-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MwUmwfUMGlMWreKUWHP6ejsKBA5hLMdiIi5jYn0JfHC1lGKPDGYkv3gPSUxcXxT4 TyyON37t/+G0NMyvoE1yIQ== 0000005320-96-000025.txt : 19960816 0000005320-96-000025.hdr.sgml : 19960816 ACCESSION NUMBER: 0000005320-96-000025 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960814 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMVESTORS FINANCIAL CORP CENTRAL INDEX KEY: 0000005320 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 481021516 STATE OF INCORPORATION: KS FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11401 FILM NUMBER: 96612336 BUSINESS ADDRESS: STREET 1: 415 SOUTHWEST 8TH AVE STREET 2: P O BOX 2039 CITY: TOPEKA STATE: KS ZIP: 66601 BUSINESS PHONE: 9132333600 MAIL ADDRESS: STREET 1: 415 SOUTHWEST 8TH AVE STREET 2: P O BOX 2039 CITY: TOPEKA STATE: KS ZIP: 66601 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN INVESTORS LIFE INSURANCE CO INC DATE OF NAME CHANGE: 19860921 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Six Months Ended June 30, 1996 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 ________________ Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the close of the period covered by this report. Class Outstanding June 30, 1996 Common Stock, no par value 12,870,203 shares AMVESTORS FINANCIAL CORPORATION INDEX PART I. Financial Information: Page Number Consolidated Balance Sheets- June 30, 1996 and December 31, 1995 2-3 Consolidated Statement of Earnings- Six months ended June 30, 1996 and 1995 4 Consolidated Statements of Earnings- Three months ended June 30, 1996 and 1995 5 Consolidated Statements of Stockholders' Equity- Twelve months ended December 31, 1995 and Six months ended June 30, 1996 6 Consolidated Statements of Cash Flows- Six months ended June 30, 1996 and 1995 7-8 Notes to Consolidated Financial Statements 9-27 Management's Discussion and Analysis of Financial Condition and Results of Operations 27-34 PART II. Other Information 34-38 1 AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS June 30, 1996 and December 31, 1995 (000's Omitted) (Unaudited)
ASSETS 1996 1995 ______________________________________ _______________ _____________ Investments: Debt securities: Bonds: Available-for-sale (cost: $2,563,280 and $1,947,777)............................. $ 2,573,421 2,044,606 Trading (cost: $6,834 and $1,489)..... 6,787 1,485 2,580,208 2,046,091 Equity securities: Common stock: Available-for-sale (cost: $2,220 and $1,047). 2,106 1,181 Preferred stock: Available-for-sale (cost: $25,462 and $7,566)....................... 25,824 7,733 Trading (cost: $2,573 and $619)...... 2,731 629 30,661 9,543 Other long-term investments........... 41,327 39,491 Short-term investments................... 580 436 Total investments................... 2,652,776 2,095,561 Cash and cash equivalents............... 9,407 48,281 Accounts receivable (net of allowance for uncollectible accounts of $876 and $739).................. 823 454 Amounts receivable under reinsurance agreements... 252,410 146,618 Amounts receivable on securities settlements in process..................... 10,313 10,873 Accrued investment income....................... 37,371 29,357 Deferred cost of policies produced........... 177,901 140,476 Deferred cost of policies purchased.............. 43,584 - Deferred income taxes............................ 1,711 - Other assets.................................... 24,125 4,584 Total assets......................... $ 3,210,421 2,476,204
See notes to consolidated financial statements. 2 AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS June 30, 1996 and December 31, 1995 (000's Omitted, except per share data) (Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995 ______________________________________ _______________ _____________ Liabilities: Policy liabilities: Future policy benefits........... $ 2,976,738 2,259,028 Other policy liabilities............... 5,392 7,312 2,982,130 2,266,340 Notes payable....................... 35,000 7,000 Amounts due on securities settlements in process........................ 2,960 1,438 Deferred income taxes................. - 22,901 Accrued expenses and other liabilities.. 9,866 4,080 Total liabilities................... 3,029,956 2,301,759 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 - 12,918,379 shares in 1996 and 10,140,738 shares in 1995......................... 16,438 12,904 Paid in capital.................. 98,753 64,284 Unrealized investment gains (losses)(net of deferred cost of policies produced amortization expense (benefit) of $2,740 and $27,327 and deferred income tax expense (benefit) of $2,673 and $24,431).......................... 4,976 45,372 Retained earnings........................ 63,361 54,714 183,528 177,274 Less treasury stock.................. (234) - Less leveraged employee stock ownership trust (LESOP) .............................. (2,829) (2,829) Total stockholders' equity............. 180,465 174,445 Total liabilities and stockholders' equity.. $3,210,421 2,476,204
See notes to consolidated financial statements. 3 AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS Six months ended June 30, 1996 and 1995 (000's Omitted, except per share data) (Unaudited) 1996 1995 Revenue: Insurance premiums and policy charges..................... $ 6,353 4,516 Net investment income......... 89,157 76,190 Net investment gains (losses)...... 2,534 (306) Other revenue................. 713 190 Total revenue.............. 98,757 80,590 Benefits and expenses: Benefits, claims and interest credited to policyholders................. 66,765 58,697 Amortization of deferred cost of policies produced................. 7,413 5,569 Amortization of deferred cost of policies purchased............... 2,116 - General insurance expenses......... 5,536 4,401 Premium and other taxes, licenses and fees........................ 1,100 873 Other expenses.............. 113 106 Total benefits and expenses...... 83,043 69,646 Operating earnings................... 15,714 10,944 Interest expense.................. 734 41 Earnings before income tax expense and extraordinary item.................... 14,980 10,903 Income tax expense................... 5,243 3,816 Earnings before extraordinary item... 9,737 7,087 Extraordinary item: Loss on early extinguishment of debt (net of income tax benefit of $25).. (47) - Net earnings............................. $ 9,690 $ 7,087 Earnings per share of common stock: Primary: Net earnings......................... $ .80 .69 Fully diluted: Net earnings....................... $ .79 .68 Average share outstanding: Primary 12,086 10,284 Fully diluted................ 12,273 10,369
See notes to consolidated financial statements. 4 AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS Three months ended June 30, 1996 and 1995 (000's Omitted, except per share data) (Unaudited)
1996 1995 Revenue: Insurance premiums and policy charges.. $ 3,896 2,612 Net investment income.................... 49,988 37,970 Net investment gains (losses)......... (5,093) (296) Other revenue.................. 688 92 Total revenue........................... 49,479 40,378 Benefits and expenses: Benefits, claims and interest credited to policyholders...................... 36,145 29,697 Amortization of deferred cost of policies produced................. 2,443 2,581 Amortization of deferred cost of policies purchased............... 2,116 - General insurance expenses............. 3,615 2,186 Premium and other taxes, licenses and fee 849 348 Other expenses............................ 53 52 Total benefits and expenses............. 45,221 34,864 Operating earnings.......................... 4,258 5,514 Interest expense.......................... 609 20 Earnings before income tax expense and extraordinary item.................... 3,649 5,494 Income tax expense...................... 1,333 1,923 Earnings before extraordinary item............ 2,316 3,571 Extraordinary item: Loss on early extinguishment of debt (net of income tax benefit of $25)..... (47) - Net earnings............................ $ 2,269 3,571 Earnings per share of common stock: Primary: Net earnings................... $ .17 .35 Fully diluted: Net earnings.......................... $ .17 .34 Average share outstanding: Primary 13,574 10,321 Fully diluted........................ 13,671 10,381
See notes to consolidated financial statements. 5 AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (000's Omitted, except share and per share data) (Unaudited)
Unrealized Investment Common Paid-in Gains Retained Treasury Stock Capital (Losses) Earnings Stock LESOP Total Balance as of January 1, 1995.. $12,769 63,499 (7,813) 38,876 - (3,135) 104,196 Net earnings. - - - 16,599 - - 16,599 Change in unrealized investment gains (losses)..... - - 53,185 - - - 53,185 Cash dividends to stockholders ($.075 per share on common stock).............. - - - (761) - - (761) Issuance of common stock: upon exercise of options........... 135 785 - - - - 920 Allocation of LESOP shares... - - - - - 306 306 Balance December 31, 1995................. 12,904 64,284 45,372 54,714 - (2,829) 174,445 Net earnings........ - - - 9,690 - - 9,690 Change in unrealized investment gains (losses). - - (40,396) - - - (40,396) Cash dividends to stockholders ($.0975 per share on common stock).......... - - - (1,043) - - (1,043) Issuance of common stock: upon acquisition of company............ 3,464 28,866 - - - - 32,330 upon exercise of options............... 70 402 - - - - 472 Issuance of warrants: upon acquisition of company................ - 5,201 - - - - 5,201 Acquisition of treasury shares.................. - - - - (234) - (234) Balance June 30, 1996... $ 16,438 98,753 4,976 63,361 (234) (2,829) 180,465 Net of income tax benefit of $155 and $440 for the periods ended June 30, 1996 and December 31, 1995, respectively.
