agents licensed in 47 states and the District of Columbia. Agents
are recruited through the company's wholly-owned subsidiary, American Sales,
as well as through various other marketing organizations. As of December 31,
1994, the company had approximately 6,700 independent agents licensed to sell
the company's products. The company does not market its annuity products
through stockbrokers. The company endeavors to attract agents to sell its
products by offering a broad selection of fixed annuity products, by
providing timely, comprehensive services to agents and customers and by
continuing to specialize in annuity products. Since 1990, over 34% of annuity
premiums received by American have been produced by agents recruited by
American Sales, resulting in commission savings for the company as compared
with business produced by agents recruited through other marketing
organizations.
Beginning in 1988, management restructured the company's investment
portfolio, reducing the holdings of non-investment grade securities from
approximately 59% of its total bond portfolio as of the end of 1987 to
approximately 7% as of December 31, 1994. During the same period, the company
has expanded internal investment management capabilities through the addition
of new personnel, and has augmented its capabilities for agent recruitment
through American Sales and the establishment of relationships with additional
marketing organizations. The company repaid its outstanding indebtedness in
1993, with proceeds from the sale to the public of 3,451,668 shares of its
common stock. As a result of these actions, management believes that the
company is now better positioned to take advantage of the opportunities for
the sale of its products in the savings and retirement market. The company's
strategy is to expand sales in a growing market, attract quality agents, sell
products with profit potential and maintain a high quality investment
portfolio.
The company incorporates certain features in its annuity contracts
that are designed to reduce the occurrence and effect of premature contract
terminations and significant withdrawals. Such features include surrender
charges which decline over time and which apply, subject to certain
exceptions, to premature terminations during the first five to fourteen years
of an annuity contract. In addition, annual withdrawals free of surrender
charges are generally limited to 10% of an annuity's cash value. Certain of
American's annuities also provide for deferred payments of the surrender
value of the annuity over a five year period or market value adjustments of
surrender value which reflect changes in interest rates.
Certain annuity policies incorporate a "bailout" feature which
generally allows policyowners to withdraw their account balances for a
limited period of time, free of surrender charges, if credited rates fall
below a specified level. The company experienced significant surrenders
following the reduction of credited rates below specified "bailout" levels
during 1992 and 1993.
Founded in 1965, American has focused on the sale of single premium
annuity products since 1984. On May 9, 1994, A.M. Best which rates insurance
companies based on factors of concern to policyowners, reaffirmed American's
"A-" (Excellent) rating. On October 24, 1994, Duff & Phelps reaffirmed
American's claims paying ability rating of "A+" (Single-A-Plus).
There were no material proceedings involving the company or any of
its subsidiaries, or mergers or acquisitions.
Item 1. (b) Financial Information About Industry Segments
______________________________________________________________
The company does not have any material reportable segments.
Item 1. (c) Narrative Description of Business
_________________________________________________
See Item 1. (c) (l) (i)
Item 1. (c) (1) Business Done and Intended to be Done
__________________________________________________________
See Item 1. (c) (l) (i)
Item 1. (c) (1) (i) Principal Products
__________________________________________
INDUSTRY OVERVIEW
Annuities have traditionally been used by individuals as a
tax-deferred savings vehicle for retirement planning. U.S. Census Bureau
statistics indicate that the 45 to 64 age group is the fastest growing age
group in the country and project a 30% increase in the number of individuals
in this age group during the 1990s. The company believes that this
demographic trend, longer life expectancy, and rising per capita income, as
well as the tax deferred savings advantage of annuity products relative to
other savings products, will increase demand for single premium annuities for
retirement planning.
COMPANY OVERVIEW
Founded in 1965, American has focused on the sale of single premium
annuities since 1984. During various periods prior to 1984, American offered
participating and nonparticipating ordinary life insurance, flexible premium
annuities and certain disability income and cancer expense policies. However,
in the middle 1980s, American perceived greater opportunities in the savings
and retirement market and began to concentrate its marketing efforts on the
sale of single premium annuities.
In 1988, management reviewed the company's investment strategy and
determined to reverse the non-investment grade strategy which the company had
employed since entering the single premium annuity market in 1984. Management
reduced the percentage of the company's bond portfolio rated below investment
grade from approximately 59% at the end of 1987 to approximately 41% by the
end of 1988. In 1989 and 1990 the company suffered substantial losses related
to its investments in non-investment grade bonds as the credit quality of
issuers of, and the market for, non-investment grade bonds deteriorated.
Through the restructuring of its investment portfolio in 1991 and 1992, the
company ultimately was able to increase, consistent with the company's
investment policy, the portion of its bond portfolio rated investment grade
to approximately 93%.
The level of sales and surrenders of SPDAs was adversely affected in
1991 and 1992 by the company's substantial investment losses, the highly
publicized financial difficulties of other life insurance companies, and A.M.
Best's lowering in July 1991, of American's rating from "A" (Excellent) to
"A-" (Excellent). In response, management took additional steps to improve
the company's financial condition and competitive position in the annuity
business. The company expanded internal investment management capabilities
and augmented its agent recruitment capabilities through its internal
marketing organization, American Sales, and the establishment of
relationships with additional marketing organizations. During 1993, the
company repaid its bank debt and contributed $14.6 million to the statutory
capital of American with proceeds from the sale of 3,451,668 shares of common
stock. Management believes the actions taken resulted in the increased sales
experienced in 1994 and 1993.
STRATEGY
The company has developed its business strategy to better enable it
to capitalize on what it perceives as significant opportunities in the
growing annuity market. The elements of this strategy are to (i) expand sales
in a growing market while maintaining its focus on single premium annuities,
(ii) attract quality agents, (iii) design and sell products with profit
potential, and (iv) maintain a high quality investment portfolio.
EXPAND SALES IN A GROWING MARKET. The company believes that its focus
on deferred annuity products in the expanding savings and retirement market
provides opportunity for growth. The company seeks to meet the needs of the
savings and retirement market by offering a portfolio of annuity products
nationwide. Over 80% of American's premiums received have been from
individuals ages 50 and over.
ATTRACT QUALITY AGENTS. The company intends to pursue the growth of
its business through increased production from existing agents and through
the creation of new agent relationships. American believes that it is able to
attract agents to sell its products by providing a broad selection of fixed
annuity products and timely, comprehensive services to agents and customers.
The company recruits agents through its wholly-owned subsidiary, American
Sales, and through other marketing organizations, and regularly evaluates its
distribution system for growth opportunities. American has approximately
6,700 independent insurance agents licensed to sell its products in 47 states
and the District of Columbia.
DESIGN AND SELL PRODUCTS WITH PROFIT POTENTIAL. The company seeks to
design its products to enhance the potential for profit and reduce the risk
of loss. Management's philosophy is to limit sales of annuities when it
believes that market conditions would prevent the company from achieving
targeted spreads. The company adjusts credited rates based on prevailing
market conditions and available investment yields, subject to certain
interest rate guarantees. Annuities currently issued by the company include
features such as surrender charges, limited free withdrawal privileges,
market value adjustments and deferred payout provisions. These features are
designed to encourage persistency and provide protection from losses due to
premature termination. Management continuously monitors and adjusts its produc
t features and terms in response to market conditions.
MAINTAIN A HIGH QUALITY INVESTMENT PORTFOLIO. The company seeks to
maintain a high quality investment portfolio and to purchase investments
taking into account the anticipated cash flows of its assets and liabilities.
The weighted average duration of the company's investments was 4.7 years as
of December 31, 1994. As of that date, approximately 97% of the company's
investment portfolio consisted of bonds approximately 93% of which were
investment grade.
MARKETING AND DISTRIBUTION
To access the market of potential annuity buyers, the company
maintains a network of independent agents licensed in 47 states and the
District of Columbia. As of December 31, 1994, American had approximately
6,700 agents contracted to sell its annuity products.
The company also maintains contact with approximately 26,000 agents
that are not currently licensed, but have either sold American's annuities in
the past or have expressed an interest in doing so. These agents continue to
receive periodic mailings related to interest rate and commission changes,
and new product introductions, and are reappointed as required in order to
represent the company in selling its products. However, in order to save
costs associated with reappointing agents, the company does not automatically
relicense an agent that has not written business for twelve months. Such
costs include the annual licensing fee of $20 to $40 per agent.
The company recruits new agents through American Sales and through
other marketing organizations. Because both American Sales and other
marketing organizations rely on independent agents, the company does not
maintain an exclusive or captive sales force thereby avoiding the related
costs. Since 1990, over 34% of annuity premiums received by American have
been produced by agents recruited through American Sales. Marketing
organizations are responsible for, and bear the cost of, recruiting agents.
In accordance with industry custom, American Sales and the marketing
organizations receive a gross commission from American for originating an
annuity contract, a portion of which is paid to the originating agent (the
"street commission"). The marketing organization or American Sales retains
the difference between the gross commission and the street commission (the
"override commission"). The availability of override commissions provides an
economic incentive to the marketing organizations to recruit agents who
produce business.
The company, through American Sales, recruits new agents principally
through direct mail solicitations. The company analyzes the market for its
products and reviews the number and geographical distribution of licensed
agents regularly. Data reviewed include premiums received and agents licensed
per capita by state. This allows the company to identify specific regions of
the country where it believes it can most effectively recruit agents for the
sales of its annuity products. The company develops a targeted list of
potential agents from sources such as databases of licensed agents maintained
by state insurance commissioners as well as industry associations such as the
Million Dollar Round Table and the American Society of Chartered Life
Underwriters. The company also regularly advertises its products, rates and
commission levels in various industry trade publications. To be contracted by
the company, agents must be licensed by state insurance regulatory
authorities and have their applications approved by the company.
Crediting rates, commissions, the perceived quality of the issuer,
product features and services are generally the principal factors influencing
an agent's willingness and ability to sell particular annuity products. The
company believes that both agents and policyowners value the service provided
by the company. For example, American generally issues an SPDA policy,
together with the agent's commission check, within 72 hours of receiving the
application and premium. The company also seeks to provide ongoing service to
the agent. Towards that end, the company provides agents with access to the
company's senior executives. The company has developed an interactive system
accessible by all agents to obtain policy information. In addition, agents
and annuitants can access information about their policies via a toll-free
telephone number.
The company collects premiums from policyowners throughout the United
States. During 1994, 57.4% of its SPDA sales were in the following states:
Florida (7.8%), Illinois (7.5%), California (6.5%), Michigan (6.5%), Texas
(5.7%), Ohio (5.2%), Kansas (4.9%), Colorado (4.6%), Wisconsin (4.6%), and
New Jersey (4.1%).
The company is not dependent on any one agent or agency for any
substantial amount of its business. No single agent accounted for more than
1.0% of American's annual sales in 1994, and the top twenty individual agents
accounted for approximately 13.8% of American's volume in 1994. The company
does not have exclusive agency agreements with its agents and management
believes most of these agents sell products, similar to those sold by
American, for other insurance companies. This can result in sales declines if
for any reason American is relatively less competitive or there are concerns
such as existed in 1991, about asset quality, the downgrade in American's
A.M.Best rating, and the insolvencies of other insurance companies.
The four major independent marketing organizations through which the
company recruits agents to sell its annuity products were responsible for the
recruitment of agents that accounted for 46.1% of premiums received during
1994. While the termination of the company's relationships with any of its
marketing organizations could result in the loss of agents and could
adversely affect the level of sales and surrenders, the company does not
believe that the loss of any one marketing organization would have a material
adverse effect on the financial condition of the company.
In 1991, the company became aware of five instances of agent fraud
involving two agents in Ohio, one agent in Tennessee, one agent in Texas and
one agent in Kansas. While there was no connection between any of the five
agents, all cases of agent fraud involved either (i) the wrongful taking of
funds from certain individuals who thought they were submitting funds to the
company, or (ii) forged endorsements of surrender checks payable to
policyholders of the company. The agents were prosecuted and settlements were
reached with the victims. Certain amounts paid by the company were recovered
from two banks that cashed checks with forged endorsements. The company (i)
engaged a firm to review and recommend procedures, (ii) adopted changes in
certain procedures relating to agent licensing, policy issuance and delivery,
and processing of withdrawals and surrenders, to help reduce future
occurrences of fraud, and (iii) purchased insurance coverage for up to $10
million of future losses from fraud. By implementing these changes the
company believes that it has substantially reduced the likelihood of future
material loss resulting from agent fraud.
PRODUCTS
The company specializes in the sale of SPDA products to individuals.
During each of the past three years, sales of SPDAs have accounted for
approximately 86% of the company's premiums received, while sales of SPIAs
and FPDAs have accounted for virtually all remaining premiums received.
SPDAs involve a one-time premium deposit by the policyowner at the
time of issuance. Following an accumulation period, the policyowner is
entitled to receive the principal value plus accumulated interest credited to
such annuity, payable either in a lump-sum or through annuity payments over a
certain period or for life. Interest credited during the accumulation period
generally is not subject to federal or state income tax. Payments are
typically made to the annuitant after age 65 and are taxable at the tax rate
then applicable to the annuitant.
American currently sells annuity products with different benefits,
interest rates and commission structures. These products offer tax-deferred
accumulation of interest, various interest guarantees, guaranteed cash
values, and a choice of guaranteed income options on the selected maturity
date. The portfolio of products is continuously reviewed with new plans added
and others discontinued in an effort to remain competitive.
The company's operating earnings are derived primarily from its
investment results, including realized gains (losses), less interest credited
to annuity contracts and expenses. In determining credited rates, American
takes into account the profitability of its annuity business and the relative
competitive positions of its products. Credited rates during the initial and
any renewal period are based on assumptions and estimates relating
principally to persistency, investment yield and expenses as well as managemen
t's judgment as to certain market and competitive conditions.
American's SPDAs have an initial credited interest rate (currently
5.75% to 8.75%, depending on the features of the contract) guaranteed for a
period of one to five years. Following the initial guarantee period, American
may adjust the credited interest rate annually, subject to the guaranteed
minimum interest rates specified in the contracts. Such minimum guaranteed
rates range from 4% to 6%. The credited rates on SPDAs with accumulated
values of approximately $537.5 million are currently set at the minimum
guaranteed rate. The accumulated values of SPDAs by credited interest rates
are as follows as of December 31, 1994: $834.7 million-less than or equal to
5.5%; $619.4 million-greater than 5.5% but less than or equal to 6.5%; $215.4
million-greater than 6.5% but less than or equal to 7.5%; and $150.5
million-greater than 7.5%. The credited rates on SPDAs representing a
majority of total accumulated value may be reset by the company within a
period of one year subject to the guaranteed minimum rate.
The company incorporates a number of features in its annuity products
designed to reduce the occurrence and adverse effect of premature termination
of the policy. Premature termination of an annuity contract results in the
loss of future investment earnings related to the annuity deposit and in the
accelerated recognition of deferred expenses related to policy acquisition,
principally commissions, which are otherwise recoverable over the life of the
policy.
The primary feature incorporated by the company to minimize premature
terminations is a surrender charge. While the policyowner is permitted at any
time to withdraw all or part of the accumulated value of his policy, such
withdrawals are generally subject to a surrender charge for the period of
years specified in the contract. The surrender charge, which is a percentage
of the total accumulated value including accrued interest, is designed to
discourage premature termination. Surrender charges, subject to certain
exceptions, apply for the number of years specified in the contract and
decline to zero over a period of five to fourteen years. All annuities
currently issued by the company include surrender charges and approximately
90% of the company's contracts in force currently have surrender charges. The
company generally limits free annual withdrawal to 10% of accumulated value.
When the company receives a request for surrender of an annuity
policy, a conservation letter is mailed to the policyowner. This letter is
designed to inform the policyowner of the possible tax implications and the
surrender charge payable under the annuity policy. No surrender benefits are
paid until the company receives a written response to the conservation
letter. Typically policyowners who have requested a surrender of $10,000 or
more are personally contacted by telephone. The company's conservation
procedures are designed to (i) attempt to conserve the business, (ii)
ascertain the causes of the surrenders, and (iii) identify and terminate
agents who write low persistency business. In certain contracts, the
surrender charge is waived for a period of 45 to 60 days following the
crediting of a renewal interest rate below a specified rate ( the "bailout"
rate). Of the company's $2.0 billion annuity contracts in force as of
December 31, 1994, $180.9 million have a "bailout" feature remaining. The "bai
lout" rate on $180.5 million of this amount is 6% or less. Surrender charges
also generally do not apply to one-time annual withdrawals by policyowners of
up to 10% of the accumulated value of the annuity.
Approximately 39% of the SPDA business in force as of December 31,
1994, provides that the company may pay any surrender value in level
installments over 60 months in lieu of a lump sum payment. Additionally, at
that date approximately 14% of the SPDA business in
force had a market value
adjustment provision that will provide American with additional protection
during a period of rising interest rates through a reduction in the surrender
value payable upon surrender of the policy.
INVESTMENTS
The company's earnings are largely determined by its ability to
maintain a spread between its investment results and the interest credited on
its annuity products. The average duration of the company's investments was
4.7 years as of December 31, 1994. As of that date, the company had $1,914.3
million of cash and invested assets of which $1,844.2 million or
approximately 96% represented investments in bonds. At that date,
approximately 93% of the company's bond portfolio was rated investment grade.
As of December 31, 1994, the carrying value of the company's bond portfolio
exceeded its market value by $91.5 million.
The following table summarizes the company's investment results for
the period indicated:
INVESTMENT RESULTS
For the Year Ended December 31,
1994 1993 1992
(dollars in millions)
Average invested assets ................... $ 1,862.3 1,770.9 1,689.6
Net investment income ..................... 142.0 138.5 141.2
Yield ..................................... 7.6% 7.8% 8.4%
Net investment gains (losses) ............. $ .8 17.0 20.5
________________
Average of cash, invested assets (before SFAS 115 adjustment) and net
amounts due to or from brokers on unsettled security trades at the beginning
and end of period.
Net of investment expenses.
Net investment income divided by average invested assets.
Net invested gains (losses) include provisions for impairments in value
that were considered other than temporary.
The following table sets forth the company's investment portfolio as
of December 31, 1994:
INVESTMENT PORTFOLIO
As of December 31, 1994
Carrying
Value % of Total
(dollars in millions)
Debt Securities :
U.S. Government...................................... $ 3.6 .1%
Investment grade corporate........................... 1,041.2 54.4
Non-investment grade corporate....................... 136.9 7.2
Mortgage-backed .................................. 662.5 34.6
Total debt securities 1,844.2 96.3
Equity Securities :
Common stock......................................... 2.4 .1
Total equity securities 2.4 .1
Mortgage loans on real estate................................ 5.5 .3
Real estate .............................................. .4 -
Policy loans................................................. 5.1 .3
Other long-term investments .............................. 47.8 2.5
Short-term investments ................................... .5 -
Less allowance for credit losses............................. (2.2) (.1)
Total investments 1,903.7 99.4
Cash......................................................... 10.6 .6
Total cash and investments $ 1,914.3 100.0%
Debt securities "held-to-maturity" are generally stated at amortized
cost adjusted for impairments in value, while those "available-for-sale" are
carried at estimated market value. Total market value of debt securities
as of December 31, 1994, was approximately $1,752.7 million, representing
net unrealized investment losses of approximately $105.6 million.
Consist primarily of collateralized mortgage obligations ("CMOs").
Equity securities are stated at current market values. Original cost of
equity securities as of December 31, 1994, was approximately $2.2 million.
Real estate owned is carried at cost less depreciation.
Consist principally of investments in limited partnerships which are
carried at an amount equal to the company's share of the partnerships'
estimated market value with any unrealized gains or
losses recorded in net investment income.
Short-term investments are carried at amortized cost which approximates
market value.
Included in other Long Term Investments on December 31, 1994, were
$23.1 million, at market, of limited partnership investments. These funds are
managed by outside investment advisors. The investment guidelines of these
partnerships allow for a very broad range of investment alternatives to
include, but not limited to, derivatives, currencies, foreign and U.S.
stocks, foreign and U.S. bonds, futures, options and commodities. Such
partnerships are generically referred to as hedge funds. These investments
were made with a goal of obtaining yield over time which exceeds the yield of
the S&P 500 Index and are carried at market value with any unrealized gains
and losses recorded in Net Investment Income in the company's statement of
earnings. Net Investment Income (Loss) on these partnerships were $1.2
million and ($1.9) million for 1993 and 1994, respectively. The company first
invested in such partnerships in July 1993; therefore, 1993 income represents
partial year results. Subsequent to December 31, 1994, the company withdrew
$5.5 million from certain of these partnerships. Management believes that the
earnings on this class of investments could experience greater volatility
than that which might be achieved by the S&P 500 Index and could, therefore, m
aterially affect the company's earnings for any given period.
Bonds and mortgage-backed securities often contain options which
permit an issuer to call, prepay or repurchase a security at a specified
price in the future. When a security is called, it is probable that American
will have to reinvest the proceeds at a lower interest rate. Mortgage-backed
securities are accounted for using expected prepayment assumptions.
Accordingly, as prepayment rates on mortgage-backed securities change, the
company adjusts its income realization on mortgage-backed securities to reflec
t its best estimate of future cash flows and the corresponding income
resulting from the accretion of discounts and the amortization of premiums.
Mortgage-backed securities are subject to prepayment risk. This is
due to the fact that in periods of declining interest rates, the mortgages
which collateralize the security may be repaid more rapidly than scheduled,
as individuals refinance higher rate mortgages to take advantage of lower
prevailing rates. As a result, holders of mortgage-backed securities could
receive prepayments on their investments which the holder may not be able to
reinvest at interest rates comparable to the rate on the prepaying security.
The company has reduced this risk of prepayment by investing a
majority (approximately 76%) of its mortgage-backed investment portfolio
in planned amortization class ("PAC"), targeted amortization class ("TAC")
and accretion directed class ("AD") instruments. These investments are
designed to amortize in a more predictable manner by shifting the primary
risk of prepayment of the underlying collateral to investors in other
tranches ("support classes") of the CMO. Sequential and pass-through classes r
epresent approximately 22% of the book value of the company's mortgage-backed
securities as of December 31, 1994.
In some instances, American invests in non-agency, non-government
sponsored enterprise mortgage-backed securities. Such investments comprised
24% of the book value of American's mortgage-backed securities at December
31, 1994. The credit risk associated with non-agency, non-government
sponsored enterprise mortgage-backed securities generally is greater than
that of an agency or government sponsored enterprise mortgage-backed
securities which benefit from either explicit or implicit guarantees of the
U.S. government or an agency or instrumentality thereof; however, all of
American's non-agency, non-government sponsored enterprise mortgage-backed
securities are rated either Aaa or Aa by Moody's. As of December 31, 1994,
the company did not own any "interest only," "principal only," or "residual"
classes of CMOs.
For additional information on the company's investment in
mortgage-backed securities see Note 2 of Notes to Consolidated Financial
Statements.
The company carries all investments which it believes have
experienced other than temporary declines in value at estimated net
realizable value. In addition, as of December 31, 1994, the company
maintained a GAAP credit loss reserve of $2.2 million. The following table
indicates by quality rating the composition of the company's debt securities
portfolio (at book and market value) excluding short-term investments as of
December 31, 1994:
COMPOSITION OF DEBT SECURITIES BY QUALITY RATING (1)
As of December 31, 1994
% of % of Market or
Book Debt Invested Estimated
Value Securities Assets Fair Value
(dollars in millions)
Investment grade:
U.S. Government, its agencies and
government sponsored enterprises......... $ 517.3 27.8% 27.0% $ 494.2
Aaa.......................................... 121.2 6.5 6.3 116.8
Aa........................................... 144.3 7.8 7.6 134.0
A............................................ 522.7 28.1 27.3 488.0
Baa.......................................... 415.9 22.4 21.7 392.0
Total investment grade 1,721.4 92.6 89.9 1,625.0
Non-investment grade:
Ba........................................... 126.4 6.8 6.6 119.4
B............................................ 10.5 .6 .6 8.3
Total non-investment grade 136.9 7.4 7.2 127.7
Total debt securities $ 1,858.3 100.0% 97.1% $ 1,752.7
As used in the above table and elsewhere in this report, book value
is defined as amortized cost, including adjustments for any other than
temporary dimunitions in value, prior to any market value adjustments.
The company defines high-yield securities as those corporate debt
obligations rated below investment grade by Standard & Poor's and Moody's or,
if unrated, those that meet the objective criteria developed by the company's
independent investment advisory firm. Management believes that the return on
high-yield securities adequately compensates the company for additional
credit and liquidity risks that characterize such investments. In some cases,
the ultimate collection of principal and timely receipt of interest is
dependent upon the issuer attaining improved operating results, selling
assets or obtaining financing.
Rising interest rates could encourage increased policy surrenders.
This could create the need to sell bonds at a time when their market values
are below their book values.
The weighted average life and duration of the company's bond
portfolio as of December 31, 1994, and for the past three years were as
follows:
WEIGHTED AVERAGE LIFE AND DURATION
As of December 31,
1994 1993 1992
Weighted average life............. 6.7 5.5 6.8
Weighted average duration...... 4.7 4.2 4.8
Reflects average duration weighted by market value. Duration is a
measure of the price sensitivity of a bond to changes in interest rates.
See Note 2 of Notes to Consolidated Financial Statements for
information regarding the maturity of the company's bond portfolio as of
December 31, 1994.
The company attempts to manage its assets and liabilities so that
income and principal payments received from investments are adequate to meet
the cash flow requirements of its policyholder liabilities. The relatively
short-term nature of the investment portfolio reflects the characteristics of
the company's liabilities. Approximately 93% of the policy and deposit
liabilities of the company represents reserves for SPDAs that may be
partially or totally surrendered at the policyholders' option, subject to
surrender charges, market value adjustments or other limitations, when
applicable. The cash flows of the company's liabilities are affected by
actual maturities, surrender experience and credited interest rates. The
company periodically performs cash flow studies under various interest rate
scenarios to evaluate the adequacy of expected cash flows from its assets to
meet the expected cash requirements of its liabilities. The company utilizes
these studies to determine if it is necessary to lengthen or shorten the
average life and duration of its investment portfolio. Because of the
significant uncertainties involved in the estimation of asset and liability
cash flows, there can be no assurance that the company will be able to
effectively manage the relationship between its asset and liability cash
flows.
The components of net investment gains (losses) for the past three
years were as follows:
COMPONENTS OF NET INVESTMENT GAINS (LOSSES)
For the Year Ended December 31,
1994 1993 1992
Investment gains on investments
disposed of................................. $ 4.3 18.6 26.9
Investment losses on investments
disposed of.................................. (3.5) (.1) (7.2)
Writedowns on investments held at
year end..................................... (.3) (.2) (3.6)
Allowance for credit losses-
beginning of year............................ 2.5 2.5 7.0
Allowance for credit losses-end
of year..................................... (2.2) (2.5) (2.5)
Other ................................... - (1.3) (.1)
Net investment gains (losses)................. $ .8 17.0 20.5
See "Management Discussion and Analysis of Financial Condition and
Results of Operations" with respect to amounts of securities sold. See Notes
1 and 2 of Notes to Consolidated Financial Statements for additional
information with respect to investments.
OTHER INSURANCE PRODUCTS
Prior to 1987, American sold, among other products, cancer expense
plans and nonparticipating and participating life insurance. In 1982,
American reinsured all of its cancer expense plans and in 1986, American
reinsured approximately 65% of its nonparticipating life insurance in force
through assumption reinsurance treaties. The total reserves on reinsurance
ceded under assumption reinsurance treaties were approximately $11 million at
the time of transfer. A recent federal district court decision held that in
certain circumstances an insurer may remain contingently or primarily liable
for policy liabilities transferred in assumption reinsurance transactions.
Based on management's belief that the reinsurers are solvent and capable of
meeting all obligations on the policies reinsured, management considers the
likelihood that any liability would inure to the company remote. However, in
the event of the insolvency of the reinsurers, it is possible that the
company would be liable for the reinsured policies.
American has $17.3 million face amount of participating life
insurance policies in force, net of reinsurance, and $53.6 million of
nonparticipating life insurance, net of reinsurance, in force. American has
followed a plan of paying dividends on its outstanding participating life
insurance policies in amounts determined annually by its Board of Directors
and expects to continue doing so in the future. For the year ended December
31, 1994, dividends paid under these policies totalled $.2 million. Actual mor
tality experience in a particular period may be different than actuarially
expected mortality experience and, consequently, may adversely affect the
company's operating results for such period.
REINSURANCE
American reinsures portions of life insurance risks with unaffiliated
insurance companies under traditional indemnity reinsurance agreements.
Generally, American enters into traditional reinsurance arrangements to
assist in diversifying its risk and to limit its maximum loss exposure on
risks that exceed American's policy retention limits, currently $150,000 per
life. Reinsurance does not fully discharge American's obligation to pay
policy claims on the reinsured business. American remains responsible for
policy claims to the extent the reinsurer fails to pay claims. No reinsurer
of business ceded by American has failed to pay any policy claims (either
individually or in the aggregate) with respect to such ceded business. As of
December 31, 1994, American had ceded to reinsurers $259.2 million of its
$330.1 million of life insurance in force and had taken $148.6 million of
related reserve credits against future policy benefits. Of the insurance
ceded and reserve credits taken, $228.9 million and $146.9 million,
respectively, relate to one reinsurance contract with Employers Reassurance
Corporation (ERC). This reinsurance agreement pertains to the coinsurance of
90% of all risks associated with all of the SPWL policies written by the
company prior to 1989. Based on a review of the 1993 statutory Annual
Statements filed by ERC with the Kansas Insurance Department and ERC's A.M.
Best rating of "A+" (Superior), the company believes that ERCis solvent and
capable of meeting its obligations on the policies reinsured.
RATINGS
American has been rated "A-" (Excellent) by A.M. Best since 1991.
A.M. Best's ratings for insurance companies currently range from "A++" to
"F," and some companies are not rated. Publications of A.M. Best indicate
that "A" (Excellent) and "A-" (Excellent) ratings are assigned to those
companies which, in A.M. Best's opinion, have achieved excellent overall
performance when compared to the norms of the life insurance industry, and
generally, have demonstrated a strong ability to meet their policyholder and
other contractual obligations. In evaluating a company's financial and
operating performance, A.M. Best reviews the company's profitability,
leverage and liquidity as well as the company's book of business, the
adequacy of its policy reserves and the experience and competency of its
management. American has a claims paying ability rating from Duff & Phelps of
"A+" (High). Duff & Phelps' claims paying ability ratings represent its
opinion as to the financial ability of an operating insurance company to meet
obligations under its insurance policies and are based on current information
provided by the insurance company and other sources. Higher ratings generally
indicate financial stability and a strong ability to pay claims. A.M. Best's
and Duff & Phelps' ratings are based upon factors of concern to policyowners,
agents and intermediaries and are not directed toward the protection of
investors.
REGULATION
The company and American are subject to the insurance laws and
regulations of Kansas, the domiciliary state of American, and the laws and
regulations of the other states in which American is licensed to do business.
At present, American is licensed to conduct business in 47 states and the
District of Columbia. The insurance laws and regulations, as well as the
level of supervisory authority that may be exercised by the various state
insurance departments, vary by jurisdiction, but generally grant broad powers
to supervisory agencies or state regulators to examine and supervise
insurance companies and insurance holding companies with respect to every
significant aspect of the insurance business. These laws and regulations
generally require insurance companies to meet certain solvency standards and
asset tests, to maintain minimum standards of business conduct and to file
certain reports with regulatory authorities, including information concerning
their capital structure, ownership and financial condition.
American is required to file annual statutory financial statements in
each jurisdiction in which it is licensed. Additionally, American is subject
to periodic examination by the insurance departments of the jurisdictions in
which it is licensed, authorized and accredited. The Kansas Insurance
Department completed its most recent examination of American for the years
ended December 31, 1990 through December 31, 1993. The results of this
examination contained no material adverse findings.
The NAIC adopted an accreditation program in 1992 which requires
Insurance Departments of the various states to become accredited by the end
of 1994 or cede certain control over their domestic companies. The program
requires certain model laws, model regulations and practices to be in effect.
The Kansas Insurance Department has been accredited under the NAIC program.
INSURANCE HOLDING COMPANY REGULATIONS; RESTRICTIONS ON DIVIDENDS AND
DISTRIBUTIONS. The company and American are subject to regulation under the
insurance and insurance holding company statutes of Kansas. The insurance
holding company laws and regulations vary from jurisdiction to jurisdiction,
but generally require insurance and reinsurance subsidiaries of insurance
holding companies to register with the applicable state regulatory
authorities and to file with those authorities certain reports describing,
among other information, their capital structure, ownership, financial
condition, certain
intercompany transactions and general business operations. The insurance
holding company statutes also require prior regulatory agency approval or, in
certain circumstances, prior notice of certain material intercompany
transfers of assets, as well as certain transactions between insurance
companies, their parent companies and affiliates.
The company is an insurance holding company and substantially all
income reflected in its Consolidated Statements of Earnings is derived from
the operations of American. The company's assets consist primarily of the
stock of American and its other subsidiaries. Dividends, fees, rents and
commissions received from American have been, and together with the company's
retained funds and earnings thereon will be, the source of funds for the
payment of operating and other expenses incurred by the company. Insurance
laws and regulations of Kansas, the state of incorporation of American,
restrict the flow of funds, including dividends, from American to the
company. In addition, the payment of dividends, fees, rents and commissions
by American reduces its capital and surplus, and therefore, can affect the
amount of annuities it can write.
Pursuant to the Kansas Insurance Holding Company Act, American may
not, without prior approval of the Kansas Insurance Department, pay dividends
if the amount of such dividends added to all other dividends or other
distributions made by American within the preceding twelve months exceeds the
greater of (i) its statutory net gain from operations for the prior calendar
year or (ii) 10% of statutory surplus at the end of the preceding calendar
year. During the year ended December 31, 1994, American had a statutory net
gain from operations of $4.2 million. As of December 31, 1994, 10% of
American's statutory
surplus was $8.8 million. In addition, another provision
of Kansas insurance law limits dividends that American may pay to the company
to earned surplus calculated on a statutory basis, which totalled $13.0
million as of December 31, 1994. Subject to the provisions of the Kansas
insurance law, American also may advance funds to the company in the form of
loans.
Under the Kansas Insurance Statute, unless (i) certain filings are
made with the Kansas Insurance Department, (ii) certain requirements are met,
including a public hearing and (iii) approval or exemption is granted by the
insurance commissioner, no person may acquire any voting security or security
convertible into a voting security of an insurance holding company, such as
the company, which controls a Kansas insurance company or merge with such a
holding company, if as a result of such transaction such person would
"control" the insurance holding company. "Control" is presumed to exist if a
person directly or indirectly owns or controls 10% or more of the voting
securities of another person.
NAIC REGULATORY CHANGES. The NAIC and insurance regulators also have
become involved in a process of re-examining existing laws and regulations
and their application to insurance companies. In particular, this
re-examination has focused on insurance company investment and solvency
issues and, in some instances, has resulted in new interpretations of
existing law, the development of new laws and the implementation of
non-statutory guidelines.
Regulations prescribed by the NAIC require the establishment of an
Asset Valuation Reserve ("AVR") account designed to stabilize a company's
statutory capital and surplus against fluctuations in the market value of
stocks and bonds. The AVR consists of two main components: a "default
component," which provides for potential credit related losses on
debt-securities and an "equity component," which provides for potential
losses on all types of equity investments, including real estate. The
regulations also require the establishment of an Interest Maintenance Reserve
("IMR"), which is credited with the portion of realized investment gains and
losses net of tax from the sale of fixed maturities attributable to changes
in interest rates. The IMR is required to be amortized into earnings over the
remaining period to maturity of the fixed maturities sold.
RISK-BASED CAPITAL REQUIREMENTS. The NAIC has adopted risk-based
capital ("RBC") requirements that require insurance companies to calculate
and report information under a risk-based formula that attempts to measure
statutory capital and surplus needs based on the risks in a company's mix of
product and investment portfolio. Under the formula, a company first
determines its Authorized Control Level risk-based capital ("ACL") by taking
into account (i) the risk with respect to the insurer's assets; (ii) the risk
of adverse insurance experience with respect to the insurer's liabilities and
obligations; (iii) the interest rate risk with respect to the insurer's
business; and (iv) all other business risks and such other relevant risks as
are set forth in the RBC instructions. A company's "Total Adjusted Capital"
is the sum of statutory capital and surplus and such other items as the RBC
instructions may provide.
The requirements provide for four different levels of regulatory
attention. The "Company Action Level" is triggered if a company's Total
Adjusted Capital is less than 2.0 times its ACL but greater than or equal to
1.5 times its ACL. At the Company Action Level, the company must submit a
comprehensive plan to the regulatory authority which discusses proposed
corrective actions to improve its capital position. The "Regulatory Action
Level"is triggered if a company's Total Adjusted Capital is less than 1.5
times but greater than or equal to 1.0 times its ACL. At the Regulatory
Action Level, the regulatory authority will perform a special examination of
the company and issue an order specifying corrective actions that must be
followed. The "Authorized Control Level" is triggered if a company's Total
Adjusted Capital is less than 1.0 times but greater than or equal to 0.7
times its ACL,
and the regulatory authority may take action it deems
necessary, including placing the company under regulatory control. The
"Mandatory Control Level" is triggered if a company's Total Adjusted Capital
is less than 0.7 times its ACL, and the regulatory authority is mandated to
place the company under its control. As of December 31, 1994, American's
Total Adjusted Capital was $111.3 million and its Authorized Control Level
risk-based capital was $25.1 million.
Should a future deficiency occur, American would be subject to an
increased level of regulatory attention and, depending on the capital
deficiency, possibly to actual control by the appropriate regulatory
authorities.
ASSESSMENTS AGAINST INSURERS. Under the guaranty fund laws of all
states in which the company operates, insurers can be assessed for losses
incurred by policyholders of insolvent insurance companies. At present, most
guaranty fund laws provide for assessments based upon the amount of primary
insurance underwritten in a given jurisdiction. See Note 13 of Notes to
Consolidated Financial Statements. The company has set up a reserve for its
current estimate of future non-recoverable guaranty fund assessments.
FEDERAL REGULATION. Although the federal government generally does
not directly regulate the insurance industry, federal initiatives often have
an impact on the business. Congress and certain federal agencies are
investigating the current condition of the insurance industry in the United
States in order to decide whether some form of federal role in the regulation
of insurance companies would be appropriate. It is not possible to predict
the outcome of any such congressional activity or the potential effects
thereof on the company.
Item 1. (c) (1) (ii) New Products
________________________________________
The company introduced various versions of SPDA and FPDA during 1994.
In addition, a flexible premium universal life policy was introduced,
providing the company with a source of revenue diversification. The company
has not marketed a life insurance policy since the first quarter of 1993.
Item 1. (c) (1) (iii) Sources of Raw Materials
_____________________________________________________
The company does not require any raw materials.
Item 1. (c) (iv) Patents, Trademarks, Franchises, Etc.
____________________________________________________________
The company does not hold any patents, trademarks, licenses,
franchises, or concessions which are materially important.
Item 1. (c) (1) (v) Seasonal Nature of Business
____________________________________________________
The company is not engaged in a seasonal business.
Item 1. (c) (1) (vi) Working Capital Items
_____________________________________________
Not applicable.
Item 1. (c) (1) (vii) Dependence on Customers
_______________________________________________
The company is not dependent on a single customer or a few customers
where the loss of any one or more of whom would have an adverse effect on the
company.
Item 1. (c) (1) (viii) Backlog of Orders
_________________________________________
There is no backlog of orders with respect to the company.
Item 1. (c) (1) (ix) Portion(s) of Business Subject to Governmental
Negotiations
______________________________________________________________________________
There are no portions of the company's business which are subject to
renegotiation or termination of governmental contracts.
Item 1. (c) (1) (x) Competition in Registrant's Business
____________________________________________________________
The insurance industry is highly competitive and the company competes
with individual companies and with groups of
affiliated companies with substantially greater financial resources, larger
sales forces and more widespread agency and brokerage relationships. In
addition, in marketing annuity products, the company competes with other life
insurance companies as well as financial institutions which market
functionally competitive products.
The company's marketing strategy is to provide products for the
individual and business market through experienced, independent insurance
agents and brokers licensed to sell life insurance. The company utilizes
marketing agencies to recruit its agency force and also recruits agents
directly, utilizing industry trade publications and direct mail. The agents
and representatives contracted to sell for the company currently number
approximately 6,700.
The company's agents and brokers also represent other insurance
companies and sell policies which may compete with those of the company. The
company believes it has been successful in attracting and retaining brokers
and agents because it has been able to offer a competitive package of
innovative products, competitive commission structures, prompt policy
issuance and responsive policyholder service.
On January 18, 1995, the U.S. Supreme Court issued its decision in
the case of NATIONSBANK OF NORTH CAROLINA, N.A., V. VARIABLE ANNUITY LIFE
INSURANCE CO. In NATIONSBANK the Supreme Court upheld a decision by the
Office of the Comptroller of the Currency that a national bank may broker
annuities. However, the decision did not grant national banks the authority
to issue or underwrite annuities. The decision may increase interest on the
part of banks to begin selling annuities or to expand their existing efforts
to sell annuities.
The decision may result in a partial shift in the distribution of
annuities from insurance agents to national banks, which could result in a
decrease in sales for the company, or it may result in an increase in the
number of annuities sold because of distribution through national banks,
which could result in new distribution opportunities for the company.
Item 1. (c) (1) (xi) Research and Development
________________________________________________
The company made no material expenditures with respect to research
and development.
Item 1. (c) (1) (xii) Environmental Issues
____________________________________________
Subsurface assessments and research conducted beneath the parking lot
of the company's home office complex have indicated the possible existence of
underground storage tanks and levels of contamination which may require
remedial action. The company does not believe that any required remedial
action will result in any material capital expenditures.
Item 1. (c) (1) (xiii) Numbers of Persons Employed
___________________________________________________
On December 31, 1994, the company employed 100 persons in its Home
Office and had approximately 6,700 full and part-time agents who are paid on
a commission basis.
Item 1. (d) Foreign Operations
______________________________
The company does not have any material operations in foreign
countries nor does it derive any material portion of its revenue from
customers in foreign countries.
Item 2. Properties
__________________
The company owns its home office complex consisting of four buildings
and the adjacent property in Topeka, Kansas. Total
floor space in the four buildings is approximately 31,000 square feet. Recent
and projected growth along with the efficiencies to be gained from having its
operations under one roof have led the company to investigate the acquisition
of different facilities.
Item 3. Legal Proceedings
_________________________
The company does not have any material legal proceedings pending
against it.
Item 4. Submission of Matters to a Vote of Security Holders
__________________________________________________________
No matters were submitted to security holders during the fourth
quarter of the fiscal year covered by this report.
Item 5. Market Price of and Dividends on the Registrant's Common Equity and
Related
______________________________________________________________________________
Stockholder Matters
_____________________
The common stock of the company began trading on the New York Stock
Exchange under the symbol AMV on November 30, 1994. Prior to that date the
company's common stock traded in the over-the-counter market under the NASDAQ
symbol AVFC. The following table shows the quarterly high and low sales price
per share of common stock of the company as reported by the New York Stock
Exchange and NASDAQ:
COMMON
High Low
1994
Fourth Quarter.................... 10 81\4
Third Quarter..................... 10 8
Second Quarter.................... 101\2 83\4
First Quarter..................... 12 95\8
1993
Fourth Quarter.................... 11 93\8
Third Quarter..................... 11 3\4 93\4
Second Quarter.................... 13 3\4 93\8
First Quarter..................... 16 7\8 10
There were no dividends paid during 1993 or 1994.
On February 23, 1995, the board of directors declared an annual cash
dividend of 71\2 cents per common share, payable April 13, 1995, to
stockholders of record on March 18, 1995.
As of March 17, 1995, there were approximately 3,723 holders of record of
the company's common stock.
See Management's Discussion and Analysis of Liquidity and Capital
Resources and Note 8 of the Notes to Consolidated Financial Statements for
the statutory limitation on dividends payable from American under Kansas law.
Item 6. Selected Financial Data
_______________________________________
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(NOT COVERED BY INDEPENDENT AUDITORS' REPORT)
Following is a summary of selected financial data for the five years ended
December 31, 1994:
(000's Omitted, except per share data)
1994 1993 1992 1991 1990
Total Revenue ................... $ 149,700 162,523 175,708 173,372 116,235
Earnings (loss) before
income taxes and
extraordinary item................ $ 19,286 26,755 17,318 6,675 (13,965)
Income tax expense (benefit)........ 5,593 8,564 118 (3,444) 3,754
Earnings (loss) before
extraordinary item.............. 13,693) 18,191 17,200 10,119 (17,719)
Extraordinary item: Loss on
early extinguishment of
debt............................ - (213) (382) - -
Net earnings (loss)................. $ 13,693 17,978 16,818 10,119 (17,719)
Earnings (loss) per share of
common stock:*
Primary:
Earnings (loss) before
extraordinary item.............. $ 1.32 2.62 2.94 1.84 (3.22)
Extraordinary item.............. - (.03) (.07) - -
Net earnings (loss)............. $ 1.32 2.59 2.87 1.84 (3.22)
Fully diluted:
Earnings (loss) before
extraordinary item.............. $ 1.32 2.49 2.62 1.84 (3.22)
Extraordinary item.............. - (.03) (.06) - -
Net earnings (loss)............. $ 1.32 2.46 2.56 1.84 (3.22)
Cash dividends per share
of common stock................ $ - - - - .50
Total Assets........................ $ 2,260,021 2,114,696 2,090,136 1,959,071 1,773,042
Capitalization:
Bank debt .......................... $ - - 19,859 28,437 33,562
Stockholders' equity................ 104,196 100,345 49,463 30,936 17,264
Total Capitalization................ $ 104,196 100,345 69,322 59,373 50,826
Total revenue for the years 1994, 1993, 1992 and 1991 includes net
investment gains of
$.8, $17.0, $20.5 and $16.5 million, respectively while the year 1990
includes net investment losses of $24.3 million.
*Per share data for 1990, 1991 and 1992 has been restated to give effect to a
one-for-two and one-half reverse stock split effective June 11, 1993.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
___________
GENERAL
The company specializes in the sale of deferred annuity products as a
retirement savings vehicle for individuals. During each of the past three
years, sales of SPDAs have accounted for at least 86% of the company's
premiums received, while sales of SPIAs and FPDAs have accounted for
virtually all remaining premiums received.
The company's operating earnings are derived primarily from its
investment results, including realized gains (losses), less interest credited
to annuity contracts and expenses. Under GAAP, premiums received on SPDAs,
SPIAs without life contingencies and FPDAs are not recognized as revenue at
the time of sale. Similarly, policy acquisition costs (principally
commissions) related to such sales are not recognized as expenses but are
capitalized as deferred acquisition costs, or "DAC". As a result of this defer
ral of costs and the lack of revenue recognition for premiums received, no
profit or loss is realized on these contracts at the time of sale. Premiums
received on SPDAs, SPIAs without life contingencies and FPDAs are reflected
on the company's balance sheet by an increase in assets equal to the premiums
received and by a corresponding increase in future policy liabilities.
The company's earnings depend, in significant part, upon the persistency
of its annuities. Over the life of the annuity, net investment income, net
investment gains and policy charges are realized as revenue, and DAC is
amortized as an expense. The timing of DACamortization is based on the
projected realization of profits including realized gains (losses) for each
type of annuity contract and is periodically adjusted for actual experience.
If a policy is terminated prior to its expected maturity, any remaining
related DAC is expensed in the current period. Most of American's annuity
policies in force have surrender charges which are designed to discourage and
mitigate the effect of premature withdrawals.As a result, the impact on
earnings from surrenders will depend upon the extent to which available
surrender charges offset the associated amortization of DAC. For the years
ended 1994, 1993 and 1992, the company's weighted average expected surrender
levels were 9.0%, 13.0% and 9.9%, compared to the weighted average actual
surrenders of 9.8%, 14.7% and 9.6%. Historically, the negative impact on
earnings of any difference between the actual surrender levels and expected
surrender levels has been more than offset by the realization of gains on the
sale of securities and the change in future expected gross profits as the
result of the company's reduction in credited rates.
Recent periods of low interest rates have reduced the company's
investment yields. As a result of the lower investment yields, the company
elected to reduce credited interest rates on certain of its annuity products.
Certain annuities issued by the company include a "bailout" feature. This
feature generally allows policyowners to withdraw their entire account
balance without surrender charge for a period of 45 to 60 days following the
initial determination of a renewal crediting rate below a predetermined
level. If a policyowner elects not to withdraw funds during this period,
surrender charges are reinstated. On policies including a "bailout" feature,
the company announces its renewal crediting rates on January 14 of each year.
In January 1994, 1993 and 1992, the company deemed it advisable, due to the
general decline in interest rates and the yield on its investment portfolio,
to reduce credited interest rates on certain annuity contracts below the
"bailout" level. The aggregate account values of annuity contracts on which
the crediting rate was reduced below the "bailout" level totalled $109.8
million, $326.2 million, and $160.4 million during 1994, 1993 and 1992,
respectively. As a result, $18.3 million, or 17%, $139.6 million, or 43%, and
$34.6 million, or 22%, of such policies were surrendered during 1994, 1993,
and 1992, respectively. The company was able to offset the negative impact of
"bailout" surrenders on its earnings through the realization of gains
on the
sale of its securities. Excluding surrenders from "bailout" products,
American's annuity withdrawal rates were 9% for 1994, 7% for 1993 and 7% for
1992. Although, as of December 31, 1994, approximately $180.9 million, or 14%
of annuity account values contained a "bailout" provision, the current
credited rates on these policies are above the "bailout" rate. The "bailout"
rate on $180.5 million of this amount is 6% or less. If the company reduces
credited rates below the "bailout" rates on policies containing "bailout"
provisions in the future, it intends to pay any resulting surrenders from
cash provided by operations and premiums received. In the event such sources
are not sufficient to pay surrenders, the company would have to sell
securities at the then current market prices. American expects that
withdrawals on its annuity contracts will increase as such contracts approach
maturity. The company may not be able to realize investment gains in the
future to offset the adverse impact on earnings, should future "bailout"
surrenders occur.
MARGIN ANALYSIS
The company's earnings are impacted by realized investment gains and
losses and by the associated amortization of DAC. The actual timing and
pattern of such amortization is determined by the actual profitability to
date (which includes realized investment gains and losses) and the expected
future profitability on a particular annuity contract. To the extent
investment income is accelerated through realization of investment gains, the
corresponding amortization of DAC is also accelerated as the stream of
profitability on the underlying annuities is effectively accelerated. When
investment losses are realized, the reverse is true. The following margin
analysis depicts the effects of realized gains (losses) on the company's
operating earnings (loss):
For the Year Ended December 31,
1994 1993 1992
(dollars in millions)
(percent of average invested assets)
Average invested assets .........$ 1,862.3 100.00% $ 1,770.9 100.00% $1,689.6 100.00%
Insurance premiums and
policy charges.................... $ 6.3 .34% $6.6 .37% $ 7.5 .44%
Net investment income ........... 142.0 7.62 138.5 7.82 141.2 8.36
Income from disposal of
private placement
securities...................... - - - - 5.8 .34
Policyholder benefits............... (112.3) (6.03) (113.8) (6.43) (128.0) (7.57)
Gross interest margin............... 36.0 1.93 31.3 1.76 26.5 1.57
Associated amortization of
deferred acquisition
costs........................... (8.8) (.47) (4.7) (.26) (7.7) (.46)
Net interest margin................. 27.2 1.46 26.6 1.50 18.8 1.11
Net investment gains................ .8 .04 17.0 .96 20.5 1.21
Associated amortization of
deferred acquisition
costs........................... (.2) (.01) (4.8) (.27) (8.7) (.51)
Net margin from investment
gains........................... .6 .03 12.2 .69 11.8 .70
Total net margin.................... 27.8 1.49 38.8 2.19 30.6 1.81
Expenses, net....................... (8.5) (.46) (11.1) (.62) (10.9) (.65)
Operating earnings.................. 19.3 1.03 27.7 1.57 19.7 1.16
Interest expense.................... - - (1.0) (.06) (2.4) (.14)
Earnings before income
taxes........................... 19.3 1.03 26.7 1.51 17.3 1.02
Income tax (expense)
benefit......................... (5.6) (.30) (8.5) (.48) (.1) (.01)
Earnings before extra-
ordinary loss................... 13.7 .73 18.2 1.03 17.2 1.01
Extraordinary loss on early
extinguishment of debt.......... - - (.2) (.01) (.4) (.02)
Net earnings........................$ 13.7 .73% $18.0 1.02% $ 16.8 .99%
Operating earnings..................$ 19.3 1.03% $27.7 1.57% $ 19.7 1.16%
Less: Net margin from
investment gains................ .6 .03 12.2 .69 11.8 .70
Operating earnings
excluding net investment
gains and associated
amortization of deferred
policy acquisition
costs...........................$ 18.7 1.00% $15.5 .88% $ 7.9 .46%
Average of cash, invested assets (before SFAS 115 adjustment) and net
amounts due to or from brokers on unsettled security trades at the beginning
and end of period.
Net investment income is presented net of investment expense.
RESULTS OF OPERATIONS
Years Ended December 31, 1994, 1993 and 1992
NET INVESTMENT INCOME increased $3.5 million, or 3%, to $142.0
million from $138.5 million in 1993. This increase resulted from an increase
in average invested assets from $1,770.9 million in 1993 to $1,862.3 million
in 1994, offset in part by a reduction in the average yield on invested
assets from 7.8% for the year ended December 31, 1993, to 7.6% for the year
ended December 31, 1994. Net investment income decreased $2.7 million, or 2%,
to $138.5 million in 1993 from $141.2 million in 1992. This decrease resulted
from the reduction in the average yield on invested assets from 8.4% for the
year ended December 31, 1992, to 7.8% for the year ended December 31, 1993,
offset in part by an increase in average invested assets from $1,689.6
million in 1992 to $1,770.9 million for 1993. Average yields have been
impacted by declining interest rates throughout 1992 and 1993 and the
reinvestment at lower yields of proceeds from securities disposed of to
realize investment gains. The 1994 yields were down as a result of an
investment in investment partnerships. These partnerships form a fund of
funds totalling $23.1 million on December 31, 1994 which is structured in an
attempt to consistently provide returns in excess of the Standard & Poor's
(S&P) 500 over time without regard to the general direction of financial
markets. This fund generated a loss of $1.9 million in 1994 compared with
income of $1.2 million in 1993. Since the date of original investment this
investment has experienced a loss of 2.2%, compared to a cash flow equivalent
loss of 9.4% had the same amounts been invested at the same time in 10 year
treasury bonds, or a .6% gain had the funds been invested in the Standard &
Poor's 500.
NET INVESTMENT GAINS decreased $16.2 million, or 95%, to $.8 million
for the year ended December 31, 1994, from $17.0 million for the year ended
December 31, 1993. This follows a $3.5 million decrease in 1993 from $20.5
million for the year ended December 31, 1992. Gains and losses may be
realized upon securities which are disposed of for various reasons. The gains
realized in 1994 are the result of general portfolio management while those
taken in 1993 were to reduce the effects of the statutory losses resulting
from surrenders following the reduction of interest crediting rates on
certain annuity policies below the "bailout" rate. The gains realized during
1992 were primarily to utilize the tax benefit of capital loss carryforwards.
The decision to realize gains or losses lies to a great degree in managements
discretion. Unrealized gains (losses) in the company's bond portfolio were
($105.6) million, $81.4 million and $41.5 million as of December 31, 1994,
1993 and 1992, respectively.
INCOME FROM DISPOSAL OF PRIVATE PLACEMENT SECURITIES was $5.8 million
in 1992. During 1988, 1989, and 1990, American purchased private placement
securities believed to have a quality rating equivalent to "BBB" by Standard
& Poor's. In 1992 the company engaged an independent firm to review the
private placement securities portfolio. That review determined those
securities would have been rated "BB" - "B" if they had been rated by S&P
when issued and that the total market value of the securities at the time of
the report was approximately $5.8 million less than the par value of these
securities. On September 21, 1992, an affiliate of the placement agent agreed
to purchase the bonds at their par value, which approximated the company's
cost. Several of these bonds had been written down in an amount totalling
$2.1 million during 1990, 1991 and 1992 when declines in value were
considered to be other than temporary. The effect on 1992 operations of this
transaction was a net investment loss of $4.3 million representing the
difference between the market value at the time of sale and the GAAP book
carrying value of the securities, and $5.8 million of income from disposal of
private placement securities representing the amount received in excess of
market value. There were no similar transactions in 1994 or 1993.
BENEFITS, CLAIMS AND INTEREST CREDITED TO POLICYHOLDERS decreased
$1.5 million, to $112.3 million in 1994 from $113.8 million in 1993. This
decrease results primarily from a reduction in the average interest rate
credited on the company's annuity liabilities, from 6.2% as of December 31,
1993 to 5.8% as of December 31, 1994. This decrease was partially offset by
an increase in annuity liabilities to $1,971.6 million on December 31, 1994.
In 1993, this amount decreased $14.2 million, or 11%, to $113.8 million from
$128.0 million in 1992. This decrease resulted primarily from a reduction in
the average interest rate credited on annuity liabilities, from 7.1% as of
December 31, 1992 to 6.2% as of December 31, 1993. This decrease was
partially offset by an increase in annuity liabilities to $1,826.9 million on
December 31, 1993, from $1,806.2 million on December 31, 1992.
AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS decreased $.4
million, to $9.0 million in 1994, from $9.4 million in 1993. Amortization of
deferred policy acquisition costs (DAC) associated with gross interest
margins increased $4.1 million, to $8.8 million in 1994, from $4.7 million in
1993. Amortization associated with investment gains decreased $4.6 million,
to $.2 million in 1994, from $4.8 million in 1993. The 1993 amortization
amounts reflect the lowering of interest crediting rates and the resulting
increase in the estimates of future expected gross profits and the
realization of $17.0 million of investments gains. This follows a decrease of
$7.0 million, or 43%, in 1993 from $16.4 million in 1992, primarily due to
decreased investment gains, the inclusion of income from disposal of private p
lacement securities in the 1992 period and the increase in the estimates of
future expected gross profits previously discussed. Acquisition costs
incurred in 1994 and deferred into future policy periods were $25.8 million,
compared with $18.2 million in 1993 and $14.1 million in 1992.
GENERAL INSURANCE EXPENSES decreased $1.2 million, or 14%, to $7.6
million in 1994 from $8.8 million in 1993. This decrease is primarily
attributable to the deferral of additional expenses related to the
acquisition of annuity contracts in 1994. This follows an increase in general
insurance expenses of $.1 million in 1993 from $8.7 million in 1992.
PREMIUM AND OTHER TAXES, LICENSES AND FEES decreased $1.1 million, or
46%, to $1.3 million in 1994 from $2.4 million in 1993 following a decrease
of $.1 million, or 4%, in 1993 from $2.5 million in 1992. The above amounts
include charges (credits) of approximately ($.4) million, $1.6 million and $1.
8 million for the years 1994, 1993 and 1992, respectively, for nonrecoverable
guaranty fund assessments resulting from a significant number of insolvencies
that occurred in recent years.
INTEREST EXPENSE decreased $1.0 million in 1994 following the
repayment of all debt in November, 1993, with proceeds from the company's
common stock offering. This follows a decrease of $1.4 million to $1.0
million in 1993 from $2.4 million in 1992. This decrease reflects the
repayment of debt in 1993.
INCOME TAX EXPENSE decreased $2.9 million to $5.6 million in 1994
from $8.5 million in 1993. During 1993, income tax expense increased $8.4
million to $8.5 million from $.1 million in 1992. A large portion of the tax
on net investment gains realized in 1992 was offset by tax benefits from
capital loss carryforwards from 1989 and 1990. These capital loss
carryforwards were fully utilized during 1992 resulting in the taxation of
the net investment gains realized in 1993 and 1994.
LIQUIDITY AND CAPITAL RESOURCES
The company is an insurance holding company whose principal asset is
the common stock of American. The company's primary cash requirements are to
pay operating expenses.
As a holding company, the company relies on funds received from
American to meet its cash requirements at the holding company level. The
company receives funds from American in the form of commissions paid to
American Sales, fees paid to AIG, rent, administrative, printing and data
processing charges and dividends. The insurance laws of Kansas generally
limit the ability of American to pay cash dividends in excess of certain
amounts without prior regulatory approval and also require that certain
agreements relating to the payment of fees and charges to the company by
American be filed with the Kansas Insurance Commissioner.
The liquidity and requirements of American are met by premiums
received from annuity sales, net investment income received, and proceeds
from investments upon maturity, sale or redemption. The primary uses of funds
by American are the payment of surrenders, policy benefits, operating
expenses and commissions, as well as the purchase of assets for investment.
For purposes of the company's consolidated statements of cash flows,
financing activities include premiums received from sales of SPDAs,
surrenders and death benefits paid, and surrender and policy charges
collected on these contracts. The net cash provided by (used in) these
particular financing activities for the years ended December 31, 1994, 1993
and 1992, was $26.6 million, ($91.5) million and ($27.7) million,
respectively.
The increase in net cash provided by annuity contracts without life
contingencies in 1994 resulted primarily from a $72.3 million decrease in
surrender and death benefits paid from $318.9 million (approximately 16.1% of
beginning reserves for future policy benefits) to $246.6 million
(approximately 12.3% of beginning reserves for future policy benefits) along
with a $45.6 million increase in premiums received from $222.2 million to
$267.8 million. The decline in net cash provided by annuity contracts without
life contingencies in 1993 resulted primarily from a $115.8 million increase
in surrender and death benefits paid from $203.1 million (approximately 11.1%
of beginning reserves for future policy benefits) to $318.9 million
(approximately 16.1% of beginning reserves for future policy benefits) offset
by a $53.5 million increase in premiums received from $168.7 million to
$222.2 million. The decline in net cash provided by annuity contracts without
life contingencies in 1992 resulted primarily from a $50.5 million decline in
premiums received from $219.2 million to $168.7 million, and a $5.8 million
increase in surrender and death benefits paid from $197.3 million
(approximately 12.6% of beginning reserves for future policy benefits) to
$203.1 million (approximately 11.1% of beginning reserves for future policy
benefits).
Net cash provided by the company's operating activities was $130.5
million, $129.7 million and $142.9 million in 1994, 1993 and 1992,
respectively.
Cash provided by financing and operating activities and by the sale
and maturity of portfolio investments is used primarily to purchase portfolio
investments and for the payment of acquisition costs (commissions and
expenses associated with the sale and issue of policies). To meet its
anticipated liquidity requirements, the company purchases investments taking
into account the anticipated future cash flow requirements of its underlying
liabilities. In addition, the company invests a portion of its assets in
short-term investments and maturities of less than one year (2%, 3% and 7% as
of December 31, 1994, 1993 and 1992, respectively). The weighted average
duration of the company's investment portfolio was 4.7 years as of December
31, 1994.
The company continually assesses its capital requirements in light of
business developments and various capital and surplus adequacy ratios which
affect insurance companies. During the past five years, the company has met
its capital needs and those of American through several different sources
including bank borrowing and the sale of both preferred and common stock. On
December 31, 1991, the company issued 172,000 shares of its $2.00 Series B
Convertible Preferred Stock with a total stated value of $4.3 million. The
Preferred Stock was convertible at $7.50 per share into 573,332 shares of the
company's Common Stock. On December 30, 1992, the company issued and sold
235,294 shares of Common Stock at $10.625 per share to the company's
Leveraged Employee Stock Ownership Plan ("LESOP"). This purchase was financed
with the proceeds of a $2.5 million loan from American. For additional
information regarding the LESOP, see Note 7 of Notes to Consolidated
Financial Statements. In 1993, the company raised $29.4 million through the
sale of 3,451,668 shares of Common Stock. In December, 1994, the company
entered into a credit agreement with The First National Bank of Chicago and
Boatman's First National Bank of Kansas City, as Lenders. Under the terms of
this agreement, the Lenders have committed to lend up to $25,000,000 in the
form of a 5-year reducing credit facility. For
additional information
regarding this credit agreement, see Note 6 of Notes to Consolidated
Financial Statements.
As of December 31, 1994, the company owned bonds of 39 issuers in
amounts exceeding 10% of stockholders' equity. The book value of such bonds
was $546.4 million which represented 29% of the company's invested assets.
See Note 2 of Notes to Consolidated Financial Statements. A default by any
one of these issuers could materially adversely affect the results of
operations and financial condition of the company. Twenty-six bonds with an
aggregate book value of $364.7 million were REMIC Trusts established by
government-sponsored enterprises. The remaining $181.7 million of such bonds
represent 13 issuers, of which all but one in the amount of $10.1 million are
rated investment grade.
Recent regulatory actions against certain large life insurers
encountering financial difficulty have prompted the various state guaranty
associations to begin assessing life insurance companies for the resulting
losses. For further information regarding the effects of guaranty fund
assessments, see Note 13 of Notes to Consolidated Financial Statements.
REINSURANCE. The company had amounts receivable under reinsurance
agreements of $149.7 million and $151.4 million as of December 31, 1994 and
1993, respectively. Of the amounts, $147.9 million and $149.5 million,
respectively, were associated with a single insurer, ERC. In 1989, the
company entered into a coinsurance agreement which ceded 90% of the risk on
the company's block of SPWL written prior to 1989 to ERC. The agreement
provides that ERC assumes 90% of all risks associated with each policy in the
block. Under the terms of the contract the company continues to administer
the policies and is reimbursed for all payments made under the terms of those
policies. Additionally, the company receives a fee from the reinsurer for
administering such policies. Cash settlements under the contract are made
with ERC on a monthly basis. If ERC were to become insolvent, American would
remain responsible for the payment of all policy liabilities.
In addition, the company is a party to two assumption reinsurance
agreements with other reinsurers. See Item 1.(c)(l) Business Done and
Intended to be Done-Other Insurance Products.
EFFECT OF INFLATION AND CHANGES IN INTEREST RATES. The company does
not believe that inflation has had a material effect on its consolidated
results of operations during the past three years. The company seeks to
manage its investment portfolio in part to reduce its exposure to interest
rate fluctuations. In general, the market value of the company's fixed income
securities increases or decreases directly with interest rate changes. For
example, if interest rates decline (as was the case in 1992 and 1993), the
company's fixed income investments generally will increase in market value,
while net investment income will decrease. Conversely, if interest rates rise
(as was the case in 1994), fixed income investments generally will decrease
in market value, while net investment income will increase.
In a rising interest rate environment (such as that experienced in
1994), the company's average cost of funds would increase over time as it
prices its new and renewing annuities to maintain a generally competitive
market rate. During such a rise in interest rates, new funds would be
invested in bonds with higher yields than the liabilities assumed. In a
declining interest rate environment, the company's cost of funds would
decrease over time, reflecting lower interest crediting rates on its fixed
annuities.
In addition to the increase in the company's average cost of funds
caused by a rising interest rate environment, surrenders of annuities that
are no longer protected by surrender charges increase. While the company
experienced a decrease in total surrenders during 1994, the decrease was
primarily due to the large number of bailout surrenders in 1993. Throughout
1994, the company saw an increase in surrenders of policies which no longer
were covered by surrender charges. Management believes the increased
surrenders experienced in 1994 were due to the increasing interest rates
throughout 1994. This trend
has continued into 1995. Management believes that
surrenders are lower during periods of declining interest rates.
BOND PORTFOLIO RESTRUCTURING. During 1990, the quoted market values
of many non-investment grade bonds substantially decreased. In response to
this decrease, the company substantially increased the allowance for credit
losses during the third quarter of that year, and completed a significant
restructuring of its bond portfolio during 1991.
During 1994, 1993 and 1992, the company disposed of bonds with book
values of $337.7, $374.6 and $673.8 million for net gains (losses) of $(.8)
$18.6 and $19.7 million, respectively. In 1993, the company reduced credited
interest rates below the "bailout" rates on certain annuity policies and the
related surrenders experienced during the "bailout" period resulted in losses
on a statutory basis. The company sold securities at gains to restore the
statutory surplus lost. The following chart sets forth the reasons that bonds
were disposed of, the book value of bonds disposed of and the gains (losses)
on dispositions for the years ended December 31, 1994, 1993, and 1992:
ANALYSIS OF BOND DISPOSITIONS
Years Ended December 31,
1994 1993 1992
Book Gains Book Gains Book Gains
Value (Losses) Value (Losses) Value (Losses)
(dollars in millions)
Bonds redeemed by issuer:
Investment grade............. $ 9.3 $.1 $ 41.2 $ .7 $ 73.7 $ -
Non-investment grade......... 2.3 (.1) 10.1 1.3 16.7 .5
Bonds sold to avoid further
losses as a result of
deteriorated credit
worthiness:
Investment grade............. 8.5 (.2) 12.4 (.1) 36.4 (.3)
Non-investment grade......... 2.0 (.2) 1.8 (.1) 55.1 (5.9)
Bonds sold as part of
normal portfolio management
Investment grade............. 315.6 (.4) - - - -
Non-investment grade......... - - - - - -
Bonds sold to utilize tax
benefit of capital
losses:
Investment grade............. - - - - 461.4 23.7
Non-investment grade......... - - - - 30.5 1.7
Bonds sold to provide
statutory capital:
Investment grade............. - - 301.9 16.5 - -
Non-investment grade......... - - 7.2 .3 - -
Subtotals:
Investment grade............. 333.4 (.5) 355.5 17.1 571.5 23.4
Non-investment grade......... 4.3 (.3) 19.1 1.5 102.3 (3.7)
Total........................ $ 337.7 $(.8) $ 374.6 $ 18.6 $673.8 $ 19.7
In managing the relationship between its assets and liabilities, the
company utilizes models which determine the cash flows necessary to meet the
expected cash needs on the underlying liabilities under various interest rate
scenarios. The company also utilizes these models to determine the dollar
value of securities that would need to be sold under each interest rate
scenario so as to determine what portion of its investment portfolio needs to
be carried on its balance sheet as "available-for-sale." In addition, certain
conditions specific to an individual security (such as deterioration in
credit quality) may result in a security being carried as
"available-for-sale." For a discussion of the impact of SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" see Note 1
of Notes to Consolidated Financial Statements.
The carrying value, estimated market value, unrealized gains, and
unrealized losses in non-investment grade bonds owned as of December 31,
1993, and December 31, 1992, were $84.1 million and $78.4 million,
respectively, $86.3 million and $74.5 million, respectively, $2.8 million and
$.6 million, respectively, and $.6 million and $4.5 million, respectively.
The carrying value and estimated market value of securities which are not
actively traded in a liquid market as of December 31, 1993 and December 31,
1992, were $.1 million and $.1 million, respectively. The market values of
corporate debt securities rated below investment grade and comparable unrated
securities tend to be more sensitive to issuer-specific developments and
changes in economic conditions than higher rated securities. Issuers of these
securities are often highly leveraged, so that their ability to service their
debt obligations during an economic downturn or during sustained periods of
rising interest rates may be impaired. In addition, such issuers may not have
other methods of financing available to them, and may be unable to repay debt
at maturity by refinancing. The risk of loss due to default in payment of
interest or principal by such issuers is significantly greater than with inves
tment grade issuers for the previously mentioned reasons and because such
securities frequently are subordinated to the prior payment of senior
indebtedness. As of December 31, 1993, the carrying value of the company's
five largest investment in securities rated non-investment grade by both
Standard & Poor's Corporation ("S&P") and Moody's Investors Service, Inc.
("Moody's") aggregated $24.3 million, with an approximate market value of
$25.2 million, none of which individually exceed $6.0 million. For a list of
all investments exceeding 10% of stockholders' equity including those
classified as non-investment grade by the company, seeNote 2 of Notes to
Consolidated Financial Statements.
The company's allowance for credit losses was $2.2 million, $2.5
million and $2.5 million on December 31, 1994, 1993 and 1992, respectively.
As of December 31, 1994, December 31, 1993 and December 31, 1992, the book
value of non-investment grade bonds were $136.9 million, $84.1 million and
$78.4 million, respectively. The amount of non-investment grade bonds held
affects the amount of credit risk in the company's portfolio more
significantly than do the amounts of investment grade bonds.
Item 8. Financial Statements and Supplemental Data
____________________________________________________________
Page Number
Independent Auditors' Report 31
Consolidated Balance Sheets - as of December 31,
1994 and 1993 32-33
Consolidated Statements of Earnings - for the years
ended December 31, 1994, 1993 and 1992 34
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1994, 1993 and
1992 35
Consolidated Statements of Cash Flows - for the
years ended December 31, 1994, 1993 and 1992 36-37
Notes to Consolidated Financial Statements - for the
years ended December 31, 1994, 1993 and 1992 38-56
INDEPENDENT AUDITORS' REPORT
__________________________________
To the Board of Directors and Shareholders of
AmVestors Financial Corporation
Topeka, Kansas
We have audited the accompanying consolidated balance sheets of
AmVestors Financial Corporation and subsidiaries (the company) as of December
31, 1994 and 1993, and the related consolidated statements of earnings,
stockholders' equity, and cash flows for each of the three years in the
period ended December 31, 1994. 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 in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of AmVestors
Financial Corporation and subsidiaries as of December 31, 1994 and 1993, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1994 in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the
company adopted the provisions of Statement of Financial Accounting Standards
No. 115, Accounting for Certain Investments in Debt and Equity Securities in
1994 and Statement of Financial Accounting Standards No. 113, Accounting and
Reporting for Reinsurance of Short-Duration and Long-Duration Contracts in
1993.
/s/Deloitte & Touche LLP
____________________________
Kansas City, Missouri
March 29, 1995
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(000's Omitted)
As of December 31,
ASSETS 1994 1993
Investments:
Debt securities:
Bonds:
Held-to-maturity (market $1,145,692 and
$1,104,914)........................................................ $ 1,237,185 1,066,583
Available-for-sale (cost $621,138 and market
$705,738).......................................................... 607,046 662,696
Preferred stock with mandatory redemption
requirements, available-for-sale
(market $177)...................................................... - 184
1,844,231 1,729,463
Equity securities, available-for-sale:
Common stock (cost $2,124 and $2,968)................................. 2,325 3,036
Preferred stock (cost $45 and $662)................................... 31 876
2,356 3,912
Other long-term investments............................................. 58,773 39,880
Short-term investments.................................................. 520 1,911
1,905,880 1,775,166
Less allowance for credit losses........................................ (2,231) (2,500)
Total investments....................................... 1,903,649 1,772,666
Cash and cash equivalents................................................... 10,621 21,782
Accounts receivable (net of allowance for
uncollectible accounts of $227 and $348)................................ 2,310 819
Amounts receivable under reinsurance agreements............................. 149,656 151,392
Amounts receivable on securities settlements
in process .......................................................... 905 1,203
Accrued investment income................................................... 29,296 26,544
Deferred policy acquisition costs........................................... 148,871 128,671
Deferred income taxes....................................................... 11,136 8,622
Other assets................................................................ 3,577 2,997
Total assets............................................ $ 2,260,021 2,114,696
See notes to consolidated financial statements.
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(000's Omitted, except per share data)
As of December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1994 1993
Liabilities:
Policy liabilities:
Future policy benefits................................................ $ 2,148,763 2,005,339
Other policy liabilities.............................................. 2,983 4,948
2,151,746 2,010,287
Amounts due on securities settlements in process........................ 274 -
Accrued expenses and other liabilities.................................. 3,805 4,064
Total liabilities...................................... 2,155,825 2,014,351
Commitments and contingencies
Stockholders' equity:
Preferred stock, $1.00 par value, authorized-
2,000,000 shares...................................................... - -
Common stock, no par value, authorized -
25,000,000 shares; issued - 10,034,742 shares
in 1994 and 10,142,842 shares in 1993................................. 12,769 12,907
Paid in capital......................................................... 63,499 64,612
Unrealized investment gains (losses)(net of
deferred policy acquisition cost amortization
expense (benefit) of $(3,476) and $-0- and deferred
income tax expense (benefit) of $(2,616) and $548).................. (7,813) 1,064
Retained earnings....................................................... 38,876 25,183
107,331 103,766
Less leveraged employee stock ownership trust
(LESOP) ....................................................... (3,135) (3,421)
Total stockholders' equity............................. 104,196 100,345
Total liabilities and stockholders'
equity................................................ $2,260,021 2,114,696
See notes to consolidated financial statements.
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(000's Omitted, except per share data)
For the Year Ended December 31,
1994 1993 1992
Revenue:
Insurance premiums and policy charges.......................... $ 6,331 6,594 7,545
Net investment income.......................................... 142,009 138,539 141,155
Net investment gains........................................... 803 17,049 20,521
Income from disposal of private placement
securities................................................... - - 5,821
Other revenue.................................................. 557 341 666
Total revenue.......................................... 149,700 162,523 175,708
Benefits and expenses:
Benefits, claims and interest credited to
policyholders................................................ 112,310 113,848 128,049
Amortization of deferred policy acquisition
costs........................................................ 9,026 9,436 16,409
General insurance expenses..................................... 7,587 8,830 8,694
Premium and other taxes, licenses and fees..................... 1,252 2,395 2,519
Other expenses................................................. 239 265 276
Total benefits and expenses............................ 130,414 134,774 155,947
Operating earnings............................................. 19,286 27,749 19,761
Interest expense............................................... - 994 2,443
Earnings before income tax expense and
extraordinary item........................................... 19,286 26,755 17,318
Income tax expense............................................. 5,593 8,564 118
Earnings before extraordinary item............................. 13,693 18,191 17,200
Extraordinary item: Loss on early
extinguishment of debt (net of income tax
benefit of $100 and $196).................................... - (213) (382)
Net earnings................................................... $13,693 17,978 16,818
Earnings per share of common stock:
Primary:
Earnings before extraordinary item........................... $ 1.32 2.62 2.94
Extraordinary item........................................... - (.03) (.07)
Net earnings................................................. $ 1.32 2.59 2.87)
Fully diluted:
Earnings before extraordinary item........................... $ 1.32 2.49 2.62
Extraordinary item........................................... - (.03) (.06)
Net earnings................................................. $ 1.32 2.46 2.56)
Average share outstanding:
Primary........................................................ 10,341 6,860 5,770
Fully diluted.................................................. 10,341 7,315 6,567
See notes to consolidated financial statements.
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(000's Omitted, except share and per share data)
Unrealized Retained
investment earnings
Common Paid-in gains (accum. Treasury
stock capital (losses) deficit) stock LESOP Total
Balance as of January 1, 1992........ $7,812 41,152 (858) (9,099) (6,855) (1,388) 30,936
Net earnings......................... - - - 16,818 - - 16,818
Decrease in unrealized
investment losses................... - - 49 - - - 49
Cash dividends to stockholders
($2.00 per share on preferred
stock).............................. - - - (278) - - (278)
Issuance of common stock:
upon exercise of options............ 75 235 - - - - 310
upon sale to LESOP.................. 299 2,201 - - - (2,500) -
Issuance of preferred stock.......... - 988 - - - - 988
Issuance of warrants................. - 440 - - - - 440
Allocation of LESOP shares........... - - - - - 200 200
Balance as of December 31, 1992 . 8,186 45,016 (809) 7,441 (6,855) (3,688) 49,463
Net earnings......................... - - - 17,978 - - 17,978
Decrease in unrealized
investment losses................... - - 1,873 - - - 1,873
Cash dividends to stockholders
($1.50 per share on preferred
stock).............................. - - - (236) - - (236)
Cash paid on reverse stock
split............................... - (25) - - - - (25)
Issuance of common stock:
upon completion of stock
offering............................ 4,392 25,014 - - - - 29,406
upon exercise of options............ 290 1,704 - - - - 1,994
upon conversion of preferred
stock.............................. 729 (557) - - - - -
Retirement of treasury stock......... (690) (6,165) - - 6,855 - -
Repurchase of warrants on debt
payment............................. - (375) - - - - (375)
Allocation of LESOP shares........... - - - - - 267 267
Balance as of December 31, 1993...... 12,907 64,612 1,064 25,183 - (3,421) 100,345
Net earnings......................... - - - 13,693 - - 13,693
Cumulative effect of adoption
of SFAS 115......................... - - 19,613 - - - 19,613
Increase in unrealized invest-
ment losses......................... - - (28,490) - - - (28,490)
Remaining offering costs............. - (135) - - - - (135)
Redemption stockholders rights
plan................................ - (101) - - - - (101)
Issuance of common stock:
upon exercise of options............ 28 133 - - - - 161
Tax effect exercise of options....... - 10 - - - - 10
Purchase of treasury shares.......... - - - - (1,186) - (1,186)
Retirement of treasury stock......... (166) (1,020) - - 1,186 - 0
Allocation of LESOP shares........... - - - - - 286 286
Balance as of December 31, 1994. $12,769 63,499 (7,813) 38,876 0 (3,135) 104,196
See notes to consolidated financial statements.