See notes to consolidated financial statements. 6 AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Increase (Decrease) in Cash and Cash Equivalents Six months ended June 30, 1996 and 1995 (Unaudited) (000's Omitted)
1996 1995 Operating Activities: Net earnings............................... $ 9,689 7,087 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Interest credited to policyholders......... 67,620 59,375 Amortization of (discounts) premiums on debt securities, net............................... (626) (444) Amortization of deferred cost of policies produced.............................. 7,412 5,569 Amortization of deferred cost of policies purchased............. 2,116 - Net investment (gains) losses............... (2,534) 306 Accrued investment income.................... (641) (221) Deferred income taxes....................... 998 3,709 Other, net................................ 1,513 1,427 Net cash provided by operating activities......... 85,547 76,808 Investing Activities: Purchases of securities: Held-to-maturity................................ - (4,209) Available-for-sale..................... (537,208) (117,377) Trading.................................. (26,456) - Proceeds from sale of securities: Held-to-maturity.............................. - - Available-for-sale...................... 340,582 25,021 Trading................................... 19,086 - Proceeds from maturity or redemption of securities: Held-to-maturity.............................. - 14,133 Available-for-sale......................... 82,463 36,630 Trading............................... 518 - Other long-term investments, net................... 4,392 20,275 Short-term investments, net....................... 12 397 Capitalization of deferred cost of policies produced................... (20,251) (16,133) Capitalization of goodwill.................. (330) - Acquisition, net of cash received............... (2,314) - Other, net..................................... (3,494) (369) Net cash used in investing activities........... (143,000) (41,632) Financing Activities: Premiums received.......................... 211,789 163,543 Surrender and death benefits paid............ (215,318) (208,334) Surrender and risk charges collected............ 5,307 3,529 Securities settlements in process............... 2,082 4,641 Acquisition of treasury stock.................... (234) - Cash dividends to stockholders.................. (1,043) (761) Issuance of common stock..................... 472 201 Notes payable........................... 12,500 - Other, net................................ 3,024 3,293 Net cash provided by (used in) financing activities.............................. 18,579 (33,888) Increase (Decrease) in Cash and Cash Equivalents....... (38,874) 1,288 Cash and Cash Equivalents: Beginning of year....................... 48,281 10,621 End of year........................................ $ 9,407 11,909
See notes to consolidated financial statements. 7 AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) Increase (Decrease) in Cash and Cash Equivalents Six months ended June 30, 1996 and 1995 (Unaudited) (000's Omitted)
1996 1995 SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION: Income tax payments (refunds)....... $ 2,215 (1,332) Interest payments....................... $ 600 - ____________________________________________________________________ Change in net unrealized investment gains (losses)......................... $ (86,739) 42,600 Less: Associated (increase) reduction in amortization of deferred policy acquisition costs.............................. 24,586 (10,650) Deferred income tax (expense) benefit................................. 21,757 (10,149) Net change in net unrealized gains (losses)................................ $ (40,396) 21,801 ____________________________________________________________________ Details of acquisition: Fair value of assets acquired.................................... $ 720,362 - Liabilities assumed................... (671,585) - Common stock and warrants issued...................................... (37,531) - Cash paid.............................. 11,246 - Less: Cash acquired..................... (8,932) - Net cash paid for acquisition........... $ 2,314 -
See notes to consolidated financial statements. 8 AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 Acquisition Subsidiary, Inc. (AAS), successor through merger with Financial Benefit Group, Inc. (FBG), AmVestors Investment Group, Inc. (AIG), Annuity International Marketing Corporation (AIMCOR), Financial Benefit Life Insurance Company (FBL), Financial Benefit Management Corporation (FBMC), The Insurancemart (TIM), and Rainbow Card Pack Publication, Inc. (RBC), (collectively the company). All significant intercompany accounts and transactions have been eliminated. B. ACCOUNTING PRINCIPLES AND PRACTICES: The accompanying unaudited consolidated financial statements have been prepared on the basis of generally accepted accounting principles as promulgated by the American Institute of Certified Public Accountants. In the opinion of the company, the consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of June 30, 1996 and the results of earnings and the statements of cash flows for the six month periods ended June 30, 1996 and 1995. C. 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. Debt securities available-for-sale are carried at estimated market value, with any unrealized gains or losses 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. Investments in common and preferred stock are carried at market, with unrealized gains (losses) recorded in stockholders' equity for securities available-for-sale. Investments in debt and equity securities which were purchased principally for the purpose of selling such securities in the near term are classified as trading securities and are carried at market. Unrealized gains (losses) are included currently in the results of earnings. 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 partner's estimated market value with any unrealized gains or losses recorded in net investment income. 9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 1. Summary of Significant Accounting Policies (continued): ___________________________________________________________ D. 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. The carrying values and estimated fair values of the company's financial instruments as of June 30, 1996, and December 31, 1995, were as follows:
(000's Omitted) 1996 1995 Carrying Fair Carrying Fair Value Value Value Value Assets Debt securities............. $ 2,580,208 2,580,208 2,046,091 2,046,091 Equity securities.............. 30,661 30,661 9,543 9,543 Other long-term investments. 41,327 41,344 39,491 39,546 Short-term investments.. 580 580 436 436 Cash and cash equivalents.... 9,407 9,407 48,281 48,281 Accounts receivable on securities settlements in process................... 10,313 10,313 10,873 10,873 Accounts receivable and accrued investment income.......... 38,194 38,194 29,811 29,811 Liabilities: Future policy benefits - investment contracts............ 2,708,764 2,522,609 2,022,653 1,900,895 Other policy liabilities......... 5,392 5,392 7,312 7,312 Notes payable................ 35,000 35,000 7,000 7,000 Amounts due on securities settlements in process.......... 2,960 2,960 1,438 1,438 Accrued expenses and other liabilities................... 9,866 9,866 4,080 4,080
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. 10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 1. Summary of Significant Accounting Policies (continued): ___________________________________________________________ ACCOUNTS RECEIVABLE AND ACCRUED INVESTMENT INCOME - THE CARRYING AMOUNTS REPORTED IN THE BALANCE SHEET FOR THESE ASSETS APPROXIMATES 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 calculated 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. NOTES PAYABLE - The fair value of the company's note payable has been estimated to be an amount equal to the balance reported in the balance sheet. AMOUNTS DUE ON SECURITIES SETTLEMENTS IN PROCESS - The carrying amount reported in the balance sheet approximates the fair value of this liability. 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. E. SIGNIFICANT RISKS AND UNCERTAINTIES: NATURE OF OPERATIONS - The company specializes in the sale of deferred annuity products, the earnings on which are not currently taxable to the annuity owner. Any changes in tax regulations which eliminate or significantly reduce this advantage of tax deferred income would adversely impact the operations of the company. The company's products are marketed nationwide through a network of independent agents. The company is not dependent on any one agent or agency for a substantial amount of its business. No single agent accounted for more than 1% of annuity sales in 1995, and the top twenty individual agents accounted for approximately 11% of 1995 annuity sales. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. CERTAIN SIGNIFICANT ESTIMATES - Certain costs incurred to acquire new business are deferred and amortized in relation to the incidence of expected gross profits over the expected life of the policies. Determination of expected gross profits includes management's estimate of certain elements over the life of the policies, including investment income, interest to be credited to the contract, surrenders and resultant surrender charges, deaths and in the case of life insurance, mortality charges to be collected. These estimates of expected gross profits are used as a basis for amortizing deferred costs. These estimates are periodically reviewed by management and, if actual experience indicates that the estimates should be revised, the total amortization recorded to date is adjusted by a charge or credit to earnings. F. DEFERRED COST OF POLICIES PRODUCED: The costs of producing 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 11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 1. Summary of Significant Accounting Policies (continued): ___________________________________________________________ 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 l, 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. Net investment gains (losses) realized in the first six months of 1996 and 1995 resulted in the company experiencing investment margins greater than or less than those estimated. As a result, $510,269 and ($70,330) of the unamortized balance of cost deferred on policies produced was expensed (benefited) in the six months ended June 30, 1996 and 1995, 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. Cost deferred on policies produced will be adjusted in the future based on actual investment income earned. G. DEFERRED COST OF POLICIES PURCHASED: At the date of acquisition of a company, a portion of the purchase price is allocated to the right to receive future cash flows from the existing insurance contracts. The amount allocated represents the present value of the projected future cash flows from the acquired policies. These projections take into account mortality, surrenders, operating expenses, investment yields on the investments held to back the policy liabilities and other factors known or expected at the valuation date based on the judgment of management. The deferred cost of policies purchased is amortized in relation to the incidence of expected cash flows over the expected life of the policies. If it is determined that the present value of future cash flows is insufficient to recover the deferred cost of policies purchased, its carrying value will be reduced with a corresponding charge to earnings. H. GOODWILL: Goodwill represents the excess of the amount paid to acquire a company over the fair value of the net assets acquired. This balance is amortized on a straight-line basis over a 30-year period. If it is determined through an estimate of future earnings that the goodwill has been impaired, its carrying value will be reduced with a corresponding charge to earnings. I. 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 41\2% to 101\2% 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. J. 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. 12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 1. Summary of Significant Accounting Policies (continued): ___________________________________________________________ K. DEPRECIATION: The home office buildings are depreciated on the straight-line basis over estimated lives of up to 40 years. Other depreciation is provided on the straight-line basis over useful lives ranging from 5 to 8 years. L. 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. M. EARNINGS PER SHARE: Earnings per share of common stock are computed by dividing net earnings 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. N. CONSOLIDATED STATEMENTS OF CASH FLOWS: For purposes of reporting cash flows, cash and cash equivalents includes cash and money market accounts. O. NEW ACCOUNTING STANDARDS: Effective January 1, 1995, the company adopted the provisions of SFAS No. 119, "Disclosure About Derivative Financial Instruments and Fair Value of Financial Instruments." This Statement requires disclosure about the amount, nature, and terms of derivative financial instruments. Since the company has no derivative financial instruments as defined in the Statement, the adoption of this accounting standard did not result in any additional financial statement disclosure. Effective November 30, 1995, the company adopted the provisions of "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities" and transferred all bonds with an amortized cost of $1,159,390,768 classified as held-to-maturity to available-for-sale. The effect of the adoption was an increase in stockholders' equity of $21,218,205 (net of related amortization of deferred policy acquisition costs of $12,792,403 and deferred income taxes of $11,425,188). Net earnings for the year ended December 31, 1995 were not affected by the adoption of this implementation guide. Effective for fiscal years beginning after December 15, 1995, SFAS No. 121, "Accounting for the Impairment of Long Lived Assets" establishes accounting standards for the impairment of long-lived assets, certain intangibles, and goodwill related to those assets. The company does not expect this Statement to have a material affect on its consolidated financial statements. Effective for financial statements for fiscal years beginning after December 15, 1995, SFAS No. 123, "Accounting for Stock-Based Compensation," will require increased disclosure of compensation expense arising from stock compensation plans. The Statement encourages rather than requires companies to adopt a new method that accounts for stock compensation awards based on their estimated fair value at the date they are granted. Companies will be permitted, however, to continue accounting under APB Option No. 25 which requires compensation cost be recognized based on the difference, if any, between the quoted market price of the stock on the date of grant and the amount an employee must pay to acquire the stock. The company will continue to apply APB Option No. 25 in its consolidated financial statements and will disclose pro forma net income and earnings per share in a footnote to its consolidated financial statements, determined as if the new method were applied. 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 1. Summary of Significant Accounting Policies (continued): ___________________________________________________________ P. RECLASSIFICATIONS: Certain reclassifications have been made to conform the June 30, 1995 and December 31, 1995 financial statements to the June 30, 1996 presentation. 2. Investments: _________________ A summary of investment income is as follows:
(000's Omitted) For the Six Month Period Ended June 30, 1996 1995 Debt securities................................ $ 86,203 72,681 Equity securities........................ 586 23 Other long-term investments....................... 2,701 3,784 Short-term investments...................... 964 758 90,454 77,246 Less investment expenses..................... 1,297 1,056 Net investment income..................... $ 89,157 76,190 (000's Omitted) For the Six Month Period Ended June 30, 1996 1995 Net investment gains (losses): Realized investment gains (losses): Debt securities, available-for-sale....... $ 1,411 (89) Debt securities, held-to-maturity......... - 85 Debt securities, trading.................. 267 - Equity securities, available-for-sale..... 577 47 Equity securities, trading................ 179 - Other......................................... (5) (349) Net realized investment gains (losses)........ 2,429 (306) Unrealized investment gains (losses): Debt securities, trading................... (43) - Equity securities, trading................. 148 - Net unrealized investment gains (losses)...... 105 - Net investment gains (losses).............. $ 2,534 (306)
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 yields 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 affect the company's earnings for any given period. 14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 2. Investments (continued): ______________________________ The maturity of the company's debt and equity securities portfolio as of June 30, 1996 was as follows:
(000's Omitted) As of June 30, 1996 Available-for-Sale Trading Estimated Estimated Amortized Market Amortized Market Cost Value Cost Value Debt securities: One year or less $ 53,176 51,493 - - Two years through five years 541,695 550,496 250 249 Six years through ten years 1,577,274 1,582,925 5,377 5,320 Eleven years and after 391,135 388,507 1,207 1,218 2,563,280 2,573,421 6,834 6,787 Equity securities 27,682 27,930 2,573 2,731 $ 2,590,962 2,601,351 9,407 9,518
These tables include mortgage-backed securities based on the estimated cash flows of the underlying mortgages. The book value, estimated market value and unrealized market gains and losses of debt and equity securities as of June 30, 1996, and December 31, 1995, were as follows:
(000's Omitted) Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value June 30, 1996 ______________ Bonds, available-for-sale: Corporate debt obligations Investment grade........ $ 1,462,925 27,185 19,561 1,470,549 High-yield.............. 199,101 1,764 4,556 196,309 1,662,026 28,949 24,117 1,666,858 U.S. Treasury obligations... 49,298 541 501 49,338 Mortgage-backed securities Investment grade.......... 844,620 13,111 6,008 851,723 High-yield................ 7,336 - 1,834 5,502 Bonds, available-for-sale 2,563,280 42,601 32,460 2,573,421 Bonds, trading: Corporate debt obligations Investment grade......... 6,081 20 51 6,050 High-yield............... 753 5 21 737 Bonds, trading........... 6,834 25 72 6,787 Total bonds.............. 2,570,114 42,626 32,532 2,580,208 Equity securities.......... 30,255 973 567 30,661 $2,600,369 43,599 33,099 2,610,869
15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 2. Investments (continued): _____________________________
(000's Omitted) Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value December 31, 1995 __________________ Bonds, available-for-sale: Corporate debt obligations Investment grade.................... $ 1,076,873 63,321 724 1,139,470 High-yield.......................... 147,878 5,468 1,810 151,536 1,224,751 68,789 2,534 1,291,006 U.S. Treasury obligations........... 51,743 942 21 52,664 Mortgage-backed securities Investment grade................... 661,652 32,062 1 693,713 High-Yield......................... 9,631 - 2,408 7,223 Bonds, available-for-sale............ 1,947,777 101,793 4,964 2,044,606 Bonds, trading: Corporate debt obligations Investment grade..................... 458 - 7 451 High-yield............................. 1,031 5 2 1,034 Bonds, trading......................... 1,489 5 9 1,485 Total bonds............................ 1,949,266 101,798 4,973 2,046,091 Equity securities.................... 9,232 614 303 9,543 $ 1,958,498 102,412 5,276 2,055,634
The preceding table includes the carrying value and estimated market value of debt securities which the company has determined to be impaired (othe r than temporary decline in value) as follows:
(000's Omitted) Accumulated Estimated Original Write Carrying Market Cost Downs Value Value June 30, 1996 $ 7,545 7,545 - - December 31, 1995 $ 7,545 7,545 - -
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. 16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 2. Investments (continued): ____________________________ The amortized cost, estimated market value and unrealized market gains and losses by type of mortgage-backed security as of June 30, 1996, and December 31, 1995 were as follows:
(000's Omitted) Amortized Unrealized Unrealized Market June 30, 1996 Cost Gains Losses Value Government agency mortgage-backed securities: Planned amortization classes...... $ 65,609 200 1 65,808 Targeted amortization classes and accretion directed classes........... 7,901 132 - 8,033 Sequential classes..................... 4,770 20 - 4,790 Pass-throughs....................... 28 2 - 30 Total government agency mortgage-backed securities........ 78,308 354 1 78,661 Government-sponsored enterprise mortgage-backed securities: Planned amortization classes........ 480,110 9,350 3,626 485,834 Targeted amortization classes and accretion directed classes.......... 41,684 301 - 41,985 Sequential classes.................. 4,246 45 - 4,291 Pass-throughs........................ 3,446 21 - 3,467 Total government-sponsored enterprise mortgage-backed securities........ 529,486 9,717 3,626 535,577 Other mortgage-backed securities: Planned amortization classes.............. 16,744 79 113 16,710 Sequential classes................. 213,313 2,957 2,259 214,011 Pass-throughs......................... 3,207 1 8 3,200 Subordinated classes.................. 10,898 3 1,835 9,066 Total other mortgage-backed securities... 244,162 3,040 4,215 242,987 Total mortgage-backed securities................ $ 851,956 13,111 7,842 857,225
17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 2. Investments (continued): ___________________________
(000's Omitted) Estimated Amortized Unrealized Unrealized Market December 31, 1995 Cost Gains Losses Value Government agency mortgage-backed securities: Planned amortization classes................... $ 71,164 1,823 - 72,987 Targeted amortization classes and accretion directed classes...... 7,833 360 - 8,193 Pass-throughs.................... 32 3 - 35 Total government agency mortgage-backed securities......... 79,029 2,186 - 81,215 Government sponsored enterprise mortgage-backed securities: Planned amortization classes..... 403,359 23,750 - 427,109 Sequential classes............... 19,546 1,405 - 20,951 Pass-throughs.................... 3,258 21 - 3,279 Total government sponsored enterprise mortgage-backed securities.... 426,163 25,176 - 451,339 Other mortgage-backed securities: Planned amortization classes. 18,574 172 - 18,746 Sequential classes........... 134,245 4,484 1 138,728 Pass-throughs................ 11 - - 11 Subordinated classes......... 13,261 44 2,408 10,897 Total other mortgage-backed securities 166,091 4,700 2,409 168,382 Total mortgage-backed securities................ $ 671,283 32,062 2,409 700,936
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-backed pass-through securities and sequential classes, which comprised 26.9% and 23.4% of the carrying value of the company's mortgage-backed securities as of June 30, 1996 and December 31, 1995, respectively, are sensitive to this prepayment risk. 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 71.8% and 74.6% of the carrying value of the company's mortgage-backed securities as of June 30, 1996 and December 31, 1995. As of June 30, 1996, 71.3% of the company's mortgage-backed securities were issued by either government agencies or government-sponsored enterprises, compared to 75.3% as of December 31, 1995. The credit risk associated with these securities is generally less than other mortgage-backed securities. With the exception of eight issues, with a carrying value of $29,762,909 as of June 30, 1996, all of the company's investments in other mortgage-backed securities are rated A or better by Standard & Poor's or Moody's. 18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 2. Investments (continued): ___________________________ 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 recogni zed 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 Six Month Period Ended June 30, 1996 1995 Consideration received................. $ 442,602 95,360 Carrying value........................ 440,168 95,316 Change in unrealized gains (losses) on trading securities.................... 105 - Net investment gains (losses)......... $ 2,539 44 Investment gains...................... $ 10,225 430 Investment losses...................... (7,791) (386) Change in unrealized gains (losses) on trading securities................... 105 - Net investment gains (losses)........... $ 2,539 44
The above table contains no sales of securities which the company had classified as held-to-maturity. Net unrealized gains (losses) on debt securities held-to-maturity, debt securities available-for-sale, debt securities trading, equity securities available-for-sale and equity securities trading changed as follows:
(000's) Omitted Net Unrealized Gains (Losses) Debt Debt Equity Securities Securities Debt Securities Equity Held-to- Available- Securities Available- Securities Maturity for-Sale Trading for-Sale Trading Balance as of January 1, 1995.. $ (91,493) (14,092) - 187 - 1995 Net Change......................... 91,493 110,921 (4) 114 10 Balance as of December 31, 1995 - 96,829 (4) 301 10 1996 Net Change......................... - (86,688) (43) (53) 148 Balance as of June 30, 1996... $ - 10,141 (47) 248 158
19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 3. Other Assets: ________________ Other assets consist of the following:
(000's Omitted) June 30, December 31, 1996 1995 _____________ ____________ Property and equipment at cost: Home office properties (including land of $1,067)............. $ 10,406 3,643 Furniture and equipment................ 4,905 3,711 Automobiles............................ 141 99 15,452 7,453 Less accumulated depreciation............ 5,759 3,650 _____________ ____________ 9,693 3,803 Goodwill.............................. 12,763 68 Other................................... 1,669 713 _____________ ____________ $ 24,125 4,584 _____________ ____________ _____________ ____________
4. 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 Period Gross Other Net Ended Descriptions Amount Companies Amount June 30, Life insurance in force $ 308,443 233,065 75,378 1996 Insurance premiums and policy charges....... 6,948 595 6,353 June 30, Life insurance in force 319,485 246,233 73,252 1995 Insurance premiums and policy charges....... 5,009 493 4,516 June 30, Future policy benefits... 2,976,738 251,242 2,725,496 1996 December 31, Future policy benefits... 2,259,028 145,183 2,113,845 1995
The company is contingently liable for the portion of the policies reinsured under each of its existing reinsurance agreements in the event the reinsurance companies are unable to pay their portion of any reinsured claim. Management believes that any liability from this contingency is likely. The company had amounts receivable under reinsurance agreements of $252,410,333 and $146,617,611 as of June 30, 1996, and December 31, 1995, respectively. Of the total amounts receivable, $142,042,937 and $144,965,371 were associated with a coinsurance agreement entered into in 1989, 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. Reimbursement received from ERC for amounts paid by the company on the reinsured risks totalled $5,608,655 and $6,787,793 for periods ended June 30, 1996 and 1995, respectively. 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 4. Reinsurance (continued): __________________________ The following table identifies the components of the amounts receivable from ERC:
(000's Omitted) June 30, December 31, 1996 1995 Reserve for future policy benefits......... $140,910 143,558 Reimbursement for benefit payments and administrative allowance.............. 1,133 1,407 $142,043 144,965
FBL and Philadelphia Life Insurance Company are parties to a reinsurance agreement under which FBL ceded 100% of the risk on certain single premium deferred annuity policies on a coinsurance basis. As of June 30, 1996, the company had amounts receivable of $108,700,884 resulting from this agreement. 5. Credit Agreement: ____________________ On April 8, 1996, the company entered into a $35,000,000 credit agreement with The First National Bank of Chicago (First Chicago), Fleet National Bank (Fleet) and Boatmen's First National Bank of Kansas City (Boatmen's), as Lenders. On that same date, the company borrowed the entire $35,000,000, using the proceeds to repay existing bank debt, fund the cash portion of the acquisition of FBG and for general corporate purposes. The effective annual interest rate on this borrowing was 7.46% as of June 30, 1996 . Principal repayments for this borrowing are as follows: 1996 $ -0- 1997 1,500,000 1998 7,500,000 1999 8,000,000 2000 8,000,000 2001 8,000,000 2002 2,000,000 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, plus a margin ranging from .00% to .50%, or (ii) a Eurodollar rate plus a margin ranging from .75% to 1.75%. 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 and FBL, minimum unassigned surplus and cash flow test results for American and FBL and 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. 6. 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 10% of covered compensation. The company made no contributions to this plan during either the six months ended June 30, 1996 or 1995. The company sponsors a Leveraged Employee Stock Ownership Plan (LESOP) for all full-time employees with one year of service. 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 6. Retirement Plans (continued): ________________________________ 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 an unpaid principal balance of $3,010,882 as of June 30, 1996, and December 31, 1995. Each year the company will make 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 will be allocated to participating employees. Of the 356,509 shares of the company's common stock now owned by the LESOP, 114,292 shares have been allocated to the participating employees with the remaining 242,217 shares being 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. Accrued contributions to the LESOP were $197,076, and $152,782, for the six months ended June 30, 1996, and 1995, 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 reach 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. A liability in the amount of $434,079, representing the present value of future benefits, has been established. Charges (credits) to earnings related to the plans were $(1,558) and $(86,660) for the six months ended June 30, 1996 and 1995, 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 three months ended June 30, 1996, and 1995 were $164,040 and $125,853 respectively. 