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
Increase (Decrease) in Cash and Cash Equivalents
(000's Omitted)
For the Year Ended December 31,
1994 1993 1992
Operating Activities:
Net earnings................................................... $ 13,693 17,978 16,818
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Interest credited to policyholders......................... 114,871 116,942 132,160
Amortization of (discounts) premiums on debt
securities, net........................................ (2,347) (1,905) (937)
Amortization of deferred policy acquisition
costs.................................................... 9,026 9,436 16,409
Net investment (gains) losses.............................. (803) (17,049) (20,521)
Accrued investment income.................................. (2,752) (2,366) (872)
Deferred income taxes...................................... 651 4,635 (2,405)
Other, net................................................. (1,830) 1,982 2,235
Net cash provided by operating activities.............. 130,509 129,653 142,887
Investing Activities:
Purchases of securities:
Held-to-maturity............................................. (242,464) (578,918) (845,211)
Available-for-sale........................................... (332,647) - -
Proceeds from sale of securities:
Held-to-maturity............................................. 8,302 341,498 581,342
Available-for-sale........................................... 319,846 - -
Proceeds from maturity or redemption
of securities:
Held-to-maturity............................................. 35,375 184,280 231,060
Available-for-sale........................................... 86,973 - -
Other long-term investment, net................................ (20,215) (20,326) (1,709)
Short-term investments, net.................................... 1,392 (487) (677)
Capitalization of deferred policy
acquisition costs............................................ (25,750) (18,212) (14,076)
Other, net..................................................... (413) (497) 163
Net cash used in investing activities.................. (169,601) (92,662) (49,108)
Financing Activities:
Premiums received.............................................. 267,802 222,177 168,657
Surrender and death benefits paid.............................. (246,632) (318,880) (203,134)
Surrender and risk charges collected........................... 5,409 5,161 6,768
Securities settlements in process.............................. 573 (25,609) 14,070
Payments on notes payable...................................... - (19,918) (9,000)
Issuance of common stock....................................... 27 31,400 2,810
Purchase of LESOP stock........................................ - - (2,500)
Other, net..................................................... 752 (2,590) (492)
Net cash provided by (used in)
financing activities.................................. 27,931 (108,259) (22,821)
Increase (Decrease) in Cash and Cash Equivalents................... (11,161) (71,268) 70,958
Cash and Cash Equivalents:
Beginning of year.............................................. 21,782 93,050 22,092
End of year.................................................... $ 10,621 21,782 93,050
See notes to consolidated financial statements.
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW (continued)
Increase (Decrease) in Cash and Cash Equivalents
(000's Omitted)
For the Year Ended December 31,
1994 1993 1992
Supplemental schedule of cash flow information:
Income tax payments............................................ $ 6,150 3,204 2,242
Interest payments.............................................. $ - 1,071 1,671
Change in net unrealized investment gains
(losses) on available-for-sale securities.................... $ (56,823) - -
Less: Associated reduction in amortization
of deferred policy acquisition costs.................. 16,221 - -
Deferred income tax benefit........................... 13,177 - -
Net change in net unrealized gains (losses)
on available-for-sale securities............................. $ (27,425) - -
See notes to consolidated financial statements.
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1994, 1993 and 1992
1. Summary of Significant Accounting Policies:
_________________________________________________
A. PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of
AmVestors and its wholly-owned subsidiaries American Investors Life Insurance
Company, Inc. (American), American Investors Sales Group, Inc. (American
Sales), AmVestors Investment Group, Inc. (AIG) and Omni-Tech Medical, Inc.
(Omni-Tech), (collectively the company). All significant intercompany
accounts and transactions have been eliminated.
B. INVESTMENTS:
Debt securities held-to-maturity are carried at amortized cost,
except that those securities with an other than temporary impairment in value
are carried at estimated net realizable value. Beginning in 1994, debt
securities available-for-sale are carried at estimated market value, with any
unrealized gains or losses recorded in stockholders' equity. In 1993, debt
securities classified as available-for-sale were carried at the lower of
aggregate cost or estimated market value, with any unrealized loss recorded
in stockholders' equity.
Investments are reviewed on each balance sheet date to determine if
they are impaired. In determining whether an investment is impaired, the
company considers whether the decline in market value at the balance sheet
date is an other than temporary decline; if so, then the investment's
carrying value is reduced to a new cost basis which represents estimated net
realizable value. The decline in value is reported as a realized loss, and a
recovery from the new cost basis is recognized as a realized gain only at
sale.
The estimates of net realizable value are based on information
obtained from published financial information provided by issuers,
independent sources such as broker dealers or the company's independent
investment advisors. Such amounts represent an estimate of the consideration
to be received in the future when the defaulted company's debt is settled
through the sale of their assets or the restructuring of their debt. These
estimates do not represent the discounted present value of these future
considerations.
An allowance for credit losses has been recorded to reduce total
investments by charging investment losses. The recorded allowance reflects
management's estimate of losses existing in the investment assets, which may
occur in the future due to conditions unknown to management at this time.
Management periodically reviews the adequacy of the allowance for credit
losses. As credit losses are realized, they are charged against the
allowance.
Investments in common stock and non-redeemable preferred stock are
carried at market.
The cost of securities sold is determined on the identified
certificate basis.
Other long-term investments include policy loans and mortgage
loans on real estate which are carried at cost less principal payments since
date of acquisition, and certain partnership investments which are carried at
an amount equal to the company's share of the partnerships' estimated market
value with any unrealized gains or losses recorded in net investment income.
C. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Estimated fair value amounts have been determined by the company
using available market information and appropriate valuation methodologies.
Due to the fact that considerable judgment is required to interpret market
data to develop the estimates of fair value, the estimates presented are not
necessarily indicative of the amounts that could be realized in a current
market exchange.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
1. Summary of Significant Accounting Policies (continued):
______________________________________________________________
The carrying values and estimated fair values of the company's financial
instruments as of December 31, 1994 and 1993 were as follows:
(000's Omitted)
As of December 31,
1994 1993
Carrying Fair Carrying Fair
Value Value Value Value
Assets:
Debt securities. . . . . . . . . 1,844,231 1,752,738 1,729,463 1,810,829
Equity securities. . . . . . . . 2,356 2,356 3,912 3,912
Other long-term investments. . . 58,773 58,536 39,880 40,215
Short-term investments. . . . . 520 520 1,911 1,911
Cash and cash equivalents. . . . 10,621 10,621 21,782 21,782
Amounts receivable on securities
settlement in process. . . . . . . 905 905 1,203 1,203
Accounts receivable and accrued
investment income. . . . . . . . . 31,606 31,606 27,363 27,363
Liabilities:
Future policy benefits - investment
contracts. . . . . . . . . . . . . 1,917,066 1,799,090 1,789,109 1,672,754
Other policy liabilities. . . . . . 2,983 2,983 4,948 4,948
Amounts due on securities
settlements in process. . . . . . 274 274 - -
Accrued expenses and other
liabilities. . . . . . . . . . . . 3,805 3,805 4,064 4,064
DEBT SECURITIES - Fair values are based on quoted market prices or
dealer quotes, if available. If a quoted market price
is not available, fair value is estimated using quoted market prices for
similar securities.
EQUITY SECURITIES - Fair value equals the carrying value as these
securities are carried at quoted market value.
OTHER LONG-TERM INVESTMENTS - For certain homogeneous categories of
mortgage loans, fair value is estimated using quoted market prices for
securities backed by similar loans, adjusted for differences in loan
characteristics. Fair value of policy loans and other long-term investments
is estimated to approximate the assets' carrying value.
SHORT-TERM INVESTMENTS AND CASH AND CASH EQUIVALENTS - The carrying
amounts reported in the balance sheet approximate the assets' fair value.
AMOUNTS RECEIVABLE ON SECURITIES SETTLEMENTS IN PROCESS - The
carrying amount reported in the balance sheet approximates the fair value of
this asset.
ACCOUNTS RECEIVABLE AND ACCRUED INVESTMENT INCOME - The carrying
amounts reported in the balance sheet approximate fair value.
FUTURE POLICY BENEFITS FOR INVESTMENT CONTRACTS - The fair values for
deferred annuities were estimated to be the amount payable on demand at the
reporting date as those investment contracts have no defined maturity and are
similar to a deposit liability. The amount payable at the reporting date was c
alculated as the account balance less any applicable surrender charges.
OTHER POLICY LIABILITIES - The carrying amount reported in the
balance sheet approximates the fair value of these liabilities.
AMOUNTS DUE ON SECURITIES SETTLEMENTS IN PROCESS - The carrying
amount reported in the balance sheet approximates the fair value of this
liability.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
1. Summary of Significant Accounting Policies (continued):
______________________________________________________________
ACCRUED EXPENSES AND OTHER LIABILITIES - The carrying amount reported
in the balance sheet approximates the fair value of these liabilities.
The use of different market assumptions and/or estimation
methodologies could have a material effect on the estimated fair value
amounts.
D. DEFERRED POLICY ACQUISITION COSTS:
The costs of acquiring new business (primarily commissions and policy
expenses), which vary with and are directly related to the production of new
business, have been deferred. The deferred costs related to investment-type
deferred annuity contracts are amortized in relation to the incidence of
expected gross profits over the expected life of the policies. For single
premium life insurance, deferred policy acquisition costs are amortized over
the life of the policies, but not more than 20 years for policies issued
before January 1, 1987, and not more than 30 years for policies issued after
December 31, 1986, based on the expected gross profits for the amortization
periods. The deferred costs related to traditional life contracts are
amortized over the premium paying period for the related policies using the
same actuarial assumptions as to interest, mortality and withdrawals as are
used to calculate the reserves for future benefits.
Determination of expected gross profits includes the best estimate of
certain elements over the life of the contracts, including anticipated excess
investment income, surrender charge revenues and mortality charge revenues
(single premium life insurance). Estimates of expected gross profits used as
a basis for amortization are evaluated regularly by management, and the total
amortization recorded to date is adjusted by a charge or credit to the
statement of earnings if actual experience indicates that the estimates
should be revised.
Net investment gains realized in 1994, 1993 and 1992 resulted in the
company experiencing investment margins greater than those estimated. As a
result, $203,940, $4,790,523 and $8,691,521 of the unamortized balance of
deferred policy acquisition costs were expensed in 1994, 1993 and 1992,
respectively. The amount charged off is based on actual gross profits earned
to date in relation to total gross profits expected to be earned over the
life of the related contracts.
Estimates of the expected gross profits to be realized in future
years include the anticipated yield on investments. Deferred policy
acquisition costs will be adjusted in the future based on actual investment
income earned.
E. FUTURE POLICY BENEFITS:
Liabilities for future policy benefits under life insurance policies,
other than single premium life insurance, have been computed by the net level
premium method based upon estimated future policy benefits (excluding
participating dividends), investment yield, mortality and withdrawals giving
recognition to risk of adverse deviation. Interest rates range from 4% to 9%
depending on the year of issue, with mortality and withdrawal assumptions
based on company and industry experience prevailing at the time of issue.
For single premium life insurance and single premium annuities, the
future policy benefits are equal to the accumulation of the single premiums
at the credited rate of interest and for single premium whole life, less any
mortality charges.
F. PARTICIPATING POLICIES:
The company issued participating policies in past years on which
dividends are paid to policyholders as determined annually by the Board of
Directors. The amount of dividends declared but undistributed is included in
other liabilities. Policy benefit reserves do not include a provision for
estimated future participating dividends.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
1. Summary of Significant Accounting Policies (continued):
______________________________________________________________
G. DEPRECIATION:
The home office buildings are depreciated on the straight-line basis
over estimated lives of 40 years. Other depreciation is provided on the
straight-line basis over useful lives ranging from 5 to 8 years.
H. INCOME TAXES:
The company and its subsidiaries prepare and file their income tax
returns on a consolidated basis.
The company provides for the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
reported in the financial statements on the liability method.
I. EARNINGS PER SHARE:
Primary earnings per share of common stock are computed by dividing
net earnings (reduced by preferred dividend requirements in 1993 and 1992) by
the sum of the weighted average number of shares outstanding during the
period plus dilutive common stock equivalents applicable to stock options and
warrants, calculated using the treasury stock method. Fully diluted earnings
per share assumes the conversion of the convertible preferred stock
outstanding during 1992. During 1993, 573,332 common shares were issued upon
conversion of $4,300,000 of Series B Convertible Preferred Stock. Had this
conversion occurred on January 1, 1993, primary earnings per share would have
been $2.46 for 1993. During 1993, 1,646,883 shares of common stock were sold
to retire debt in the amount of $14,030,289. Had this sale and the
corresponding retirement of debt occurred on January 1, 1993, primary
earnings per share would have been $2.25 for 1993.
J. CONSOLIDATED STATEMENTS OF CASH FLOWS:
For purposes of reporting cash flows, cash and cash equivalents
includes cash and money market accounts.
K. NEW ACCOUNTING STANDARDS:
Effective January 1, 1994, the company adopted to provisions of SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity Securities."
This Statement addresses the accounting and reporting for certain investments
in debt and equity securities by requiring such investments to be classified
in held-to-maturity, available-for-sale, or trading categories. The
cumulative effect of the adoption of this Statement was an increase in
stockholder's equity of $19,612,653 (net of related amortization of deferred
policy acquisition costs of $12,745,031 and deferred income tax expense of
$10,560,659), representing the aggregate excess fair value over cost for
those securities included in the available-for-sale category, net of
associated amortization of deferred policy acquisition costs and deferred
income tax expense. Net earnings for the period ended December 31, 1994 were
not affected by the adoption of this Statement.
Effective May 1993, the company adopted the provisions of SFAS No.
113, "Accounting and Reporting for Reinsurance of Short-Duration and
Long-Duration Contracts" and restated the financial statements of prior years
to report amounts ceded to reinsurers separately as assets in the respective
consolidated balance sheets. Adoption of this standard increased total assets
and liabilities by $148,626,459 and $150,635,000 as of December 31, 1994 and
1993, respectively.
L. RECLASSIFICATIONS:
Certain reclassifications have been made to conform prior years' financial
statements to the December 31, 1994, presentation.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
2. Investments:
A summary of investment income is as follows:
(000's Omitted)
For the Year Ended December 31,
1994 1993 1992
Debt securities.................................................... $ 142,469 136,533 139,089
Equity securities.................................................. 50 76 89
Other long-term investments........................................ 486 3,096 1,972
Short-term investments............................................. 830 931 2,083
143,835 140,636 143,233
Less investment expenses........................................... 1,826 2,097 2,078
Net investment income.............................................. $ 142,009 138,539 141,155
Net investment gains (losses)
Debt securities................................................ $ (533) 18,486 23,560
Equity securities.............................................. 1,335 (274) 11
Other ........................................................ 1 (1,163) (3,050)
Net investment gains (losses)...................................... $ 803 17,049 20,521
Certain limited partnership investments are included in income from
other long-term investments. These funds (commonly referred to as hedge
funds) are managed by outside investment advisors. The investment guidelines
of these partnerships provide for a broad range of investment alternatives,
including stocks, bonds, futures, options, commodities, and various other
financial instruments. These investments were purchased with the
strategy that yield in excess of the S&P 500 Index may be obtained. The
partnerships are carried at an amount equal to the company's share of the
partnerships' estimated market value with related unrealized gains and losses
recorded in net investment income. In accordance with the permitted
guidelines, the investments purchased by these partnerships may experience
greater than normal volatility which could materially effect the company's
earnings for any given period.
The maturity of the company's debt and equity securities portfolio as
of December 31, 1994 was as follows:
(000's Omitted)
As of December 31, 1994
Held-to-maturity Available-for-sale
Estimated Estimated
Book Market Book Market
Value Value Value Value
Debt Securities:
Bonds:
One year or less $ 999 1,003 23,580 22,232
Two years through five years 195,835 187,900 159,075 158,308
Six years through ten years 892,544 823,583 319,157 311,431
Eleven years and after 147,807 133,206 119,326 115,075
1,237,185 1,145,692 621,138 607,046
Equity securities - - 2,169 2,356
$ 1,237,185 1,145,692 623,307 609,402
These tables include mortgage-backed securities based on the
estimated future cash
flows of the underlying mortgages.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
2. Investments (cont.):
_________________________
The book value, estimated market value and unrealized market gains
and losses of debt and equity securities as of December 31, 1994, and 1993
were as follows:
(000's Omitted)
Estimated
Book Unrealized Unrealized Market
Value Gains Losses Value
December 31, 1994
__________________
Bonds held-to-maturity:
Corporate debt obligations
Investment grade.................................... $ 792,746 1,160 62,907 730,999
High-yield.......................................... 135,698 108 9,267 126,539
928,444 1,268 72,174 857,538
U.S. Treasury obligations........................... 3,618 - 319 3,299
Mortgage-backed securities.......................... 305,123 1 20,269 284,855
Bonds held-to-maturity.............................. 1,237,185 1,269 92,762 1,145,692
Bonds available-for-sale:
Corporate debt obligations
Investment grade.................................... 253,055 1,005 5,633 248,427
High-yield.......................................... 1,218 - 8 1,210
254,273 1,005 5,641 249,637
Mortgage-backed securities.......................... 366,865 590 10,046 357,409
Bonds available-for-sale............................ 621,138 1,595 15,687 607,046
Total bonds......................................... 1,858,323 2,864 108,449 1,752,738
Equity securities available-for-sale.................. 2,169 417 230 2,356
$1,860,492 3,281 108,679 1,755,094
December 31, 1993
_______________________
Bonds held-to-maturity:
Corporate debt obligations
Investment grade.................................... $ 776,905 32,703 3,480 806,128
High-yield.......................................... 84,063 2,799 559 86,303
860,968 35,502 4,039 892,431
U.S. Treasury obligations........................... 3,631 14 5 3,640
Mortgage-backed securities.......................... 201,984 6,905 46 208,843
Bonds held-to-maturity.............................. 1,066,583 42,421 4,090 1,104,914
Bonds available-for-sale:
Corporate debt obligations
Investment grade.................................... 198,636 19,943 - 218,579
U.S. Treasury obligations........................... 9,954 12 - 9,966
Mortgage-backed securities.......................... 454,106 23,087 - 477,193
Bonds available-for-sale............................ 662,696 43,042 - 705,738
Total bonds......................................... 1,729,279 85,463 4,090 1,810,652
Preferred stock with mandatory
redemption requirements............................. 184 - 7 177
Equity securities..................................... 3,630 795 513 3,912
$ 1,733,093 86,258 4,610 1,814,741
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
2. Investments (cont.):
_________________________
The preceding table includes the carrying value and estimated market
value of debt securities which the company has determined to be impaired
(other than temporary decline in value) as follows:
(000's Omitted)
Accumulated Estimated
Original Write- Carrying Market
Cost downs Value Value
December 31, 1994 $9,535 7,814 1,721 1,721
December 31, 1993 $7,611 7,582 29 76
The company defines high-yield securities as those corporate debt
obligations rated below investment grade by Standard & Poor's and Moody's or,
if unrated, those that meet the objective criteria developed by the company's
independent investment advisory firm. Management believes that the return on
high-yield securities adequately compensates the company for additional
credit and liquidity risks that characterize such investments. In some cases,
the ultimate collection of principal and timely receipt of interest is
dependent upon the issuer attaining improved operating results, selling
assets or obtaining financing.
The book value, estimated market value and unrealized market gains
and losses by type of mortgage-backed security as of December 31, 1994, and
December 31, 1993 were as follows:
(000's Omitted)
Estimated
Book Unrealized Unrealized Market
December 31, 1994 Value Gains Losses Value
Government agency mortgage-backed securities:
Planned amortization classes................................$ 75,557 12 5,614 69,955
Targeted amortization classes and accretion
directed classes........................................... 7,729 - 319 7,410
Pass-throughs............................................... 40 2 - 42
Total government agency mortgage-backed
securities........................................... 83,326 14 5,933 77,407
Government sponsored enterprise mortgage-backed
securities:
Planned amortization classes................................ 410,313 104 15,852 394,565
Sequential classes.......................................... 19,705 - 1,087 18,618
Pass-throughs............................................... 299 - 2 297
Total government sponsored enterprise
mortgage-backed securities........................... 430,317 104 16,941 413,480
Other mortgage-backed securities:
Planned amortization classes................................ 22,686 22 745 21,963
Sequential classes.......................................... 125,100 451 5,345 120,206
Pass-throughs............................................... 13 - - 13
Subordinated classes........................................ 10,546 - 1,351 9,195
Total other mortgage-backed securities. . . . . . . . . 158,345 473 7,441 151,377
Total mortgage-backed securities............................... $ 671,988 591 30,315 642,264
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
2. Investments (cont.):
______________________
(000's Omitted)
Estimated
Book Unrealized Unrealized Market
December 31, 1993 Value Gains Losses Value
Government agency mortgage-backed securities:
Planned amortization classes................................$ 104,528 5,064 - 109,592
Targeted amortization classes and accretion
directed classes........................................... 7,646 436 - 8,082
Sequential classes.......................................... 37,220 1,171 - 38,391
Pass-throughs............................................... 60 6 - 66
Total government agency mortgage-backed
securities........................................... 149,454 6,677 - 156,131
Government sponsored enterprise mortgage-backed
securities:
Planned amortization classes................................ 340,328 17,588 - 357,916
Sequential classes.......................................... 5,612 58 - 5,670
Pass-throughs............................................... 428 30 - 458
Total government sponsored enterprise
mortgage-backed securities........................... 346,368 17,676 - 364,044
Other mortgage-backed securities:
Planned amortization classes................................ 47,887 983 31 48,839
Sequential classes.......................................... 101,852 4,306 15 106,143
Pass-throughs.............................................. 19 1 - 20
Subordinated classes........................................ 10,510 349 - 10,859
Total other mortgage-backed securities............... 160,268 5,639 46 165,861
Total mortgage-backed securities............................... $ 656,090 29,992 46 686,036
Certain mortgage-backed securities are subject to significant
prepayment risk. This is due to the fact that in periods of declining
interest rates, mortgages may be repaid more rapidly than scheduled, as
individuals refinance higher rate mortgages to take advantage of the lower
current rates. As a result, holders of mortgage-backed securities may receive
large prepayments on their investments which they are unable to reinvest at
an interest rate comparable to the rate on the prepaying mortgages. Mortgage-b
acked pass-through securities and sequential classes, which comprised 21.6%
and 22.1% of the carrying value of the company's mortgage-backed securities
as of December 31, 1994 and December 31, 1993, respectively, are sensitive to
this prepayment risk.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
2. Investments (cont.):
_______________________
A portion of the company's mortgage-backed securities portfolio
consists of planned amortization class ("PAC"), targeted amortization class
("TAC") and accretion directed class ("AD") instruments. These securities are
designed to amortize in a more predictable manner by shifting the primary
risk of prepayment to investors in other tranches (support classes) of the
mortgage-backed security. PAC, TAC and ADsecurities comprised 76.8% and 76.3%
of the carrying value of the company's mortgage-backed securities as of
December 31, 1994 and December 31, 1993, respectively. The company does not
invest in support class securities or principal-only ("PO") and interest-only
("IO") strips.
As of December 31, 1994, 76.4% of the company's mortgage-backed
securities were issued by either government agencies or government sponsored
enterprises, compared to 75.6% as of December 31, 1993. The credit risk
associated with these securities is generally less than other mortgage-backed
securities. With the exception of four issues, with a carrying value of
$15,186,000 as of December 31, 1994, all of the company's investments in
other mortgage-backed securities are rated A or better by Standard& Poor's or
Moody's.
The following investments held as of December 31, 1994, exceeded ten
percent of stockholders' equity:
(000's Omitted)
As of December 31,
1994 1993
Book Estimated Book Estimated
Value Market Value Market
10% of Stockholders' Equity..................................... $ 10,420 10,035
Bonds:
Ashland Oil, Inc., various interest rates
and due dates through 2004.............................. $ 13,731 13,383
CBC Holdings, Inc., 10.33%, due 08-1997......................... 16,395 16,110 16,598 17,057
Countrywide Funding Corp, various interest
rates and due dates through 2023........................ 16,733 14,811 12,127 12,145
D&P CBO Partners & Corporation, 9.93%,
due 01-1995............................................. 13,033 13,038 14,999 15,095
FHLMC 1142 G, 7.95%, due 06-2000................................ 12,725 12,582 14,935 15,403
FHLMC 1295,J 7.5%, due 11-2005.................................. 14,678 13,938 14,676 15,586
FHLMC1435 G, 7%, due 10-2000.................................... 13,784 13,233
FHLMC 1496 G, 4%, due 05-2003................................... 11,780 11,555
FHLMC 1497 D, 6.4%, due 01-2003................................. 12,738 12,441
FHLMC 1538 H, 6.5%, due 04-2007................................. 13,726 13,055
FHLMC 1564 G, 6.25%, due 02-2003................................ 12,996 12,447
FHLMC 1698 G, 6%, due 06-2003................................... 13,725 13,050
FHLMC 1701 PG, 6.25%, due 10-2002............................... 13,704 12,903
FHLMC 1693 G, 6%, due 04-2003................................... 13,649 13,008
FNMAREMIC 90 138 G P11, 8.5%, due 01-1999...................... 13,961 13,860 14,039 14,630
FNMAG30 PG, 8.2%, due 03-1997................................... 14,843 14,855 14,816 15,492
FNMA92 24 G P11, 7.5%, due 03-2000.............................. 15,251 14,391 15,293 15,492
FNMA92 15H, 6.75%, due 12-2006.................................. 15,105 13,111 15,106 15,272
FNMAG 93 G01, 7%, due 02-2003................................... 14,822 13,402 14,815 15,342
FNMA 92 210 H, 6.5%, due 02-2006................................ 12,153 11,604
FNMA 92 192 H P11, 6.5%, due 12-2001............................ 14,541 13,570 14,489 15,070
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
2. Investments (cont.):
_______________________
(000's Omitted)
As of December 31,
1994 1993
Book Estimated Book Estimated
Value Market Value Market
FNMAG 92 G64 G, 7%, due 11-2002................................. 16,236 14,783 16,221 16,887
FNMAG 92 66 G, 7%, due 01-2003.................................. 14,853 13,477 14,849 15,314
FNMAG 93 G02, 7%, due 12-2002................................... 14,803 13,439 14,795 15,319
FNMA 93 85 PH, 6.5%, due 11-2007............................... 11,449 11,088
FNMA 94 34 PG, 6%, due 09-2003.................................. 13,697 13,013
FNMA 94 86 PH, 6%, due 07-2005.................................. 13,291 12,558
FNMA 94 83 B, 7.5%, due 12-2007............................... 19,177 18,031
FNMA89 65 G, 8.65%, due 01-1998....................... 12,069 11,955 12,112 12,514
Greentree 94-1, 6.9%, due 05-2002..................... 14,814 13,758
Hydro Quebec Ser IF, 7.375%, due 02-2003.............. 11,997 11,177
Liberty Mutual Capital Corp, 8.10%, due 01-2005....... 12,208 10,647 12,292 12,062
Ontario Province, various interest rates
and due dates through 2004.............................. 19,418 18,464
Paramount Communications Inc., 7.5%,
due 01-2002................................... 10,665 9,831 10,630 11,110
Prudential Home Mtg 92-A B 31 Sub, 7.85%
due 09-1995................................... 10,546 9,195 10,510 10,859
RFC 1992, various interest rates and due
dates through 1997............................ 19,517 18,772
RTC 1991 6 CL B5, 8.839%, due 02-1997................. 14,989 14,972 14,985 15,375
Texas Utilities Electric, various interest
rates and due dates through 2005.............. 10,905 10,309
Three Rivers CBO LP, 9.62% due 10-1998................ 11,710 11,385 11,782 12,072
The amounts shown as "estimated market" are primarily based on
quotations obtained from independent sources such as
broker dealers who make markets in similar securities. Unless representative
trades of securities actually occur at the balance sheet date, these quotes
are generally estimates of market value based on an evaluation of appropriate
factors such as institution-size trading in similar securities, yield, credit
quality, coupon rate, maturity, type of issue and other market data. Losses
are recognized in the period they occur based upon specific review of the
securities portfolio and other factors.
The consideration received on sales of debt and equity securities,
carrying value and realized gains and losses on those sales were as follows:
(000's Omitted)
For the Year Ended December 31,
1994 1993 1992
Consideration received..................... $ 462,138 393,142 693,532
Carrying value............................. 461,335 374,584 673,870
Net investment gains (losses)............ $ 803 18,558 19,662
Investment gains........................... $ 4,268 18,677 26,851
Investment losses.......................... (3,465) (119) (7,189)
Net investment gains (losses)............ $ 803 18,558 19,662
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
2. Investments (cont.):
_______________________
The above table includes bonds of one issuer which the company had
classified as held-to-maturity. These bonds have a book value of $8,507,732
and the sale resulted in a realized loss of $205,526. The decision to sell
these bonds was based upon a significant deterioration in the issuer's
creditworthiness.
In addition to the above sales, the company transferred bonds of two
issuers from held-to-maturity to available-for-sale as a result of an
increase in the risk weights used for regulatory risk-based capital purposes.
The book value of these bonds was $16,960,874. Bonds of another issuer with a
book value of $1,721,460 were also transferred from held-to-maturity to
available-for-sale based upon a significant deterioration in the issuer's
creditworthiness.
Net unrealized gains (losses) on debt securities held-to-maturity,
debt securities available-for-sale, equity securities available-for-sale and
other long-term investments changed as follows:
(000's) Omitted
Net Unrealized Gains (Losses)
Debt Debt Equity
Securities Securities Securities Other Long-
Held-to- Available- Available- term
Maturity for-Sale for-Sale Investments
Balance as of January 1, 1992........... $ 45,063 - (858) -
1992 Net change....................... (7,643) 4,115 49 -
Balance as of December 31, 1992.... 37,420 4,115 (809) -
1993 Net Change.................... 911 38,920 1,091 1,330
Balance as of December 31, 1993.... 38,331 43,035 282 1,330
1994 Net Change.................... (129,824) (57,127) (95) (1,330)
Balance as of December 31, 1994...... $ (91,493) (14,092) 187 -
At December 31, 1994 and 1993, investments with statutory carrying
values of $1,866,074,033 and $1,736,404,701 respectively, were on deposit
with various insurance departments. These amounts exceeded the minimum
required deposits by $66,325,834 and $57,640,783 as of December 31, 1994 and
1993, respectively.
3. Related Party Transactions:
______________________________
On January 22, 1991, the company made a $504,000, 30 year, first
mortgage loan on the personal residence of a Director. At the time the loan
was made, it represented a loan to value of 80%. This loan originally
provided for interest at the rate equal to the cost of funds of the Eleventh
District of the Federal Reserve, plus two percent and had a final payment due
February 1, 2021. On December 10, 1992 the terms of the loan were
renegotiated to provide for interest to be fixed at a rate of 7.5% and a final
payment due January 10, 2008. The outstanding principal balances on this
loan were $11,815 and $205,059 as of December 31, 1994 and 1993,
respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
4. Other Assets:
________________
Other assets consist of the following: (000's Omitted)
As of December 31,
Property and equipment at cost:
Home office building
(including land of $352) $ 2,152 2,113
Furniture and equipment 3,464 3,328
Automobiles 115 100
5,731 5,541
Less accumulated depreciation 3,336 3,174
2,395 2,367
Other........................................................ 1,182 630
$ 3,577 2,997
5. Reinsurance:
________________
The company reinsures portions of insurance it writes. The maximum
amount of risk retained by the company on any one life is $150,000.
A summary of reinsurance data follows (000's Omitted):
For the Ceded to
Year Ended Gross other Net
December 31, Descriptions amount companies amount
1994 Life insurance
in force.................... $ 330,108 259,200 70,908
Insurance premiums
and policy charges......... $ 7,308 977 6,331
Future policy
benefits................... $ 2,148,763 148,575 2,000,188
1993 Life insurance
in force.................... $ 354,703 280,819 73,884
Insurance premiums
and policy charges......... $ 7,936 1,342 6,594
Future policy
benefits................... $ 2,005,339 150,500 1,854,839
1992 Life insurance
in force.................... $ 384,179 306,506 77,673
Insurance premiums
and policy charges......... $ 9,312 1,767 7,545
Future policy
benefits................... $ 1,984,013 150,194 1,833,819
The company had amounts receivable under reinsurance agreements of
$149,656,094 and $151,392,088 as of December 31, 1994, and December 31, 1993,
respectively. Of the amounts, $147,949,099 and $149,468,739 were associated
with a single reinsurer. In 1989, the company entered into a coinsurance
agreement which ceded 90% of the risk on the company's block of single
premium whole life policies written prior to 1989 to Employers Reassurance
Corporation (ERC). The agreement provides that ERC assumes 90% of all risks
associated with each policy in the block.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
5. Reinsurance (cont.):
_______________________
The following table identifies the components of the amounts
receivable from ERC:
(000's Omitted)
As of December 31,
1994 1993
Reserve for future policy benefits $ 146,919 148,712
Reimbursement for benefit payments....................... 1,030 757
$ 147,949 149,469
6. Credit Agreement:
____________________
On December 29, 1994, the company entered into a credit agreement
with The First National Bank of Chicago (First Chicago) and Boatmen's First
National Bank of Kansas City (Boatmen's), as Lenders. Under the terms of this
agreement, the Lenders have committed to lend up to $25,000,000 in the form
of a 5-year reducing revolving credit facility. The company has agreed to pay
a commitment fee of .25% per annum on the unused portion of the commitment.
Borrowings under this agreement may be used for general corporate purposes.
Interest on the borrowings under this agreement is determined at the
option of the company to be: (i) a fluctuating rate of interest equal to the
higher of the corporate base rate announced by First Chicago from time to
time, and a fluctuating rate equal to the weighted average of rates on
overnight Federal Funds transactions with members of the Federal Reserve
System as published by the Federal Reserve Bank of New York plus .50% per
annum, or (ii) a Eurodollar rate plus a margin ranging from 1.00% to 1.25%.
In addition to general covenants which are customary for facilities
such as this, the company has agreed to maintain minimum consolidated net
worth, a minimum cash flow coverage ratio, minimum risk based capital for
American, minimum capital, surplus and asset valuation reserve of American
and to maintain a maximum debt to equity(including indebtedness) ratio.
Additional covenants include: (i) limitations on acquisitions; (ii)
maintenance of current lines of business; (iii) limitations on additional
indebtedness; (iv) limitations on investments; (v) limitations on dividends
and stock repurchases, and (vi) limitations on mergers, consolidations and
sales of assets, typical of such facilities.
At December 31, 1994, there had been no borrowings under this
agreement.
7. Retirement Plans:
____________________
The company sponsors an Employee Stock Ownership Plan (ESOP) for all
full-time employees with one year of service. Qualifying participants may
contribute an amount not to exceed ten percent of covered compensation. The
company made no contributions to the plan during the three years ended
December 31, 1994.
The company sponsors a Leveraged Employee Stock Ownership Plan
(LESOP) for all full-time employees with one year of service.
The LESOP has acquired 370,244 shares of the company's stock through
the proceeds of a note payable to American. The note bears interest at 7.0%
and is payable in annual installments through December 30, 2002. The note had
unpaid principal balances of $3,336,038 and $3,639,922 as of December 31,
1994 and 1993, respectively.
Each year, the company makes contributions to the LESOP which are to
be used to make loan interest and principal payments. On December 31 of each
year, a portion of the common stock is allocated to participating employees.
Of the 368,079 shares of the company's common stock now owned by the LESOP,
99,704 shares have been allocated to the
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
7. Retirement Plans (continued):
________________________________
participating employees with the remaining 268,375 shares held by American as
collateral for the loan.
The unallocated portion of the company's common stock owned by the
LESOP has been recorded as a separate reduction of stockholders' equity.
Contributions to the LESOP during December 31, 1994, 1993 and 1992 were
$285,565, $266,886 and $200,226, respectively.
During 1992, the company's Board of Directors approved retirement
plans for its members and members of the Board of Directors of certain of its
subsidiaries. The plans provide that retired Directors shall serve as
Advisory Members to the Board at a fee of $750 per meeting attended and a
monthly lifetime benefit in the amount of $750 be paid to each qualified
Director upon retirement. In addition, the company has agreed to continue any
life insurance policies being provided as of the date of retirement.
To qualify for this benefit, a Director must have reached the age of
60 and meet years of service requirements thereafter. The plan also calls for
a mandatory retirement on the date the Director's term expires following age
70.
As of December 31, 1994, five of the company's directors qualified
for benefits under the plan. A liability in the amount of $521,180,
representing the present value of future benefits, has been established.
Charges (credits) to earnings relating to the plans were
($40,244), $(3,282) and $564,706, for the years ended December 31,
1994, 1993 and 1992, respectively.
Effective January 1, 1993, the company adopted an Age-Weighted Money
Purchase Plan for all full-time employees with one year of service. The full
cost of this plan will be paid by the company with qualifying participants
receiving contributions based upon their age at plan implementation and
current salary. Contributions to the Age-Weighted Money Purchase Plan for the
year ended December 31, 1994 and 1993, were $215,664 and $213,059,
respectively.
8. Stockholders' Equity:
________________________
Dividends by American to AmVestors are limited by laws applicable to
insurance companies. Under Kansas law, American may pay a dividend from its
surplus profits, without prior consent of the Kansas Commissioner of
Insurance, if the dividend does not exceed the greater of 10% of statutory
capital and surplus at the end of the preceding year or all of the statutory
net gain from operations of the preceding year. As of December 31, 1994,
surplus profits of American were $12,996,673 and 10% of statutory capital and
surplus was $8,752,120. American is also required to maintain, on a statutory
basis, paid-in capital stock and surplus (capital in excess of par value and
unassigned surplus) of $100,000 each. As of December 31, 1994 and 1993
American's statutory capital and surplus was $87,521,204 and $87,146,052,
respectively. Statutory net income (loss) for the years 1994, 1993 and 1992
was $4,167,120, ($1,469,786) and $1,853,297, respectively.
In connection with the original establishment of the Interest
Maintenance Reserve (IMR), the Commissioner of Insurance of Kansas, the
company's domiciliary state, ordered that American prepare its December 31,
1992, NAIC Annual Statement Form to equitably allocate 1992 capital gains and
losses, not included in the calculation of the Asset Valuation Reserve (AVR),
on other than government securities, fifty (50%) percent to surplus and fifty
(50%) percent to IMR, after calculation of the AVR pursuant to the
instructions provided by the NAIC. This differs from prescribed statutory
accounting practices.
This permitted accounting practice increased statutory surplus as of
December 31, 1992, by $8,167,587. Gains and losses for years subsequent to
1992 are recorded in accordance with prescribed statutory accounting
practices.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
8. Stockholders' Equity (cont.):
_________________________________
On March 17, 1989, the Board of Directors of the company adopted the
1989 Nonqualified Stock Option Plan. The options granted under the 1989
Nonqualified Plan will cover the same number of shares and have the same
exercise price as the cancelled options, and none of such options may be
exercised beyond ten years from the original date of grant of the cancelled
option. A total of 859,837 options to acquire common stock are outstanding
under the 1989 Nonqualified Plan.
The 1989 Nonqualified Plan is administered by the Board of Directors
and officers of the company and its subsidiaries. The terms of the options,
including the number of shares, and the exercise price are subject to the
sole discretion of the Board of Directors.
Changes during the years were as follows:
For the Year Ended December 31,
1994 1993 1992
Options outstanding, beginning
of year...................................... 816,107 757,340 797,632
Options granted............................... 95,000 413,000 81,574
Options exercised............................. (22,200) (227,561) (58,264)
Options expired........................... (29,070) (126,659) (63,602)
Options cancelled........................ - (13) -
Options outstanding, end of year......... 859,837 816,107 757,340
Outstanding options exercisable
at end of year.......................... 764,837 403,107 675,766
Options reserved for future grants
at end of year.......................... 132,247 145,677 3,802
Option prices per share:
Exercised, during the year............ $5.31-$7.50 $4.84-$9.60 $5.31
Outstanding, end of year.............. $4.84-$12.66 $4.84-$13.75 $4.84-$13.75
On March 17, 1989, the Board of Directors also adopted the 1989 Stock
Appreciation Rights Plan (the SAR Plan) and the 1989 Restricted Stock Plan
(the Restricted Stock Plan). The SAR Plan authorized the Board of Directors
to grant stock appreciation rights to employees, officers and directors in
such amounts and with such exercise prices as it shall determine. No stock
appreciation rights granted under the SAR Plan may be exercised more than
five years from its date of grant. The SAR Plan authorized a maximum of
125,000 shares to be issued pursuant to stock appreciation rights granted
thereunder.
For the Year Ended December 31,
1994 1993
Rights outstanding, beginning of year..................... 30,000 60,000
Rights granted............................................ - -
Rights exercised.......................................... - (30,000)
Rights expired............................................ (30,000) -
Rights cancelled.......................................... - -
Rights outstanding, end of year........................... -0- 30,000
Rights reserved for future grants ....................... 5,000 5,000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
8. Stockholders' Equity (cont.):
_________________________________
The company recorded compensation expense relating to stock
appreciation rights of
$-0-, $1,875 and $121,875, for the years ended December 31, 1994, 1993, and
1992, respectively.