7. Stockholders' Equity: ________________________ Dividends by American and FBLto 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, provided that such dividend does not exceed its unassigned surplus (surplus profits) at the end of the preceding year. As of December 31, 1995, surplus profits of American were $16,764,059 and 10% of statutory capital and surplus was $9,828,859. 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 $400,000 each. As of June 30, 1996, and December 31, 1995, American's statutory capital and surplus was $97,369,733 and $98,288,590, respectively. Statutory net income (loss) for 1995 was $5,984,601 . Under Florida insurance law and regulations, the aggregate dividends that FBL may pay without prior regulatory approval is limited to the greater of the sum of statutory net operating profits and net realized capital gains for the preceding calendar year (provided there is available surplus from net operating profits and net realized capital gains) or 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 7. Stockholders' Equity (continued): ____________________________________ 10% of its available and accumulated statutory surplus derived from net operating profits and net realized capital gains. After payment of a dividend, FBLmust have 115% of required statutory surplus. On December 31, 1995, FBLhad accumulated statutory surplus derived from net operating profits and net realized capital gains of $23.7 million. The sum of statutory net profits and net realized capital gains for 1995 were $3.4 million. As of June 30, 1996, available surplus from net operating profits and net realized capital gains was $2.4 million. Required statutory surplus as of June 30, 1996 was $19.7 million and actual surplus was $32.8 million. 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 represented a permitted accounting practice for regulatory purposes, the effect of which was to increase statutory surplus by $8,168,000 as of December 31, 1992 ($5,952,000 as of June 30, 1996). In addition, American received permission from the Commissioner of Insurance of Kansas to amortize the effects of changing to Actuarial Guideline No. 32 concerning the Commissioners Annuity Reserve Valuation Method for individual annuity contracts over a three-year period beginning in 1995 rather than to record the full amount of the change of $2,176,000. The effect of this permitted accounting practice was to increase statutory surplus by $943,150 as of December 31, 1995 ($687,709 as of June 30, 1996). On March 17, 1989, the Board of Directors of the company adopted the 1989 Nonqualified Stock Option Plan. These options have an exercise price equal to the closing price of the company's common stock on the date of grant and none may be exercised beyond ten years from the grant date. A total of 899,423 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 periods were as follows:
For the Period Ended June 30, December 31, 1996 1995 Options outstanding, beginning of period........................ 841,341 859,837 Options granted.................... 130,000 87,500 Options exercised................... (55,418) (105,996) Options cancelled.................. (16,500) - Options outstanding, end of period.... 899,423 841,341 Outstanding options exercisable at end of period................ 769,423 779,841 Options reserved for future grants at end of period....... 206,247 44,747 Option prices per share: Exercised, during the period... $4.84-$10.00 $4.84-$10.63 Outstanding, end of period..... $4,84-$13.50 $4.84-$12.66
23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 7. Stockholders' Equity (continued): ____________________________________ 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 Period Ended June 30, December 31, 1996 1995 Rights outstanding, beginning of period. - - Rights granted................ - - Rights exercised............... - - Rights expired................ - - Rights cancelled............... - - Rights outstanding, end of period.. - - Rights reserved for future grants at end of period.............. 5,000 5,000
The company recorded no compensation expense relating to stock appreciation rights for the six months ended June 30, 1996, and 1995, 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. On March 28, 1996, the Board of Directors of the company adopted the 1996 Incentive Stock Option Plan (the Plan). These options have an exercise price equal to the closing price of the company's common stock on the date of grant and none may be exercised beyond ten years from the date of grant. The Plan authorized a maximum of 950,000 shares to be issued. A total of 673,000 options to acquire common stock are outstanding. The 1996 Incentive Stock Option Plan is administered by the Board of Directors of the company. The term of the options, including the number of shares and the exercise price are subject to the sole discretion of the Board of Directors.
For the Period Ended June 30, December 31, 1996 1995 Options outstanding, beginning of period.. - - Options granted....... 653,000 - Options outstanding, end of period....... 653,000 - Outstanding options exercisable at end of period............................ - - Options reserved for future grants at end of period......................... 297,000 - Option prices per share: Outstanding, end of period........... $12.875 -
24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) In conjunction with a previous 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
In conjunction with the acquisition of FBG, the company issued warrants to purchase 663,708 shares of its common stock. These warrants are exercisable at $16.42 per share of common stock and expire on April 2, 2002. In addition to the above, the company assumed warrants previously issued by FBGto purchase a total of 302,735 shares of its common stock as summarized in the following table:
Warrant Issue Number Exercise Expiration Holder Date of Shares Price Date Wabash Life 2/18/92 63,176 $ 1.98 2/19/97 Insurance 12/20/92 63,176 1.48 12/20/2002 Company 5/18/93 120,334 1.56 3/18/2003 246,686 Fleet National Bank 6/27/94 34,381 7.09 6/30/2001 Other Various 21,668 1.34-3.72 Various 302,735
8. 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 during the three months ended June 30, 1996 and 1995 was $57,859 and $61,980, respectively. Other revenue for the quarter ended June 30, 1996 includes override commissions of $418,669 attributable to the marketing efforts of AIMCORand TIM, $142,790 of rental income received by FBL and $50,700 of advertising revenues received by RBC. 9. Income Taxes: _________________ The provision for income taxes charged to operations was as follows:
(000's Omitted) For the six Months Ended June 30, 1996 1995 Current income tax expense (benefit)........ $2,499 107 Deferred income tax expense (benefit)....... 2,744 3,709 Total income tax expense................ $5,243 3,816
25 10. Acquisition: __________________ On September 8, 1995, the company signed a merger agreement pursuant to which it acquired all of the outstanding capital stock of Financial Benefit Group, Inc., (FBG) a Delaware corporation, for $5.31 per share, payable in the company's common stock, warrants and cash. FBG was an insurance holding company which owned all of the shares of Financial Benefit Life Insurance Company, a Florida domiciled insurer which specializes in the sale and underwriting of annuity products and is admitted in 41 jurisdictions, which includes 39 states, the District of Columbia and the U.S. Virgin Islands. FBG also owned all of the shares of Annuity International Marketing Corporation and The Insurancemart, Inc. both of which specialize in the distribution and marketing of annuities. The merger received the approval of the shareholders of both FBG and the company, and became effective on April 8, 1996. The transaction has been accounted for using the purchase method with any resulting goodwill being amortized over a period not to exceed 30 years. The opening consolidated balance sheet of the acquired entities follows:
(000's Omitted) ASSETS _________________ Investments..................... $ 524,165 Cash and cash equivalents....... 8,932 Accounts receivable............. 815 Amounts receivable under reinsurance agreements........... 112,875 Accrued investment income....... 7,373 Deferred cost of policies purchased.. 45,700 Deferred income taxes............... 5,023 Goodwill........................... 12,485 Other assets....................... 2,994 Total assets..................... $ 720,362 LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Policy liabilities................. $ 650,174 Notes payable...................... 15,500 Accrued expenses and other liabilities... 5,911 Total liabilities.................. 671,585 Stockholders' Equity: Common stock, no par value Paid in capital..................... 48,777 Total stockholders' equity............ 48,777 Total liabilities and stockholders' equity.. $ 720,362
11. Contingencies: __________________ The company's insurance subsidiaries are 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 insur- 26ers. Most state laws permit assessments or some portion thereof to be credited against future premium taxes. Charges (credits) relating to the guaranty fund assessments impacted 1995 and 1994 income before taxes by approximately $1,001,000 and $504,000, respectively. The company expects that further charges to income may be required in the future and will record such amounts when they become known. 12. Subsequent Event: _____________________ On July 12, 1996, the company closed on an offering of $65,000,000 of Convertible Subordinated Debentures. These securities were placed in Europe pursuant to Regulations S under the Securities Act of 1933. The debentures pay an annual cash yield of 3% payable semi-annually, are convertible into the company's common stock at $17.125, and mature in seven years unless previously converted or redeemed. The debentures are redeemable, in whole or in part, at the option of the holders, on September 30, 2001, at 124.25% of their principal amount (which in essence reflects deferred interest at a compounded rate of 4.25%), plus accrued but unpaid cash interest at the coupon rate of 3%. The debentures are redeemable, at the company's option, on or after June 30, 1999, at certain specified declining redemption prices (starting at 103% of principal value) plus accrued but unpaid cash interest (at the rate of 3%) and accrued deferred interest (at a compounded rate of 4.25%). The debentures may be redeemed any time after August 15, 1996, at the company's option at their principal amount plus accrued cash interest (at the rate of 3%), but with no payment for accrued deferred interest, if the average closing price of the company's common stock equals or exceeds $23.12 for 20 consecutive trading days. The debentures are unsecured obligations of the company, subordinated to all existing and future senior indebtedness. Approximately $35,000,000 of the net proceeds of the offering were used to repay existing bank debt, $20,000,000 was contributed to American and the balance will be used for other general corporate purposes. ITEM 2. 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 deferred annuities have accounted for at least 96% of the company's premiums received, while sales of Single Premium Immediate Annuities (SPIAs) and Flexible Premium Universal Life policies (FPULs) 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 Generally Accepted Accounting Principals (GAAP), premiums received on deferred annuities, SPIAs without life contingencies and FPULs, 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 cost of policies produced, or "DAC". As a result of this deferral 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 deferred annuities, SPIAs without life contingencies and FPULs 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 (losses) and policy charges are realized as revenue, and DAC is amortized as an expense. The timing of DAC amortization 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 the company's annuity policies in force have surrender charges which are designed to discourage and mitigate the effect of 27 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. 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 and 1993, 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 and $326.2 million during 1994 and 1993, respectively. As a result, $18.3 million, or 17%, and $139.6 million, or 43%, of such policies were surrendered during 1994 and 1993, 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 and 7% for 1993. Although, as of June 30, 1996, approximately $238.9 million, or 13% of American's annuity account values contained a "bailout" provision, the current credited rates on these policies are above the "bailout" rate. The "bailout" rate on $236.8 million of this amount is 6% or less. As of that same date, approximately $25.1 million, or 5% of FBL's annuity account values contained a "bailout" provision, the current credited rates on these policies are above the "bailout" rate. The "bailout" rate on the entire $25.1 million is 5.5% or less, with $19.5 million at 4.5% 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 withdrawal s on its annuity contracts will increase as such contracts approach maturity. There is no certainty as to the company's ability to realize investment gains in the future to offset the adverse impact on earnings, should future "bailout" surrenders occur. 28 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:
For the Six Months Ended June 30, 1996 1995 (dollars in millions) (percent of average invested assets annualized) Average invested assets ............... $ 2,361.7 100.0% $ 1,940.1 100.0% Insurance premiums and policy charges...... $ 6.4 .54% $ 4.5 .47% Net investment income ................. 89.2 7.55 76.2 7.85 Net investment gains (losses), core........ 1.6 .14 - - Policyholder benefits..................... (66.8) (5.65) (58.7) (6.05) Gross interest margin...................... 30.4 2.57 22.0 2.27 Associated amortization of deferred cost of policies produced and purchased. (9.5) (.80) (5.6) (.58) Net interest margin....................... 20.9 1.77 16.4 1.69 Net investment gains (losses), other...... .9 .07 (.3) (.03) Associated amortization of deferred cost of policies produced and purchased. - - (.1) .01 Net margin from investment gains (losses), other.................................. .9 .07 (.2) (.02) Total net margin......................... 21.8 1.84 16.1 1.66 Expenses, net........................... (6.0) (.51) (5.2) (.54) Operating earnings...................... 15.8 1.33 10.9 1.12 Interest expense........................ .7 .06 - - Earnings before income taxes and extraordinary items.................... 15.0 1.27 10.9 1.12 Income tax expense...................... 5.3 .44 3.8 .39 Earnings before extraordinary item...... 9.7 .83 7.1 .73 Extraordinary item...................... - - - - Net earnings........................... $ 9.7 .83% $ 7.1 .73% Operating earnings..................... $ 15.8 1.33% $ 10.9 1.12% Less: Net margin from investment gains (losses), other...................... .9 .07 (.2) (.02) Operating earnings excluding net margin from investment gains (losses), other...... $ 14.9 1.26% $ 11.1 1.14% Average of cash, invested assets (before SFAS 115 adjustment) and net amounts due to or from brokers on unsettled security trades at the beginningand end of period for 1995 and time weighted for 1996 for acquisition of FBG effective April 1, 1996. Net investment income is presented net of investment expense.
Note: Numbers may not add due to rounding. 29
For the Quarter Ended June 30, 1996 1995 (dollars in millions) (percent of average invested assets annualized) Average invested assets .... $2,647.9 100.0% $ 1,947.2 100.0% Insurance premiums and policy charges. $ 3.9 .59% $ 2.6 .54% Net investment income ........... 50.0 7.55 38.0 7.80 Net investment gains (losses), core..... 1.2 .18 - - Policyholder benefits............... (36.1) (5.46) (29.7) (6.10) Gross interest margin................ 18.9 2.86 10.9 2.24 Associated amortization of deferred cost of policies produced and purchased... (6.5) (.99) (2.7) (.55) Net interest margin...................... 12.4 1.87 8.2 1.69 Net investment gains (losses).............. (6.3) (.95) (.3) (.06) Associated amortization of deferred cost of policies produced and purchased... 2.0 .30 .1 .02 Net margin from investment gains (losses).. (4.3) (.65) (.2) (.04) Total net margin.......................... 8.1 1.22 8.0 1.65 Expenses, net............................ (3.8) (.58) (2.5) (.52) Operating earnings....................... 4.3 .64 5.5 1.13 Interest expense.......................... .6 .09 - - Earnings before income taxes and extraordinary item...................... 3.7 .55 5.5 1.13 Income tax expense (benefit)............ 1.3 .20 1.9 .40 Earnings before extraordinary item....... 2.3 .35 3.6 .73 Extraordinary item..................... - - - - Net earnings........................ $ 2.3 .35% $ 3.6 .73% Operating earnings.................. $ 4.3 .64% $ 5.5 1.13% Less: Net margin from investment gains (losses)............................... (4.6) (.69) (.2) (.04) Operating earnings excluding net margin from investment gains (losses), other... $ 8.9 1.33% $ 5.7 1.17% Average of cash, invested assets (before SFAS 115 adjustment) and net amounts due to or from brokers on unsettled security trades at the beginningand end of period for 1995 and time weighted for 1996 for acquisition of FBG effective April 1, 1996. Net investment income is presented net of investment expense.
Note: Numbers may not add due to rounding. 30 RESULTS OF OPERATIONS Six Months Ended June 30, 1996, and 1995 INSURANCE PREMIUMS AND POLICY CHARGES increased $1.9 million or 42%, to $6.4 million in 1996, due primarily to a $1.4 million increase in surrender charges received on increased surrenders of annuity policies, resulting primarily from the acquisition of FBG. NET INVESTMENT INCOME increased $10.0 million or 13%, to $89.2 million in 1996. This increase reflects an increase in average invested assets from $1,940.1 million in 1995 to $2,361.7 million in 1996 offset in part by a decrease in the average yield on invested assets from 7.9% for the six months ended June 30, 1995, to 7.6% for the same period in 1996. The increase in average invested assets can be attributed to the acquisition of FBG. NET INVESTMENT GAINS (LOSSES) WERE $2.5 million in 1996, compared with a $.3 million loss in 1995. Gains and losses may be realized upon securities which are disposed of for various reasons. The net gains realized in 1996 are the result of general portfolio management while the net losses realized in 1995 result from writedowns of $1.0 million on securities deemed to have an other than temporary dimunition in value. Unrealized gains in the company's bond portfolio were $10.1 million, $96.8 million and $46.8 million as of June 30, 1996, December 31, 1995 and June 30, 1995, respectively. BENEFITS, CLAIMS AND INTEREST CREDITED TO POLICYHOLDERS increased $8.1 million, or 14%, to $66.8 million in 1996 from $58.7 million in 1995. This increase results primarily from an increase in the annuity liabilities to $2,797.8 million on June 30, 1996, from $1,989.2 million on June 30, 1995. This increase was partially offset by a decrease in the average interest rate credited on the company's annuity liabilities, from 6.0% as of June 30, 1995, to 5.7% as of June 30, 1996. Both the increase in annuity liabilities and the decrease in the average interest rate credited on those liabilities is largely due to the acquisition of FBG. AMORTIZATION OF DEFERRED COST OF POLICIES PRODUCED increased $1.8 million, or 32%, to $7.4 million in 1996 from $5.6 million in 1995. Amortization associated with gross interest margin increased $1.7 million to $7.3 million in 1996 from $5.6 million in 1995, with the remaining change being attributable to investment gains. Costs incurred during 1996 and deferred into future policy periods were $20.3 million, compared with $16.1 million in 1995. Amortization of deferred cost of policies purchased of $2.1 million represents the amortization of the purchase price allocated to the policies acquired in the acquisition of FBG. General insurance expenses increased $1.1 million, or 25%, to $5.5 million for the 1996 six months from $4.4 million for the same period in 1995. This increase is due primarily to the acquisition of FBG. Interest expense increased $.7 million as a result of the borrowing of $7.0 million in December, 1995 and an additional $28.0 million in April, 1996. The funds borrowed in 1996 were used to fund the acquisition of FBG. Income tax expense increased $1.4 million to $5.2 million in 1996 from $3.8 million in 1995. Taxes were provided at an effective rate of 35% on both 1996 and 1995 income. 31 Three Months Ended June 30, 1996, and 1995 INSURANCE PREMIUMS AND POLICY CHARGES increased $1.3 million or 50%, to $3.9 million in 1996, due primarily to a $1.4 million increase in surrender charges received on increased surrenders of annuity policies, resulting primarily from the acquisition of FBG. NET INVESTMENT INCOME increased $12.0 million or 32%, to $50.0 million in 1996. This increase reflects an increase in average invested assets from $1,947.2 million in 1995 to $2,647.9 million in 1996 offset in part by a decrease in the average yield on invested assets from 7.8% for the three months ended June 30, 1995, to 7.6% for the same period in 1996. The increase in average invested assets can be attributed to the acquisition of FBG. NET INVESTMENT GAINS (LOSSES) WERE a net loss of $5.1 million in 1996, compared with a $.3 million loss in 1995. Gains and losses may be realized upon securities which are disposed of for various reasons. The net losses realized in 1996 are the result of general portfolio management while the net losses realized in 1995 result from writedowns of $1.0 million on securities deemed to have an other than temporary dimunition in value. Unrealized gains in the company's bond portfolio were $10.1 million, $96.8 million and $46.8 million as of June 30, 1996, December 31, 1995 and June 30, 1995, respectively. BENEFITS, CLAIMS AND INTEREST CREDITED TO POLICYHOLDERS increased $6.4 million, or 22%, to $36.1 million in 1996 from $29.7 million in 1995. This increase results primarily from an increase in the annuity liabilities to $2,797.8 million on June 30, 1996, from $1,989.2 million on June 30, 1995. This increase was partially offset by a decrease in the average interest rate credited on the company's annuity liabilities, from 6.0% as of June 30, 1995, to 5.7% as of June 30, 1996. Both the increase in annuity liabilities and the decrease in the average interest rate credited on those liabilities is largely due to the acquisition of FBG. Amortization of deferred cost of policies purchased of $2.1 million represents the amortization of the purchase price allocated to the policies acquired in the acquisition of FBG. General insurance expenses increased $1.4 million, or 64%, to $3.6 million for the 1996 three months from $2.2 million for the same period in 1995. This increase is due primarily to the acquisition of FBG. Interest expense increased $.6 million as a result of the borrowing of $7.0 million in December, 1995 and an additional $28.0 million in April, 1996. The funds borrowed in 1996 were used to fund the acquisition of FBG. Income tax expense decreased $.6 million to $1.3 million in 1996 from $1.9 million in 1995. Taxes were provided at an effective rate of 37% on 1996 income and 35% on 1995 income. LIQUIDITY AND CAPITAL RESOURCES The company is an insurance holding company whose principal asset is the common stock of its insurance subsidiaries. The company's primary cash requirements are to pay operating expenses. As a holding company, the company relies on funds received from American and FBL 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, investment fees paid to AIG, rent, administrative, printing and data processing charges and dividends. The insurance laws of Kansas and Florida generally limit the ability of American and FBLto 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 approved by the Kansas Insurance Commissioner. 32 The liquidity requirements of American and FBLare 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 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 six months ended June 30, 1996, and 1995, was $1.8 million and $(41.3) million, respectively. The increase in net cash provided by annuity contracts without life contingencies in the first six months of 1996 resulted primarily from a $48.3 million increase in premiums received from $163.5 million to $211.8 million partially offset by an $7.0 million increase in surrender and death benefits paid from $126.9 million to $215.3 million. Net cash provided by the company's operating activities was $85.5 million and $76.8 million in 1996 and 1995, 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 (4% and 4% as of June 30, 1996, and December 31, 1995, respectively). The weighted average duration of the company's investment portfolio was 4.6 years as of June 30, 1996. 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 6 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 31, 1994, the company entered into a credit agreement with The First National Bank of Chicago and Boatmen's First National Bank of Kansas City, as Lenders. Under the terms of this agreement, the Lenders have committed to lend up to $15,000,000 in the form of a 5-year reducing credit facility, of which $7,000,000 has been been borrowed at December 31, 1995. For additional information regarding this credit agreement, see Note 5 of Notes to Consolidated Financial Statements. 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 11 of Notes to Consolidated Financial Statements. REINSURANCE. The company had amounts receivable under reinsurance agreements of $252.4 million and $146.6 million as of June 30, 1996, and December 31, 1995, respectively. Of the amounts, $142.0 million and $145.0 million, respectively, were associated with ERC. 33 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 (SPWL) policies 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. The company also 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. FBL and Philadelphia Life Insurance Company are parties to a reinsurance agreement under which FBLceded 100% of the risk on certain single premium deferred annuity policies on a coinsurance basis. As of June 30, 1996, the company had amounts receivable of $108.7 million resulting from this agreement. In addition, the company is a party to two assumption reinsurance agreements with other reinsurers. 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 1995), 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 1996), 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 continued throughout 1995 and into 1996. Management believes that surrenders are lower during periods of declining interest rates. PART II. OTHER INFORMATION AMVESTORS FINANCIAL CORPORATION Item 1. Legal Proceedings ________________________________ The company has no material legal proceedings pending against it. Item 2. Changes in Securities _____________________________________ None Item 3. Defaults upon Senior Securities _________________________________________________ None 34 Item 4. Submission of Matters to a Vote of Security Holders ________________________________________________________________________ A special meeting of the stockholders of the company was held April 8, 1996. A proposal to approve an agreement and plan merger of Financial Benefit Group, Inc. with the company passed with 6,189,247 shares voting in favor, 63,992 shares voting against and 40,841 shares abstaining. In addition, a proposal to vote upon an amendment to the 1989 Non-Qualified Stock Option Plan to increase the number of shares by 275,000 shares and to grant options in connection with the merger. This proposal passed with 5,980,893 shares voting in favor, 401,482 shares voting against and 47,685 shares abstaining. The annual meeting of the stockholders of the company was held May 16, 1996. The following Directors were elected at the annual meeting: Ralph W. Laster, Jr. R. Rex Lee, M.D. James V. O'Donnell Frank T. Crohn The names of the other Directors whose terms of office as Directors continued after the meeting were as follows: Janis L. Andersen Mark V. Heitz Robert T. McElroy, M.D. Jack R. Manning Robert G. Billings Jack H. Brier Robert R. Lee II John F.X. Mannion In addition, a proposal to approve the 1996 Incentive Stock Option Plan for 950,000 shares passed with 6,874,736 shares voting in favor, 1,024,813 shares voting against and 74,305 shares abstaining. Item 5. Other Information ________________________________ None Item 6. Exhibits and Reports on Form 8-K ___________________________________________________ (a)Exhibits (numbered in accordance with Item 601 of Regulations S-K).