The Restricted Stock Plan authorizes the Board of Directors to make
restricted stock awards to employees, officers and directors in such amounts
as it shall determine. The stock issued pursuant to such awards is subject to
restrictions on transferability for a period of five years. Such stock is
subject to a five-year vesting schedule, and the company is required to
repurchase all vested stock from a grantee if such grantee's employment with
the company is terminated prior to the lapse of the transfer restrictions.
The Restricted Stock Plan authorizes a maximum of 125,000 shares to be issued
thereunder. No restricted stock awards have been granted pursuant to the
Restricted Stock Plan.
In conjunction with its bank borrowing, the company issued ten-year
warrants to purchase a total of 170,002 shares of its common stock as
summarized in the following table:
Warrant Issue Number Exercise Expiration
Holder Date of Shares Price Date
Morgan Guaranty 12/8/88 75,000 $ 3.9688 12/9/98
4/30/92 95,002 6.3855 5/1/02
__________
170,002
__________
9. Stockholders' Rights Plan:
______________________________
On June 30, 1994, the company's Board of Directors voted to repeal
the 1988 Stockholders' Rights Plan and set the close of business on July 22,
1994 as the record date for the payment of the one cent per share redemption
price. Stockholders of record were paid on August 8, 1994, in full redemption
of the rights under the plan. The total amount to redeem the Rights was
$101,432.
10. Income From Disposal of Private Placement Securities
_____________________________________________________
Income from disposal of private placement securities was $5.8 million
in 1992. During 1988, 1989, and 1990, American purchase private placement
securities believed to have a quality rating equivalent to "BBB" by S&P. In
1992, the company engaged an independent firm to review the private placement
portfolio. That review determined those securities would have been rated
"BB"-"B" if they had been rated by S&P when issued and that the total market
value of the securities at the time of the report was approximately $5.8
million less than the par value of these securities. On September 21, 1992,
an affiliate of the placement agent agreed to purchase the bonds at their par
value, which approximated the company's cost. Several of these bonds had been
written down in an amount totalling $2.1 million during 1990, 1991 and 1992
when declines in value were considered to be other than temporary. The effect
on 1992 operations of this transaction was a net investment loss of $4.3
million representing the difference between the market value at the time of
the sale and the GAAP book carrying value of the securities, and $5.8 million
of income from the disposal of private placement securities, representing the
amount received in excess of market value. There were no similar transactions
in 1994 or 1993.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
11. Other Revenue:
_________________
Effective December 1, 1989, the company entered into a coinsurance
agreement with Employers Reassurance Corporation (ERC) which reinsured 90% of
the risk on the company's block of SPWL policies written prior to 1989. The
agreement provides that ERC assumes 90% of all risks associated with each
policy in the block. These policies continue to be administered by American.
In return, American receives an administrative allowance of $31.50 per policy
per year. The total allowance received in 1994, 1993 and 1992 was $129,972,
$136,912 and $143,370, respectively.
During 1993 and 1992, the company received amounts of $51,000 and
$472,000, respectively representing recoveries of amounts paid during 1991 as
a result of the settlement of legal claims which resulted from agent fraud.
12. Income Taxes:
________________
The provision for income taxes charged to operations was as follows:
(000's Omitted)
For the Year Ended December 31,
1994 1993 1992
Current income tax expense......................................... $ 4,943 4,477 2,523
Deferred income tax expense (benefit).............................. 650 4,087 (2,405)
Total income tax expense (benefit)............................. $ 5,593 8,564 118
The net deferred tax asset was comprised of the following:
(000's Omitted)
For the Year Ended
December 31,
1994 1993
Gross deferred tax assets:
Investments $ 7,178 2,359
Accrued investment income - 10
Property and equipment 341 107
Other assets 11 2
Reserves for future policy benefits 107,448 101,816
Accrued expenses and other liabilities 1,828 1,943
116,806 106,237
Gross deferred tax liabilities:
Investments $ 1,011 2,299
Accounts receivable 51,940 51,098
Accrued investment income 193 -
Deferred policy acquisition costs 49,653 41,807
Policy and contract claims 279 101
103,076 95,305
13,730 10,932
Less valuation allowance (2,594) (2,310)
Net deferred tax asset $ 11,136 8,622
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
12. Income Taxes (cont.):
________________________
The actual tax expense (benefit) for each year differs from the
"expected" tax expense (computed by applying the Federal tax rate of 35% to
earnings before income taxes) as follows:
(000's Omitted)
For the Year Ended December 31,
1994 1993 1992
Expected tax expense............................................... $ 6,750 9,091 5,873
State income tax................................................... 254 201 45
Tax exempt municipal bond interest and dividends
received deductions................................................ - - (2)
Capital loss carryforward.......................................... - - (6,130)
Book/tax capital difference on bond dispositions................... - - (225)
Operating loss carryforward not tax effected....................... - - -
Stock options exercised............................................ - - (92)
Change in valuation allowance on future
deductions..................................................... (153) (470) 1,238
Change in valuation allowance on capital loss
temporary differences.......................................... (597) (555) (638)
Change in expected tax rate on future
deductions..................................................... (321) - -
Change in other net temporary differences, not
previously tax effected........................................ (340) 297 49
Actual income tax expense (benefit)................................ $ 5,593 8,564 118
Deferred income taxes are provided for the tax effects of transactions
that are reported in different periods for financial reporting and tax return
purposes. The primary components of the deferred income tax provision are as
follows:
(000's Omitted)
For the Year Ended December 31,
1994 1993 1992
Investments........................................................ $ (692) 938 (2,545)
Accounts receivable................................................ 842 4,447 1,531
Accrued investment income.......................................... 204 (10) -
Deferred policy acquisition costs.................................. 6,629 2,488 (1,776)
Property and equipment............................................. (234) (107) -
Other assets....................................................... (9) (1) -
Future policy benefits............................................. (5,632) (2,485) (1,893)
Policy and contract claims......................................... 178 - 32
Accrued expenses and other liabilities............................. 114 (440) (807)
Operating loss carryforward........................................ - 282 (282)
Valuation allowance on future deductions and
capital loss differences....................................... (750) (1,025) 3,335
Deferred income tax expense (benefit).......................... $ 650 4,087 (2,405)
As of December 31, 1994, the company had no capital loss
carryforwards available to offset future realized investment gains.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
13. Commitments and Contingencies:
________________________________
The company's insurance subsidiary is subject to state guaranty
association assessments in all states in which it is admitted. Generally
these associations guarantee specified amounts payable to residents of the
state under policies issued by insolvent insurers. Most state laws permit
assessments or some portion thereof to be credited against future premium
taxes. Charges (credits) relating to guaranty fund assessments impacted 1994,
1993 and 1992 income before taxes by approximately $(368,000), $1,594,000 and
$1,834,000, respectively. The company expects that further charges to income
may be required in the future and will record such amounts when they become
known.
14. Quarterly results (Unaudited):
________________________________
The company's quarterly results are set forth in the following table:
(000's Omitted, except per share data)
1994 Quarter Ended
March 31 June 30 Sept. 30 Dec. 31
Total revenue........................................... $ 37,491 35,954 37,519 38,188
Earnings before income taxes............................ $ 5,412 3,771 4,833 5,270
Income tax expense...................................... 1,840 1,282 1,628 843
Net earnings............................................ $ 3,572 2,489 3,205 4,427
Per share of common stock:
Primary:
Net earnings.................................. $ .34 .24 .31 .43
Fully diluted:
Net earnings.................................. $ .34 .24 .31 .43
1993 Quarter Ended
March 31 June 30 Sept. 30 Dec. 31
Total revenue........................................... $ 45,927 39,359 38,336 38,901
Earnings before income taxes and extra-
ordinary item....................................... $ 7,843 5,163 6,990 6,743
Income tax expense...................................... 2,353 1,549 2,497 2,149
Net earnings before extraordinary item.................. 5,490 3,614 4,493 4,594
Extraordinary item...................................... - - - (213)
Net earnings............................................ $ 5,490 3,614 4,493 4,381
Per share of common stock:
Primary:
Net earnings before extraordinary item.......... $ .84 .55 .69 .57
Extraordinary item............................ - - - (.03)
Net earnings.................................. $ .84 .55 .69 .54
Fully diluted:
Net earnings before extraordinary item........ $ .78 .52 .65 .54
Extraordinary item............................ - - - (.02)
Net earnings.................................. $ .78 .52 .65 .52
Item 9. Changes in and Disagreements with Accountants and
Accounting and Financial Disclosure
There have been no disagreements on accounting and financial
disclosure within the twenty-four months prior to the date of the most recent
financial statements.
PART III
Item 10. Directors and Executive Officers of the Registrant
______________________________________________________________
The information set forth under the caption "Proposal A. Election of
Directors" in the company's definitive Proxy Statement for the Annual Meeting
of Stockholders to be held May 18, 1995, is incorporated herein by reference.
Item 11. Executive Compensation
_________________________________
The information set forth under the caption "Executive Compensation"
in the company's definitive Proxy Statement for the Annual Meeting of
Stockholders to be held May 18, 1995, is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
__________________________________________________________________________
The information set forth under the caption "Principal Holders of Voting
Securities" in the company's definitive Proxy Statement for the Annual
Meeting of Stockholders to be held May 18, 1995, is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions
_________________________________________________________
The information set forth under the caption "Compensation Committee
Interlocks and Insider Participation" in the company's definitive Proxy
Statement for the Annual Meeting of Stockholders to be held May 18, 1995, is
incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
____________________________________________________________________________
(a) 1. Financial Statements
See index to Financial Statements at Item 8.
(b) 2. Financial Statement Schedules
Schedule Page
Number Description Number
________ ____________________________________________________ _________________
Independent Auditors' Report 61
I Summary of investments 62
II Condensed Financial information of registrant 63-64
III Supplementary insurance information 65
V Valuation and qualifying accounts and reserves 66
All other schedules are omitted because they are not required or
because the required information is included in the consolidated financial
statements and the notes thereto.
Exhibit Page Number or Incorporation
Number Description by Reference
(2)(a) Plan and Agreement of Union dated Exhibit (2) to Registration
July 10, 1986, between AmVestors Financial From S-2, File #2-82811
Corporation and American Investors Life dated November 26, 1986.
Insurance Company, Inc.
(2)(b) Resolutions of the Board of Directors Exhibit (2)(a) to Form 10-Q
dated January 7, 1988, providing for dated May 11, 1988.
succession to the position of Chairman
of the Board of Directors
(3)(a) Articles of Incorporation as Amended and Exhibit (3)(a) to Form 10-Q
Restated dated October 26, 1993
(4)(a) Specimen Common Stock Certificate P 67
(4)(b) Common Stock Purchase Warrant Exhibit (10)(o) to Form 10-K
expiring December 9, 1998 dated April 12, 1989
(4)(c) Common Stock Purchase Warrant Exhibit (10)(v) to Form 10-Q
expiring May 1, 2002 dated May 13, 1992
(10)(a) Form of Indemnification Agreement between Exhibit (10)(o) to Form 10-K
company and its officers and directors dated March 29, 1988
(10)(b) Employment Agreement dated May 18, 1989, Exhibit (10)(a) to Form 10-Q
between the company and Ralph W. Laster, dated August 8, 1989
Jr.
(10)(c) 1989 Non-Qualified Stock Option Plan Exhibit (10)(q) to Form 10-K
adopted March 17, 1989 dated April 12, 1989
(10)(d) Stock Appreciation Rights Plan adopted Exhibit (10)(r) to Form 10-K
March 17, 1989 dated April 12, 1989
(10)(e) Restricted Stock Plan adopted Exhibit 4.4 to Registration
March 17, 1989 statement on Form S-8 dated
September 19, 1989
Registration No. 33-31155
(10)(f) Employment Agreement dated October 3, 1994 Exhibit (10)(a) to Form 10-Q
1992, between the company and Ralph W. dated November 10, 1994
Laster, Jr.
(10)(g) Bonus Compensation Agreement dated Exhibit (10)(b) to Form 10-Q
September 30, 1994, between to company dated November 10, 1994
and Ralph W. Laster,Jr.
(10)(h) Bonus Compensation Agreement dated Exhibit (10)(c) to Form 10-Q
September 30, 1994, between the Company dated November 10, 1994
and Mark V. Heitz
(10)(i) Credit Agreement dated December 29, 1994, P 68-144
between the company, First National Bank
of Chicago and Boatman's First National
Bank of Kansas City
Exhibit Page Number or Incorporation
Number Description by Reference
(10)(j) 1994 Stock Purchase Plan for Non-Employee PP 145-149
Directors effective February 24, 1994
(10)(k) Incentive Compensation Plan between the PP 150-156
company and certain designated employees
effective for the calendar year 1994
(11) Calculation of Earnings (Loss) per Share P 157
(20) Reports on Form 8-K
There were no reports on Form 8-K for
the twelve months ended December 31, 1994
(21) Wholly-owned subsidiaries of the registrant
American Investors Life Insurance
Company, Inc.
415 Southwest Eighth Avenue
Topeka, Kansas 66603
American Investors Sales Group, Inc
(formerly Gateway Corporation)
415 Southwest Eighth Avenue
Topeka, Kansas 66603
AmVestors Investment Group, Inc.
(formerly American Investors
Sales Group, Inc.)
415 Southwest Eighth Avenue
Topeka, Kansas 66603
Omni-Tech Medical, Inc.
6206 Southwest Ninth Terrace
Topeka, Kansas 66615
(23) Independent Auditors' Consent P 158
(27) Financial Data Sheet
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.
AMVESTORS FINANCIAL CORPORATION
By: /s/Ralph W. Laster, Jr.
Ralph W. Laster, Jr.
Chairman of the Board
Chief Executive Officer
(Principal Executive Officer)
and Chief Financial Officer
(Principal Accounting Officer)
Date: March 30, 1995
________________
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/Ralph W. Laster, Jr. March 30, 1995
Ralph W. Laster, Jr Chief Executive Officer
(Principal Executive Officer)
and Chief Financial Officer
(Principal Accounting Officer)
/s/Mark V. Heitz President, General Counsel March 30, 1995
Mark V. Heitz and Director
/s/Janis L. Andersen Director March 30, 1995
Janis L. Andersen
/s/Robert G. Billings Director March 30, 1995
Robert G. Billings
/s/Jack H. Brier Director March 30, 1995
Jack H. Brier
/s/Robert T. McElroy Director March 30, 1995
Robert T. McElroy, M.D.
/s/R. Rex Lee Director March 30, 1995
R. Rex Lee, M.D.
/s/Robert R. Lee Director March 30, 1995
Robert R. Lee
/s/James V. O'Donnell Director March 30, 1995
James V. O'Donnell
INDEPENDENT AUDITORS' REPORT
_____________________________
We have audited the consolidated financial statements of AmVestors
Financial Corporation and subsidiaries as of December 31, 1994 and 1993, and
for each of the three years in the period ended December 31, 1994, and have
issued our report thereon dated March 29, 1995; such report is included
elsewhere in this Form 10-K. Our audits also included the financial statement
schedules of AmVestors Financial Corporation and subsidiaries, listed in Item
14. These financial statement schedules are the responsibility of the
company's management. Our responsibility is to express an opinion based on
our audits. In our opinion, such financial statement schedules, when
considered in relation to the basic consolidated financial statements taken
as a whole, present fairly in all material respects the information set forth
therein.
/s/Deloitte & Touche LLP
____________________________
Kansas City, Missouri
March 29, 1995
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
SUMMARY OF INVESTMENTS
SCHEDULE I
As of December 31, 1994
(000's Omitted)
Amount at
which shown
in the
Market balance
Type of Investment Cost Value sheet
Debt securities:
Bonds:
Held-to-maturity:
U.S. treasury obligations $ 3,618 3,299 3,618
Mortgage-backed securities 305,123 284,855 305,123
Public utilities 124,818 114,073 124,818
All other corporate bonds 803,626 743,465 803,626
Available-for-sale:
U.S. treasury obligations - - -
Mortgage-backed securities 366,865 357,409 357,409
Public utilities 22,276 21,699 21,699
All other corporate bonds 231,997 227,938 227,938
Total Bonds 1,858,323 1,752,738 1,844,231
Preferred stock-redeemable - - -
Total debt securities 1,858,323 1,752,738 1,844,231
Equity securities:
Common stocks:
Banks, trust and insurance
companies 1,825 2,037 2,037
Public utilities 237 89 89
All other common stock 62 199 199
Preferred stock - non-redeemable 45 31 31
Total equity securities 2,169 2,356 2,356
Mortgage loans on real estate 5,465 5,475 5,465
Other long-term investments 53,308 53,061 53,308
Short-term investments 520 520 520
1,919,785 1,814,150 1,905,880
Allowance for credit losses (2,231) - (2,231)
Total investments $ 1,917,554 1,814,150 1,903,649
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SCHEDULE II
BALANCE SHEETS
(000's Omitted)
As of December 31,
1994 1993
ASSETS
Investment in subsidiaries 107,744 104,773
Long-term investments 536 494
Cash and cash equivalents $ (33) (48)
Other assets 2,782 2,941
Total Assets $ 111,029 108,160
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes Payable $ 5,434 5,761
Other liabilities 1,399 2,054
Total liabilities 6,833 7,815
Stockholders' Equity:
Preferred stock - -
Common stock 12,769 12,907
Paid-in capital 63,499 64,612
Unrealized investment gains (losses) (7,813) 1,064
Retained earnings 38,876 25,183
107,331 103,766
Less leveraged employee stock ownership trust (3,135) (3,421)
Total stockholders' equity 104,196 100,345
Total liabilities and stockholders' equity $ 111,029 108,160
STATEMENTS OF OPERATIONS
For the year ended December 31,
1994 1993 1992
Equity in earnings of subsidiaries $ 13,748 17,732 18,562
Investment income 67 23 58
Other revenues 4,149 4,103 3,713
Operating expense (3,867) (2,921) (3,399)
Interest expense (466) (1,533) (2,766)
Net earnings before income taxes
and extraordinary item 13,631 17,404 16,168
Income tax benefit (62) (787) (1,032)
Net earnings before extraordinary
item 13,693 18,191 17,200
Extraordinary loss - (213) (382)
Net earnings $ 13,693 17,978 16,818
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SCHEDULE II (cont.)
STATEMENTS OF CASH FLOWS (000's Omitted)
Increase (Decrease) in Cash and Cash Equivalents
For the Year Ended December 31,
1994 1993 1992
Operating Activities:
Net earnings $ 13,693 17,978 16,818
Adjustments to reconcile net
earnings to net cash provided by
(used in) operating activities:
Equity in earnings of subsidiaries (13,748) (17,732) (18,562)
Amortization of discount on notes
payable - 59 862
Other liabilities (656) 1,368 215
Other assets 160 877 (4)
Other, net 134 (372) (647)
Net cash provided by (used in)
operating activities (417) 2,178 (1,318)
Investing Activities:
Investment in subsidiaries (135) (14,600) -
Dividends from subsidiaries 1,900 2,680 7,495
Purchases of debt securities - - (75)
Proceeds from sale of debt securities - 75 -
Purchases of long-term investments (233) (494) -
Principal payments on long-term
investments 190 - -
Net cash provided by (used in)
investing activities 1,722 (12,339) 7,420
Financing Activities:
Additions to notes payable - - 3,159
Payments on notes payable (326) (20,855) (9,521)
Cash dividends to stockholders - (236) (278)
Redemption of stockholder plan (101) - -
Fractional cash on reverse stock
split - (25) -
Issuance of common stock 27 31,400 2,810
Purchase of treasury stock (1,186) - -
Repurchase of warrants - (375) -
Purchase of LESOP stock - - (2,500)
Allocation of LESOP shares 286 267 200
Other, net 10 - -
Net cash provided by (used in)
financing activities (1,290) 10,176 (6,130)
Increase (Decrease) in Cash and
Cash Equivalents 15 15 (28)
Cash and Cash Equivalents:
Beginning of year (48) (63) (35)
End of year $ (33) (48) (63)
Supplemental schedule of cash flow
information:
Income tax payments $ 6,150 3,204 2,000
Interest payments $ - 1,614 1,516
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
SCHEDULE III
(000's Omitted)
Future
Policy Amortization
Year Deferred Benefits Other Premium Benefits of Deferred
Ended Policy Losses, Claims & Policy Net Claims & Policy Other
December Acquisition Claims & & Charges Investment Settlement Acquisition Operating
31, Costs Loss Expense Benefits Revenue Income Expenses Costs Expenses
1992 $119,895 1,984,013 148 7,545 141,155 4,458 16,409 11,280
1993 $128,671 2,005,339 157 6,594 138,539 4,257 9,436 11,285
1994 $148,871 2,148,763 134 6,331 142,009 3,570 9,026 8,883
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
SCHEDULE V
(000's Omitted)
Additions
Balance Charged to Charged to Balance at
Beginning Costs and Other and End of
of Period Expenses Accounts Deductions Period
Year Ended December 31, 1992:
Allowance for Credit Losses $ 7,000 - 658 5,158 2,500
Allowance for Deferred Tax
Asset - 3,335 - - 3,335
Allowance for Uncollectible
Agent Balances 23 254 - - 277
$ 7,023 3,589 658 5,158 6,112
Year Ended December 31, 1993:
Allowance for Credit Losses $ 2,500 - 1,442 1,442 2,500
Allowance for Deferred Tax
Asset 3,335 - - 1,025 2,310
Allowance for Uncollectible
Agent Balances 277 141 - 70 348
$ 6,112 141 1,442 2,537 5,158
Year Ended December 31, 1994:
Allowance for Credit Losses $ 2,500 - 360 629 2,231
Allowance for Deferred Tax
Asset 2,310 284 - - 2,594
Allowance for Uncollectible
Agent Balances 348 88 - 209 227
$ 5,158 372 360 838 5,052
EX-4.B
2
AmVestors Financial Certificate of Common Stock (FRONT SIDE)
At the top of the certificate is a 11.5 inch by 1.125 inch bar printed in ink
color PMS 2945 with reversed geometric design
The left and right corners .125 inch below the above described color bar
contain:
"common stock number" with a box containing "AV- ". The box on the left
printed in standard sans-serif type are the words "TRANSFERABLE IN THE CITY
OF ST. LOUIS, MISSOURI AND NEW YORK, NEW YORK" printed beneath it. The right
hand box has "SEE REVERSE SIDE FOR CERTAIN DEFINITIONS" printed beneath it
also printed in standard sans-serif type.
1.5 inches from the top of the certificate and beginning 4.5 inches from the
left edge is AmVestors Financial Corporations' logo consisting of:
AmVestors Financial Corporation typed in goudy type style with a stylized
rendition of an eagles' profile printed in ink color PMS 2945 centered in the
goudy type. Under the logo is an all caps line consisting of "INCORPORATED
UNDER THE LAWS OF THE STATE OF KANSAS" printed in a standard sans-serif type
style.
3 inches from the top of the certificate and .5 inch from the left edge is a
black and white drawing of a man and woman with the man pointing forward.
2.5 inches from the top and 3.5 inches from the left edge is a box printed in
ink color PMS 2945 with a cross hatched screen inside with contains the words
"This Certifies That" in script type 1.125 inches below are the words "Is the
Owner of" also in script type. On the far right side of this box are "CUSIP
and numbers" Printed beneath the box are the words "FULLY PAID AND
NON-ASSESSABLE SHARES OF COMMON STOCK, NO PAR VALUE, OF" printed in a
standard sans-serif type style
.125 inch below the above box are the words "CERTIFICATE OF STOCK" printed in
ink color PMS 2945 screen behind the following:
Printed 4.75 inches from top of certificate and beginning 6.25 inches from
left edge in Bold Sans-Serif type are the words "AMVESTORS FINANCIAL
CORPORATION", beneath this are the words "TRANSFERABLE ON THE BOOKS OF THE
CORPORATION BY THE HOLDER HEREOF IN PERSON, OR BY DULY AUTHORIZED ATTORNEY
UPON THE SURRENDER OF THIS CERTIFICATE PROPERLY ENDORSED. THIS CERTIFICATE IS
NOT VALID UNTIL COUNTERSIGNED AND REGISTERED BY THE TRANSFER AGENT AND
REGISTRAR. WITNESS THE FACSIMILE SEAL OF THE CORPORATION AND THE FACSIMILE
SIGNATURES OF ITS DULY AUTHORIZED OFFICERS.
DATED:" all printed in script type.
5 inches from the top of the certificate and .625 inch from the left edge is
the company's round seal which is 1.5 inches in diameter and includes the
following wording: "AMVESTORS FINANCIAL CORPORATION, KANSAS" printed in a
circle on the outside of the words "Corporate SEAL 1986".
To the left of the seal are "AMVESTORS FINANCIAL CORPORATION" in bold
sans-serif type with the facsimile signatures of the Chairman and Secretary
of the Corporation with those titles printed beneath the signatures in
sans-serif type. To the left of these signatures is the wording
"COUNTERSIGNED AND REGISTERED:" in sans-serif type followed by the words
"BOATMAN'S TRUST COMPANY, (ST. LOUIS MISSOURI) and "TRANSFER AGENT AND
REGISTRAR" also in sans-serif type.
6.25 inches below the top of the certificate and 8.25 inches from the left
edge are the words "BY" printed in sans-serif type.
6.5 inches below the top of the certificate and 10.625 inches from the left
edge are the words "AUTHORIZED OFFICER" printed in sans-serif type.
6.625 inches from top edge of certificate is a 11.5 inch by 1.125 inch bar
printed in ink color PMS 2945 which is a copy of the bar at top.
A copyright symbol and the words "NORTHERN BANK NOTE COMPANY" is centered on
the bottom line of the certificate.
AmVestors Financial Certificate of Common Stock (BACK SIDE)
The back side descriptions will be in order of printing from top to bottom.
The certificate is printed horizontally on the back side running left to
right on the short grain.
"AMVESTORS FINANCIAL CORPORATION" printed in a bold serif type style is
centered at the top of the certificate back.
The following is all printed in a standard sans-serif type style:
"The corporation will furnish without charge to each stockholder who
so requests the powers, designations preferences and relative participating,
optional or other special rights of each class of stock or series thereof and
the qualifications, limitations or restrictions of such preferences and/or
rights. Such request may be made to the Secretary of the Corporation."
"The following abbreviations when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations.
TEN COM - as tenants in common
TENENT - As tenants by the entireties
JT TEN - as joint tenants with right of survivorship and not as tenants in
common
UNIF GIFT MIN ACT- (LINE) Custodian (LINE)
(Cust) (Minor)
under Uniform Gifts to Minors Act
(Line)
(State)
Additional abbreviations may also be used though not in the above list.
For Value Received, (Line) hereby sell, assign and transfer
unto
PLEASE INSERT SOCIAL SECURITY NUMBER OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
(BOX)(LINE)
(LINE)
(Please print or typewrite name and address, including zip code, of assignee)
(LINE)
(LINE)
(LINE)Shares of Common Stock represented by the within Certificate, and do
hereby irrevocably constitute and appoint.
(LINE)
(LINE) Attorney to transfer the said stock on the books of the within named
Corporation with full power of substitution in he premises.
Dated, (LINE)
X in large bold type (LINE)
Notice: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S)
AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. (ARROW)
X in large bold type (LINE)
(BOX)containing "Signature(s) must be guaranteed by a qualified Medallion
Guarantee member."
EX-10.I
3
EXECUTION COPY
CREDIT AGREEMENT
AMONG
AMVESTORS FINANCIAL CORPORATION,
as Borrower,
THE LENDERS NAMED HEREIN
and
THE FIRST NATIONAL BANK OF CHICAGO,
as Agent
DATED AS OF
December 29, 1994
TABLE OF CONTENTS
ARTICLE I
DEFINITIONS 1
ARTICLE II
THE CREDITS 16
2.1. Advances 16
2.2. Ratable Loans 16
2.3. Types of Advances 16
2.4. Commitment Fee; Reductions in Aggregate Revolving
Credit Commitment 16
2.5. Minimum Amount of Each Advance 17
2.6. Optional Principal Payments 17
2.7. Mandatory Commitment Reductions 17
2.8. Method of Selecting Types and Interest Periods
for New Advances 18
2.9. Conversion and Continuation of Outstanding
Advances 19
2.10. Changes in Interest Rate, etc. 19
2.11. Rates Applicable After Default 20
2.12. Method of Payment 20
2.13. Notes; Telephonic Notices 20
2.14. Interest Payment Dates; Interest and Fee Basis 21
2.15. Notification of Advances, Interest Rates,
Prepayments and Commitment Reductions 21
2.16. Lending Installations 21
2.17. Non-Receipt of Funds by the Agent 22
2.18. Taxes 22
2.19. Agent's Fees 23
ARTICLE III
CHANGE IN CIRCUMSTANCES 24
3.1. Yield Protection 24
3.2. Changes in Capital Adequacy Regulations 24
3.3. Availability of Types of Advances 25
3.4. Funding Indemnification 25
3.5. Lender Statements; Survival of Indemnity 25
ARTICLE IV
CONDITIONS PRECEDENT 26
4.1. Initial Loan 26
4.2. Each Future Advance 28
ARTICLE V
REPRESENTATIONS AND WARRANTIES 28
5.1. Corporate Existence and Standing 28
5.2. Authorization and Validity 29
5.3. Compliance with Laws and Contracts 29
5.4. Governmental Consents 29
5.5. Financial Statements 30
5.6. Material Adverse Change 30
5.7. Taxes 30
5.8. Litigation and Contingent Obligations 30
5.9. Capitalization 31
5.10. ERISA 31
5.11. Defaults 32
5.12. Federal Reserve Regulations 32
5.13. Investment Company 32
5.14. Certain Fees 32
5.15. Solvency 33
5.16. Ownership of Properties 33
5.17. Indebtedness 33
5.18. Employee Controversies 33
5.19. Material Agreements 33
5.20. Environmental Laws 34
5.21. Corporate Insurance 35
5.22. Insurance Licenses. 35
5.23. Disclosure 35
ARTICLE VI
COVENANTS 36
6.1. Financial Reporting 36
6.2. Use of Proceeds 38
6.3. Notice of Default. 39
6.4. Conduct of Business 39
6.5. Taxes 40
6.6. Corporate Insurance 40
6.7. Compliance with Laws 40
6.8. Maintenance of Properties 40
6.9. Inspection 40
6.10. Dividends 40
6.11. Indebtedness 41
6.12. Merger 41
6.13. Sale of Assets 42
6.14. Sale and Leaseback 42
6.15. Investments and Purchases 42
6.16. Contingent Obligations 44
6.17. Liens 44
6.18. Affiliates 45
6.19. Amendments to Agreements 45
6.20. Environmental Matters 45
6.21. Change in Corporate Structure; Fiscal Year 46
6.22. Inconsistent Agreements 46
6.23. Financial Covenants 46
6.23.1. Net Worth 46
6.23.2. Leverage Ratio 47
6.23.3. Cash Flow Coverage Ratio 47
-ii-
6.23.4. Risk-Based Capital 47
6.23.5. Adjusted Capital and Surplus
to Assets 47
6.24. Tax Consolidation 47
6.25. ERISA Compliance 47
6.26. Derivatives 48
ARTICLE VII
DEFAULTS 48
ARTICLE VIII
ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES 51
8.1. Acceleration 51
8.2. Amendments 51
8.3. Preservation of Rights 52
ARTICLE IX
GENERAL PROVISIONS 52
9.1. Survival of Representations 52
9.2. Governmental Regulation 52
9.3. Taxes 52
9.4. Headings 53
9.5. Entire Agreement 53
9.6. Several Obligations; Benefits of this Agreement 53
9.7. Expenses; Indemnification 53
9.8. Numbers of Documents 53
9.9. Accounting 54
9.10. Severability of Provisions 54
9.11. Nonliability of Lenders 54
9.12. Choice of Law 54
9.13. Consent to Jurisdiction 54
9.14. Waiver of Jury Trial 55
9.15. Disclosure 55
9.16. Counterparts 55
ARTICLE X
THE AGENT 55
10.1. Appointment 55
10.2. Powers 56
10.3. General Immunity 56
10.4. No Responsibility for Loans, Recitals, etc. 56
10.5. Action on Instructions of Lenders 56
10.6. Employment of Agents and Counsel 56
10.7. Reliance on Documents; Counsel 57
10.8. Agent's Reimbursement and Indemnification 57
10.9. Notice of Default 57
10.10. Rights as a Lender 57
10.11. Lender Credit Decision 58
-iii-
10.12. Successor Agent 58
ARTICLE XI
SETOFF; RATABLE PAYMENTS 59
11.1. Setoff 59
11.2. Ratable Payments 59
ARTICLE XII
BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS 59
12.1. Successors and Assigns 59
12.2. Participations. 60
12.2.1. Permitted Participants;
Effect. 60
12.2.2. Voting Rights 60
12.2.3. Benefit of Setoff 60
12.3. Assignments 61
12.3.1. Permitted Assignments 61
12.3.2. Effect; Effective Date 61
12.4. Dissemination of Information 61
12.5. Tax Treatment 62
ARTICLE XIII
NOTICES 62
13.1. Giving Notice 62
13.2. Change of Address 62
-iv-
EXHIBITS
Exhibit A (Section 1) Revolving Credit Note
Exhibit B (Section 4.1(h)) Money Transfer Instructions
Exhibit C (Section 6.1(a)) Accountants' Privity Letter
Exhibit D (Section 6.1(h)) Compliance Certificate
Exhibit E (Section 12.3.1) Assignment Agreement
SCHEDULES
Schedule 1.1-1 - Management Agreements
Schedule 1.1-2 - Risk Based Capital Act
Schedule 5.3 - Approvals and Consents
Schedule 5.8 - Litigation and Material Contingent Obligations
Schedule 5.9 - Capitalization
Schedule 5.10 - ERISA
Schedule 5.16 - Owned and Leased Properties
Schedule 5.17 - Indebtedness
Schedule 5.20 - Environmental
Schedule 5.22 - Insurance Licenses
Schedule 6.15 - Investments
Schedule 6.17 - Liens
Schedule 6.26 - Investment Guidelines for Derivatives
-v-
CREDIT AGREEMENT
This Credit Agreement, dated as of December 29, 1994, is among
AMVESTORS FINANCIAL CORPORATION, a Kansas corporation, the Lenders and THE
FIRST NATIONAL BANK OF CHICAGO, individually and as Agent.
R E C I T A L S:
A. The Borrower has requested the Lenders to make
financial accommodations to it in the aggregate principal
amount of $25,000,000, the proceeds of which the Borrower will use for the
working capital needs of the Borrower and its Subsidiaries; and
B. The Lenders are willing to extend such financial
accommodations on the terms and conditions set forth
herein.
NOW, THEREFORE, in consideration of the mutual covenants and
undertakings herein contained, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the Borrower,
the Lenders and the Agent hereby agree as follows:
ARTICLE I
DEFINITIONS
As used in this Agreement:
"Advance" means a borrowing pursuant to SECTION 2.1 consisting of
the aggregate amount of the several Loans made on the same Borrowing Date by
the Lenders to the Borrower of the same Type and, in the case of Eurodollar
Advances, for the same Interest Period.
"Adjusted Capital and Surplus" means, with respect to any
Insurance Subsidiary at any date, the sum of (a) the capital and surplus of
such Insurance Subsidiary at such date ("Liabilities, Surplus and Other
Funds" statement, Page 3, Line 37 of the Annual Statement), plus (b) the
asset valuation reserve of such Insurance Subsidiary at such date
("Liabilities, Surplus and Other Funds" statement, Page 3, Line 24.1 of the
Annual Statement), in each case as determined in accordance with SAP.
"Affiliate" of any Person means any other Person directly or
indirectly controlling, controlled by or under common control with such
Person. A Person shall be deemed to control another Person if the
controlling Person owns 10% or more of any class of voting securities (or
other ownership interests) of the controlled Person or possesses, directly or
indirectly, the power to direct or cause the direction of the management or
policies of the controlled Person, whether through ownership of stock, by
contract or otherwise.
"Agent" means First Chicago in its capacity as agent for the
Lenders pursuant to ARTICLE X, and not in its individual
capacity as a Lender, and any successor Agent appointed pursuant to ARTICLE X
"Aggregate Revolving Credit Commitment" means the aggregate of
the Revolving Credit Commitments of all the Lenders hereunder.
"Agreement" means this Credit Agreement, as it may be amended,
modified or restated and in effect from time to time.
"Agreement Accounting Principles" means generally accepted
accounting principles as in effect from time to time, applied in a manner
consistent with those used in preparing the financial statements referred to
in SECTION 5.5(A) AND (B); provided, however, that for purposes of all
computations required to be made with respect to compliance by the Borrower
with SECTION 6.23, such term shall mean generally accepted accounting
principles as in effect on the date hereof, applied in a manner consistent
with those used in preparing the financial statements referred to in SECTION
5.5(A) AND (B).
"American" means American Investors Life Insurance Company, a
Kansas insurance company.
"Annual Statement" means the annual statutory financial statement
of any Insurance Subsidiary required to be filed with the insurance
commissioner (or similar authority) of its jurisdiction of incorporation,
which statement shall be in the form required by such Insurance Subsidiary's
jurisdiction of incorporation or, if no specific form is so required, in the
form of financial statements permitted by such insurance commissioner (or
such similar authority) to be used for filing annual statutory financial
statements and shall contain the type of information permitted by such
insurance commissioner (or such similar authority) to be disclosed therein,
together with all exhibits or schedules filed therewith
"Article" means an article of this Agreement unless another
document is specifically referenced.
"Asset Disposition" means any sale, transfer or other disposition
of any asset of the Borrower or any Subsidiary in a single transaction or in
a series of related transactions (other than the sale of investment assets in
the ordinary course).
"Authorized Officer" means any of the president, chief executive
officer, chief financial officer or treasurer of the Borrower, acting singly.
"Bankruptcy Code" means Title 11, United States Code, sections 1
E
T SEQ., as the same may be amended from time to time, and any successor
thereto or replacement therefor which may be hereafter enacted.
-2-
"Borrower" means AmVestors Financial Corporation, a Kansas
corporation, and its successors and assigns.
"Borrowing Date" means a date on which an Advance is made
hereunder.
"Borrowing Notice" is defined in SECTION 2.8.
"Business Day" means (a) with respect to any borrowing, payment
or rate selection of Eurodollar Advances, a day (other than a Saturday or
Sunday) on which banks generally are open in Chicago for the conduct of
substantially all of their commercial lending activities and on which
dealings in United States dollars are carried on in the London interbank
market, and (b) for all other purposes, a day (other than a Saturday or
Sunday) on which banks generally are open in Chicago for the conduct of
substantially all of their commercial lending activities.
"Capitalized Lease" of a Person means any lease of Property by
such Person as lessee which would be capitalized on a balance sheet of such
Person prepared in accordance with Agreement Accounting Principles.
"Capitalized Lease Obligations" of a Person means the amount of
the obligations of such Person under Capitalized Leases which would be shown
as a liability on a balance sheet of such Person prepared in accordance with
Agreement Accounting Principles.
"Cash Equivalents" means Investments maturing within one year
from the date of investment (excluding (x) Investments as to which the
principal amount to be repaid may be subject to fluctuation and (y) mortgage
backed securities consisting of principal only or interst only strips) in (a)
certificates of deposit, Eurodollar time deposits and other interest bearing
deposits or accounts with United States commercial banks having a combined
capital and surplus of at least $500,000,000 and rated C or better by Keefe
Bruyette and Associates or with any Lender, (b) certificates of deposit,
other interest bearing accounts or deposits and demand deposits with other
United States commercial banks, which deposits and accounts are in amounts
fully insured by the Federal Deposit Insurance Corporation, (c) obligations
issued or unconditionally guaranteed by the United States government or
issued by an agency thereof and backed by the full faith and credit of the
United States, (d) direct obligations issued by any state of the United
States or any political subdivision thereof which have the highest rating
obtainable from Standard & Poor's Ratings Group on the date of investment,
(e) commercial paper rated A-1 or better by Standard & Poor's Ratings Group
and P-1 or better by Moody's Investors Services, Inc. or (f) money market
mutual funds identified by the valuation office of the NAIC as requiring no
investment reserve.
-3-
"Cash Flow Coverage Ratio" means, as of any date of
determination, the ratio of (a) the sum of (i) the aggregate
Statutory Net Income of the Insurance Subsidiaries for the period of four
Fiscal Quarters ending on such date, PLUS (ii) the aggregate Investments of
the Borrower and its Unregulated Subsidiaries consisting of cash and Cash
Equivalents, determined on a non-consolidated basis as of such date, to (b)
the sum of (i) the aggregate interest expenses of the Borrower and its
Subsidiaries on a consolidated basis for the period of four Fiscal Quarters
ending on such date, PLUS (ii) the required principal payments and other
repayments of Indebtedness required to be made by the Borrower and its
Subsidiaries on a consolidated basis for the period of four Fiscal Quarters
immediately following the date of determination. For purposes of this
definition only, "INTEREST EXPENSES" shall mean the aggregate of all interest
paid or accrued by the Borrower and its Subsidiaries in respect of any
Indebtedness and all fees and costs related thereto, including, without
limitation, all interest, fees and costs payable with respect to the
Obligations (other than fees and costs which may be capitalized as
termination costs in accordance with Agreement Accounting Principles), the
interest portion of any Capitalized Lease Obligations and any dividends paid
or accrued on the Borrower's preferred stock, all as determined in accordance
with Agreement Accounting Principles or SAP, as applicable.
"CERCLA" is defined in SECTION 6.22.
"Change" is defined in SECTION 3.2.
"Change in Control" means (a) the acquisition by any Person, or
two or more Persons acting in concert, including without limitation any
acquisition effected by means of any transaction contemplated by SECTION
6.12,
of beneficial ownership (within the meaning of Rule 13d-3 of the Securities
and Exchange Commission under the Securities Exchange Act of 1934) of 20% or
more of the outstanding shares of voting stock of the Borrower, or (b) during
any period of 25 consecutive calendar months, commencing on the date of this
Agreement, the ceasing of those individuals (the "Continuing Directors") who
(i) were directors of the Borrower on the first day of each such period or
(ii) subsequently became directors of the Borrower and whose initial election
or initial nomination for election subsequent to that date was approved by a
majority of the Continuing Directors then on the board of directors of the
Borrower, to constitute a majority of the board of directors of the Borrower.
"Closing Transactions" is defined in SECTION 4.1(D) hereof.
"Code" means the Internal Revenue Code of 1986, as amended,
reformed or otherwise modified from time to time.
"Commitment" and "Revolving Credit Commitment" each mean, for
each Lender, the obligation of such Lender to make Loans to the Borrower
pursuant to SECTION
-4-
2.1 in an aggregate amount at any one time outstanding not exceeding the
amount set forth opposite its name under the heading "Commitment" on the
signature page hereto, as such amount may be modified or reduced from time to
time pursuant to the terms of this Agreement.
"Condemnation" is defined in SECTION 7.8.
"Consolidated" or "consolidated", when used in connection with
any calculation, means a calculation to be determined on a consolidated basis
for the Borrower and its Subsidiaries in accordance with Agreement Accounting
Principles.
"Consolidated Person" means, for the taxable year of reference,
each Person which is a member of the affiliated group of the Borrower if
Consolidated returns are or shall be filed for such affiliated group for
federal income tax purposes or any combined or unitary group of which the
Borrower is a member for state income tax purposes.
"Contingent Obligation" of a Person means any agreement,
undertaking or arrangement by which such Person assumes, guarantees,
endorses, contingently agrees to purchase or provide funds for the payment
of, or otherwise becomes or is contingently liable upon, the obligation or
liability of any other Person, or agrees to maintain the net worth or working
capital or other financial condition of any other Person, or otherwise
assures any creditor of such other Person against loss, including, without
limitation, any comfort letter, operating agreement or take-or-pay contract.
"Controlled Group" means all members of a controlled group of
corporations and all trades or businesses (whether or not incorporated) under
common control which, together with the Borrower or any of its Subsidiaries,
are treated as a single employer under Section 414 of the Code.
"Conversion/Continuation Notice" is defined in SECTION 2.9.
"Corporate Base Rate" means a rate per annum equal to the
corporate base rate of interest announced by First Chicago from time to time,
changing when and as said corporate base rate changes. The Corporate Base
Rate is a reference rate and does not necessarily represent the lowest or
best rate of interest actually charged to any customer. First Chicago may
make commercial loans or other loans at rates of interest at, above or below
the Corporate Base Rate.
"Default" means an event described in ARTICLE VII.
"Derivatives Instruments" means (a) any and all agreements,
devices or arrangements designed to protect at least one of the parties
thereto from the fluctuations of interest rates, exchange rates or forward
rates applicable to
-5-
such party's assets, liabilities or exchange transactions, including, but not
limited to, dollar-denominated or cross-currency interest rate exchange
agreements, forward currency exchange agreements, interest rate cap or collar
protection agreements, forward rate currency or interest rate options, puts
and warrants, and (b) any and all cancellations, buybacks, reversals,
terminations or assignments of any of the foregoing.
"Derivatives Investment" of a Person means any investment in, or
purchase or other acquisition of, any Derivatives Instrument by such Person
as to which such Person pays an amount at the time of such investment or
purchase and has no further obligation, contingent or otherwise, to pay any
additional amount in respect thereof.
"Environmental Laws" is defined in SECTION 5.20.
"Environmental Permits" is defined in SECTION 5.20.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended from time to time.
"Eurodollar Advance" means an Advance which bears interest at a
Eurodollar Rate.
"Eurodollar Base Rate" means, with respect to a Eurodollar
Advance for the relevant Interest Period, the rate determined by the Agent to
be the rate of interest per annum for deposits in U.S. dollars for a period
equal to the relevant Interest Period quoted on Telerate, Page 3750 (or its
successor if such page number changes) at approximately 11 a.m. (London time)
two Business Days prior to the first day of such Interest Period. If no
quotation is available on Telerate, the "Eurodollar Base Rate" shall mean the
rate determined by the Agent to be the rate at which deposits in U.S. dollars
are offered by First Chicago to first class banks in the London interbank
market at approximately 11 a.m. (London time) two Business Days prior to the
first day of such Interest Period.
"Eurodollar Rate" means, with respect to a Eurodollar Advance for
the relevant Interest Period, the sum of (a) the quotient of (i) the
Eurodollar Base Rate applicable to such Interest Period, divided by (ii) one
minus the Reserve Requirement (expressed as a decimal) applicable to such
Interest Period, plus, (b) for the applicable period, the corresponding rate
per annum set forth below:
PERIOD RATE
Closing Date - 12/31/96 1.0%
1/1/97 - 12/31/98 1.125%
1/1/99 and thereafter 1.25%
-6-
The Eurodollar Rate shall be rounded to the next higher multiple of 1/16 of
1% if the rate is not such a multiple.
"Facility Termination Date" means December 31, 1999.
"Federal Funds Effective Rate" means, for any day, an interest
rate per annum equal to the weighted average of the rates on overnight
Federal funds transactions with members of the Federal Reserve System
arranged by Federal Funds brokers on such day, as published for such day (or,
if such day is not a Business Day, for the immediately preceding Business
Day) by the Federal Reserve Bank of New York, or, if such rate is not so
published for any day which is a Business Day, the average of the quotations
at approximately 10 a.m. (Chicago time) on such day on such transactions
received by the Agent from three Federal funds brokers of recognized standing
selected by the Agent in its sole discretion.
"Financial Statements" is defined in SECTION 5.5.
"First Chicago" means The First National Bank of Chicago in its
individual capacity, and its successors.
"Fiscal Quarter" means each of the four quarterly accounting
periods in each Fiscal Year.
"Fiscal Year" means the twelve month accounting period commencing
on January 1 and ending on December 31 of each year.
"Floating Rate" means, for any day, a rate of interest per annum
equal to the higher of (a) the Corporate Base Rate for such day, and (b) the
sum of the Federal Funds Effective Rate for such day plus 1/2% per annum.
"Floating Rate Advance" means an Advance which bears interest at
the Floating Rate.
"Goodwill" means the purchase cost in excess of the fair values
assigned to all identifiable net assets.
"Governmental Authority" means any nation or government, any
state or other political subdivision thereof and any entity exercising
executive, legislative, judicial, regulatory or administrative functions of
or pertaining to government including, without limitation, any board of
insurance, insurance department or insurance commissioner.
"Hazardous Materials" is defined in SECTION 5.20.
"Indebtedness" of a Person means such Person's (a) obligations
for borrowed money, (b) obligations representing the deferred purchase price
of Property or services (other than accounts payable arising in the ordinary
course of such Person's business payable on terms customary in the trade),
(c) obligations, whether or not assumed, secured by Liens or payable out of
the
-7-
proceeds or production from Property now or hereafter owned or acquired by
such Person, (d) obligations which are evidenced by notes, acceptances, or
other instruments, (e) Capitalized Lease Obligations, (f) Rate Hedging
Obligations, (g) Contingent Obligations, (h) obligations for which such
Person is obligated pursuant to or in respect of a Letter of Credit,
including without limitation any application for a Letter of Credit, and (i)
repurchase obligations or liabilities of such Person with respect to accounts
or notes receivable sold by such Person, but excluding any obligations of
such Person arising under insurance policies issued by it.
"Insurance Subsidiary" means any Subsidiary which is engaged in
the insurance business.
"Interest Period" means, with respect to a Eurodollar Advance, a
period of one, two, three or six months commencing on a Business Day selected
by the Borrower pursuant to this Agreement. Such Interest Period shall end
on (but exclude) the day which corresponds numerically to such date one, two,
three or six months thereafter; PROVIDED, HOWEVER, that if there is no such
numerically corresponding day in such next, second, third or sixth succeeding
month, such Interest Period shall end on the last Business Day of such next,
second, third or sixth succeeding month. If an Interest Period would
otherwis
e end on a day which is not a Business Day, such Interest Period shall end on
the next succeeding Business Day; PROVIDED, HOWEVER, that if said next
succeeding Business Day falls in a new calendar month, such Interest Period
shall end on the immediately preceding Business Day.
"Investment" of a Person means any loan, advance (other than
commission, travel and similar advances to officers and employees made in the
ordinary course of business), extension of credit (other than accounts
receivable arising in the ordinary course of business on terms customary in
the trade), deposit account or contribution of capital by such Person to any
other Person or any investment in, or purchase or other acquisition of, the
stock, partnership interests, notes, debentures or other securities of any
other Person made by such Person.
"Lenders" means the lending institutions listed on the signature
pages of this Agreement and their respective successors and assigns.
"Lending Installation" means, with respect to a Lender or the
Agent, any office, branch, subsidiary or affiliate of such Lender or the
Agent.
"Letter of Credit" of a Person means a letter of credit or
similar instrument which is issued upon the application of such Person or
upon which such Person is an account party or for which such Person is in any
way liable.
-8-
"Leverage Ratio" means, with respect to the Borrower on a
consolidated basis with its Subsidiaries, at any time, the ratio of (a)
Indebtedness to (b) the sum of (i) Indebtedness plus (ii) Net Worth.
"License" means any license, certificate of authority, permit or
other authorization which is required to be obtained from any Governmental
Authority in connection with the operation, ownership or transaction of
insurance business.
"Lien" means any security interest, lien (statutory or other),
mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance
or preference, priority or other security agreement or preferential
arrangement of any kind or nature whatsoever (including, without limitation,
the interest of a vendor or lessor under any conditional sale, Capitalized
Lease or other title retention agreement).
"Loan" means, with respect to a Lender, such Lender's portion of
any Advance and "Loans" means, with respect to the Lenders, the aggregate of
all Advances.
"Loan Documents" means this Agreement, the Notes and the other
documents and agreements contemplated hereby and executed by the Borrower in
favor of the Agent or any Lender.
"Management Agreements" means, collectively, the agreements
listed on SCHEDULE 1.1-1 hereto.
"Margin Stock" has the meaning assigned to that term under
Regulation U.
"Material Adverse Effect" means a material adverse effect on (a)
the business, Property, condition (financial or other), performance, results
of operations, or prospects of the Borrower or any Subsidiary, (b) the
ability of the Borrower or any Subsidiary to perform its obligations under
the Loan Documents, or (c) the validity or enforceability of any of the Loan
Documents or the rights or remedies of the Agent or the Lenders thereunder.
"Multiemployer Plan" means a Plan maintained pursuant to a
collective bargaining agreement or any other arrangement to which the
Borrower or any member of the Controlled Group is a party to which more than
one employer is obligated to make contributions.
"NAIC" means the National Association of Insurance Commissioners
or any successor thereto, or in lieu thereof, any other association, agency
or other organization performing advisory, coordination or other like
functions among insurance departments, insurance commissioners and similar
Governmental Authorities of the various states of the United States toward
the promotion of uniformity in the practices of such Governmental
Authorities.
-9-
"Net Available Proceeds" means with respect to any sale or
issuance of any equity securities of the Borrower, cash or Cash Equivalents
received (but excluding any other non-cash form) therefrom, whether at the
time of such disposition or subsequent thereto, net of all legal, title and
recording tax expenses, commissions and other fees and all costs and expenses
incurred and all federal, state, local and other taxes required to be accrued
as a liability as a consequence of such transactions.
"Net Income" means, for any computation period, with respect to
the Borrower on a consolidated basis with its Subsidiaries, cumulative net
income earned during such period as determined in accordance with Agreement
Accounting Principles.
"Net Worth" means, at any date, the consolidated stockholders'
equity of the Borrower and its consolidated Subsidiaries determined in
accordance with Agreement Accounting Principles, but excluding the effect
thereon of Statement of Financial Accounting Standards No. 115.
"Non-Excluded Taxes" is defined in SECTION 2.18(A).
"Note" means a promissory note in substantially the form of
EXHIBIT A hereto, with appropriate insertions, duly executed and delivered to
the Agent by the Borrower and payable to the order of a Lender in the amount of
its Revolving Credit Commitment, including any amendment, modification,
renewal or replacement of such promissory note.
"Notice of Assignment" is defined in SECTION 12.3.2.
"Obligations" means all unpaid principal of and accrued and
unpaid interest on the Notes, all accrued and unpaid fees and all expenses,
reimbursements, indemnities and other obligations of the Borrower to the
Lenders or to any Lender, the Agent or any indemnified party hereunder
arising under any of the Loan Documents and any Rate Hedging Obligations or
foreign exchange contracts of the Borrower owing to the Agent or any Lender.
"Omni-Tech" means Omni-Tech Medical, Inc., a Kansas corporation.
"Participants" is defined in SECTION 12.2.1.
"Payment Date" means the last day of each March, June, September
and December.
"PBGC" means the Pension Benefit Guaranty Corporation or any
successor thereto.
"Person" means any natural person, corporation, firm, joint
venture, partnership, association, enterprise, trust or other entity or
organization, or any
-10-
government or political subdivision or any agency, department or
instrumentality thereof.
"Plan" means an employee pension benefit plan, as defined in
Section 3(2) of ERISA, as to which the Borrower or any member of the
Controlled Group may have any liability.
"Property" of a Person means any and all property, whether real,
personal, tangible, intangible, or mixed, of such Person, or other assets
owned, leased or operated by such Person.
"pro-rata" means, when used with respect to a Lender, and any
described aggregate or total amount, an amount equal to such Lender's
pro-rata share or portion based on its percentage of the Aggregate Revolving
Credit Commitment or if the Aggregate Revolving Credit Commitment has been
terminated, its percentage of the aggregate principal amount of outstanding
Advances.
"Purchase" means any transaction, or any series of related
transactions, consummated on or after the date of this Agreement, by which
the Borrower or any of its Subsidiaries (a) acquires any going business or
all or substantially all of the assets of any firm, corporation or division
thereof, whether through purchase of assets, merger or otherwise, or (b)
directly or indirectly acquires (in one transaction or as the most recent
transaction in a series of transactions) at least a majority (in number of
votes) of the securities of a corporation which have ordinary voting power for
the election of directors (other than securities having such power only by
reason of the happening of a contingency) or a majority (by percentage or
voting power) of the outstanding partnership interests of a partnership.
"Purchasers" is defined in SECTION 12.3.1.
"Quarterly Statement" means the quarterly statutory financial
statement of any Insurance Subsidiary required to be filed with the insurance
commissioner (or similar authority) of its jurisdiction of incorporation or,
if no specific form is so required, in the form of financial statements
permitted by such insurance commissioner (or such similar authority) to be
used for filing quarterly statutory financial statements and shall contain
the type of financial information permitted by such insurance commissioner
(or such similar authority) to be disclosed therein, together with all
exhibits or schedules filed therewith.
"Rate Hedging Obligations" of a Person means any and all
obligations of such Person, whether absolute or contingent and howsoever and
whensoever created, arising, evidenced or acquired (including all renewals,
extensions and modifications thereof and substitutions therefor), under
Derivatives Instruments, other than any Derivatives Instruments constituting
Derivatives Investments. The aggregate amount of Rate Hedging Obligations, as
at any date,
-11-
shall be equal to one half of one percent (0.5%) TIMES the notional amount
thereof TIMES the square root of the remaining years to maturity.
"Regulation D" means Regulation D of the Board of Governors of
the Federal Reserve System as from time to time in effect and any successor
thereto or other regulation or official interpretation of said Board of
Governors relating to reserve requirements applicable to depositary
institutions.
"Regulation G" means Regulation G of the Board of Governors of
the Federal Reserve System as from time to time in effect and shall include
any successor or other regulation or official interpretation of said Board of
Governors relating to the extension of credit by Persons other than banks,
brokers and dealers for the purpose of purchasing or carrying margin stocks
applicable to such Persons.
"Regulation T" means Regulation T of the Board of Governors of
the Federal Reserve System as from time to time in effect and shall include
any successor or other regulation or official interpretation of such Board of
Governors relating to the extension of credit by securities brokers and
dealers for the purpose of purchasing or carrying margin stocks applicable to
such Persons.
"Regulation U" means Regulation U of the Board of Governors of
the Federal Reserve System as from time to time in effect and any successor
or other regulation or official interpretation of said Board of Governors
relating to the extension of credit by banks for the purpose of purchasing or
carrying margin stocks applicable to such Persons.
"Regulation X" means Regulation X of the Board of Governors of
the Federal Reserve System as from time to time in effect and shall include
any successor or other regulation or official interpretation of said Board of
Governors relating to the extension of credit by the specified lenders for
the purpose of purchasing or carrying margin stocks applicable to such
Persons.
"Release" is defined in the Comprehensive Environmental Response,
Compensation and Liability Act, as amended, 42 U.S.C. 39601 ET SEQ.
"Reportable Event" means a reportable event as defined in Section
4043 of ERISA and the regulations issued under such section, with respect to
a Plan, excluding, however, such events as to which the PBGC has by
regulation waived the requirement of Section 4043(a) of ERISA that it be
notified within 30 days of the occurrence of such event; PROVIDED, that a
failure to meet the minimum funding standard of Section 412 of the Code and
of Section 302 of ERISA shall be a Reportable Event regardless of the
issuance of any such waiver of the notice requirement in accordance with
either Section 4043(a) of ERISA or Section 412(d) of the Code.
-12-
"Required Lenders" means Lenders in the aggregate having at least
66-2/3% of the Aggregate Revolving Credit Commitment or, if the Aggregate
Revolving Credit Commitment has been terminated, Lenders in the aggregate
holding at least 66-2/3% of the aggregate unpaid principal amount of the
outstanding Loans.
"Reserve Requirement" means, with respect to an Interest Period,
the maximum aggregate reserve requirement (including all basic, supplemental,
marginal and other reserves) which is imposed under Regulation D on
Eurocurrency liabilities.
"Risk Based Capital Act" means the Risk-Based Capital (RBC) for
Life and/or Health Insurers Model Act in the form attached as SCHEDULE 1.1-2
hereto.
"Risk-Based Capital Guidelines" is defined in SECTION 3.2.
"SAP" means, with respect to any Insurance Subsidiary, the
statutory accounting practices prescribed or permitted by the insurance
commissioner (or other similar authority) in the jurisdiction of such Person
for the preparation of annual statements and other financial reports by
insurance companies of the same type as such Person in effect from time to
time, applied in a manner consistent with those used in preparing the
financial statements referred to in SECTION 5.5(C) AND (D); PROVIDED, that
with respect to the financial covenants contained in SECTION 6.23 hereof, and
the related definitions, "SAP" means such statutory accounting practices in
effect on the date hereof, applied in a manner consistent with those used in
preparing the financial statements referred to in SECTION 5.5(C) AND (D).
"Section" means a numbered section of this Agreement, unless
another document is specifically referenced.
"Single Employer Plan" means a Plan subject to Title IV of ERISA
maintained by the Borrower or any member of the Controlled Group for
employees of the Borrower or any member of the Controlled Group, other than a
Multiemployer Plan.
"Solvent" means, when used with respect to a Person, that (a) the
fair saleable value of the assets of such Person is in excess of the total
amount of the present value of its liabilities (including for purposes of
this definition all liabilities (including loss reserves as determined by the
Borrower), whether or not reflected on a balance sheet prepared in accordance
with Agreement Accounting Principles and whether direct or indirect, fixed or
contingent, secured or unsecured, disputed or undisputed), (b) such Person is
able to pay its debts or obligations in the ordinary course as they mature
and (c) such Person does not have unreasonably small capital to carry out its
business as conducted and as proposed to be conducted. "Solvency" shall have
a correlative meaning.
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"Statutory Net Income" means, with respect to any Insurance
Subsidiary for any computation period, the net income earned by such
Insurance Subsidiary during such period, as determined in accordance with SAP
("Summary of Operations" statement, Page 4, Line 33 of the Annual Report).
"Subsidiary" of a Person means (a) any corporation more than 50%
of the outstanding securities having ordinary voting power of which shall at
the time be owned or controlled, directly or indirectly, by such Person or by
one or more of its Subsidiaries or by such Person and one or more of its
Subsidiaries, or (b) any partnership, association, joint venture or similar
business organization more than 50% of the ownership interests having
ordinary voting power of which shall at the time be so owned or controlled.
Unless otherwise expressly provided, all references herein to a "Subsidiary"
shall mean a Subsidiary of the Borrower.
"Substantial Portion" means, with respect to the Property of the
Borrower and its Subsidiaries, Property which (a) represents more than 10% of
the consolidated assets of the Borrower and its Subsidiaries, as would be
shown in the consolidated financial statements of the Borrower and its
Subsidiaries as at the end of the Fiscal Quarter next preceding the date on
which such determination is made, or (b) is responsible for more than 10% of
the consolidated net revenues or of the consolidated net income of the
Borrower and its Subsidiaries for the 12-month period ending as of the end of
the Fiscal Quarter next preceding the date of determination.
"Tax Sharing Agreement" means that certain Amended and Restated
Agreement for the Sharing of Federal and State Income Taxes dated as of
October 29, 1992 among the Borrower, American, American Investors Sales
Group, Inc., AmVestors Investment Group, Inc. and Omni-Tech, as amended,
supplemented or modified from time to time in accordance with the terms of
this Agreement.
"Termination Event" means, with respect to a Plan which is
subject to Title IV of ERISA, (a) a Reportable Event, (b) the withdrawal of
the Borrower or any other member of the Controlled Group from such Plan
during a plan year in which the Borrower or any other member of the
Controlled Group was a "substantial employer" as defined in Section
4001(a)(2) of ERISA or was deemed such under Section 4068(f) of ERISA, (c)
the termination of such Plan, the filing of a notice of intent to terminate
such Plan or the treatment of an amendment of such Plan as a termination
under Section 4041 of ERISA, (d) the institution by the PBGC of proceedings
to terminate such Plan or (e) any event or condition which might constitute
grounds under Section 4042 of ERISA for the termination of, or appointment of
a trustee to administer, such Plan.
"Transferee" is defined in SECTION 12.4.
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"Type" means, with respect to any Advance, its nature as a
Floating Rate Advance or Eurodollar Advance.
"UCC" means the Illinois Uniform Commercial Code as amended or
modified and in effect from time to time.
"Unfunded Liability" means the amount (if any) by which the
present value of all vested and unvested accrued benefits under a Single
Employer Plan exceeds the fair market value of assets allocable to such
benefits, all determined as of the then most recent valuation date for such
Plans using PBGC actuarial assumptions for single employer plan terminations.
"Unmatured Default" means an event which but for the lapse of
time or the giving of notice, or both, would constitute a Default.
"Unregulated Subsidiary" means a Subsidiary which is neither (a)
an Insurance Subsidiary nor (b) an entity subject to governmental regulation
(other than laws or regulations applicable to business corporations
generally) with respect to its dividends, distributions or other payments or
transfers to its shareholders or affiliates.
"Wholly-Owned Subsidiary" of a Person means (a) any Subsidiary
all of the outstanding voting securities of which shall at the time be owned
or controlled, directly or indirectly, by such Person or one or more
Wholly-Owned Subsidiaries of such Person, or by such Person and one or more
Wholly-Owned Subsidiaries of such Person, or (b) any partnership,
association, joint
venture or similar business organization 100% of the ownership interests
having ordinary voting power of which shall at the time be so owned or
controlled.
The foregoing definitions shall be equally applicable to both the
singular and plural forms of the defined terms. References herein to
particular columns, lines or sections of any Person's Annual Statement shall
be deemed, where appropriate, to be references to the corresponding column,
line or section of such Person's Quarterly Statement, or if no such
corresponding column, line or section exists or if any report form changes,
then to the corresponding item referenced thereby. References herein to the
Risk Based Capital Act shall be deemed to be references to such act as in
effect on the date of this Agreement; PROVIDED, that the Agent, the Lenders
and the Borrower agree to make mutually acceptable modifications to SECTION
6.23.4 hereof following the request by any thereof upon any modification to
such act. Each accounting term used herein which is not otherwise defined
herein shall be defined in accordance with Agreement Accounting Principles
unless otherwise specified.
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ARTICLE II
THE CREDITS
2.1. ADVANCES. (a) From and including the date hereof to
but not including the Facility Termination Date, each
Lender severally (and not jointly) agrees, on the terms and conditions set
forth in this Agreement, to make Advances to the Borrower from time to time
in amounts not to exceed in the aggregate at any one time outstanding the
amount of its pro-rata share of the Aggregate Revolving Credit Commitment
existing at such time. Subject to the terms of this Agreement, the Borrower
may borrow, repay and reborrow Advances at any time prior to the Facility
Termination Date.
(b)The Borrower hereby agrees that if at any time the
aggregate balance of the Loans exceeds the Aggregate
Revolving Credit Commitment, the Borrower shall repay immediately its then
outstanding Loans in such amount as may be necessary to eliminate such
excess.
(c)The Borrower's obligation to pay the principal of,
and interest on, the Loans shall be evidenced by the
Notes. Although the Notes shall be dated the date of the initial Advance,
interest in respect thereof shall be payable only for the periods during
which the Loans evidenced thereby are outstanding and, although the stated
amount of each Note shall be equal to the applicable Lender's Revolving
Credit Commitment, each Note shall be enforceable, with respect to the
Borrower's obligation to pay the principal amount thereof, only to the extent
of the unpaid principal amount of the Loan at the time evidenced thereby.
(d)Each Advance included in the Loan shall mature, and
the principal amount thereof and the unpaid accrued
interest thereon shall be due and payable, on the Facility Termination Date.
2.2. RATABLE LOANS. Each Advance hereunder shall consist of
Loans made from the several Lenders ratably in
proportion to the ratio that their respective Revolving Credit Commitments
bear to the Aggregate Revolving Credit Commitment.
2.3. TYPES OF ADVANCES. The Advances may be Floating Rate
Advances or Eurodollar Advances, or a combination
thereof, selected by the Borrower in accordance with SECTIONS 2.8 and 2.9.
2.4. COMMITMENT FEE; REDUCTIONS IN AGGREGATE REVOLVING
CREDIT COMMITMENT. (a) The Borrower agrees to pay to
the Agent for the account of each Lender a commitment fee of one quarter of
one percent (0.25%) per annum on the average daily unborrowed portion of such
Lender's Revolving Credit Commitment from the date hereof to and including
the Facility Termination Date, payable on each Payment Date hereafter and on
the Facility Termination Date. All accrued com-
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mitment fees shall be payable on the effective date of any termination of the
obligations of the Lenders to make Loans hereunder.
(b)The Borrower may permanently reduce the Aggregate
Revolving Credit Commitment in whole, or in part
ratably among the Lenders in a minimum aggregate amount of $3,000,000 or any
integral multiple of $1,000,000 in excess thereof, upon at least three (3)
Business Days' prior written notice to the Agent, which notice shall specify
the amount of any such reduction; PROVIDED, HOWEVER, that the amount of the
Aggregate Revolving Credit Commitment may not be reduced below the aggregate
principal amount of the outstanding Advances. Such reductions shall be in
addition to reductions occurring pursuant to SECTION 2.7.
2.5. MINIMUM AMOUNT OF EACH ADVANCE. Each Advance shall be
in the minimum amount of $1,000,000 (and in
multiples of $250,000 if in excess thereof); PROVIDED, HOWEVER, that (a) any
Floating Rate Advance may be in the amount of the
unused Aggregate Revolving Credit Commitment and (b) in no event shall more
than four (4) Eurodollar Advances be permitted to be outstanding at any time.
2.6. OPTIONAL PRINCIPAL PAYMENTS. The Borrower may from
time to time pay, without penalty or premium, all
outstanding Floating Rate Advances, or, in a minimum aggregate amount of
$250,000 or any integral multiple of $100,000 in excess thereof, any portion
of the outstanding Floating Rate Advances upon notice to the Agent not later
than 10:00 a.m. (Chicago time) on the date of payment. Subject to SECTION 3.4
and upon two Business Days' notice to the Agent, a Eurodollar Advance may be
paid prior to the last day of the applicable Interest Period.
2.7. MANDATORY COMMITMENT REDUCTIONS. (a) The Aggregate
Revolving Credit Commitment shall be automatically and
permanently reduced by the following amounts on the following dates:
DATE REDUCTION AMOUNT
3/31/97 $1,625,000
6/30/97 1,625,000
9/30/97 1,625,000
12/31/97 1,625,000
3/31/98 2,000,000
6/30/98 2,000,000
9/30/98 2,000,000
12/31/98 2,000,000
3/31/99 2,625,000
6/30/99 2,625,000
9/30/99 2,625,000
12/31/99 2,625,000 or such other
amount as shall
then be
outstanding
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(b)The Aggregate Revolving Credit Commitment shall
also be automatically and permanently reduced
concurrently with the receipt thereof, in an amount equal to twenty-five
percent (25%) of the Net Available Proceeds received by the Borrower of sales
(including without limitation upon the exercise of options or conversion of
convertible securities) of equity securities of the Borrower in excess of
$500,000 during each Fiscal Year. Contemporaneously with any automatic
reductions in the Aggregate Revolving Credit Commitment pursuant to this
SECTI
ON 2.7(B), the Borrower shall prepay the Loans in an amount equal to the
lesser of (A) the outstanding principal amount of Loans and (B) the amount of
such reduction; provided, however, that no such prepayment shall be required
if, at such time, the Borrower could satisfy the conditions set forth in
SECTION 4.2(B) for the reborrowing thereof. The preceding sentence shall not
affect the obligations of the Borrower under SECTION 2.1(B).
(c)Mandatory commitment reductions under this SECTION
2.7 shall be cumulative and in addition to
reductions occurring pursuant to SECTION 2.4(B). Any mandatory commitment
reductions under SECTION 2.7(B) or voluntary
commitment reduction pursuant to SECTION 2.4(B) shall be applied to the
mandatory commitment reductions required to be made
pursuant to SECTION 2.7(A) in the inverse order of maturity.
(d)Any reduction in the Aggregate Revolving Credit
Commitment pursuant to this SECTION 2.7 or otherwise
shall ratably reduce the Revolving Credit Commitment of each Lender.
2.8. METHOD OF SELECTING TYPES AND INTEREST PERIODS FOR NEW
ADVANCES. The Borrower shall select the Type of
Advance and, in the case of each Eurodollar Advance, the Interest Period
applicable to each Advance from time to time; PROVIDED, HOWEVER, that for a
period of sixty-five (65) days after the date hereof, the Borrower will keep
all of the Loans in a Eurodollar Advance with a one month Interest Period and
with the same maturity date, or in a combination of Floating Rate Advances
and one Eurodollar Advance meeting the qualifications set forth above. The
Borrower shall give the Agent irrevocable notice (a "BORROWING NOTICE") not
later than 10:00 a.m. (Chicago time) at least one (1) Business Day before the
Borrowing Date of each Floating Rate Advance and at least three (3) Business
Days before the Borrowing Date for each Eurodollar Advance, specifying:
(a) the Borrowing Date, which shall be a Business Day, of
such Advance;
(b) the aggregate amount of such Advance;
(c) the Type of Advance selected; and
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(d) in the case of each Eurodollar Advance, the Interest
Period applicable thereto, which shall end on or
prior to the Facility Termination Date.
Not later than noon (Chicago time) on each Borrowing Date, each Lender shall
make available its Loan or Loans, in funds immediately available in Chicago,
to the Agent at its address specified pursuant to ARTICLE XIII. The Agent
will make the funds so received from the Lenders available to the Borrower at
the Agent's aforesaid address.
2.9. CONVERSION AND CONTINUATION OF OUTSTANDING ADVANCES.
Floating Rate Advances shall continue as Floating Rate
Advances unless and until such Floating Rate Advances are converted into
Eurodollar Advances. Each Eurodollar Advance shall continue as a Eurodollar
Advance until the end of the then applicable Interest Period therefor, at
which time such Eurodollar Advance shall be automatically converted into a
Floating Rate Advance unless the Borrower shall have given the Agent a
Conversion/Continuation Notice requesting that, at the end of such Interest
Period, such Eurodollar Advance continue as a Eurodollar Advance for the same
or another Interest Period. Subject to the terms of SECTION 2.5, the
Borrower may elect from time to time to convert all or any part of an Advance
of any Type into any other Type or Types of Advances; PROVIDED, HOWEVER, that
any conversion of any Eurodollar Advance shall be made on, and only on, the
last day of the Interest Period applicable thereto. The Borrower shall give
the Agent irrevocable notice (a "CONVERSION/CONTINUATION NOTICE") of each
conversion ofa a Floating Rate Advance or continuation of a Eurodollar
Advance not later than 10:00 a.m. (Chicago time) at least one (1) Business
Day, in the case of a conversion into a Floating Rate Advance, or at least
three (3) Business Days, in the case of a conversion into or continuation of
a Eurodollar Advance, prior to the date of the requested conversion or
continuation, specifying:
(a) the requested date of such conversion or continuation
which shall be a Business Day;
(b) the aggregate amount and Type of the Advance which is
to be converted or continued; and
(c) the amount(s) and Type(s) of Advance(s) into which
such Advance is to be converted or continued and, in
the case of a conversion into or continuation of a Eurodollar Advance, the
duration of the Interest Period applicable thereto, which shall end on or
prior to the Facility Termination Date.
2.10. CHANGES IN INTEREST RATE, ETC. Each Floating Rate
Advance shall bear interest at the Floating Rate from and
including the date of such Advance or the date on which such Advance was
converted into a Floating Rate Advance to (but not including) the date on
which such Floating Rate Advance is paid or converted to a Eurodollar
Advance. Changes in the rate of interest on that
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portion of any Advance maintained as a Floating Rate Advance will take effect
simultaneously with each change in the Corporate Base Rate. Each Eurodollar
Advance shall bear interest from and including the first day of the Interest
Period applicable thereto to, but not including, the last day of such
Interest Period at the interest rate determined as applicable to such
Eurodollar Advance. No Interest Period may end after the Facility Termination
Date. The Borrower shall select Interest Periods so that it is not necessary
to repay any portion of a Eurodollar Advance prior to the last day of the
applicable Interest Period in order to make a mandatory repayment required
pursuant to SECTION 2.7.
2.11. RATES APPLICABLE AFTER DEFAULT. Notwithstanding anything
to the contrary contained in SECTION 2.8 or 2.9, no Advance may be made as,
converted into or continued as a Eurodollar Advance (except with the consent
of the Agent and the Required Lenders) when any Default or Unmatured Default
has occurred and is continuing. During the continuance of a Default the
Required Lenders may, at their option, by notice to the Borrower (which
notice may be revoked at the option of the Required Lenders notwithstanding
any provision of SECTION 8.2 requiring unanimous consent of the Lenders to
changes in interest rates), declare that each Eurodollar Advance and Floating
Rate Advance shall bear interest at a rate per annum equal to the Floating
Rate plus two percent (2%) per annum.
2.12. METHOD OF PAYMENT. All payments of the Obligations
hereunder shall be made, without setoff, deduction or counterclaim, in
immediately available funds to the Agent at the Agent's address specified
pursuant to ARTICLE XIII, or at any other Lending Installation of the Agent
specified in writing by the Agent to the Borrower, by noon (Chicago time) on
the date when due and shall be applied ratably by the Agent among the
Lenders. Each payment delivered to the Agent for the account of any Lender
shall be delivered promptly by the Agent to such Lender in the same type of
funds that the Agent received at its address specified pursuant to ARTICLE
XIII or at any Lending Installation specified in a notice received by the
Agent from such Lender. The Agent is hereby authorized to charge the account
of the Borrower maintained with First Chicago for each payment of principal,
interest and fees as it becomes due hereunder.
2.13. NOTES; TELEPHONIC NOTICES. Each Lender is hereby
authorized to record the principal amount of each of its Loans and each
repayment on the schedule attached to its Note; PROVIDED, HOWEVER, that
neither the failure to so record nor any error in such recordation shall
affect the Borrower's obligations under such Note. The Borrower hereby
authorizes the Lenders and the Agent to extend, convert or continue Advances,
effect selections of Types of Advances and to transfer funds to the
Borrower's direct deposit account at First Chicago based on telephonic
notices made by any person or persons the Agent or any Lender in good faith
believes to be acting on behalf of the Borrower. The Borrower agrees to
deliver promptly to the Agent a written con-
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firmation, if such confirmation is requested by the Agent or any Lender, of
each telephonic notice signed by an Authorized Officer. If the written
confirmation differs in any material respect from the action taken by the
Agent and the Lenders, the records of the Agent and the Lenders shall govern
absent manifest error.
2.14. INTEREST PAYMENT DATES; INTEREST AND FEE BASIS. Interest
accrued on each Floating Rate Advance shall be payable on each Payment Date,
commencing on March 31, 1995, on any date on which a Floating Rate Advance is
prepaid, whether due to acceleration or otherwise, and at maturity. Interest
accrued on that portion of the outstanding principal amount of any Floating
Rate Advance converted into a Eurodollar Advance on a day other than a
Payment Date shall be payable on the next Payment Date. Interest accrued on
each Eurodollar Advance shall be payable on the last day of its applicable
Interest Period, on any date on which the Eurodollar Advance is prepaid,
whether by acceleration or otherwise, and at maturity. Interest accrued on
each Eurodollar Advance having an Interest Period longer than three months
shall also be payable on the last day of each three-month interval during
such Interest Period. Interest with respect to Eurodollar Advances shall be
calculated for actual days elapsed on the basis of a 360-day year, and
interest with respect to Floating Rate Advances and commitment fees shall be
calculated for actual days elapsed on the basis of a 365/366-day year.
Interest shall be payable for the day an Advance is made but not for the day
of any payment on the amount paid if payment is received prior to noon
(Chicago time) at the place of payment. If any payment of principal of or
interest on an Advance shall become due on a day which is not a Business Day,
such payment shall be made on the next succeeding Business Day and, in the
case of a principal payment, such extension of time shall be included in
computing interest in connection with such payment.
2.15. NOTIFICATION OF ADVANCES, INTEREST RATES, PREPAYMENTS AND
COMMITMENT REDUCTIONS. Promptly after receipt thereof, the Agent will notify
each Lender of the contents of each Aggregate Revolving Credit Commitment
reduction notice, Borrowing Notice, Conversion/Continuation Notice, and
repayment notice received by it hereunder. The Agent will notify each Lender
of the interest rate applicable to each Eurodollar Advance promptly upon
determination of such interest rate and will give each Lender prompt notice
of each change in the Corporate Base Rate.
2.16. LENDING INSTALLATIONS. Each Lender may book its Loans at
any Lending Installation selected by such Lender and may change its Lending
Installation from time to time. All terms of this Agreement shall apply to
any such Lending Installation and the Notes shall be deemed held by each
Lender for the benefit of such Lending Installation. Each Lender may, by
written
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notice to the Agent and the Borrower, designate a Lending Installation
through which Loans will be made by it and for whose account Loan payments
are to be made.