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 Statement on Form S-2, Financial Corporation and American File No. 2-82811 dated Investors Life Insurance Company, November 26, 1996. Inc.
35
Exhibit Page Number or Incorporation Number Description by Reference (2)(b) Resolutions of the Board of Exhibit (2)(a) to Form 10-Q Directors dated January 7, 1988, dated May 11, 1988. providing for succession to the position of Chairman of the Board of Directors (2)(c) Agreement and Plan of Merger dated Exhibit (2.1)to Registration September 8, 1995, between Financial Statement on Form S-4, Benefit Group, Inc., AmVestors File No. 333-01309 dated Financial Corporation and AmVestors March 1, 1996 Acquisition Subsidiary, Inc. as amended (3)(a) Articles of Incorporation as Amended Exhibit (3)(a) to Form 10-Q and Restated dated October 26, 1993 (3)(b) Bylaws of the company Exhibit (4.2) to Registration Statement on Form S-8, File No. 33-31155 dated September 19, 1989 (4)(a) Specimen Common Stock Certificate Exhibit (4)(a) to Form 10-K dated March 30, 1995. (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 dated May 13, 1992 (10)(a) Form of Indemnification Agreement between Exhibit (10(a) to Form 10-K company and its officers and directors dated March 29, 1988 (10)(b) 1989 Non-Qualified Stock Option Plan Exhibit (10)(q) to Form 10-K adopted March 17, 1989 dated April 12, 1989 (10)(c) Stock Appreciation Rights Plan adopted Exhibit (10)(r) to Form 10-K March 17, 1989 dated April 12, 1989 (10)(d) Restricted Stock Plan adopted Exhibit (4.4) to Registration March 17, 1989 Statement on Form S-8, File No. 33-31155 dated September 19, 1989 (10)(e) Employment Agreement dated December 17, Exhibit (10)(l) to Form 10-K 1992, among the company, it's dated March 30, 1993 subsidiaries and Mark V. Heitz (10)(f) Employment Agreement dated October 3, Exhibit (10)(a) to Form 10-Q 1994, among the company, its dated November 10, 1994 subsidiaries and Ralph W. Laster, Jr.
36
Exhibit Page Number or Incorporation Number Description by Reference (10)(g) Bonus Compensation Agreement dated Exhibit (10)(b) to Form 10-Q September 30, 1994, between the 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, Exhibit (10)(i) to Form 10-K between the company, First National Bank dated March 30, 1995 of Chicago and Boatmen's First National Bank of Kansas City (10)(j) Amendment No. 1 to Credit Agreement dated Exhibit (10)(a) to Form 10-Q December 29, 1994, between the company, dated August 11, 1995 First National Bank of Chicago and Boatmen's First National Bank of Kansas City (10)(k) 1994 Stock Purchase Plan for Non-Employee Exhibit (10)(j) to Form 10-K Directors effective February 24, 1994 dated March 30, 1995 (10)(l) Incentive Compensation Plan between the Exhibit (10)(k) to Form 10-K company and certain designated employees dated March 30, 1995 effective for the calendar year 1994 (10)(m) 1995 Special Incentive Bonus Agreement Exhibit (10)(m) to Form 10-K dated April 27, 1995, between the company dated March 14, 1996 and Ralph W. Laster, Jr. (10)(n) 1995 Special Incentive Bonus Agreement Exhibit (10)(n) to Form 10-K dated April 27, 1995, between the company dated March 14, 1996 and Mark V. Heitz (10)(o) Credit Agreement dated April 8, 1996 PP 40-109 between the company, First National Bank of Chicago and Boatmen's First National Bank of Kansas City (11) Calculation of Earnings per Share P 110 (20)(a) Reports on Form 8-K There were no reports on Form 8-K for the three months ended June 30, 1996
37
Exhibit Page Number or Incorporation Number Description by Reference (22) 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 AmVestors Acquisition Subsidiary, Inc. 415 Southwest Eighth Avenue Topeka, Kansas 66603 Financial Benefit Life Insurance Company 7251 West Palmetto Park Road Boca Raton, Florida 33433 Annuity International Marketing Corporation 7251 West Palmetto Park Road Boca Raton, Florida 33433 Financial Benefit Management Corporation 7251 West Palmetto Park Road Boca Raton, Florida 33433 The Insurancemart, Inc. 7251 West Palmetto Park Road Boca Raton, Florida 33433 Rainbow Card Pack Publication, Inc. 7251 West Palmetto Park Road Boca Raton, Florida 33433 (27) Financial Data Schedule
38 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: /c/ 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: August 14, 1996 ____________________ 39 EX-10.O 2 $35,000,000 CREDIT AGREEMENT AMONG AMVESTORS FINANCIAL CORPORATION, as Borrower, THE LENDERS NAMED HEREIN and THE FIRST NATIONAL BANK OF CHICAGO, as Agent DATED AS OF April 8, 1996 TABLE OF CONTENTS ARTICLE I DEFINITIONS 1 ARTICLE II THE CREDITS 17 2.1. Advances 17 2.2. Ratable Loans 17 2.3. Types of Advances 17 2.4. Commitment Fee; Reductions in Aggregate Revolving Credit Commitment 17 2.5. Minimum Amount of Each Advance 18 2.6. Optional Principal Payments 18 2.7. Mandatory Commitment Reductions 18 2.8. Method of Selecting Types and Interest Periods for New Advances 19 2.9. Conversion and Continuation of Outstanding Advances 20 2.10. Changes in Interest Rate, etc. 20 2.11. Rates Applicable After Default 21 2.12. Method of Payment 21 2.13. Notes; Telephonic Notices 21 2.14. Interest Payment Dates; Interest and Fee Basis 21 2.15. Notification of Advances, Interest Rates, Prepayments and Commitment Reductions 22 2.16. Lending Installations 22 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 25 4.1. Initial Loan 25 4.2. Each Future Advance 28 ARTICLE V REPRESENTATIONS AND WARRANTIES 29 5.1. Corporate Existence and Standing 29 5.2. Authorization and Validity 29 5.3. Compliance with Laws and Contracts 29 5.4. Governmental Consents 30 5.5. Financial Statements 30 5.6. Material Adverse Change 30 5.7. Taxes 30 5.8. Litigation and Contingent Obligations 31 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 32 5.16. Ownership of Properties 33 5.17. Indebtedness 33 5.18. Employee Controversies 33 5.19. Material Agreements 33 5.20. Environmental Laws 33 5.21. Corporate Insurance 34 5.22. Insurance Licenses. 34 5.23. Merger Documents 34 5.24. Disclosure 35 ARTICLE VI COVENANTS 35 6.1. Financial Reporting 35 6.2. Use of Proceeds 38 6.3. Notice of Default. 38 6.4. Conduct of Business 38 6.5. Taxes 39 6.6. Corporate Insurance 39 6.7. Compliance with Laws 39 6.8. Maintenance of Properties 39 6.9. Inspection 39 6.10. Dividends 39 6.11. Indebtedness 40 6.12. Merger 40 6.13. Sale of Assets 40 - -ii- 6.14. Sale and Leaseback 40 6.15. Investments and Purchases 41 6.16. Contingent Obligations 42 6.17. Liens 42 6.18. Affiliates 43 6.19. Amendments to Agreements 43 6.20. Environmental Matters 43 6.21. Change in Corporate Structure; Fiscal Year 44 6.22. Inconsistent Agreements 44 6.23. Financial Covenants 44 6.23.1. Net Worth 44 6.23.2. Leverage Ratio 44 6.23.3. Fixed Charge Coverage Ratio 44 6.23.4. Risk-Based Capital 44 6.23.5. Unassigned Earned Surplus 45 6.23.6 Cash Flow Tests 45 6.24. Tax Consolidation 45 6.25. ERISA Compliance 45 6.26. Derivatives 46 ARTICLE VII DEFAULTS 46 ARTICLE VIII ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES 48 8.1. Acceleration 48 8.2. Amendments 48 8.3. Preservation of Rights 49 ARTICLE IX GENERAL PROVISIONS 49 9.1. Survival of Representations 49 9.2. Governmental Regulation 49 9.3. Taxes 50 9.4. Headings 50 9.5. Entire Agreement 50 9.6. Several Obligations; Benefits of this Agreement 50 9.7. Expenses; Indemnification 50 9.8. Numbers of Documents 50 9.9. Accounting 50 9.10. Severability of Provisions 51 - -iii- 9.11. Nonliability of Lenders 51 9.12. CHOICE OF LAW 51 9.13. CONSENT TO JURISDICTION 51 9.14. WAIVER OF JURY TRIAL 52 9.15. Disclosure 52 9.16. Counterparts 52 ARTICLE X THE AGENT 52 10.1. Appointment 52 10.2. Powers 52 10.3. General Immunity 52 10.4. No Responsibility for Loans, Recitals, etc. 53 10.5. Action on Instructions of Lenders 53 10.6. Employment of Agents and Counsel 53 10.7. Reliance on Documents; Counsel 53 10.8. Agent's Reimbursement and Indemnification 53 10.9. Notice of Default 54 10.10. Rights as a Lender 54 10.11. Lender Credit Decision 54 10.12. Successor Agent 54 ARTICLE XI SETOFF; RATABLE PAYMENTS 55 11.1. Setoff 55 11.2. Ratable Payments 55 ARTICLE XII BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS 56 12.1. Successors and Assigns 56 12.2. Participations. 56 12.2.1. Permitted Participants; Effect. 56 12.2.2. Voting Rights 56 12.2.3. Benefit of Setoff 56 12.3. Assignments 57 12.3.1. Permitted Assignments 57 12.3.2. Effect; Effective Date 57 12.4. Dissemination of Information 57 12.5. Tax Treatment 57 - -iv- ARTICLE XIII NOTICES 58 13.1. Giving Notice 58 13.2. Change of Address 58 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 5.4 - Governmental Consents Schedule 5.5 - Pro Forma Balance Sheet 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 April 8, 1996, 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. Financial Benefit Group, Inc. ("Financial Benefit"), a Delaware corporation, is party to a certain Merger Agreement (as hereinafter defined) pursuant to which Financial Benefit is to be merged with and into AmVestors Acquisition Subsidiary, Inc. ("Acquisition Co."), a Delaware corporation and a wholly-owned subsidiary of the Borrower (as hereinafter defined), with Acquisition Co. being the surviving corporation of such merger; B. The Borrower has requested the Lenders to make financial accommodations to it in the aggregate principal amount of $35,000,000, the proceeds of which the Borrower will use (a) in part to finance the cash payment to be made pursuant to the Merger Agreement, (b) to refinance certain indebtedness of the Borrower and its Subsidiaries and (c) for the general corporate purposes of the Borrower and its Subsidiaries; and C. 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: "Acquisition Co." is defined in the recitals hereof. "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 38 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 ten percent (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. - -2- "Applicable Commitment Fee Percentage" means, subject to the last sentence of this definition, for any period, the applicable of the following percentages in effect with respect to such period as Total Funded Debt shall fall within the indicated ranges:
Total Funded Debt Applicable Commitment Fee Percentage not less than $30 million 0.375% less than $30 million but 0.375% greater than or equal to $25 million less than $25 million but 0.375% greater than or equal to $20 million less than $20 million but 0.250% greater than or equal to $15 million less than $15 million 0.250%
Total Funded Debt shall be calculated by the Borrower as of the end of each of its fiscal quarters commencing June 30, 1996 and shall be reported to the Agent pursuant to a certificate executed by the chief financial officer of the Borrower and delivered in accordance with Section 6.1(h) hereof. The Applicable Commitment Fee Percentage shall be adjusted, if necessary, quarterly as of the tenth day after the required delivery date for the certificate provided for above; provided, that if such certificate, together with the financial statements to which such certificate relates, are not delivered by such tenth day, then the Applicable Commitment Fee Percentage shall be equal to 0.375% for the relevant quarter. Until adjusted as described above after June 30, 1996, the Applicable Commitment Fee Percentage shall be equal to 0.375%. "Applicable Eurodollar Margin" means, subject to the last sentence of this definition, for any period, the applicable of the following percentages in effect with respect to such period as Total Funded Debt shall fall within the indicated ranges:
Total Funded Debt Applicable Eurodollar Margin not less than $30 million 1.75% less than $30 million but 1.50% greater than or equal to $25 million less than $25 million but 1.25% greater than or equal to $20 million less than $20 million but 1.00% greater than or equal to $15 million less than $15 million .075%