2.17. NON-RECEIPT OF FUNDS BY THE AGENT. Unless the Borrower or
a Lender, as the case may be, notifies the Agent prior to the date on which
it is scheduled to make payment to the Agent of (a) in the case of a Lender,
the proceeds of a Loan, or (b) in the case of the Borrower, a payment of
principal, interest or fees to the Agent for the account of the Lenders, that
it does not intend to make such payment, the Agent may assume that such payment
has been made. The Agent may, but shall not be obligated to, make the amount
of such payment available to the intended recipient in reliance upon such
assumption. If the Borrower has not in fact made such payment to the Agent,
the Lenders shall, on demand by the Agent, repay to the Agent the amount so
made available together with interest thereon in respect of each day during
the period commencing on the date such amount was so made available by the
Agent until the date the Agent recovers such amount at a rate per annum equal
to the Federal Funds Effective Rate for such day. If any Lender has not in
fact made such payment to the Agent, such Lender or the Borrower shall, on
demand by the Agent, repay to the Agent the amount so made available together
with interest thereon in respect of each day during the period commencing on
the date such amount was so made available by the Agent until the date the
Agent recovers such amount at a rate per annum equal to (a) in the case of
payment by a Lender, the Federal Funds Effective Rate for such day, or (b) in
the case of payment by the Borrower, the interest rate applicable to the
relevant Loan.
2.18. TAXES. (a) Any payments made by the Borrower under this
Agreement shall be made free and clear of, and
without deduction or withholding for or on account of, any present or future
income, stamp or other taxes, levies, imposts, duties, charges, fees,
deductions or withholdings, now or hereafter imposed, levied, collected,
withheld or assessed by any Governmental Authority, excluding net income
taxes and franchise taxes or any other tax based upon any income imposed on
the Agent or any Lender by the jurisdiction in which the Agent or such
Lender, as the case may be, is incorporated or has its principal place of
business. If any such non-excluded taxes, levies, imposts, duties, charges,
fees deductions or withholdings ("Non-Excluded Taxes") are required to be
withheld from any amounts payable to the Agent or any Lender hereunder, the
amounts so payable to the Agent or such Lender shall be increased to the
extent necessary to yield to the Agent or such Lender (after payment of all
Non-Excluded Taxes) interest or any such other amounts payable hereunder at
the rates or in the amounts specified in or pursuant to this Agreement;
PROVIDED, HOWEVER, that the Borrower shall not be required to increase any such
amounts payable to any Lender that is not organized under the laws of the
U.S. or a state thereof if such Lender fails to comply with the requirements
of paragraph (b) of this SECTION 2.18. Whenever any Non-Excluded Taxes are
payable by the Borrower, as promptly as practicable thereafter the Borrower
shall send to the Agent for its own account or for the account of such
Lender,
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as the case may be, a certified copy of an original official receipt received
by the Borrower showing payment thereof. If the Borrower fails to pay any
Non-Excluded Taxes when due to the appropriate taxing authority or fails to
remit to the Agent the required receipts or other required documentary
evidence, the Borrower shall indemnify the Agent and the Lenders for any
incremental taxes, interest or penalties that may become payable by any Agent
or any Lender as a result of any such failure. The agreements in this
SECTION
2.18 shall survive the termination of this Agreement and the payment of all
other amounts payable hereunder.
(b)At least five Business Days prior to the first date
on which interest or fees are payable hereunder for
the account of any Lender, each Lender that is not incorporated under the
laws of the United States of America, or a state thereof, agrees that it will
deliver to each of the Borrower and the Agent two duly completed copies of
United States Internal Revenue Service Form 1001 or 4224, certifying in
either case that such Lender is entitled to receive payments under this
Agreement and the Notes without deduction or withholding of any United States
federal income taxes. Each Lender which so delivers a Form 1001 or 4224
further undertakes to deliver to each of the Borrower and the Agent two
additional copies of such form (or a successor form) on or before the date
that such form expires (currently, three successive calendar years for Form
1001 and one calendar year for Form 4224) or becomes obsolete or after the
occurrence of any event requiring a change in the most recent forms so
delivered by it, and such amendments thereto or extensions or renewals
thereof as may be reasonably requested by the Borrower or the Agent, in each
case certifying that such Lender is entitled to receive payments under this
Agreement and the Notes without deduction or withholding of any United States
federal income taxes, unless an event (including, without limitation, any
change in treaty, law or regulation) has occurred prior to the date on which
any such delivery would otherwise be required which renders all such forms
inapplicable or which would prevent such Lender from duly completing and
delivering any such form with respect to it and such Lender advises the
Borrower and the Agent that it is not capable of receiving payments without
any deduction or withholding of United States federal income tax.
2.19. AGENT'S FEES. The Borrower shall pay to the Agent those
fees, in addition to the commitment fees referenced
in SECTION 2.4(A), in the amounts and at the times separately agreed to
between the Agent and the Borrower.
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ARTICLE III
CHANGE IN CIRCUMSTANCES
3.1. YIELD PROTECTION. If, after the date hereof, the
adoption or any change in any law or any governmental or
quasi-governmental rule, regulation, policy, guideline or directive (whether
or not having the force of law), or any
interpretation thereof, or the compliance of any Lender therewith,
(a)subjects any Lender or any applicable Lending
Installation to any tax, duty, charge or withholding on
or from payments due from the Borrower (excluding taxation of the overall net
income of any Lender or applicable Lending Installation imposed by the
jurisdiction in which such Lender or Lending Installation is incorporated or
has its principal place of business), or changes the basis of taxation of
principal, interest or any other payments to any Lender or Lending
Installation in respect of its Loans or other amounts due it hereunder, or
(b)imposes or increases or deems applicable any
reserve, assessment, insurance charge, special deposit or
similar requirement against assets of, deposits with or for the account of,
or credit extended by, any Lender or any applicable Lending Installation
(other than reserves and assessments taken into account in determining the
interest rate applicable to Eurodollar Advances), or
(c)imposes any other condition the result of which is
to increase the cost to any Lender or any applicable
Lending Installation of making, funding or maintaining loans or reduces any
amount receivable by any Lender or any applicable Lending Installation in
connection with loans, or requires any Lender or any applicable Lending
Installation to make any payment calculated by reference to the amount of
loans held, or interest received by it, by an amount deemed material by such
Lender,
then, within 15 days of demand by such Lender, the Borrower shall pay such
Lender that portion of such increased expense incurred or resulting in an
amount received which such Lender determines is attributable to making,
funding and maintaining its Loans and its Commitment.
3.2. CHANGES IN CAPITAL ADEQUACY REGULATIONS. If a Lender
determines the amount of capital required or expected
to be maintained by such Lender, any Lending Installation of such Lender or
any corporation controlling such Lender is increased as a result of a Change,
then, within 15 days of demand by such Lender, the Borrower shall pay such
Lender the amount necessary to compensate for any shortfall in the rate of
return on the portion of such increased capital which such Lender determines
is attributable to this Agreement, its Loans or its obligation to make Loans
hereunder (after taking into account such
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Lender's policies as to capital adequacy). "CHANGE" means (a) any change
after the date of this Agreement in the Risk-Based Capital Guidelines, or (b)
any adoption of or change in any other law, governmental or
quasi-governmental
rule, regulation, policy, guideline, interpretation, or directive (whether
or not having the force of law) after the date of this Agreement which
affects the amount of capital required or expected to be maintained by any
Lender or any Lending Installation or any corporation controlling any Lender.
"RISK-BASED CAPITAL GUIDELINES" means (a) the risk-based capital guidelines
in effect in the United States on the date of this Agreement, including
transition rules, and (b) the corresponding capital regulations promulgated
by regulatory authorities outside the United States implementing the July
1988 report of the Basle Committee on Banking Regulation and Supervisory
Practices entitled "International Convergence of Capital Measurements and
Capital Standards," including transition rules, and any amendments to such
regulations adopted prior to the date of this Agreement.
3.3. AVAILABILITY OF TYPES OF ADVANCES. If any Lender
determines that maintenance of its Eurodollar Advances at
a suitable Lending Installation would violate any applicable law, rule,
regulation, or directive, whether or not having the force of law, or if the
Required Lenders determine that (a) deposits of a type and maturity
appropriate to match fund Eurodollar Advances are not available, or (b) the
interest rate applicable to a Type of Advance does not accurately or fairly
reflect the cost of making or maintaining such Advance, then the Agent shall
suspend the availability of the affected Type of Advance and require any
Eurodollar Advances of the affected Type to be repaid.
3.4. FUNDING INDEMNIFICATION. If any payment of a
Eurodollar Advance occurs on a date which is not the last day
of the applicable Interest Period, whether because of acceleration,
prepayment or otherwise, or a Eurodollar Advance is not made on the date
specified by the Borrower for any reason other than default by the Lenders,
the Borrower will indemnify the Agent and each Lender for any loss or cost
incurred by it resulting therefrom, including, without limitation, any loss
or cost in liquidating or employing deposits acquired to fund or maintain the
Eurodollar Advance.
3.5. LENDER STATEMENTS; SURVIVAL OF INDEMNITY. To the extent
reasonably possible, each Lender shall designate an
alternate Lending Installation with respect to its Eurodollar Advances to
reduce any liability of the Borrower to such Lender under SECTIONS 3.1 and
3.2
or to avoid the unavailability of a Type of Advance under SECTION 3.3, so
long as such designation is not disadvantageous to such Lender. Each Lender
shall deliver a written statement of such Lender to the Borrower (with a copy
to the Agent) as to the amount due, if any, under SECTION 3.1, 3.2 or 3.4.
Such written statement shall set forth in reasonable detail the calculations
upon which such Lender determined such amount
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and shall be final, conclusive and binding on the Borrower in the absence of
manifest error. Determination of amounts payable under such Sections in
connection with a Eurodollar Advance shall be calculated as though each
Lender funded its Eurodollar Advances through the purchase of a deposit of
the type and maturity corresponding to the deposit used as a reference in
determining the Eurodollar Rate applicable to such Loan, whether in fact that
is the case or not. Unless otherwise provided herein, the amount specified
in the written statement of any Lender shall be payable on demand after
receipt by the Borrower of the written statement. The obligations of the
Borrower under SECTIONS 3.1, 3.2 and 3.4 shall survive payment of the
Obligations and termination of this Agreement.
ARTICLE IV
CONDITIONS PRECEDENT
4.1. INITIAL LOAN. The Lenders shall not be required to
make the initial Advance hereunder unless the Borrower
has furnished the following to the Agent with sufficient copies for the
Lenders and the other conditions set forth below have been satisfied, in each
case on or before December 31, 1994:
(a)CHARTER DOCUMENTS. Copies of the articles of
incorporation of the Borrower, together with all
amendments, and a certificate of good standing, both certified by the
appropriate governmental officer in its jurisdiction of incorporation.
(b)BY-LAWS AND RESOLUTIONS. Copies, certified by the
Secretary or Assistant Secretary of the Borrower, of
its by-laws and of its Board of Directors' resolutions authorizing the
execution, delivery and performance of the Loan Documents
to which the Borrower is a party.
(c)SECRETARY'S CERTIFICATE. An incumbency
certificate, executed by the Secretary or Assistant Secretary
of the Borrower, which shall identify by name and title and bear the
signature of the officers of the Borrower authorized to sign the Loan
Documents and to make borrowings hereunder, upon which certificate the Agent
and the Lenders shall be entitled to rely until informed of any change in
writing by the Borrower.
(d)OFFICER'S CERTIFICATE. A certificate, dated as of
the date of this Agreement, signed by an Authorized
Officer of the Borrower, in form and substance satisfactory to the Agent, to
the effect that: (i) as of the date of this Agreement (both before and after
giving effect to the making of the Loans hereunder) no Default or Unmatured
Default has occurred and is continuing; (ii) no injunction or temporary
restraining order which would prohibit the making of the Loans or any of the
other transactions contemplated hereby (collectively, including the making of
the Loans, the "Closing Transactions"), or
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other litigation which could reasonably be expected to have a Material
Adverse Effect is pending or, to the best of such Person's knowledge,
threatened; (iii) all orders, consents, approvals, licenses, authorizations,
or validations of, or filings, recordings or registrations with, or
exemptions by, any governmental or public body or authority, or any
subdivision thereof, required to make or consummate the Closing Transactions
have been or, prior to the time required, will have been, obtained, given,
filed or taken and are or will be in full force and effect (or the Borrower has
obtained effective judicial relief with respect to the application thereof)
and all applicable waiting periods have expired; (iv) the Borrower has not
failed to perform any material obligation or covenant required in connection
with any Closing Transaction to be performed or complied with by it on or
before the date of this Agreement; (v) each of the representations and
warranties set forth in ARTICLE V of this Agreement is true and correct on
and as of the date hereof; and (vii) since December 31, 1993, no event or
change has occurred that has caused or evidences a Material Adverse Effect.
(e)LEGAL OPINIONS. A written opinion of Bryan Cave,
counsel to the Borrower, addressed to the Agent and
the Lenders in form and substance acceptable to the Agent and its counsel.
(f)NOTES. Notes payable to the order of each of the
Lenders duly executed by the Borrower.
(g)LOAN DOCUMENTS. Executed originals of this
Agreement and each of the Loan Documents, which shall be in
full force and effect, together with all schedules, exhibits, certificates,
instruments, opinions, documents and financial statements required to be
delivered pursuant hereto and thereto.
(h)LETTERS OF DIRECTION. Written money transfer
instructions with respect to the initial Advances and to
future Advances in the form of EXHIBIT B hereto addressed to the Agent and
signed by an Authorized Officer, together with such
other related money transfer authorizations as the Agent may have reasonably
requested.
(i)SOLVENCY CERTIFICATE. A written solvency
certificate from the chief financial officer of the Borrower
in form and content satisfactory to the Agent, dated as of the date of this
Agreement, with respect to the value, Solvency and other factual information
of, or relating to, as the case may be, the Borrower on a consolidated basis,
after giving effect to the Closing Transactions.
(j)SUBSIDIARY CHARTER DOCUMENTS. Copies of the
articles or certificates of incorporation of each
Subsidiary of the Borrower, together with all amendments, and a certificate
of good standing, both certified by the appropriate governmental officer in
its jurisdiction of incorporation, together with a certificate of compliance
from each Insurance Subsidiary's
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jurisdiction of domicile and, with respect to American, from the States of
Ohio, Illinois, California, Florida, Wisconsin and Texas.
(k)SUBSIDIARY BY-LAWS. Copies, certified by the
Secretary or Assistant Secretary of each Subsidiary of
the Borrower, of its by-laws.
(l)OTHER. Such other documents as the Agent, any
Lender or their counsel may have reasonably requested.
4.2. EACH FUTURE ADVANCE. The Lenders shall not be required
to make any Advance unless on the applicable
Borrowing Date:
(a) There exists no Default or Unmatured Default and none
would result from such Advance;
(b) The representations and warranties contained in
ARTICLE V are true and correct as of such Borrowing Date
except for changes in the Schedules hereto (submitted to the Agent and each
Lender in writing by the Borrower) reflecting transactions permitted by this
Agreement;
(c) A Borrowing Notice shall have been properly submitted;
and
(d) All legal matters incident to the making of such
Advance shall be satisfactory to the Lenders and their
counsel.
Each Borrowing Notice with respect to each such Advance shall
constitute a representation and warranty by the Borrower that the conditions
contained in SECTION 4.2 have been satisfied. Any Lender may require a duly
completed compliance certificate in substantially the form of EXHIBIT D
hereto as a condition to making an Advance.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to the Lenders that, both
before and after giving effect to the Closing Transactions:
5.1. CORPORATE EXISTENCE AND STANDING. Each of the Borrower
and each Subsidiary is a corporation duly
incorporated, validly existing and in good standing under the laws of its
respective jurisdiction of incorporation and is duly qualified and in good
standing as a foreign corporation and is duly authorized to conduct its
business in each jurisdiction in which its business is conducted or proposed
to be conducted.
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5.2. AUTHORIZATION AND VALIDITY. The Borrower has all
requisite power and authority (corporate and otherwise)
and legal right to execute and deliver (or file, as the case may be) each of
the Loan Documents and to perform its obligations thereunder. The execution
and delivery (or filing, as the case may be) by the Borrower of the Loan
Documents and the performance of its obligations thereunder have been duly
authorized by proper corporate proceedings and the Loan Documents constitute
legal, valid and binding obligations of the Borrower, enforceable against the
Borrower, in accordance with their terms, except as enforceability may be
limited by bankruptcy, insolvency or similar laws affecting the enforcement
of creditors' rights generally.
5.3. COMPLIANCE WITH LAWS AND CONTRACTS. The Borrower and
its Subsidiaries have complied in all material
respects with all applicable statutes, rules, regulations, orders and
restrictions of any domestic or foreign government or any instrumentality or
agency thereof, having jurisdiction over the conduct of their respective
businesses or the ownership of their respective properties, except where the
failure to so comply could not reasonably be expected to have a Material
Adverse Effect. Neither the execution and delivery by the Borrower of the
Loan Documents, the application of the proceeds of the Loans, the
consummation of the Closing Transactions or any other transaction
contemplated in the Loan Documents, nor compliance with the provisions of the
Loan Documents will, or at the relevant time did, (a) violate any law, rule,
regulation (including Regulations G, T, U or X), order, writ, judgment,
injunction, decree or award binding on the Borrower or any Subsidiary or the
Borrower's or any Subsidiary's charter, articles or certificate of
incorporation or by-laws, (b) violate the provisions of or require the
approval or consent of any party to any indenture, instrument or agreement to
which the Borrower or any Subsidiary is a party or is subject, or by which
it, or its property, is bound, or conflict with or constitute a default
thereunder, or result in the creation or imposition of any Lien (other than
Liens permitted by, the Loan Documents) in, of or on the property of the
Borrower or any Subsidiary pursuant to the terms of any such indenture,
instrument or agreement, or (c) require any consent of the stockholders of
any Person, except for approvals or consents which will be obtained on or
before the initial Advance and are disclosed on SCHEDULE 5.3, except for any
violation of, or failure to obtain an approval or consent required under, any
such indenture, instrument or agreement that could not reasonably be expected
to have a Material Adverse Effect.
5.4. GOVERNMENTAL CONSENTS. No order, consent, approval,
qualification, license, authorization, or validation
of, or filing, recording or registration with, or exemption by, or other
action in respect of, any court, governmental or public body or authority, or
any subdivision thereof, any securities exchange or other Person is or at the
relevant time was required to authorize, or is or at the relevant time was
required in connection with the execution,
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delivery, consummation or performance of, or the legality, validity, binding
effect or enforceability of, any of the Loan Documents, the application of
the proceeds of the Loans or any other transaction contemplated in the Loan
Documents.
5.5. FINANCIAL STATEMENTS. The Borrower has heretofore
furnished to each of the Lenders (a) the December 31,
1993 audited consolidated financial statements of the Borrower and its
Subsidiaries, (b) the unaudited consolidated financial statements of the
Borrower and its Subsidiaries through September 30, 1994, (c) the December
31,
1993 audited financial statements of American and (d) the unaudited
financial statements of American through September 30, 1994 (collectively,
the "FINANCIAL STATEMENTS"). Each of the Financial Statements was prepared in
accordance with generally accepted accounting principles or statutory
accounting practices, as applicable, and (in the case of the Financial
Statements prepared in accordance with generally accepted accounting
principles) fairly presents the consolidated financial condition and
operations of the Borrower and its Subsidiaries at such dates and the
consolidated results of their operations for the respective periods then
ended (except, in the case of such unaudited statements, for normal year-end
audit adjustments).
5.6. MATERIAL ADVERSE CHANGE. No material adverse change in
the business, Property, condition (financial or
otherwise), performance, prospects or results of operations of the Borrower
and its Subsidiaries has occurred since December 31, 1993.
5.7. TAXES. The Borrower and its Subsidiaries have filed or
caused to be filed on a timely basis and in correct
form all United States federal and applicable foreign, state and local tax
returns and all other tax returns which are required to be filed and have
paid
all taxes due pursuant to said returns or pursuant to any assessment
received by the Borrower or any Subsidiary, except such taxes, if any, as are
being contested in good faith and as to which adequate reserves have been
provided in accordance with Agreement Accounting Principles and as to which
no Lien exists. The United States income tax returns of the Borrower on a
consolidated basis for all Fiscal Years through 1990 are closed, and there
are no pending audits or investigations regarding the Borrower's or its
Subsidiaries' federal, foreign, state or local tax returns, other than a
pending audit of the Borrower in the State of Florida, as to which the
Borrower's liability is not expected to exceed $100,000. No tax liens have
been filed and no claims are being asserted with respect to any such taxes
which could reasonably be expected to have a Material Adverse Effect. The
charges, accruals and reserves on the books of the Borrower and its
Subsidiaries in respect of any taxes or other governmental charges are in
accordance with Agreement Accounting Principles.
5.8. LITIGATION AND CONTINGENT OBLIGATIONS. There is no
litigation, arbitration, proceeding, inquiry or
governmental investigation pending or, to the knowledge of any of their
officers, threatened against or affecting the Borrower or any Subsidiary or
any of their respective properties except as set
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forth on SCHEDULE 5.8, and no such matter set forth therein could reasonably
be expected to have a Material Adverse Effect or to prevent, enjoin or unduly
delay the making of the Loans or Advances under this Agreement. Neither the
Borrower nor any Subsidiary has any material contingent obligations except as
set forth on SCHEDULE 5.8.
5.9. CAPITALIZATION. SCHEDULE 5.9 hereto contains (a) an
accurate description of the Borrower's capitalization
and (b) an accurate list of all of the existing Subsidiaries as of the date
of this Agreement, setting forth their respective jurisdictions of
incorporation and the percentage of their capital stock owned by the Borrower
or other Subsidiaries. All of the issued and outstanding shares of capital
stock of the Borrower and of each Subsidiary have been duly authorized and
validly issued and are fully paid and non-assessable, and all such shares of
each Subsidiary are free and clear of all Liens, other than the Liens created
by the Loan Documents. Except as set forth on SCHEDULE 5.9, no authorized
but unissued or treasury shares of capital stock of the Borrower or any
Subsidiary are subject to any option, warrant, right to call or commitment of
any kind or character. Except as set forth on SCHEDULE 5.9, neither the
Borrower nor any Subsidiary has any outstanding stock or securities
convertible into or exchangeable for any shares of its capital stock, or any
right issued to any Person (either preemptive or other) to subscribe for or
to purchase, or any options for the purchase of, or any agreements providing
for the issuance (contingent or otherwise) of, or any calls, commitments or
claims of any character relating to any of its capital stock or any stock or
securities convertible into or exchangeable for any of its capital stock
other than as expressly set forth in the certificate or articles of
incorporation of the Borrower or such Subsidiary. Neither the Borrower nor
any Subsidiary is subject to any obligation (contingent or otherwise) to
repurchase or otherwise acquire or retire any shares of its capital stock or
any convertible securities, rights or options of the type described in the
preceding sentence except as otherwise set forth on SCHEDULE 5.9.
5.10. ERISA. Except as disclosed on SCHEDULE 5.10, neither the
Borrower nor any other member of the Controlled Group maintains any Single
Employer Plans, and no Single Employer Plan has any Unfunded Liability.
Neither the Borrower nor any other member of the Controlled Group maintains,
or is obligated to contribute to, any Multiemployer Plan or has incurred, or
is reasonably expected to incur, any withdrawal liability to any
Multiemployer Plan. Each Plan complies in all material respects with all
applicable requirements of law and regulations. Neither the Borrower nor any
member of the Controlled Group has, with respect to any Plan, failed to make
any contribution or pay any amount required under Section 412 of the IRC or
Section 302 of ERISA or the terms of such Plan. There are no pending or, to
the knowledge of the Borrower, threatened claims, actions, investigations or
lawsuits against any Plan, any fiduciary thereof, or the Borrower or any
member of the Controlled Group with respect to a Plan. The Borrower has not
engaged in any prohibited
-31-
transaction (as defined in Section 4975 of the IRC or Section 406 of ERISA)
in connection with any Plan which would subject the Borrower to any material
liability. Within the last five years neither the Borrower nor any member of
the Controlled Group has engaged in a transaction which resulted in a Single
Employer Plan with an Unfunded Liability being transferred out of the
Controlled Group. No Termination Event has occurred or is reasonably
expected to occur with respect to any Plan which is subject to Title IV of
ERISA.
5.11. DEFAULTS. No Default or Unmatured Default has occurred and
is continuing.
5.12. FEDERAL RESERVE REGULATIONS. Neither the Borrower nor any
Subsidiary is engaged, directly or indirectly, principally, or as one of its
important activities, in the business of extending, or arranging for the
extension of, credit for the purpose of purchasing or carrying Margin Stock.
No part of the proceeds of any Loan will be used in a manner which would
violate, or result in a violation of, Regulation G, Regulation T, Regulation
U or Regulation X. Neither the making of any Advance hereunder, nor the use
of the proceeds thereof, will violate or be inconsistent with the provisions
of Regulation G, Regulation T, Regulation U or Regulation X. Following the
application of the proceeds of the Loans, less than 25% of the value (as
determined by any reasonable method) of the assets of the Borrower and its
Subsidiaries which are subject to any limitation on sale, pledge, or other
restriction hereunder taken as a whole have been, and will continue to be,
represented by Margin Stock.
5.13. INVESTMENT COMPANY. Neither the Borrower nor any
Subsidiary is, or after giving effect to any Advance will be, an "investment
company" or a company "controlled" by an "investment company" within the
meaning of the Investment Company Act of 1940, as amended.
5.14. CERTAIN FEES. No broker's or finder's fee or commission
was, is or will be payable by the Borrower or any Subsidiary with respect to
any of the transactions contemplated by this Agreement. The Borrower hereby
agrees to indemnify the Agent and the Lenders against and agrees that it will
hold each of them harmless from any claim, demand or liability for broker's
or finder's fees or commissions alleged to have been incurred by the Borrower
in connection with any of the transactions contemplated by this Agreement and
any expenses (including, without limitation, attorneys' fees and time charges
of attorneys for the Agent or any Lender, which attorneys may be employees of
the Agent or any Lender) arising in connection with any such claim, demand or
lia-
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bility. No other similar fee or commissions will be payable by the Borrower
or any Subsidiary for any other services rendered to the Borrower or any
Subsidiary ancillary to any of the transactions contemplated by this
Agreement.
5.15. SOLVENCY. As of the date hereof, after giving effect to
the consummation of the transactions contemplated by the Loan Documents and
the payment of all fees, costs and expenses payable by the Borrower with
respect to the transactions contemplated by the Loan Documents, each of the
Borrower and each Subsidiary is Solvent.
5.16. OWNERSHIP OF PROPERTIES. Except as set forth on SCHEDULE
5.16 hereto, the Borrower and its Subsidiaries have a subsisting leasehold
interest in, or good and marketable title, free of all Liens, other than
those permitted by SECTION 6.18 or by any of the other Loan Documents, to all
of the properties and assets reflected in the Financial Statements as being
owned by it, except for assets sold, transferred or otherwise disposed of in
the ordinary course of business since the date thereof. To the knowledge of
the Borrower, there are no actual, threatened or alleged defaults with
respect to any leases of real property under which the Borrower or any
Subsidiary is lessee or lessor which could reasonably be expected to have a
Material Adverse Effect. The Borrower and its Subsidiaries own or possess
rights to use all licenses, patents, patent applications, copyrights, service
marks, trademarks and trade names necessary to continue to conduct their
business as heretofore conducted, and no such license, patent or trademark
has been declared invalid, been limited by order of any court or by agreement
or is the subject of any infringement, interference or similar proceeding or
challenge, except for proceedings and challenges which could not reasonably
be expected to have a Material Adverse Effect.
5.17. INDEBTEDNESS. Attached hereto as SCHEDULE 5.17 is a
complete and correct list of all Indebtedness of the Borrower and its
Subsidiaries outstanding on the date of this Agreement (other than
Indebtedness in a principal amount not exceeding $25,000 for a single item of
Indebtedness and $100,000 in the aggregate for all such Indebtedness listed),
showing the aggregate principal amount which was outstanding on such date
after giving effect to the making of the Loans.
5.18. EMPLOYEE CONTROVERSIES. There are no strikes, work
stoppages or controversies pending or threatened between the Borrower or any
Subsidiary and any of its employees, other than employee grievances arising
in the ordinary course of business, which, in the aggregate, could not
reasona
bly be expected to have a Material Adverse Effect.
5.19. MATERIAL AGREEMENTS. Neither the Borrower nor any
Subsidiary is a party to any agreement or instrument or subject to any
charter or other corporate restriction which could reasonably be expected to
have a Material
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Adverse Effect. Neither the Borrower nor any Subsidiary is in default in the
performance, observance or fulfillment of any of the obligations, covenants
or conditions contained in any agreement to which it is a party, which
default could reasonably be expected to have a Material Adverse Effect.
5.20. ENVIRONMENTAL LAWS. Except as set forth on SCHEDULE 5.20,
there are no claims, investigations, litigation, administrative proceedings,
notices, requests for information, whether pending or threatened, or
judgments or orders asserting violations of applicable federal, state and
local environmental, health and safety statutes, regulations, ordinances,
codes, rules, orders, decrees, directives and standards ("ENVIRONMENTAL
LAWS")
or relating to any toxic or hazardous waste, substance or chemical or any
pollutant, contaminant, chemical or other substance defined in or regulated
pursuant to any Environmental Law, including, without limitation, asbestos,
petroleum, crude oil or any fraction thereof ("HAZARDOUS MATERIALS") asserted
against the Borrower or any of its Subsidiaries. Neither the Borrower nor
any Subsidiary has caused or permitted any Hazardous Materials to be
released, either on or under real property, currently or formerly, legally or
beneficially owned or operated by the Borrower or any Subsidiary or on or
under real property to which the Borrower or any of its Subsidiaries
transported, arranged for the transport or disposal of, or disposed of
Hazardous Materials. Except as set forth on SCHEDULE 5.20, no real property
currently or formerly owned or operated by the Borrower or any Subsidiary has
ever been used as a dump or disposal site or as a treatment or storage site
for Hazardous Materials. The Borrower and each of its Subsidiaries have
obtained and are in compliance with all permits, certificates, licenses,
approvals and other authorizations ("ENVIRONMENTAL PERMITS") required for the
operation of their business and have filed all required notifications or
reports relating to chemical substances, air emissions, effluent discharges
and the storage, treatment, transport and disposal of Hazardous Materials.
Except as set forth on SCHEDULE 5.20, no asbestos containing materials,
polychlorinated biphenyls or underground storage tanks are or have been
located in, on or under real property owned or operated by the Borrower or
any of its Subsidiaries. There are no liens threatened or attached to real
property owned or operated by the Borrower or any of its Subsidiaries. As of
the date hereof, the Borrower and its Subsidiaries do not have liabilities
exceeding $100,000 in the aggregate for all of them with respect to
compliance with applicable Environmental Laws and Environmental Permits or
related to the generation, treatment, storage, disposal, release,
investigation or cleanup of Hazardous Materials, except for the matter set
forth on SCHEDULE 5.20, as to which such liabilities do not exceed $500,000
in the aggregate, and, except as set forth on SCHEDULE 5.20, no facts or
circumstances exist which could give rise to such liabilities with respect to
compliance with applicable Environmental Laws and Environmental Permits and
the generation, treatment, storage, disposal, release, investigation or
cleanup of Hazardous Materials. The operation and production of the Borrower
and its
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Subsidiaries will not be materially impacted or affected by the compliance by
any such Person with applicable Environmental Laws and Environmental Permits
or related to the generation, treatment, storage, disposal, release,
investigation or cleanup of Hazardous Materials.
5.21. CORPORATE INSURANCE. The Borrower and its Subsidiaries
maintain with financially sound and reputable insurance companies insurance
on their Property in such amounts and covering such risks as is consistent
with sound business practice.
5.22. INSURANCE LICENSES. SCHEDULE 5.22 hereto lists all of the
jurisdictions in which any Insurance Subsidiary holds actual Licenses and is
authorized to transact insurance business as of the date of this Agreement.
No such License, the loss of which could reasonably be expected to have a
Material Adverse Effect, is the subject of a proceeding for suspension or
revocation. To the Borrower's knowledge, there is no sustainable basis for
such suspension or revocation, and no such suspension or revocation has been
threatened by any Governmental Authority. SCHEDULE 5.22 also indicates the
line or lines of insurance in which each such Insurance Subsidiary is engaged
and the state or states in which such Insurance Subsidiary is licensed to
engage in any line of insurance, in each case as of the date of this
Agreement.
5.23. DISCLOSURE. None of the (a) information, exhibits or
reports furnished or to be furnished by the Borrower or any Subsidiary to the
Agent or to any Lender in connection with the negotiation of the Loan
Documents, or (b) representations or warranties of the Borrower or any
Subsidiary contained in this Agreement, the other Loan Documents, or any
other document, certificate or written statement furnished to the Agent or
the Lenders by or on behalf of the Borrower or any Subsidiary for use in
connection with the transactions contemplated by this Agreement, contained,
contains or will contain any untrue statement of a material fact or omitted,
omits or will omit to state a material fact necessary in order to make the
statements contained herein or therein not misleading in light of the
circumstances in which the same were made. The pro forma financial
information contained in such materials is based upon good faith estimates
and assumptions believed by the Borrower to be reasonable at the time made.
There is no fact known to the Borrower (other than matters of a general
economic nature) that has had or could reasonably be expected to have a
Material Adverse Effect and that has not been disclosed herein or in such
other documents, certificates and statements furnished to the Lenders for use
in connection with the transactions contemplated by this Agreement.
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ARTICLE VI
COVENANTS
During the term of this Agreement, unless the Required Lenders
shall otherwise consent in writing:
6.1. FINANCIAL REPORTING. The Borrower will maintain, for
itself and each Subsidiary, a system of accounting
established and administered in accordance with generally accepted accounting
principles, consistently applied, or SAP as applicable, and will furnish to
the Lenders:
(a)As soon as practicable and in any event within 90
days after the close of each of its Fiscal Years, an
unqualified audit report (which shall not be qualified as to scope of audit
or going concern or in any other material respect) certified by independent
certified public accountants, acceptable to the Lenders, prepared in
accordance with Agreement Accounting Principles on a consolidated and
consolidating basis (consolidating statements need not be certified by such
accountants) for itself and its Subsidiaries, including balance sheets as of
the end of such period, related income and reconciliation of shareholders'
equity statements, and a statement of cash flows, accompanied by (i) any
management letter prepared by said accountants, (ii) a certificate of said
accountants that, in the course of the examination necessary for their
certification of the foregoing, they have obtained no knowledge of any
Default or Unmatured Default, or if, in the opinion of such accountants, any
Default or Unmatured Default shall exist, stating the nature and status
thereof, (iii) a letter from said accountants substantially in the form of
EXH
IBIT C hereto addressed to the Lenders acknowledging that the Lenders are
extending credit in primary reliance on such financial statements and
authorizing such reliance; and (iv) a copy of a written reconciliation
between SAP and Agreement Accounting Principles with respect to such
financial statements if such reconciliation is provided to the insurance
regulatory authority in the state of domicile of any Insurance Subsidiary.
(b)As soon as practicable and in any event within 45
days after the close of the first three quarterly
periods of each of its Fiscal Years, for itself and its Subsidiaries,
consolidated and consolidating unaudited balance sheets as at the close of
each such period and consolidated and consolidating profit and loss and
reconciliation of surplus statements and a statement of cash flows for the
period from the beginning of such Fiscal Year to the end of such Fiscal
Quarter, all certified by its chief financial officer and prepared in
accordance with Agreement Accounting Principles.
(c)(i) Upon the earlier of (A) fifteen days after the
regulatory filing date or (B) 75 days after the close of each Fiscal Year of
each Insurance Subsidiary, copies of the unaudited Annual Statement of such
Insurance Subsidiary, certified by the President, Secretary and Treasurer of
and the
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actuary for such Insurance Subsidiary, all such statements to be prepared in
accordance with SAP consistently applied throughout the periods reflected
therein and (ii) no later than each June 15, copies of such Annual Statements
audited and certified by independent certified public accountants of
recognized annual standing.
(d) Upon the earlier of (i) ten (10) days after the
regulatory filing date or (ii) 60 days after the close of each of the first
three Fiscal Quarters of each Fiscal Year of each Insurance Subsidiary,
copies of the Quarterly Statement of each of the Insurance Subsidiaries,
certified by the president, secretary and treasurer of such Insurance
Subsidiary, all such statements to be prepared in accordance with SAP
consistently applied through the period reflected herein.
(e)Promptly and in any event within ten days after (i)
learning thereof, notification of any changes after
the date hereof in the rating given by A.M. Best & Co. in respect of any
Insurance Subsidiary and (ii) receipt thereof, copies of any ratings analysis
by A.M. Best & Co. relating to any Insurance Subsidiary.
(f)Copies of any actuarial certificates prepared with
respect to any Insurance Subsidiary, promptly after
the receipt thereof.
(g)As soon as available, but in any event not later
than the last Business Day in March of each year, a
copy of the plan and forecast of the Borrower and its Subsidiaries for the
next Fiscal Year (including a projected consolidated balance sheet, income
statement and funds flow statement of the Borrower and its Subsidiaries and a
projected balance sheet and income statement of each Insurance Subsidiary).
(h)Together with the financial statements required by
CLAUSES (A) and (B) above, a compliance certificate
in substantially the form of EXHIBIT D hereto signed by the Borrower; chief
financial officer showing the calculations necessary
to determine compliance with this Agreement and stating that no Default or
Unmatured Default exists, or if any Default or Unmatured Default exists,
stating the nature and status thereof.
(i)Within 270 days after the close of each Fiscal
Year, a statement of the Unfunded Liabilities of each
Single Employer Plan, certified as correct by an actuary enrolled under
ERISA.
(j)As soon as possible and in any event within 10 days
after the Borrower knows that any Termination Event
has occurred with respect to any Plan, a statement, signed by the chief
financial officer of the Borrower, describing said Termination Event and the
action which the Borrower proposes to take with respect thereto.
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(k)As soon as possible and in any event within 10 days
after receipt by the Borrower, a copy of (i) any
notice, claim, complaint or order to the effect that the Borrower or any of
its Subsidiaries is or may be liable to any Person as a result of the release
by the Borrower, any of its Subsidiaries, or any other Person of any
Hazardous Materials into the environment or requiring that action be taken to
respond to or clean up a Release of Hazardous Materials into the environment,
and (ii) any notice, complaint or citation alleging any violation of any
Environmental Law or Environmental Permit by the Borrower or any of its
Subsidiaries. Within ten days of the Borrower or any Subsidiary having
knowledge of the proposal, enactment or promulgation of any Environmental Law
which could reasonably be expected to have a Material Adverse Effect, the
Borrower shall provide the Agent with written notice thereof.
(l)Promptly upon the furnishing thereof to the
shareholders of the Borrower, copies of all financial
statements, reports and proxy statements so furnished.
(m)Promptly upon the filing thereof, copies of all
registration statements and annual, quarterly, monthly
or other regular reports which the Borrower or any of its Subsidiaries files
with the Securities and Exchange Commission, the National Association of
Securities Dealers, any securities exchange, the NAIC or any insurance
commission or department or analogous Governmental Authority (including
without limitation, any filing made by the Borrower or any Subsidiary
pursuant to any insurance holding company act or related rules or
regulations), but excluding routine or non-material filings with the NAIC,
any insurance commissioner or department or analogous Governmental Authority.
(n)Promptly and in any event within ten (10) days
after learning thereof, notification of (i) any tax
assessment, demand, notice of proposed deficiency or notice of deficiency
received by the Borrower or any other Consolidated Person or (ii) the filing
of any tax Lien or commencement of any judicial proceeding by or against any
such Consolidated Person, if any such assessment, demand, notice, Lien or
judicial proceeding relates to tax liabilities in excess of ten percent (10%)
of shareholders' equity.
(o)Such other information (including, without
limitation, the annual Best's Advance Report Service report
prepared with respect to each Insurance Subsidiary rated by A.M. Best & Co.)
as the Agent or any Lender may from time to time reasonably request.
6.2. USE OF PROCEEDS. The Borrower will use the proceeds of
the Advances for the general corporate purposes of
the Borrower and its Subsidiaries. The Borrower will not, nor will it permit
any Subsidiary to, use any of the proceeds of the Advances to purchase or
carry any "margin stock" (as defined in Regulation U).
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6.3. NOTICE OF DEFAULT. The Borrower will, and will cause
each Subsidiary to, give prompt notice in writing to
the Lenders of (a) the occurrence of any Default or Unmatured Default, (b)
the occurrence of any other development, financial or other, relating
specifically to the Borrower or any of its Subsidiaries (and not of a general
economic or political nature) which could reasonably be expected to have a
Material Adverse Effect, (c) the receipt of any notice from any Governmental
Authority of the expiration without renewal, revocation or suspension of, or
the institution of any proceedings to revoke or suspend, any License now or
hereafter held by any Insurance Subsidiary which is required to conduct
insurance business in compliance with all applicable laws and regulations and
the expiration, revocation or suspension of which could reasonably be
expected to have a Material Adverse Effect, (d) the receipt of any notice
from any Governmental Authority of the institution of any disciplinary
proceedings against or in respect of any Insurance Subsidiary, or the
issuance of any order, the taking of any action or any request for an
extraordinary audit for cause by any Governmental Authority which, if
adversely determined, could reasonably be expected to have a Material Adverse
Effect, (e) any judicial or administrative order limiting or controlling the
insurance business of any Insurance Subsidiary (and not the insurance
industry generally) which has been issued or adopted and which has had, or
could reasonably be expected to have, a Material Adverse Effect, or (f) the
commencement of any litigation which could reasonably be expected to create a
Material Adverse Effect.
6.4. CONDUCT OF BUSINESS. The Borrower will, and will cause
each Subsidiary to, (a) carry on and conduct its
business only in substantially the same manner and in substantially the same
fields of enterprise as it is presently conducted, (b) with respect to each
Insurance Subsidiary, only engage in the life insurance business, (c) do all
things necessary to remain duly incorporated, validly existing and in good
standing in its jurisdiction of incorporation and its jurisdiction of
domicile and maintain all requisite authority to conduct its business in each
other jurisdiction in which its business is conducted, and (d) do all things
necessary to renew, extend and continue in effect all Licenses which may at
any time and from time to time be necessary for any Insurance Subsidiary to
operate its insurance business in compliance with all applicable laws and
regulations; PROVIDED, that any Insurance Subsidiary may withdraw from one or
more states (other than its state of domicile) as an admitted insurer if such
withdrawal is determined by the Borrower's Board of Directors to be in the
best interest of the Borrower and could not reasonably be expected to have a
Material Adverse Effect. No Insurance Subsidiary shall change its state of
domicile or incorporation without the prior written consent of the Required
Lenders. Each Wholly-Owned Subsidiary in existence as of the date of this
Agreement shall continue to be a Wholly-Owned Subsidiary; PROVIDED, that the
Borrower may sell all of the capital stock of any Subsidiary other than
American, subject to SECTION 6.13 hereof.
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6.5. TAXES. The Borrower will, and will cause each
Subsidiary to, timely file complete and correct United
States federal and applicable foreign, state and local tax returns required
by applicable law and pay when due all taxes, assessments and governmental
charges and levies upon it or its income, profits or Property, except those
which are being contested in good faith by appropriate proceedings and with
respect to which adequate reserves have been set aside.
6.6. CORPORATE INSURANCE. The Borrower will, and will cause
each Subsidiary to, maintain with financially sound
and reputable insurance companies insurance on all their Property in such
amounts and covering such risks as is consistent with sound business
practice, and the Borrower will furnish to the Agent and any Lender upon
request full information as to the insurance carried.
6.7. COMPLIANCE WITH LAWS. The Borrower will, and will
cause each Subsidiary to, comply with all laws, rules,
regulations, orders, writs, judgments, injunctions, decrees or awards to
which it may be subject, except where the failure so to comply could not
reasonably be expected to have a Material Adverse Effect.
6.8. MAINTENANCE OF PROPERTIES. The Borrower will, and will
cause each Subsidiary to, do all things necessary
to maintain, preserve, protect and keep its Property in good repair, working
order and condition, and make all necessary and proper repairs, renewals and
replacements so that its business carried on in connection therewith may be
properly conducted at all times.
6.9. INSPECTION. The Borrower will, and will cause each
Subsidiary to, permit the Agent and the Lenders, by
their respective representatives and agents, to inspect any of the Property,
corporate books and financial records of the Borrower and each Subsidiary, to
examine and make copies of the books of accounts and other financial records
of the Borrower and each Subsidiary, and to discuss the affairs, finances and
accounts of the Borrower and each Subsidiary with, and to be advised as to
the same by, their respective officers at such reasonable times and intervals
as the Lenders may designate. The Borrower will keep or cause to be kept,
and cause each Subsidiary to keep or cause to be kept, appropriate records
and books of account in which complete entries are to be made reflecting its
and their business and financial transactions, such entries to be made in
accordance with Agreement Accounting Principles or SAP, as applicable,
consistently applied.
6.10. DIVIDENDS. The Borrower will not, nor will it permit any
Subsidiary to, declare or pay any dividends or make any distributions on its
capital stock (other than dividends payable in its own capital stock) or
redeem, repurchase or otherwise acquire or retire any of its capital stock or
any options or other rights in respect thereof at any time outstanding,
except that (a) any Subsidiary may declare and pay dividends or make
distributions to the Borrower, and (b) so long as no Default or Event of
Default is pending before or after
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giving effect to the declaration or payment of such dividends or the
redemption, repurchase, acquisition or retirement of such stock, the Borrower
may declare and pay dividends on its capital stock or redeem, repurchase,
acquire or retire its capital stock commencing in Fiscal Year 1995 so long as
the aggregate amount of all such dividends, redemptions, repurchases and
acquisitions in any Fiscal Year does not exceed the lesser of (x) $5,000,000
and (y) 25% of Net Income for the prior Fiscal Year.
6.11. INDEBTEDNESS. The Borrower will not, nor will it permit
any Subsidiary to, create, incur or suffer to exist any Indebtedness, except:
(a)the Loans;
(b)Indebtedness existing on the date hereof and
described in SCHEDULE 5.17 hereto;
(c)Rate Hedging Obligations incurred by the Borrower
related to the Loans;
(d)other Rate Hedging Obligations incurred by any
Insurance Subsidiary of not more than one-quarter of one
percent (.25%) of the investment assets ("Assets" statement, Page 2, Line 10A
of the Annual Report) of such Insurance Subsidiary at any one time
outstanding;
(e)Indebtedness with an initial principal amount not
to exceed $7,000,000 incurred by the Borrower in
connection with the construction or permanent financing of a headquarters
facility for the Borrower; and
(f)additional unsecured Indebtedness (other than Rate
Hedging Obligations) which, in respect of
Indebtedness with an initial principal amount in excess of $100,000, is
incurred on terms and conditions acceptable to the Required Lenders, so long
as (i) no Default or Unmatured Default has occurred and is existing or would
occur after giving effect thereto and (ii) such incurrence would not violate
S
ECTION 6.23.2 hereof.
6.12. MERGER. The Borrower will not, nor will it permit any
Subsidiary to, merge or consolidate with or into or sell all or substantially
all of its assets to any other Person, except that a Subsidiary may merge
into the Borrower or any Wholly-Owned Subsidiary of the Borrower; PROVIDED,
that the Borrower may enter into any merger or consolidation with a
corporation organized under the laws of any state of the United States so
long as (a) such transaction is permitted under SECTION 6.15(A)(IV) or (b)(i)
the Borrower is the surviving corporation, (ii) no Default or Unmatured
Default has occurred and is continuing
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or would occur after giving effect thereto and (iii) the Required Lenders
have given their prior written consent to such transaction, which shall not
unreasonably be withheld.
6.13. SALE OF ASSETS. The Borrower will not, nor will it permit
any Subsidiary to, lease, sell, transfer or otherwise dispose of its
Property, to any other Person except for (a) sales of investment assets in
the ordinary course of business, and (b) leases, sales, transfers or other
dispositions of its Property that, together with all other Property of the
Borrower and its Subsidiaries previously leased, sold or disposed of (other
than inventory sold in the ordinary course of business) as permitted by this
S
ECTION 6.13 since the date hereof, do not constitute a Substantial Portion of
the Property of the Borrower and its Subsidiaries.
6.14. SALE AND LEASEBACK. The Borrower will not, nor will it
permit any Subsidiary to, sell or transfer any of its Property in order to
concurrently or subsequently lease as lessee such or similar Property.
6.15. INVESTMENTS AND PURCHASES. (a) The Borrower will not, nor
will it permit any Subsidiary which is not an Insurance Subsidiary to, make
or suffer to exist any Investments (including, without limitation, loans and
advances to, and other Investments in, Subsidiaries), or commitments
therefor, or to create any Subsidiary or to become or remain a partner in any
partnership or joint venture, or to make any Purchases, except:
(i) Cash and Cash Equivalents;
(ii) Investments in existence on the date hereof
(including Investments in Subsidiaries) and described
in SCHEDULE 6.15 hereto;
(iii) Other Investments by the Borrower in American so long
as (A) no Default or Unmatured Default has occurred
and is continuing either before or after giving effect thereto and (B) the
Borrower has provided the Agent with pro forma financial statements as of the
end of the next succeeding quarter after giving effect to such Investment
demonstrating compliance with each of the covenants set forth in SECTION
6.23;
(iv) Purchases of businesses or entities engaged in
the life insurance business which do not constitute
hostile takeovers made (A) for consideration consisting of the Borrower's
capital stock not to exceed $50,000,000 in the aggregate after the date of
this Agreement or (B) for other types of consideration not to exceed (x)
$10,000,000 in the aggregate after the date of this Agreement (including the
amount of any consideration other than the Borrower's capital stock paid in
connection with Purchases made pursuant to clause (A)), less (y) the
aggregate consideration paid in respect of any Purchases made pursuant to
SECTION 6.15(B)(V);
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(v)Other Investments in Omni-Tech not to exceed
$500,000 in the aggregate made after the date of this
Agreement;
(vi) Derivatives Investments made by the Borrower in
respect of the Obligations; and
(vii) Up to $10,000,000 in the aggregate at any time
outstanding of other Investments which do not constitute Purchases or
Derivatives Investments.
(b) The Borrower will not permit any Insurance Subsidiary
to make or suffer to exist any Investments
(including, without limitation, loans and advances to and other Investments
in, Subsidiaries), or commitments therefor, or to create any Subsidiary or to
become or remain a partner in any partnership or joint venture, or to make
any Purchases, except:
(i)Cash and Cash Equivalents;
(ii) Investments in debt securities rated BBB- or
better by Standard & Poor's Ratings Group, Baa-3 or
better by Moody's Investors Services, Inc. or NAIC-2 or better by the NAIC;
PROVIDED, that any such Investment which, at any time
after which it is made, ceases to meet such rating requirements shall (A)
cease to be permitted hereby if then permitted by SECTIO
N 6.15(B)(III) and (B) if not then permitted by SECTION 6.15(B)(III) remain
permitted hereby until the earlier of the time it is
permitted under SECTION 6.15(B)(III) and the date which is 30 days after the
date on which such rating requirement is no longer
met;
(iii) Other Investments (other than Derivatives
Investments) of a quality acceptable to the insurance commissioner in the
respective domiciliary state of such Insurance Subsidiary; PROVIDED, that
such Investments do not exceed, in the aggregate at any one time outstanding,
15% of the Investments of any Insurance Subsidiary, of which not more than
(A) four percent (4%) of such Investments shall consist of Investments in
real estate mortgages, (B) three percent (3%) of such Investments shall
consist of Investments in real estate, (C) ten percent of such Investments
shall consist of Investments in debt securities rated not less than BB- by
Standard & Poor's Ratings Group, Ba3 by Moody's Investors Services, Inc. and
NAIC-3 by the NAIC, (D) three and one-half percent (3.5%) of such Investments
shall consist of Investments in equity securities or (E) four percent (4%) of
such Investments shall consist of Investments other than those described in
clauses (A) through (D);
(iv) Existing Investments in Subsidiaries and other
Investments in existence on the date hereof and described in SCHEDULE 6.15
hereto;
(v) Purchases of businesses or entities engaged in
the life insurance business (which do not constitute hostile takeovers) made
after the date
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of this Agreement for an aggregate consideration not to exceed (A)
$10,000,000, less (B) the aggregate consideration paid in respect of any
Purchases made pursuant to SECTION 6.15(A)(IV)(B);
(vi) Derivatives Investments made after the date of
this Agreement not to exceed either (A) $20,000,000 in the aggregate for all
Insurance Subsidiaries or (B) in the aggregate, 1% of the investment assets
("Assets" statement, Page 2, Line 10A of the Annual Report) as of the date of
determination of the Insurance Subsidiary making the Investment; PROVIDED,
that any such Investment which, at any time after which it is made, ceases to
meet such requirement, shall remain permitted hereby until the date which is
30 days after the date on which such requirement is no longer met; and
(vii) An Investment by American consisting of a loan
made to the Borrower for the purposes described in SECTION 6.11(E);
provided, that in no event shall more than three percent (3%) of the combined
Investments (other than Investments described in clause (c) of the definition
of "Cash Equivalents") of the Insurance Subsidiaries be Investments in any
one Person; PROVIDED, FURTHER, that for purposes of the preceding proviso,
each specific group of collateralized assets created under a
quasi-governmental agency shall constitute a separate Person.
6.16. CONTINGENT OBLIGATIONS. The Borrower will not, nor will it
permit any Subsidiary to, make or suffer to exist any Contingent Obligation
(including, without limitation, any Contingent Obligation with respect to the
obligations of a Subsidiary), except by endorsement of instruments for
deposit or collection in the ordinary course of business.
6.17. LIENS. The Borrower will not, nor will it permit any
Subsidiary to, create, incur, or suffer to exist any Lien in, of or on the
Property of the Borrower or any of its Subsidiaries, except:
(a)Liens for taxes, assessments or governmental
charges or levies on its Property if the same shall not at
the time be delinquent or thereafter can be paid without penalty, or are
being contested in good faith and by appropriate proceedings and for which
adequate reserves in accordance with Agreement Accounting Principles or SAP,
as applicable, shall have been set aside on its books;
(b)Liens imposed by law, such as carriers',
warehousemen's and mechanics' liens and other similar liens
arising in the ordinary course of business which secure payment of
obligations not more than 60 days past due or which are being contested in
good faith by appropriate proceedings and for which adequate reserves in
accordance with Agreement Accounting Principles or SAP, as applicable, shall
have been set aside on its books;
-44-
(c)Liens arising out of pledges or deposits under
worker's compensation laws, unemployment insurance, old
age pensions, or other social security or retirement benefits, or similar
legislation;
(d)Utility easements, building restrictions and such
other encumbrances or charges against real property
as are of a nature generally existing with respect to properties of a similar
character and which do not in any material way affect the marketability of
the same or interfere with the use thereof in the business of the Borrower or
the Subsidiaries; and
(e)Liens on securities constituting joint custody
receipts in favor of the Kansas Department of Insurance;
(f)Liens securing Indebtedness incurred pursuant to
SECTION 6.11(E); and
(g)Liens existing on the date hereof and described in
SCHEDULE 6.17 hereto.
6.18. AFFILIATES. The Borrower will not, and will not permit any
Subsidiary to, enter into any transaction
(including, without limitation, the purchase or sale of any Property or
service) with, or make any payment or transfer to, any Affiliate except (a)
in
the ordinary course of business and pursuant to the reasonable requirements
of the Borrower's or such Subsidiary's business and upon fair and reasonable
terms no less favorable to the Borrower or such Subsidiary than the Borrower
or such Subsidiary would obtain in a comparable arms-length transaction and
(b) a loan permitted pursuant to SECTION 6.15(B)(VII).
6.19. AMENDMENTS TO AGREEMENTS. The Borrower will not, and will
not permit any Subsidiary to, amend, waive, modify or terminate (a) the terms
and conditions of any agreement or charter provision governing any preferred
stock or (b) any Management Agreement, except as required by applicable law
or regulation.
6.20. ENVIRONMENTAL MATTERS. The Borrower shall and shall cause
each of its Subsidiaries to (a) at all times comply in all material respects
with all applicable Environmental Laws and (b) promptly take any and all
necessary remedial actions in response to the presence, storage, use,
disposal, transportation or Release of any material amount of Hazardous
Materials on, under or about any real property owned, leased or operated by
the Borrower or any of its Subsidiaries. In the event that the Borrower or
any Subsidiary undertakes any remedial action with respect to any Hazardous
Material on, under or about any real property, the Borrower or such
Subsidiary shall conduct and complete such remedial action in material
compliance with all applicable Environmental Laws and in accordance with the
policies, orders and directives of all federal, state and local governmental
authorities, except when the Borrower's or such Subsidiary's liability for
such presence, storage, use, disposal, transportation or Release of any
Hazardous Material is being contested in good faith by the Borrower or such
Subsidiary and appropriate reserves therefor have been
-45-
established. If the Agent or any Lender at any time has a reasonable basis to
believe that there may be a material violation of any Environmental Law by
the Borrower or any of its Subsidiaries, or any material liability arising
thereunder or related to a Release of Hazardous Materials on any real
property owned, leased or operated by the Borrower or any of its Subsidiaries
or a Release on real property adjacent to such real property, then the
Borrower shall, upon the request of the Agent or such Lender, provide the
Agent and each Lender with all such reports, certificates, engineering
studies and other written material or data relating thereto as the Agent or
any Lender may reasonably require.
6.21. CHANGE IN CORPORATE STRUCTURE; FISCAL YEAR. The Borrower
shall not, nor shall it permit any Subsidiary to, (a) permit any amendment or
modification to be made to its certificate or articles of incorporation or
by-laws which is materially adverse to the interests of the Lenders (provided
that the Borrower shall notify the Agent of any other amendment or
modification thereto as soon as practicable thereafter) or (b) change its
Fiscal Year to end on any date other than December 31 of each year.
6.22. INCONSISTENT AGREEMENTS. The Borrower shall not, nor shall
it permit any Subsidiary to, enter into any indenture, agreement, instrument
or other arrangement which, (a) directly or indirectly prohibits or
restrains, or has the effect of prohibiting or restraining, or imposes
materia
lly adverse conditions upon, the incurrence of the Obligations, the granting
of Liens to secure the Obligations, or the amendment of the Loan Documents or
(b) contains any provision which would be violated or breached by the making
of Advances or by the performance by the Borrower of any of its obligations
under any Loan Document.
6.23. FINANCIAL COVENANTS. Subject to normal year-end and
closing audit adjustments for calculations or determinations made in
accordance with Agreement Accounting Principles or SAP, as applicable, prior
to the end of a Fiscal Year, the Borrower on a consolidated basis with its
Subsidiaries shall:
6.23.1. NET WORTH. At all times after the date
hereof, maintain a Net Worth (less the aggregate Goodwill of the Borrower and
its Subsidiaries) equal to or greater than the sum of (a) $97,000,000, PLUS
(b) fifty percent (50%) of the sum of the Net Income (but not net loss) of
the Borrower and its Subsidiaries for each Fiscal Quarter ending on or after
December 31, 1994, PLUS (c) an amount equal to 100% of the cash and non-cash
proceeds of any equity securities issued by the Borrower after the date of
this Agreement.
6.23.2. LEVERAGE RATIO. At all times after the date
hereof, maintain a Leverage Ratio of not more .20:1.0.
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6.23.3. CASH FLOW COVERAGE RATIO. As of the end of
each Fiscal Quarter, maintain a Cash Flow Coverage Ratio of not less than
1.5:1.0.
6.23.4. RISK-BASED CAPITAL. At all times after the
date hereof, cause each Insurance Subsidiary to maintain a ratio of (a) Total
Adjusted Capital (as defined in the Risk-Based Capital Act or in the rules
and procedures prescribed from time to time by the NAIC with respect thereto)
to (b) the Company Action Level RBC (as defined in the Risk-Based Capital Act
or in the rules and procedures prescribed from time to time by the NAIC with
respect thereto) of at least 200%.
6.23.5. ADJUSTED CAPITAL AND SURPLUS TO ASSETS. At
all times after the date hereof, cause each Insurance Subsidiary to maintain
Adjusted Capital and Surplus of greater than or equal to 5% of its assets
("Assets" statement, Page 2, Line 22, Column 1 of the Annual Statement).
6.24. TAX CONSOLIDATION. The Borrower will not and will not
permit any of its Subsidiaries to (a) file or consent to the filing of any
consolidated, combined or unitary income tax return with any Person other
than the Borrower and its Subsidiaries or (b) amend, terminate or fail to
enforce the Tax Sharing Agreement or enter into any other tax sharing
agreement or similar arrangement.
6.25. ERISA COMPLIANCE.
With respect to any Plan, neither the Borrower nor any
Subsidiary shall:
(a)engage in any "prohibited transaction" (as such
term is defined in Section 406 of ERISA or Section 4975
of the IRC) for which a civil penalty pursuant to Section 502(i) of ERISA or
a tax pursuant to Section 4975 of the IRC in excess of $100,000 could be
imposed;
(b)incur any "accumulated funding deficiency" (as such
term is defined in Section 302 of ERISA) in excess
of $100,000, whether or not waived, or permit any Unfunded Liability to
exceed $100,000;
(c)permit the occurrence of any Termination Event
which could result in a liability to the Borrower or any
other member of the Controlled Group in excess of $100,000;
(d)be an "employer" (as such term is defined in
Section 3(5) of ERISA) required to contribute to any
Multiemployer Plan or a "substantial employer" (as such term in defined in
Section 4001(a)(2) of ERISA) required to contribute to any Multiemployer
Plan;
or
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(e)permit the establishment or amendment of any Plan
or fail to comply with the applicable provisions of
ERISA and the IRC with respect to any Plan which could result in liability to
the Borrower or any other member of the Controlled Group which, individually
or in the aggregate, could reasonably be expected to have a Material Adverse
Effect.
6.26. DERIVATIVES. The Borrower and its Insurance Subsidiaries
may enter into Derivatives Investments (a) subject to the limitations set
forth in SECTIONS 6.11 AND 6.15 hereof and (b) for so long as such
transactions are within the Investment Guidelines for Interest Rate Exchange
Agreements (Swaps) provided to the Borrower by NISA Investment Advisors LLC,
as set forth on SCHEDULE 6.26 hereto and as in effect on the date of this
Agreement; PROVIDED, that notwithstanding clause (b) above, the Borrower and
its Insurance Subsidiaries may enter into interest rate cap (under which such
Person is the cap purchaser) or collar (under which such Person is the floor
provider and the cap purchaser) protection agreements.
ARTICLE VII
DEFAULTS
The occurrence of any one or more of the following events shall
constitute a Default:
7.1. Any representation or warranty made or deemed made by
or on behalf of the Borrower or any of its
Subsidiaries to the Lenders or the Agent under or in connection with this
Agreement, any Loan, or any certificate or information delivered in
connection
with this Agreement or any other Loan Document shall be false in any
material respect on the date as of which made.
7.2. Nonpayment of (a) principal of any Note when due, or
(b) interest upon any Note or any commitment fee or
other fee or obligations under any of the Loan Documents within five days
after the same becomes due.
7.3. The breach by the Borrower of any of the terms or
provisions of SECTION 6.2, SECTION 6.3(A) or SECTIONS
6.10 through 6.26.
7.4. The breach by the Borrower (other than a breach which
constitutes a Default under SECTION 7.1, 7.2 or 7.3)
of any of the terms or provisions of this Agreement which is not remedied
within ten (10) days after written notice from the Agent or any Lender.
7.5. The default by the Borrower or any of its Subsidiaries
in the performance of any term, provision or
condition contained in any agreement or agreements under which any
Indebtedness aggregating in excess of $100,000 was
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created or is governed, or the occurrence of any other event or existence of
any other condition, the effect of any of which is to cause, or to permit the
holder or holders of such Indebtedness to cause, such Indebtedness to become
due prior to its stated maturity; or any such Indebtedness of the Borrower or
any of its Subsidiaries shall be declared to be due and payable or required
to be prepaid in whole (other than by a regularly scheduled payment) prior to
the stated maturity thereof.
7.6. The Borrower or any of its Subsidiaries shall (a) have
an order for relief entered with respect to it under
the Federal bankruptcy laws as now or hereafter in effect, (b) make an
assignment for the benefit of creditors, (c) apply for, seek, consent to, or
acquiesce in, the appointment of a receiver, custodian, trustee, examiner,
liquidator or similar official for it or any Substantial Portion of its
Property, (d) institute any proceeding seeking an order for relief under the
Federal bankruptcy laws as now or hereafter in effect or seeking to
adjudicate it a bankrupt or insolvent, or seeking dissolution, winding up,
liquidation, reorganization, arrangement, adjustment or composition of it or
its debts under any law relating to bankruptcy, insolvency or reorganization
or relief of debtors or fail to file an answer or other pleading denying the
material allegations of any such proceeding filed against it, (e) take any
corporate action to authorize or effect any of the foregoing actions set
forth in this SECTION 7.6, (f) fail to contest in good faith any appointment
or proceeding described in SECTION 7.7 or (g) become unable, not pay, or
admit in writing its inability to pay, its debts generally as they become
due.
7.7. Without the application, approval or consent of the
Borrower or any of its Subsidiaries, a receiver,
trustee, examiner, liquidator or similar official shall be appointed for the
Borrower or any of its Subsidiaries or any Substantial Portion of its
Property
, or a proceeding described in SECTION 7.6(D) shall be instituted against the
Borrower or any of its Subsidiaries and such appointment continues
undischarged or such proceeding continues undismissed or unstayed for a
period of thirty consecutive days.
7.8. Any court, government or governmental agency shall
condemn, seize or otherwise appropriate, or take custody
or control of (each a "CONDEMNATION"), all or any portion of the Property of
the Borrower and its Subsidiaries which, when taken
together with all other Property of the Borrower and its Subsidiaries so
condemned, seized, appropriated, or taken custody or control of, during the
twelve-month period ending with the month in which any such Condemnation
occurs, constitutes a Substantial Portion.
7.9. The Borrower or any of its Subsidiaries shall fail
within thirty days to pay, bond or otherwise discharge
any judgment or order for the payment of money in excess of $100,000 (or
multiple judgments or orders for the pay-
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ment of an aggregate amount in excess of $500,000), which is not stayed on
appeal or otherwise being appropriately contested in good faith.
7.10. The Borrower or any of its Subsidiaries shall be the
subject of any proceeding or investigation pertaining to the discovery of any
Hazardous Materials on the leased or owned property of the Borrower or any of
its Subsidiaries, the release by the Borrower or any of its Subsidiaries, or
any other Person of any Hazardous Materials into the environment, or any
violation of any Environmental Law or Environmental Permit, which, in any
such case, could reasonably be expected to have a Material Adverse Effect.
7.11. Any Change in Control shall occur.
7.12. Nonpayment by the Borrower of any Rate Hedging Obligation
or the breach by the Borrower of any term, provision or condition contained
in any agreement, device or arrangement giving rise to any Rate Hedging
Obligation.
7.13. Any License of any Insurance Subsidiary (a) shall be
revoked by the Governmental Authority which issued such License, or any
action (administrative or judicial) to revoke such License shall have been
commenced against such Insurance Subsidiary and shall not have been dismissed
within 30 days after the commencement thereof, (b) shall be suspended by such
Governmental Authority for a period in excess of 30 days or (c) shall not be
reissued or renewed by such Governmental Authority upon the expiration
thereof following application for such reissuance or renewal of such
Insurance Subsidiary.
7.14. Any Insurance Subsidiary shall be the subject of a final
non-appealable order imposing a fine in an amount in excess of $250,000 in
any single instance or other such orders imposing fines in excess of
$1,000,000 in the aggregate after the date of this Agreement by or at the
request of any state insurance regulatory agency as a result of the violation
by such Insurance Subsidiary of such state's applicable insurance laws or the
regulations promulgated in connection therewith.
7.15. Any Insurance Subsidiary shall become subject to (a) any
conservation or liquidation order, directive or mandate issued by any
Governmental Authority or (b) any other directive or mandate issued by any
Governmental Authority, which in either case is not stayed within ten (10)
days.
ARTICLE VIII
ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES
8.1. ACCELERATION. If any Default described in SECTION 7.6
or 7.7 occurs with respect to the Borrower, the
obligations of the Lenders to make Loans hereunder shall automatically
terminate and the Obligations shall immediately
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become due and payable without any election or action on the part of the
Agent or any Lender. If any other Default occurs, the Required Lenders (or
the Agent with the consent of the Required Lenders) may terminate or suspend
the obligations of the Lenders to make Loans hereunder, or declare the
Obligations to be due and payable, or both, whereupon the Obligations shall
become immediately due and payable, without presentment, demand, protest or
notice of any kind, all of which the Borrower hereby expressly waives.
If, within ten Business Days after acceleration of the maturity
of the Obligations or termination of the obligations of the Lenders to make
Loans hereunder as a result of any Default (other than any Default as
described in SECTION 7.6 or 7.7 with respect to the Borrower) and before any
judgment or decree for the payment of the Obligations due shall have been
obtained or entered, the Required Lenders (in their sole discretion) shall so
direct, the Agent shall, by notice to the Borrower, rescind and annul such
acceleration and/or termination.
8.2. AMENDMENTS. Subject to the provisions of this ARTICLE
VIII, the Required Lenders (or the Agent with the
consent in writing of the Required Lenders) and the Borrower may enter into
agreements supplemental hereto for the purpose of adding or modifying any
provisions to the Loan Documents or changing in any manner the rights of the
Lenders or the Borrower hereunder or waiving any Default hereunder; PROVIDED,
HOWEVER, that no such supplemental agreement shall, without the consent of
each Lender affected thereby:
(a)Extend the final maturity of any Loan or Note or
reduce the principal amount thereof, or reduce the
rate or extend the time of payment of interest or fees thereon;
(b)Reduce the percentage specified in the definition
of Required Lenders;
(c)Reduce the amount or extend the payment date for
the mandatory payments required under SECTION 2.1(B)
or 2.7, or increase the amount of the Commitment of any Lender hereunder;
(d)Extend the Facility Termination Date or reduce the
amount or extend the time of any mandatory
commitment reduction required by SECTION 2.7;
(e)Amend this SECTION 8.2; or
(f)Permit any assignment by the Borrower of its
Obligations or its rights hereunder.
No amendment of any provision of this Agreement relating to the Agent shall
be effective without the written consent of the
Agent. The Agent may waive payment of the fee required under SECTION 12.3.2
without obtaining the consent of any other party to
this Agreement.
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8.3. PRESERVATION OF RIGHTS. No delay or omission of the
Lenders or the Agent to exercise any right under the
Loan Documents shall impair such right or be construed to be a waiver of any
Default or an acquiescence therein, and the making of a Loan notwithstanding
the existence of a Default or the inability of the Borrower to satisfy the
conditions precedent to such Loan shall not constitute any waiver or
acquiescence. Any single or partial exercise of any such right shall not
preclude other or further exercise thereof or the exercise of any other
right, and no waiver, amendment or other variation of the terms, conditions
or provisions of the Loan Documents whatsoever shall be valid unless in
writing signed by the Lenders required pursuant to SECTION 8.2, and then only
to the extent in such writing specifically set forth. All remedies contained
in the Loan Documents or by law afforded shall be cumulative and all shall be
available to the Agent and the Lenders until the Obligations have been paid
in full.
ARTICLE IX
GENERAL PROVISIONS
9.1. SURVIVAL OF REPRESENTATIONS. All representations and
warranties of the Borrower contained in this
Agreement or of the Borrower or any Subsidiary contained in any Loan Document
shall survive delivery of the Notes and the making of the Loans herein
contemplated.
9.2. GOVERNMENTAL REGULATION. Anything contained in this
Agreement to the contrary notwithstanding, no Lender
shall be obligated to extend credit to the Borrower in violation of any
limitation or prohibition provided by any applicable statute or regulation.
9.3. TAXES. Any taxes (excluding income taxes on the
overall net income of any Lender) or other similar
assessments or charges payable or ruled payable by any governmental authority
in respect of the Loan Documents shall be paid by the Borrower, together with
interest and penalties, if any.
9.4. HEADINGS. Section headings in the Loan Documents are
for convenience of reference only, and shall not
govern the interpretation of any of the provisions of the Loan Documents.
9.5. ENTIRE AGREEMENT. The Loan Documents embody the entire
agreement and understanding among the Borrower, the
Agent and the Lenders and supersede all prior agreements and understandings
among the Borrower, the Agent and the Lenders relating to the subject matter
thereof other than the fee letter dated November 18, 1994 in favor of First
Chicago.
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9.6. SEVERAL OBLIGATIONS; BENEFITS OF THIS AGREEMENT. The
respective obligations of the Lenders hereunder are
several and not joint and no Lender shall be the partner or agent of any
other (except to the extent to which the Agent is authorized to act as such).
The failure of any Lender to perform any of its obligations hereunder shall
not relieve any other Lender from any of its obligations hereunder. This
Agreement shall not be construed so as to confer any right or benefit upon
any Person other than the parties to this Agreement and their respective
successors and assigns.
9.7. EXPENSES; INDEMNIFICATION. The Borrower shall
reimburse the Agent for any reasonable costs, internal
charges and out-of-pocket expenses (including attorneys' fees and time
charges of attorneys for the Agent, which attorneys may be
employees of the Agent) paid or incurred by the Agent in connection with the
preparation, negotiation, execution, delivery, review, amendment,
modification
, and administration of the Loan Documents. The Borrower also agrees to
reimburse the Agent and the Lenders for any costs, internal charges and
out-of
-pocket expenses (including attorneys' fees and time charges of attorneys for
the Agent and the Lenders, which attorneys may be employees of the Agent or
the Lenders) paid or incurred by the Agent or any Lender in connection with
the collection and enforcement of the Loan Documents. The Borrower further
agrees to indemnify the Agent and each Lender, its directors, officers and
employees against all losses, claims, damages, penalties, judgments,
liabilities and expenses (including, without limitation, all expenses of
litigation or preparation therefor whether or not the Agent or any Lender is
a party thereto) which any of them may pay or incur arising out of or
relating to this Agreement and the other Loan Documents, the transactions
contemplated hereby or thereby or the direct or indirect application or
proposed application of the proceeds of any Loan hereunder except to the
extent that they arise out of the gross negligence or willful misconduct of
the party seeking indemnification. The obligations of the Borrower under
this SECTION 9.7 shall survive the termination of this Agreement.
9.8. NUMBERS OF DOCUMENTS. All statements, notices, closing
documents, and requests hereunder shall be
furnished to the Agent with sufficient counterparts so that the Agent may
furnish one to each of the Lenders.
9.9. ACCOUNTING. Except as provided to the contrary herein,
all accounting terms used herein shall be
interpreted and all accounting determinations hereunder shall be made in
accordance with (a)SAP in the case of determinations applicable to the
insurance operations of the Insurance Subsidiaries and (b)
Agreement Accounting Principles in the case of all other determinations.
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9.10. SEVERABILITY OF PROVISIONS. Any provision in any Loan
Document that is held to be inoperative, unenforceable, or invalid in any
jurisdiction shall, as to that jurisdiction, be inoperative, unenforceable,
or invalid without affecting the remaining provisions in that jurisdiction or
the operation, enforceability, or validity of that provision in any other
jurisdiction, and to this end the provisions of all Loan Documents are
declared to be severable.
9.11. NONLIABILITY OF LENDERS. The relationship between the
Borrower and the Lenders and the Agent shall be solely that of borrower and
lender. Neither the Agent nor any Lender shall have any fiduciary
responsibilities to the Borrower. Neither the Agent nor any Lender
undertakes any responsibility to the Borrower to review or inform the
Borrower of any matter in connection with any phase of the Borrower's
business or operations. The Borrower agrees that neither the Agent nor any
Lender shall have liability to the Borrower (whether sounding in tort,
contract or otherwise) for losses suffered by the Borrower in connection
with, arising out of, or in any way related to, the transactions contemplated
and the relationship established by the Loan Documents, or any act, omission
or event occurring in connection therewith, unless it is determined by a
court of competent jurisdiction by final and non-appealable judgment that
such losses resulted from the gross negligence or willful misconduct of the
party from which recovery is sought. Neither the Agent nor any Lender shall
have any liability with respect to, and the Borrower hereby waives, releases
and agrees not to sue for, any special, indirect or consequential damages
suffered by the Borrower in connection with, arising out of, or in any way
related to the Loan Documents or the transactions contemplated thereby.
9.12. CHOICE OF LAW. THE LOAN DOCUMENTS (OTHER THAN THOSE
CONTAINING A CONTRARY EXPRESS CHOICE OF LAW PROVISION) SHALL BE CONSTRUED IN
ACCORDANCE WITH THE INTERNAL LAWS, WITHOUT REGARD TO CONFLICT OF LAWS
PROVISIONS, OF THE STATE OF ILLINOIS, BUT GIVING EFFECT TO FEDERAL LAWS
APPLICABLE TO NATIONAL BANKS.
9.13. CONSENT TO JURISDICTION. THE BORROWER HEREBY IRREVOCABLY
SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR
ILLINOIS STATE COURT SITTING IN CHICAGO IN ANY ACTION OR PROCEEDING ARISING
OUT OF OR RELATING TO ANY LOAN DOCUMENTS AND THE BORROWER HEREBY IRREVOCABLY
AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD
AND DETERMINED IN ANY SUCH COURT AND IRREVOCABLY WAIVES ANY OBJECTION IT MAY
NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING
BROUGHT IN SUCH A COURT OR THAT SUCH COURT IS AN INCONVENIENT FORUM. NOTHING
HEREIN SHALL LIMIT THE RIGHT OF THE AGENT OR ANY LENDER TO BRING PROCEEDINGS
AGAINST THE BORROWER IN THE COURTS OF ANY OTHER JURISDICTION. ANY JUDICIAL
PROCEEDING BY THE
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BORROWER AGAINST THE AGENT OR ANY LENDER OR ANY AFFILIATE OF THE AGENT OR ANY
LENDER INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY ARISING OUT
OF, RELATED TO, OR CONNECTED WITH ANY LOAN DOCUMENT SHALL BE BROUGHT ONLY IN
A COURT IN CHICAGO, ILLINOIS; PROVIDED, THAT SUCH PROCEEDINGS MAY BE BROUGHT
IN OTHER COURTS IF JURISDICTION MAY NOT BE OBTAINED IN A COURT IN CHICAGO,
ILLINOIS.
9.14. WAIVER OF JURY TRIAL. THE BORROWER, THE AGENT AND EACH
LENDER HEREBY WAIVE TRIAL BY JURY IN ANY JUDICIAL PROCEEDING INVOLVING,
DIRECTLY OR INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN TORT, CONTRACT OR
OTHERWISE) IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY LOAN
DOCUMENT OR THE RELATIONSHIP ESTABLISHED THEREUNDER.
9.15. DISCLOSURE. The Borrower and each Lender hereby (a)
acknowledge and agree that First Chicago and/or its Affiliates from time to
time may hold other investments in, make other loans to or have other
relationships with the Borrower, including, without limitation, in connection
with any interest rate hedging instruments or agreements or swap
transactions, and (b) waive any liability of First Chicago or such Affiliate
in connection with the transaction contemplated hereby to the Borrower or any
Lender, respectively, arising out of or resulting from such investments,
loans or relationships other than liabilities arising out of the gross
negligence or willful misconduct of First Chicago or its Affiliates.
9.16. COUNTERPARTS. This Agreement may be executed in any number
of counterparts, all of which taken together shall constitute one agreement,
and any of the parties hereto may execute this Agreement by signing any such
counterpart. This Agreement shall be effective when it has been executed by
the Borrower, the Agent and the Lenders and each party has notified the Agent
by telex or telephone, that it has taken such action.
ARTICLE X
THE AGENT
10.1. APPOINTMENT. First Chicago is hereby appointed Agent
hereunder and under each other Loan Document, and each of the Lenders
authorizes the Agent to act as the agent of such Lender. The Agent agrees to
act as such upon the express conditions contained in this ARTICLE X. The
Agent shall not have a fiduciary relationship in respect of the Borrower or
any Lender by reason of this Agreement.
10.2. POWERS. The Agent shall have and may exercise such powers
under the Loan Documents as are specifically delegated to the Agent by the
terms of each thereof, together with such powers as are reasonably incidental
thereto.
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The Agent shall have no implied duties to the Lenders, or any obligation to
the Lenders to take any action thereunder, except any action specifically
provided by the Loan Documents to be taken by the Agent.
10.3. GENERAL IMMUNITY. Neither the Agent nor any of its
directors, officers, agents or employees shall be liable to the Borrower or
any Lender for any action taken or omitted to be taken by it or them
hereunder or under any other Loan Document or in connection herewith or
therewith except for its or their own gross negligence or willful misconduct.
10.4. NO RESPONSIBILITY FOR LOANS, RECITALS, ETC. Neither the
Agent nor any of its directors, officers, agents or employees shall be
responsible for or have any duty to ascertain, inquire into, or verify (a)
any statement, warranty or representation made in connection with any Loan
Document or any borrowing hereunder, (b) the performance or observance of any
of the covenants or agreements of any obligor under any Loan Document,
including, without limitation, any agreement by an obligor to furnish
information directly to each Lender; (c) the satisfaction of any condition
specified in ARTICLE IV, except receipt of items required to be delivered to
the Agent and not waived at closing, or (d) the validity, effectiveness,
sufficiency, enforceability or genuineness of any Loan Document or any other
instrument or writing furnished in connection therewith. The Agent shall
have no duty to disclose to the Lenders information that is not required to
be furnished by the Borrower to the Agent at such time, but is voluntarily
furnished by the Borrower to the Agent (either in its capacity as Agent or in
its individual capacity).