Total Funded Debt shall be calculated by the Borrower as of the end of each of its fiscal quarters commencing June 30, 1996 and shall be reported to the Agent pursuant to a - -3- certificate executed by the chief financial officer of the Borrower and delivered in accordance with Section 6.1(h) hereof. The Applicable Eurodollar Margin shall be adjusted, if necessary, quarterly as of the tenth day after the required delivery date for the certificate provided for above; provided, that if such certificate, together with the financial statements to which such certificate relates, are not delivered by such tenth day, then the Applicable Eurodollar Margin shall be equal to 1.75% for the relevant quarter. Until adjusted as described above after June 30, 1996, the Applicable Eurodollar Margin shall be equal to 1.75%. "Applicable Floating Rate Margin" means, subject to the last sentence of this definition, for any period, the applicable of the following percentages in effect with respect to such period as Total Funded Debt shall fall within the indicated ranges: Total Funded Debt Applicable Floating Rate Margin not less than $30 million 0.50% less than $30 million but 0.25% greater than or equal to $25 million less than $25 million 0.00% Total Funded Debt shall be calculated by the Borrower as of the end of each of its fiscal quarters commencing June 30, 1996 and shall be reported to the Agent pursuant to a certificate executed by the chief financial officer of the Borrower and delivered in accordance with Section 6.1(h) hereof. The Applicable Floating Rate Margin shall be adjusted, if necessary, quarterly as of the tenth day after the required delivery date for the certificate provided for above; provided, that if such certificate, together with the financial statements to which such certificate relates, are not delivered by such tenth day, then the Applicable Floating Rate Margin shall be equal to 0.50% for the relevant quarter. Until adjusted as described above after June 30, 1996, the Applicable Floating Rate Margin shall be equal to 0.50%. "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 et seq., as the same may be amended from time to time, and any successor thereto or replacement therefor which may be hereafter enacted. - -4- "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 (1) 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 interest 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. "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 - -5- Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934) of twenty percent (20%) or more of the outstanding shares of voting stock of the Borrower, or (b) during any period of twenty-five (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 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. - -6- "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 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 (2) 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 (2) Business Days prior to the first day of such Interest Period. - -7- "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 (1) minus the Reserve Requirement (expressed as a decimal) applicable to such Interest Period, plus, (b) the Applicable Eurodollar Margin. 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 April 8, 2002. "FB Life" means Financial Benefit Life Insurance Company, a Florida insurance company and wholly-owned subsidiary of Financial Benefit. "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 (3) Federal funds brokers of recognized standing selected by the Agent in its sole discretion. "Financial Benefit" is defined in the recitals hereof. "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 (4) 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. "Fixed Charge Coverage Ratio" means, as of the end of any Fiscal Quarter, the ratio of (a) the sum of (i) the greater of (x) the aggregate Statutory Net Income of American for the period of four (4) Fiscal Quarters ending on such date or (y) ten percent (10%) of the capital and surplus of American determined as of the end of the immediately preceding Fiscal Year, plus (ii) the greater of (x) the aggregate Statutory Net Income of FB Life for the period of four (4) Fiscal Quarters ending on such date or (y) ten percent (10%) of the capital and surplus of FB Life determined as of the end of the immediately preceding Fiscal Year, plus (iii) the aggregate net income (determined in accordance with Agreement Accounting Principles) of the Borrower and its Unregulated Subsidiaries, determined on a non-consolidated basis for the period of four (4) Fiscal Quarters ending on such date, to (b) the sum of (i) the aggregate interest expenses of the Borrower and its Subsidiaries on a - -8- consolidated basis for the period of four (4) 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 (including without limitation an amount equal to the excess, if any, of (A) the aggregate principal balance of the Loans as of the end of the applicable Fiscal Quarter over (B) the amount of the Aggregate Revolving Credit Commitment at such time less the sum of the scheduled reductions therein to occur during the next succeeding four Fiscal Quarters pursuant to Section 2.7). 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. "Floating Rate" means, for any day, a rate of interest per annum equal to the sum of (a) the higher of (i) the Corporate Base Rate for such day, or (ii) the sum of the Federal Funds Effective Rate for such day plus one-half percent (1/2 %) per annum plus (b) the Applicable Floating Rate Margin. "Floating Rate Advance" means an Advance which bears interest at the Floating Rate. "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. "Hostile Takeover" means a Purchase of any Person which has not been approved and recommended by the Board of Directors (or functional equivalent) of the Person being acquired. "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 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 - -9- (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 otherwise 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. "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. - -10- "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. "Merger" means the merger of Financial Benefit with and into Acquisition Co. pursuant to the Merger Documents. "Merger Agreement" means that certain Agreement and Plan of Merger dated as of September 8, 1995 by and among Acquisition Co., Financial Benefit and the Borrower, as amended by Amendment No. 1 dated as of October 17, 1995, Amendment No. 2 dated as of December 28, 1995 and Amendment No. 3 dated as of February 14, 1996, and as the same may be amended or modified after the date hereof with the consent of the Required Lenders. "Merger Documents" means the Merger Agreement together with the certificate for ownership and merger filed with the Secretary of State of the State of Delaware to effectuate the Merger and the other documents, certificates and agreements delivered in connection with the Merger Agreement. "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. - -11- "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. "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. "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. - -12- "Person" means any natural person, corporation, firm, joint venture, partnership, association, enterprise, trust or other entity or organization, or any 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. "Pro Forma" is defined in Section 5.5. "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 - -13- date, 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 thirty (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. "Required Lenders" means Lenders in the aggregate having at least sixty-six and two-thirds percent (66-2/3%) of the Aggregate Revolving Credit Commitment or, if the - -14- Aggregate Revolving Credit Commitment has been terminated, Lenders in the aggregate holding at least sixty-six and two-thirds percent (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. "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 Statement). - -15- "Subsidiary" of a Person means (a) any corporation more than fifty percent (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 fifty percent (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 ten percent (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 ten percent (10%) of the consolidated net revenues or of the consolidated net income of the Borrower and its Subsidiaries for the twelve-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 Medical, Inc., as amended to date, as amended to delete Omni-Tech Medical, Inc. and add Financial Benefit and its Subsidiaries as parties thereto, and as further 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. "Total Funded Debt" means all Indebtedness of the Borrower and its Subsidiaries which would be reflected on a consolidated balance sheet of the Borrower and its Subsidiaries prepared in accordance with Agreement Accounting Principles. "Transaction Documents" means, collectively, the Loan Documents and the Merger Documents. "Transferee" is defined in Section 12.4. - -16- "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. "Unassigned Earned Surplus" means, with respect to any Insurance Subsidiary, its "unassigned funds (surplus)" ("Liabilities, Surplus and Other Funds" statement, page 3, line 35 of the Annual Statement) of such Insurance Subsidiary. "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 one hundred percent (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. - -17- 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 equal to the product of (i) the Applicable Commitment Fee Percentage per annum times (ii) 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 commitment - -18- fees shall be payable on the effective date of any reduction in or 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 (2) 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 12/31/97 $1,500,000 3/31/98 1,500,000 6/30/98 2,000,000 9/30/98 2,000,000 12/31/98 2,000,000 3/31/99 2,000,000 6/30/99 2,000,000 9/30/99 2,000,000 12/31/99 2,000,000 3/31/00 2,000,000 6/30/00 2,000,000 9/30/00 2,000,000 12/31/00 2,000,000 3/31/01 2,000,000 - -19- 6/30/01 2,000,000 9/30/01 2,000,000 12/31/01 2,000,000 3/31/02 2,000,000 or such other amount as shall then be outstanding (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 or its Subsidiaries 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 (other than sales to the Borrower or its Wholly-Owned Subsidiaries) during each Fiscal Year. Contemporaneously with any automatic reductions in the Aggregate Revolving Credit Commitment pursuant to this Section 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 (1) 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; - -20- (c) the Type of Advance selected; and (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 of 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 portion of any Advance maintained as a Floating Rate Advance will take effect simultaneously with each change in the Corporate Base Rate. Each - -21- 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 confirmation, 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. - -22- 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 June 30, 1996, 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 (3) 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 or any fee payable hereunder 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 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 - -23- 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, 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 (5) 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 (2) 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 - -24- 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 (2) 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 (1) 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. 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 - -25- (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 fifteen (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 fifteen (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 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 until such circumstance no longer exists 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 - -26- 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 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 April 30, 1996: (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 - -27- 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, 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 consummation of the Merger, the consummation of the other transactions contemplated by the Transaction Documents and the making of the Loans hereunder (collectively, the "Closing Transactions")) 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 other Closing Transaction, or 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 Transaction Documents are in full force and effect and no term or condition thereof has been amended, modified or waived after the execution thereof except with the written consent of the Required Lenders; (v) the Merger has been consummated in accordance with the Merger Agreement and no conditions to closing set forth therein have been waived; (vi) 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; (vii) 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 (both before and after giving effect to the Closing Transactions); and (viii) since December 31, 1995, no event or change has occurred that has caused or evidences a Material Adverse Effect. (e) Legal Opinions. (i) A written opinion of Bryan Cave L.L.P., counsel to the Borrower, addressed to the Agent and the Lenders in form and substance acceptable to the Agent and its counsel and (ii) confirmation from counsel to each party to the Merger Agreement that the Agent and the Lenders may rely upon its opinion delivered pursuant to the Merger Agreement. (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. - -28- (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, where applicable, 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 jurisdiction of domicile and, with respect to American, from the States of Ohio, Illinois, California, Florida, Wisconsin and Texas and, with respect to FB Life, from the States of Florida, Ohio and Michigan. (k) Merger Documents. A copy of the Merger Documents and any amendments, supplements and modifications thereto certified as true and complete by an Authorized Officer, together with evidence satisfactory to the Agent that the Merger has been consummated. (l) Financial Statements. The Lenders shall have received (i) the Pro Forma which shall not be less favorable, in the Lenders' reasonable judgment, than the projections previously provided to them and which shall demonstrate, in their reasonable judgment, together with all other information then available to the Lenders, that the Borrower and its Subsidiaries can repay their debts and satisfy their respective other obligations as and when due, and can comply with the financial covenants set forth herein and (ii) such information as the Lenders may reasonably request to confirm the tax, legal and business assumptions made in the Pro Forma. (m) Bank Payoff Letter. A bank payoff letter in form and substance acceptable to the Agent from Fleet National Bank (f/k/a Shawmut Bank Connecticut, N.A.) stating that the total amount due under Financial Benefit's loan agreements with such lender shall be satisfied (and such agreements terminated) upon payment of an amount certain, which amount shall not in any event be greater than $16,000,000, together with such lien releases and other documents as the Agent shall require. (n) Repayment of Indebtedness. All Indebtedness of the Borrower under that certain Credit Agreement dated as of December 29, 1994 among the Borrower, The First National Bank of Chicago, as agent, and the lenders party thereto shall be repaid in full. - -29- (o) A.M. Best Rating. The Agent shall not have received notice to the effect that, immediately prior to the Closing, American's rating from A.M. Best & Co. is less than "A-." (p) Actuarial Reports. The Agent shall have received true and complete copies of actuarial reports prepared by (i) Actuarial Resources Corporation, (in the case of American for the period ended December 31, 1995) and (ii) Milliman and Robertson, Inc. (in the case of FB Life for the period ended October 31, 1995), each in form and substance satisfactory to the Lenders, demonstrating that the reserves and assets maintained by FB Life (including, without limitation, its current and prospective Investment portfolio) and American, are adequate and sufficient to fund the legal and contractual obligations (including, without limitation, any obligation to declare dividends) of FB Life and American to their respective policy holders together with such other actuarial reports or reviews as the Agent has requested. (q) Dividends. The Lenders shall be satisfied as to the ability of FB Life to pay dividends. (r) 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. - -30- 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. 