10.5. ACTION ON INSTRUCTIONS OF LENDERS. The Agent shall in all
cases be fully protected in acting, or in refraining from acting, hereunder
and under any other Loan Document in accordance with written instructions
signed by the Required Lenders (or, to the extent required by SECTION 8.2,
all Lenders), and such instructions and any action taken or failure to act
pursuant thereto shall be binding on all of the Lenders and on all holders of
Notes. The Agent shall be fully justified in failing or refusing to take any
action hereunder and under any other Loan Document unless it shall first be
indemnified to its satisfaction by the Lenders pro rata against any and all
liability, cost and expense that it may incur by reason of taking or
continuing to take any such action.
10.6. EMPLOYMENT OF AGENTS AND COUNSEL. The Agent may execute
any of its duties as Agent hereunder and under any other Loan Document by or
through employees, agents and attorneys-in-fact and shall not be answerable
to the Lenders, except as to money or securities received by it or its
authorized agents, for the default or misconduct of any such agents or
attorneys-in-fact selected by it with reasonable care. The Agent shall be
entitled to advice of counsel concerning all matters pertaining to the agency
hereby created and its duties hereunder and under any other Loan Document.
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10.7. RELIANCE ON DOCUMENTS; COUNSEL. The Agent shall be
entitled to rely upon any Note, notice, consent, certificate, affidavit,
letter, telegram, statement, paper or document believed by it to be genuine
and correct and to have been signed or sent by the proper person or persons,
and, in respect to legal matters, upon the opinion of counsel selected by the
Agent, which counsel may be employees of the Agent.
10.8. AGENT'S REIMBURSEMENT AND INDEMNIFICATION. The Lenders
agree to reimburse and indemnify the Agent ratably in proportion to their
respective Commitments (or, if the Commitments have been terminated, in
proportion to their Commitments immediately prior to such termination) (a)
for any amounts not reimbursed by the Borrower for which the Agent is
entitled to reimbursement by the Borrower under the Loan Documents, (b) for
any other expenses incurred by the Agent, on behalf of the Lenders, in
connection with the preparation, execution, delivery, administration and
enforcement of the Loan Documents, and (c) for any liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements of any kind and nature whatsoever which may be imposed on,
incurred by or asserted against the Agent in any way relating to or arising
out of the Loan Documents or any other document delivered in connection
therewith or the transactions contemplated thereby, or the enforcement of any
of the terms thereof or of any such other documents; PROVIDED, that no Lender
shall be liable for any of the foregoing to the extent they arise from the
gross negligence or willful misconduct of the Agent. The obligations of the
Lenders under this SECTION 10.8 shall survive payment of the Obligations and
termination of this Agreement.
10.9. NOTICE OF DEFAULT. The Agent shall not be deemed to have
knowledge or notice of the occurrence of any Default or Unmatured Default
hereunder unless the Agent has received written notice from a Lender or the
Borrower referring to this Agreement describing such Default or Unmatured
Default and stating that such notice is a "notice of default". In the event
that the Agent receives such a notice, the Agent shall give prompt notice
thereof to the Lenders.
10.10. RIGHTS AS A LENDER. In the event the Agent is a Lender,
the Agent shall have the same rights and powers hereunder and under any other
Loan Document as any Lender and may exercise the same as though it were not
the Agent, and the term "Lender" or "Lenders" shall, at any time when the
Agent is a Lender, unless the context otherwise indicates, include the Agent
in its individual capacity. The Agent may accept deposits from, lend money
to, and generally engage in any kind of trust, debt, equity or other
transaction, in addition to those contemplated by this Agreement or any other
Loan Document, with the Borrower or any of its Subsidiaries in which the
Borrower or such Subsidiary is not restricted hereby from engaging with any
other Person. The Agent, in its individual capacity, is not obligated to
remain a Lender.
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10.11. LENDER CREDIT DECISION. Each Lender acknowledges that it
has, independently and without reliance upon the Agent or any other Lender
and based on the financial statements prepared by the Borrower and such other
documents and information as it has deemed appropriate, made its own credit
analysis and decision to enter into this Agreement and the other Loan
Documents. Each Lender also acknowledges that it will, independently and
without reliance upon the Agent or any other Lender and based on such
documents and information as it shall deem appropriate at the time, continue
to make its own credit decisions in taking or not taking action under this
Agreement and the other Loan Documents.
10.12. SUCCESSOR AGENT. The Agent may resign at any time by
giving written notice thereof to the Lenders and the Borrower, such
resignation to be effective upon the appointment of a successor Agent or, if
no successor Agent has been appointed, forty-five days after the retiring
Agent gives notice of its intention to resign. Upon any such resignation, the
Required Lenders shall have the right to appoint, on behalf of the Borrower
and the Lenders, a successor Agent. If no successor Agent shall have been so
appointed by the Required Lenders and shall have accepted such appointment
within thirty days after the resigning Agent's giving notice of its intention
to resign, then the resigning Agent may appoint, on behalf of the Borrower
and the Lenders, a successor Agent. If the Agent has resigned and no
successor Agent has been appointed, the Lenders may perform all the duties of
the Agent hereunder and the Borrower shall make all payments in respect of
the Obligations to the applicable Lender and for all other purposes shall
deal directly with the Lenders. No successor Agent shall be deemed to be
appointed hereunder until such successor Agent has accepted the appointment.
Any such successor Agent shall be a commercial bank having capital and
retained earnings of at least $50,000,000. Upon the acceptance of any
appointment as Agent hereunder by a successor Agent, such successor Agent
shall thereupon succeed to and become vested with all the rights, powers,
privileges and duties of the resigning Agent. Upon the effectiveness of the
resignation of the Agent, the resigning Agent shall be discharged from its
duties and obligations hereunder and under the Loan Documents. After the
effectiveness of the resignation of an Agent, the provisions of this ARTICLE
X shall continue in effect for the benefit of such Agent in respect of any
actions taken or omitted to be taken by it while it was acting as the Agent
hereunder and under the other Loan Documents.
ARTICLE XI
SETOFF; RATABLE PAYMENTS
11.1. SETOFF. In addition to, and without limitation of, any
rights of the Lenders under applicable law, if the Borrower becomes
insolvent, however evidenced, or any Default or Unmatured Default occurs, any
and all deposits
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(including all account balances, whether provisional or final and whether or
not collected or available) and any other Indebtedness at any time held or
owing by any Lender to or for the credit or account of the Borrower may be
offset and applied toward the payment of the Obligations owing to such
Lender, whether or not the Obligations, or any part hereof, shall then be
due.
11.2. RATABLE PAYMENTS. If any Lender, whether by setoff or
otherwise, has payment made to it upon its Loans (other than payments
received pursuant to SECTIONS 3.1, 3.2 or 3.4) in a greater proportion than
its pro-rata share of such Loans, such Lender agrees, promptly upon demand,
to purchase a portion of the Loans held by the other Lenders so that after
such purchase each Lender will hold its ratable proportion of Loans. If any
Lender, whether in connection with setoff or amounts which might be subject
to setoff or otherwise, receives collateral or other protection for its
Obligations or such amounts which may be subject to setoff, such Lender
agrees, promptly upon demand, to take such action necessary such that all
Lenders share in the benefits of such collateral ratably in proportion to
their Loans. In case any such payment is disturbed by legal process, or
otherwise, appropriate further adjustments shall be made. If an amount to be
setoff is to be applied to Indebtedness of the Borrower to a Lender, other
than Indebtedness evidenced by any of the Notes held by such Lender, such
amount shall be applied ratably to such other Indebtedness and to the
Indebtedness evidenced by such Notes.
ARTICLE XII
BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS
12.1. SUCCESSORS AND ASSIGNS. The terms and provisions of the
Loan Documents shall be binding upon and inure to the benefit of the Borrower
and the Lenders and their respective successors and assigns, except that (a)
the Borrower shall not have the right to assign its rights or obligations
under the Loan Documents, and (b) any assignment by any Lender must be made
in compliance with SECTION 12.3. Notwithstanding CLAUSE (B) of this Section,
any Lender may at any time, without the consent of the Borrower or the Agent,
assign all or any portion of its rights under this Agreement and its Notes to
a Federal Reserve Bank; PROVIDED, HOWEVER, that no such assignment to a
Federal Reserve Bank shall release the transferor Lender from its obligations
hereunder. The Agent may treat the payee of any Note as the owner thereof
for all purposes hereof unless and until such payee complies with SECTION
12.3 in the case of an assignment thereof or, in the case of any other
transfer, a written notice of the transfer is filed with the Agent. Any
assignee or transferee of a Note agrees by acceptance thereof to be bound by
all the terms and provisions of
-59-
the Loan Documents. Any request, authority or consent of any Person, who at
the time of making such request or giving such authority or consent is the
holder of any Note, shall be conclusive and binding on any subsequent holder,
transferee or assignee of such Note or of any Note or Notes issued in
exchange therefor.
12.2. PARTICIPATIONS.
12.2.1. PERMITTED PARTICIPANTS; EFFECT. Any Lender
may, in the ordinary course of its business and in accordance with applicable
law, at any time sell to one or more banks or other entities ("PARTICIPANTS")
participating interests in any Loan owing to such Lender, any Note held by
such Lender, any Commitment of such Lender or any other interest of such
Lender under the Loan Documents. In the event of any such sale by a Lender
of participating interests to a Participant, such Lender's obligations under
the Loan Documents shall remain unchanged, such Lender shall remain solely
responsible to the other parties hereto for the performance of such
obligations, such Lender shall remain the holder of any such Note for all
purposes under the Loan Documents, all amounts payable by the Borrower under
this Agreement shall be determined as if such Lender had not sold such
participating interests, and the Borrower and the Agent shall continue to
deal solely and directly with such Lender in connection with such Lender's
rights and obligations under the Loan Documents.
12.2.2. VOTING RIGHTS. Each Lender shall retain the
sole right to approve, without the consent of any Participant, any amendment,
modification or waiver of any provision of the Loan Documents other than any
amendment, modification or waiver which effects any of the modifications
referenced in clauses (a), (c) and (d) of SECTION 8.2.
12.2.3. BENEFIT OF SETOFF. The Borrower agrees that
each Participant shall be deemed to have the right of setoff provided in
SECTION 11.1 in respect of its participating interest in amounts owing under
the Loan Documents to the same extent as if the amount of its participating
interest were owing directly to it as a Lender under the Loan Documents;
PROVIDED, that each Lender shall retain the right of setoff provided in SECTION
11.1 with respect to the amount of participating interests sold to each
Participant. The Lenders agree to share with each Participant, and each
Participant, by exercising the right of setoff provided in SECTION 11.1,
agrees to share with each Lender, any amount received pursuant to the
exercise of its right of setoff, such amounts to be shared in accordance with
SECTION 11.2 as if each Participant were a Lender.
12.3. ASSIGNMENTS.
12.3.1. PERMITTED ASSIGNMENTS. Any Lender may, in
the ordinary course of its business and in accordance with applicable law, at
any time assign to one or more banks or other entities ("PURCHASERS") all or
any part of its
-60-
rights and obligations under the Loan Documents; provided, however, that in
the case of an assignment to an entity which is not a Lender or an Affiliate
of a lender, such assignment shall be in a minimum amount of $5,000,000. Such
assignment shall be substantially in the form of EXHIBIT E hereto or in such
other form as may be agreed to by the parties thereto. The consent of the
Agent and, prior to the occurrence of any Default, the Borrower, shall be
required prior to an assignment becoming effective with respect to a
Purchaser which is not a Lender or an Affiliate thereof. Such consent shall
not be unreasonably withheld.
12.3.2. EFFECT; EFFECTIVE DATE. Upon (a) delivery to
the Agent of a notice of assignment, substantially in the form attached as
Exhibit I to EXHIBIT E hereto (a "NOTICE OF ASSIGNMENT"), together with any
consents required by SECTION 12.3.1, and (b) payment of a $2,500 fee to the
Agent for processing such assignment, such assignment shall become effective
on the effective date specified in such Notice of Assignment. On and after
the effective date of such assignment, (a) such Purchaser shall for all
purposes be a Lender party to this Agreement and any other Loan Document
executed by the Lenders and shall have all the rights and obligations of a
Lender under the Loan Documents, to the same extent as if it were an original
party hereto, and (b) the transferor Lender shall be released with respect to
the percentage of the Aggregate Revolving Credit Commitment and Loans
assigned to such Purchaser without any further consent or action by the
Borrower, the Lenders or the Agent. Upon the consummation of any assignment
to a Purchaser pursuant to this SECTION 12.3.2, the transferor Lender, the
Agent and the Borrower shall make appropriate arrangements so that
replacement Notes are issued to such transferor Lender and new Notes or, as
appropriate, replacement Notes, are issued to such Purchaser, in each case in
principal amounts reflecting their Revolving Credit Commitment, as adjusted
pursuant to such assignment.
12.4. DISSEMINATION OF INFORMATION. The Borrower authorizes
each Lender to disclose to any Participant or Purchaser or any other Person
acquiring an interest in the Loan Documents by operation of law (each a
"TRANSFEREE") and any prospective Transferee any and all information in such
Lender's possession concerning the creditworthiness of the Borrower and its
Subsidiaries.
12.5. TAX TREATMENT. If any interest in any Loan Document is
transferred to any Transferee which is organized under the laws of any
jurisdiction other than the United States or any State thereof, the
transferor Lender shall cause such Transferee, concurrently with the
effectiveness of such transfer, to comply with the provisions of SECTION 2.18.
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ARTICLE XIII
NOTICES
13.1. GIVING NOTICE. Except as otherwise permitted by SECTION
2.13 with respect to borrowing notices, all notices and other communications
provided to any party hereto under this Agreement or any other Loan Document
shall be in writing, by facsimile, first class U.S. mail or overnight courier
and addressed or delivered to such party at its address set forth below its
signature hereto or at such other address as may be designated by such party
in a notice to the other parties. Any notice, if mailed and properly
addressed with first class postage prepaid, return receipt requested, shall
be deemed given three (3) Business Days after deposit in the U.S. mail; any
notice, if transmitted by facsimile, shall be deemed given when transmitted;
and any notice given by overnight courier shall be deemed given when received
by the addressee.
13.2. CHANGE OF ADDRESS. The Borrower, the Agent and any Lender
may each change the address for service of notice upon it by a notice in
writing to the other parties hereto.
[signature pages to follow]
-62-
IN WITNESS WHEREOF, the Borrower, the Lenders and the Agent have
executed this Agreement as of the date first above
written.
FINANCIAL CORPORATION
By:
Print Name:
Title:
Address: 415 Southwest 8th Avenue
P.O. Box 2039
Topeka, Kansas 66601
Attn: Lynn F. Hammes
Telecopy: (913) 232-3594
Telephone: (913) 232-6945
COMMITMENTS
$12,500,000 THE FIRST NATIONAL BANK OF CHICAGO,
Individually and as Agent
By:
Print Name: Cynthia W. Priest
Title: Vice President
Address: One First National Plaza
Chicago, Illinois 60670
Attn: Cynthia W. Priest
Telecopy: (312) 732-4033
Telephone: (312) 732-9565
-63-
$12,500,000 BOATMEN'S FIRST NATIONAL BANK OF KANSAS CITY
By:
Print Name: Barry P. Sullivan
Title: Vice President
Address: 14 West Tenth Street
5th Floor
Kansas City, Missouri
64105
Attn: Barry P. Sullivan
Telecopy: (816)
691-7426
Telephone: (816) 691-7569
Aggregate Initial
Commitment $25,000,000
-64-
NOTE
$12,500,000 Chicago, Illinois
December 29, 1994
FOR VALUE RECEIVED, AMVESTORS FINANCIAL CORPORATION, a
Kansas corporation (the "Borrower"), HEREBY PROMISES TO PAY to the order of
BOATMEN'S FIRST NATIONAL BANK OF KANSAS CITY (the "Lender") the principal sum
of Twelve Million Five Hundred Thousand United States Dollars ($12,500,000)
or, if less, the aggregate unpaid principal amount of the Loans made by the
Lender to the Borrower pursuant to Section 2.1 of the Credit Agreement (as
hereinafter defined), on or before the Facility Termination Date; together,
in each case, with interest on any and all principal amounts remaining unpaid
hereunder from time to time. Interest upon the unpaid principal amount
hereof shall accrue at the rates, shall be calculated in the manner and shall
be payable on the dates set forth in the Credit Agreement. After maturity,
whether by acceleration or otherwise, accrued interest shall be payable upon
demand. Both principal and interest shall be payable in accordance with the
Credit Agreement to The First National Bank of Chicago, as Agent (the
"Agent") on behalf of the Lender, at its main office in Chicago, Illinois in
immediately available funds. The Loans made by the Lender to the Borrower
pursuant to the Credit Agreement and all payments on account of principal
here of shall be recorded by the Lender and, prior to any transfer thereof,
endorsed on SCHEDULE A attached hereto which is part of this Note or
otherwise in accordance with its usual practices; PROVIDED, HOWEVER, that the
failure to so record shall not affect the Borrower's obligations under this
Note.
This Note is a Note referred to in, and is entitled to
the benefits of, the Credit Agreement dated as of December 29, 1994 by and
among the Borrower, the financial institutions signatory thereto (including
the Lender) and the Agent (as amended, modified, restated or supplemented
from time to time, the "Credit Agreement") and the other Loan Documents.
Capitalized terms used but not otherwise defined herein shall have the
respective meanings ascribed thereto in the Credit Agreement. The Credit
Agreement, among other things, contains provisions for acceleration of the
maturity hereof upon the happening of certain stated events and also for
prepayments on account of principal hereof prior to the maturity hereof upon
the terms and conditions therein specified.
The Borrower hereby waives presentment, demand, protest
or notice of any kind in connection with this Note.
THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE INTERNAL LAWS, WITHOUT REGARD TO CONFLICT OF LAWS
PROVISIONS, AND DECISIONS OF THE STATE OF ILLINOIS BUT GIVING EFFECT TO
FEDERAL LAWS APPLICABLE TO NATIONAL BANKS.
AMVESTORS FINANCIAL CORPORATION
By:
Title:
SCHEDULE A
Note
dated December 29, 1994
payable to the order of
Boatmen's First National Bank of Kansas City
PRINCIPAL PAYMENTS
Amount of Amount of Unpaid
Principal Principal Principal Notation
DATE BORROWED -REPAID BALANCE- MADE BY-
NOTE
$12,500,000 Chicago, Illinois
December 29, 1994
FOR VALUE RECEIVED, AMVESTORS FINANCIAL CORPORATION, a
Kansas corporation (the "Borrower"), HEREBY PROMISES TO PAY to the order of
THE FIRST NATIONAL BANK OF CHICAGO (the "Lender") the principal sum of Twelve
Million Five Hundred Thousand United States Dollars ($12,500,000) or, if
less, the aggregate unpaid principal amount of the Loans made by the Lender
to the Borrower pursuant to Section 2.1 of the Credit Agreement (as
hereinafter defined), on or before the Facility Termination Date; together,
in each case, with interest on any and all principal amounts remaining unpaid
hereunder from time to time. Interest upon the unpaid principal amount
hereof shall accrue at the rates, shall be calculated in the manner and shall
be payable on the dates set forth in the Credit Agreement. After maturity,
whether by acceleration or otherwise, accrued interest shall be payable upon
demand. Both principal and interest shall be payable in accordance with the
Credit Agreement to The First National Bank of Chicago, as Agent (the
"Agent") on behalf of the Lender, at its main office in Chicago, Illinois in
immediately available funds. The Loans made by the Lender to the Borrower
pursuant to the Credit Agreement and all payments on account of principal
hereof shall be recorded by the Lender and, prior to any transfer thereof,
endorsed on SCHEDULE A attached hereto which is part of this Note or
otherwise in accordance with its usual practices; PROVIDED, HOWEVER, that the
failure to so record shall not affect the Borrower's obligations under this
Note.
This Note is a Note referred to in, and is entitled to
the benefits of, the Credit Agreement dated as of December 29, 1994 by and
among the Borrower, the financial institutions signatory thereto (including
the Lender) and the Agent (as amended, modified, restated or supplemented
from time to time, the "Credit Agreement") and the other Loan Documents.
Capitalized terms used but not otherwise defined herein shall have the
respective meanings ascribed thereto in the Credit Agreement. The Credit
Agreement, among other things, contains provisions for acceleration of the
maturity hereof upon the happening of certain stated events and also for
prepayments on account of principal hereof prior to the maturity hereof upon
the terms and conditions therein specified.
The Borrower hereby waives presentment, demand, protest
or notice of any kind in connection with this Note.
THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE INTERNAL LAWS, WITHOUT REGARD TO
CONFLICT OF LAWS PROVISIONS, AND DECISIONS OF THE STATE OF ILLINOIS BUT
GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS.
AMVESTORS FINANCIAL CORPORATION
By:
Title:
SCHEDULE A
Note
dated December 29, 1994
payable to the order of
The First National Bank of Chicago
PRINCIPAL PAYMENTS
Amount of Amount of Unpaid
Principal Principal Principal Notation
DATE BORROWED -REPAID BALANCE- MADE BY-
EX-10.J
4
1994 STOCK PURCHASE PLAN FOR NON-EMPLOYEE DIRECTORS
ARTICLE I - PURPOSE OF PLAN AND CERTAIN DEFINED TERMS
1.1 PURPOSE OF PLAN. AmVestors Financial Corporation (the
"Company") has adopted the 1994 Stock Purchase Plan for Non-Employee
Directors (the "Plan") to provide Non-Employee Directors with an increased
equity interest in the Company in order to attract and retain well-qualified
individuals to serve as Non-Employee Directors and to enhance the identity of
interests between Non-Employee Directors and the stockholders of the Company.
1.2 CERTAIN DEFINED TERMS. Whenever used in this Plan, the
following defined terms shall have the meanings set forth below.
(a) "Election" means an election to purchase Stock
under the Plan on a Purchase Date in lieu of receiving
Fees.
(b) "Election Date" means July 20th and January 20th.
(c) "Fair Market Value" means, when used with respect
to a share of Stock, the average of the high and
low prices at which the Stock was sold on the relevant date, or if there were
no trades on such date, then the last day traded immediately prior to the
relevant date, as reported on the National Association of Securities Dealers
Automated Quotations ("NASDAQ") National Market System. If the Stock is not
reported on the NASDAQ National Market System, Fair Market Value shall mean
the average of the highest and lowest quoted selling prices for the Stock on
the relevant date, or, if there were no trades on such date, then the last
day traded immediately prior to the relevant date, as reported in the New
York Stock Exchange - Composite Transactions by the Wall Street Journal, or,
if the Stock is not listed on the New York Stock Exchange, as reported on
such other principal United States securities exchange registered under the
Securities Exchange Act of 1934 (the "1934 Act") on which the Stock is
listed.
(d) "Fees" means annual and per meeting attendance
fees received for service on the Board of Directors
and Committees of the Board of Directors.
(e) "Non-Employee Director" means a member of the
Board of Directors of the Company who is not an
employee of the Company or any of its affiliates or subsidiaries.
(f) "Participant" means any Non-Employee Director who
has made an Election.
(g) "Purchase Date" means the last business day in
the month of July or the month of January, immediately
following the
expiration of a period of six months beginning on the date of a
Participant's Election.
(f) "Stock" means the Company's Common Stock, no par
value per share.
ARTICLE II - ELIGIBILITY AND PARTICIPATION
Only Non-Employee Directors shall be eligible to participate in
the Plan, and participation in the Plan is subject to irrevocable Elections
as set forth hereinafter.
ARTICLE III - TERMS AND CONDITIONS
3.1 ELECTIONS. Commencing on the effective date of the Plan,
on or before each Election Date, each Participant
may provide the Company with an Election covering all or any portion of his
or her Fees earned during the period commencing on the last business day of
the month of the applicable Election Date and ending on the applicable
Purchase Date. Participants shall submit Elections to the Company in
writing. Each Election shall set forth the portion of the Fees that is to be
covered by the Election (the "Purchase Amount"). Elections shall be
irrevocable as of the applicable Election Date. The Company shall withhold
the Purchase Amount from Fees earned by such Participant during the period
commencing on the last business day of the month of the applicable Election
Date and ending on the applicable Purchase Date. No interest shall be paid
on amounts withheld from a Participant's Fees pending the purchase of Stock
on a Purchase Date.
3.2 PURCHASES OF STOCK. The Purchase Amount shall
automatically be used to purchase Stock from the Company on the
applicable Purchase Date. The number of shares of Stock to be purchased
pursuant to an Election shall be determined by dividing the Purchase Amount
by the Fair Market Value of a share of Stock on the Purchase Date. The price
per share shall be the Fair Market Value on the Purchase Date and shall be
payable to the Company solely from the Purchase Amount. Notwithstanding the
foregoing, only whole numbers of shares of Stock may be purchased under the
Plan. To the extent the Purchase Amount is not used toward the purchase of
Stock on any Purchase Date, that portion of the Purchase Amount will be
returned to the Participant.
ARTICLE IV - DELIVERY OF STOCK CERTIFICATES
The Company shall issue and deliver a certificate representing
shares of Stock purchased under the Plan to the Participant as soon as
practicable following the Purchase Date. The Company may legend the
certificates
delivered in accordance herewith to give appropriate notice of any
restrictions on the shares of Stock represented by such certificates,
including, without limitation, restrictions under Federal or state securities
laws.
ARTICLE V - SHARES AVAILABLE UNDER PLAN
The aggregate number of shares of Stock that may be purchased
under the Plan shall not exceed one hundred thousand (100,000) shares, unless
such number of shares is adjusted as provided in Article VIII of this Plan.
ARTICLE VI - TERMINATION OF DIRECTOR STATUS
If a Participant ceases to be a director of the Company for any
reason following the delivery of an Election to the Company but prior to the
next Purchase Date, then the Election shall cease to be effective and any
amounts withheld from such Participant's Fees pursuant to the Election shall
be paid to such Participant in cash as soon as practicable.
ARTICLE VII - RIGHTS AS A STOCKHOLDER
A Participant shall have no rights as a stockholder of the
Company with respect to any shares of Stock until the shares are purchased
under the Plan.
ARTICLE VIII - ADJUSTMENT UPON CHANGES IN CAPITALIZATION
In the event of a stock dividend, stock split or combination,
reclassification, recapitalization or other capital adjustment of shares of
Stock, the maximum number of shares of Stock that may be purchased under the
Plan shall be proportionately adjusted to account for the change. No
fractional shares of Stock shall be issued under the Plan on account of any
adjustment specified herein.
ARTICLE IX - TERMINATION AND AMENDMENT OF PLAN
The Board of Directors of the Company may at any time terminate,
suspend or amend this Plan; PROVIDED that no such amendment which requires
stockholder approval in order for the Plan to continue to comply with Rule
16b-3 under the 1934 Act (including any successor to such Rule) shall become
effective unless such amendment shall be approved by the stockholders of the
Company.
ARTICLE X - GOVERNMENT REGULATIONS
10.1 LIMITATION ON OBLIGATIONS TO ISSUE STOCK. The obligations
of the Company under this Plan shall be subject to all applicable laws, rules
and regulations and the obtaining of all such approvals by governmental
agencies as may be deemed necessary or appropriate by the Board of Directors
of the Company.
10.2 CERTAIN NECESSARY OR APPROPRIATE CHANGES. Except as
otherwise provided in Article IX of this Plan, the Board of Directors of the
Company may make such changes as may be necessary or appropriate to comply
with the rules and regulations of any governmental authority.
ARTICLE XI - MISCELLANEOUS
11.1 UNFUNDED PLAN. The Plan shall be unfunded with respect to
the Company's obligations hereunder, and a
Participant's rights to receive any payment hereunder shall be not greater
than the rights of an unsecured general creditor of the Company.
11.2 NON-TRANSFERABILITY; ENCUMBRANCES. A Participant may not
make any transfer (including, but not limited to,
assignment, pledge or hypothecation) of his or her rights under the Plan. An
Election and the purchase of Stock under this Plan may only be made by a
Participant during such Participant's tenure as a Non-Employee Director. Any
attempt to assign, transfer or hypothecate any right under the Plan shall be
void and of no force and effect whatsoever.
11.3 APPLICABLE LAW. The validity, interpretation and
administration of this Plan and any rules, regulations,
determinations or decisions made hereunder, and the rights of any and all
persons having or claiming to have any interest herein or hereunder, shall be
determined exclusively in accordance with the laws of the State of Kansas,
without regard to the choice of laws provisions thereof.
11.4 HEADINGS. The headings in this Plan are for reference
purposes only and shall not affect the meaning or
interpretation of this Plan.
11.5 SECURITIES LAW COMPLIANCE. Transactions under this Plan
are intended to comply with all applicable conditions or Rule 16b-3 or its
successors under the 1934 Act. To the extent any provision of this Plan or
action hereunder by the Board of Directors fails to so comply, it shall be
deemed null and void, to the extent permitted by law and deemed advisable by
the Board of Directors.
11.6 NOTICES. All notices or other communications given
pursuant to this Plan shall be in writing and shall be
sufficiently given if hand-delivered or mailed by certified mail, addressed
to any Participant at the address contained in the records of the Company or
to the Company at its principal office.
ARTICLE XII - EFFECTIVE DATE OF PLAN
This Plan shall become effective on the date on which it was
adopted by the Board of Directors of the Company (February 24, 1994);
PROVIDED
that it is approved by the affirmative vote of the holders of a majority of
the votes of the holders of the Stock present, or represented, and entitled
to vote, at a meeting of the stockholders of the Corporation duly held in
accordance with the laws of the State of Kansas on or before February 1,
1995.
EX-10.K
5
INCENTIVE COMPENSATION PLAN
I. Purpose and Effective Date. The purpose of this Incentive
Compensation Plan ["Plan"] is to provide certain designated
employees of AmVestors Financial Corporation ["AmVestors"],
American Investors Life Insurance Company, Inc. ["AILICO"] and/or
their affiliates [collectively referred to as "the Company" for
purposes of this Plan only] with the opportunity to earn
additional or bonus compensation based upon the financial
performance of the Company during each calendar year in which
this Plan remains in force and effect. This Plan shall be
effective for the calendar year 1994 and shall continue thereafter
until terminated by the AmVestors and/or AILICO.
II. Incentive Compensation. During each calendar year of their
respective employment with the Company, the following designated
officers shall be entitled to earn incentive or bonus compensation
based upon the annual financial performance of AmVestors and/or
AILICO: the Executive Vice President for Corporate Development of
AmVestors; the Chief Actuary of AILICO; the Chief Financial
Officer of AILICO; and the Chief Investment Officer of AILICO.
These designated officers shall be entitled to receive such
compensation if one or more specified performance objectives have
been fulfilled and the conditions of this Plan are otherwise
satisfied.
(a) Peformance Objectives. During each calendar
year of their respective employment with AmVestors and/or AILICO,
the officers designated above shall be entitled to incentive or
bonus compensation if AmVestors and/or AILICO, as applicable,
-1-
meet one or more performance goals or objectives for the calendar
year as a whole. These objectives may include, without
limitation, the following: (i) AmVestors achieves a return on
equity equal to or greater than 13%; (ii) AmVestors achieves asset
growth equal to or greater than 15%; (iii) AmVestors realizes a
total return on its own common stock equal to or greater than the
total return reported in the Standard & Poor Life Index for the
life insurance industry that year; (iv) AmVestors' core operating
earnings are equal to or greater than the reported expectations of
market analysts as of April 1st of the calendar year; (v) AILICO
receives premiums and annuity consideration before reinsurance
equal to or greater than $300 million; (vi) AmVestors realizes
and/or maintains a gross margin equal to or greater than 200 basis
points ["BP"]; and (vi) AmVestors incurs total expenses equal to
or less than 100 basis points ["BP"].
(b) Definitions For purposes of this section:
(i) "return on equity" shall be stated as a percentage derived
from net income divided by average shareholder's equity for the
calendar year; (ii) "asset growth" shall be stated as a percentage
derived from total assets as of December 31st of the calendar year
minus total assets as of December 31st of the preceding calendar
year divided by total assets as of December 31st of the preceding
calendar year; (iii) "total return on its own common stock" shall
be calculated using the same factors and metholodology as the
Standard & Poor Life Index, including stock appreciation and
dividends per share, if any, during the calendar year; (iv) "core
operating earnings" shall be derived from the corresponding entry
-2-
on Form 10K of AmVestors' annual report to the shareholders; (v)
"the reported expectations of market analysts" means any published
forecast(s) of future financial performance deemed to be reliable
by AmVestors' Board of Directors in its sole discretion; (vi)
"premiums and annuity consideration before reinsurance" shall be
derived from AILICO's annual statement filed with the Kansas
Insurance Department; (vii) "gross margin" shall be derived from
the corresponding entry in the margin analysis on Form 10K of
AmVestors' annual report to the shareholders; and (viii) "total
expenses" means general insurance expenses and amortization of
deferred acquisition cost ["DAC"] associated with core operating
earnings stated as a percentage of average invested assets for the
calendar year.
(c) Incentive or Bonus Compensation Formula.
Incentive or bonus compensation for each designated officer shall
be calculated by multiplying the percentage of his or her annual
base salary for the calendar year ["base"] specified below times
the ratio of performance objective points earned divided by total
performance objective points possible.
For purposes of this formula, the applicable
percentage of base for each officer shall be as follows:
Executive Vice President for Corporate Development of AmVestors -
50%; Chief Actuary of AILICO - 35%; Chief Financial Officer of
AILICO - 50%; and Chief Investment Officer - 75%. In the event
that a person occupies two or more of these positions
simultaneously for at least nine (9) months of any calendar year
for which incentive or bonus compensation may be due, the highest
-3-
applicable percentage of base shall be utilized in the calculation
and any other percentage shall be disregarded. Percentages of
base shall not in any event be combined to produce a higher
cumulative percentage.
For purposes of this formula, performance
objectives for the Executive Vice President for Corporate
Development of AmVestors and the Chief Actuary of AILICO are
assigned with point values as follows:
Objective Points
AmVestors Return on Equity > 13% . . . . . . 1
AmVestors Asset Growth > 15% . . . . . . . . 1
AmVestors Core Operating Earnings
> Analyst Expectations . . . . . . . . . . 1
AILICO Premiums & Annuity
Consideration > $300 Million . . . . . . . 1
AmVestors Gross Margin > 200 BP . . . . . . . 0.5
AmVestors Total Expenses
< 100 BP . . . . . . . . . . . . . . . . . 0.5
for a total of 5.0 performance objective points possible each year
in which such criteria are utilized.
Performance objectives for the Chief Financial Officer
and Chief Investment Officer are assigned with point values as
follows:
Objective Points
AmVestors Return on Equity > 13% . . . . . . 1
AmVestors Asset Growth > 15% . . . . . . . . 1
AmVestors Core Operating Earnings
> Analyst Expectations . . . . . . . . . . 1
AmVestors Gross Margin > 200 BP . . . . . . . 0.5
-4-
AmVestors Total Expenses
< 100 BP . . . . . . . . . . . . . . . . . 0.5
for a total of 4.0 performance objective points possible each year
in which such criteria are utilized.
For purposes of this formula, the
multiplication ratio shall be expressed as a fractional amount in
which the total objective points earned serves as the numerator
and the total objective points possible serves as the denominator.
If no performance objectives are achieved for the calendar year as
a whole, however, no points are earned and no additional or bonus
compensation shall be due.
(d) Modification of Performance Measures and Point
Values. During the first ninety (90) days of calendar year 1995
and each calendar year thereafter as deemed appropriate, the Board
of Directors of the Company, in consultation with its Chairman of
the Board and Chief Executive Officer, and the Compensation
Committee, is authorized in its sole discretion to amend, modify
and/or supplement the performance goals or objectives and/or
percentages of base set forth in subsections (a) and (b) above,
and to assign relative point values to all such performance goals
or objectives, for the purpose of determining the eligibility of
designated officers for incentive or bonus compensation and
calculating its amount, and any such amendments or modifications
shall be effective as of January 1st of any calendar year in which
the action is taken.
(e) Allocation and Payment of Additional or Bonus
Compensation. The total amount of any incentive or bonus
compensation which may be otherwise due in accordance with this
-5-
section for any calendar year of employment shall be allocated, in
the sole discretion of the Company's Chairman of the Board and
Chief Executive Officer, as a cash bonus, salary bonus or
combination thereof to be paid during the next succeeding calendar
year as follows: (i) any cash bonus amount shall be paid in a
lump sum within ten (10) days following receipt of the certified
audit report for the calendar year in which objective points were
earned, but no later than April 15th; and (ii) any salary bonus
amount shall be paid in equal bi-monthly installments from April
15th through December 31st except as otherwise provided herein.
(f) Entitlement to and Forfeiture of Additional or
Bonus Compensation Under Prescribed Circumstances.
In the event that the employment of any
designated officer is terminated due to death or disability at any
time prior to December 31st of any calendar year, his or her
personal representative(s): shall be entitled to receive a lump
sum payment equal to the full amount of any cash bonus and/or
salary bonus that would otherwise have been due or owing to him or
her for the remainder of such calendar year, which shall be paid
within thirty (30) days of death or disability; and, if such
officer was employed at least eleven (11) months during the
calendar year of death or diability, a lump sum payment equal to
the full amount of any cash bonus and/or salary bonus that would
otherwise have been due or owing to him or her during the next
succeeding calendar year, which shall be paid within ten (10) days
following receipt of the certified audit report for the calendar
year of death or disability.
-6-
In the event that the employment of any designated
officer is terminated for any reason other than death or
disability prior to December 31st of any calendar year, such
officer shall forfeit his or her right to any unpaid salary bonus
through the remainder of the calendar year of termination, and
such officer shall not be entitled to receive any cash bonus or
salary bonus that would have otherwise been due or owing to him or
her under this Plan at any time during the calendar year following
such termination.
-7-
EX-11
6
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES EXHIBIT 11
CALCULATION OF EARNINGS (LOSS) PER SHARE
(000's Omitted, except per share data)
For the Year Ended December 31,
1994 1993 1992 1991 1990
CALCULATION OF PRIMARY
EARNINGS (LOSS) PER SHARE
Net earnings (loss)
applicable to common shares:
Net earnings (loss).......... $ 13,693 17,978 16,818 10,119 (17,719)
Less dividends accrued on
preferred stock................ - (236) (278) - -
Earnings (loss) for primary
earnings per share... $ 13,693 17,742 16,540 10,119 (17,719)
Average number of common
shares and common share
equivalents outstanding:
Average number of common
shares outstanding............ 10,140 6,595 5,618 5,508 5,508
Dilutive effect of stock
options and warrants after
application of treasury
stock method......... 201 265 152 - -
10,341 6,860 5,770 5,508 5,508
Primary earnings (loss)
per share............ $ 1.32 2.59 2.87 1.84 (3.22)
CALCULATION OF FULLY DILUTED
EARNINGS (LOSS) PER SHARE
Net earnings (loss)
applicable to common shares
on a fully diluted basis:
Earnings (loss) for fully
diluted earnings per share.... $ 13,693 17,978 16,818 10,119 (17,719)
Average number of common
shares outstanding on a
fully diluted basis:
Shares used in calculating
primary earnings per share....... 10,341 6,860 5,770 5,508 5,508
Shares resulting from assumed
conversion of preferred
stock................ - 455 562 2 -
Additional dilutive effect of
stock options and warrants
after application of treasury
stock method............... - - 235 - -
10,341 7,315 6,567 5,510 5,508
Fully diluted earnings
(loss) per share..... $ 1.32 2.46 2.56 1.84 (3.22)
EX-23
7
INDEPENDENT AUDITORS' CONSENT
_____________________________
Exhibit 23
We consent to the incorporation by reference in Registration
Statements No. 33-31155,
No. 33-56011, No. 33-52969 and No. 33-71952 on Form S-8 of AmVestors
Financial Corporation of our report dated March 29, 1995, appearing in this
Annual Report on Form 10-K of AmVestors Financial Corporation and
subsidiaries for the year ended December 31, 1994.
/s/Deloitte & Touche LLP
____________________________
Kansas City, Missouri
March 29, 1995
EX-27
8
ARTICLE 7 FDS FOR 10-K
7
1,000
YEAR
DEC-31-1994
DEC-31-1994
607,046
1,237,185
1,145,692
2,356
0
0
1,903,649
10,621
149,656
148,871
2,260,021
2,148,763
0
0
2,983
0
12,769
0
0
91,427
2,260,021
6,331
142,009
803
557
112,310
9,026
9,078
19,286
5,593
13,693
0
0
0
13,693
1.32
1.32
0
0
0
0
0
0
0