5.2. Authorization and Validity. The Borrower and each Subsidiary have 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 the other Transaction Documents to which it is a party and to perform its obligations thereunder. The execution and delivery (or filing, as the case may be) by the Borrower and each Subsidiary of the Loan Documents and the other Transaction Documents to which it is a party and the performance of its obligations thereunder have been duly authorized by proper corporate proceedings and the Loan Documents and the other Transaction Documents constitute legal, valid and binding obligations of the Borrower or such Subsidiary, as applicable, enforceable against the Borrower or such Subsidiary, as applicable, 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 and each Subsidiary of the Loan Documents and the other Transaction Documents to which it is a party, the application of the proceeds of the Loans, the consummation of the Closing Transactions or any other transaction contemplated in the Loan Documents and the other Transaction Documents, nor compliance with the provisions of the Loan Documents and the other Transaction 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 - -31- 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, delivery, consummation or performance of, or the legality, validity, binding effect or enforceability of, any of the Loan Documents or the other Transaction Documents, the application of the proceeds of the Loans or the consummation of the Merger or any other transaction contemplated in the Loan Documents or the other Transaction Documents, except such as have been previously obtained and remain in full force and effect and disclosed on Schedule 5.4 hereto. No filings were required to be made with respect to the Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. 5.5. Financial Statements. The Borrower has heretofore furnished to each of the Lenders (a) the December 31, 1995 audited consolidated financial statements of the Borrower and its Subsidiaries, (b) the December 31, 1995 statutory financial statements of American (c) the December 31, 1995 audited consolidated financial statements of Financial Benefit and (d) the December 31, 1995 statutory financial statements of FB Life (collectively, the "Financial Statements"). The pro forma balance sheet (the "Pro Forma") of the Borrower and its Subsidiaries on a consolidated basis as of January 1, 1996 is attached hereto as Schedule 5.5. As of the date hereof, the Pro Forma estimates the Borrower's and the Subsidiaries' assets and liabilities on a consolidated basis, taking into account the Closing Transactions and the other transactions and actions contemplated by this Agreement and the other Transaction Documents, and is based upon assumptions that the Borrower believes are reasonable and appropriate as of the date hereof. 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 (i) the Borrower and its Subsidiaries and (ii) Financial Benefit and its Subsidiaries has occurred since December 31, 1995. 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 - -32- 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 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 or the consummation of any other Closing Transaction. 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 after giving effect to the Merger and the other Closing Transactions and (b) an accurate list of all of the existing Subsidiaries as of the date of this Agreement after giving effect to the Merger and the other Closing Transactions, 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 - -33- 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 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 (5) 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, nor any other aspect of the financing of the Merger, 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 twenty-five percent (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. - -34- 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 (including, without limitation, the Merger) contemplated by this Agreement or the other Transaction Documents 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 liability. 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 other Transaction Documents and the payment of all fees, costs and expenses payable by the Borrower with respect to the transactions contemplated by the Loan Documents and the other Transaction 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 and the other Closing Transactions. 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, - -35- other than employee grievances arising in the ordinary course of business, which, in the aggregate, could not reasonably 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 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 Subsidiaries will not be materially impacted or affected by the compliance - -36- 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. Merger Documents. The Borrower has delivered to each of the Lenders true, complete and correct copies of the Merger Documents. The Merger Documents as originally executed and delivered by the parties thereto have not been amended, waived, supplemented or modified in any material respect as of the date hereof without the consent of the Lenders. Each of the representations and the warranties of the Borrower and Acquisition Co. (and, to the knowledge of the Borrower, of Financial Benefit) are true and correct in all material respect as of the date hereof. Neither the Borrower nor, to the Borrower's knowledge, any other party thereto is in default in the performance of or compliance with any provisions thereof. The Merger Documents are in form and substance satisfactory for effecting the Merger pursuant to such agreements under the laws of the State of Delaware, all required Merger Documents have been filed with the Secretary of State of the State of Delaware and the Merger has been effected and is valid in accordance with the laws of the State of Delaware. 5.24. 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 - -37-(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. 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 ninety (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 Exhibit 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 forty-five (45) days after the close of the first three (3) 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. - -38- (c) (i) Upon the earlier of (A) fifteen (15) days after the regulatory filing date or (B) seventy-five (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 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) sixty (60) days after the close of each of the first three (3) 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 (10) 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's 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 two hundred seventy (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 ten (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. - -39- (k) As soon as possible and in any event within ten (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 (10) 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 to provide funds for the Merger and the payment of related fees and expenses and the repayment of certain indebtedness of the Borrower and its Subsidiaries and 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). 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 - -40-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. The Borrower shall cause Acquisition Co. (a) to carry on and conduct solely the business of an insurance holding company and (b) not to incur any Indebtedness. 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. 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. - -41- 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 or any Wholly-Owned Subsidiary of the Borrower, and (b) so long as no Default or Event of Default is pending before or after 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 1996 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) twenty- five percent (25%) of Net Income for the prior Fiscal Year. - -42- 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 Statement) of such Insurance Subsidiary at any one time outstanding; and (e) 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; (ii) such incurrence would not violate Section 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) the Borrower is the surviving corporation, (b) no Default or Unmatured Default has occurred and is continuing or would occur after giving effect thereto and (c) unless such transaction is permitted under Section 6.15(a)(iv), 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 Section 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. - -43- 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 or Acquisition Co. or by Acquisition Co. in FB Life, in each case 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 (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); and (v) Derivatives Investments made by the Borrower in respect of the Obligations. (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 Section 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 - -44- 6.15(b)(iii) and the date which is thirty (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, fifteen percent (15%) of the aggregate Investments of any Insurance Subsidiary, of which not more than (A) four percent (4%) of such aggregate Investments shall consist of Investments in real estate mortgages, (B) three percent (3%) of such aggregate Investments shall consist of Investments in real estate, (C) ten percent (10%) of such aggregate 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 aggregate Investments shall consist of Investments in equity securities or (E) four percent (4%) of such aggregate 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 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); and (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, one percent (1%) of the investment assets ("Assets" statement, Page 2, Line 10A of the Annual Statement) 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 thirty (30) days after the date on which such requirement is no longer met; provided, 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. - -45- 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 sixty (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; (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; (e) Liens on securities constituting joint custody receipts in favor of the Kansas Department of Insurance or the Florida Department of Insurance; and (f) 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. - -46- 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 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 materially 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, 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 equal to or greater than the sum of (a) $116,000,000 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 - -47-Quarter ending on or after March 31, 1996, plus (c) an amount equal to one hundred percent (100%) of the cash and non-cash proceeds of any equity securities issued by the Borrower on or after the date of this Agreement (including in connection with the Merger). 6.23.2. Leverage Ratio. At all times after the date hereof, maintain a Leverage Ratio of not more .20:1.0. 6.23.3. Fixed Charge Coverage Ratio. As of the end of each Fiscal Quarter, maintain a Fixed Charge 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 two hundred percent (200%). 6.23.5. Unassigned Earned Surplus. At all times after the date hereof, cause American to maintain an Unassigned Earned Surplus of not less than $10,000,000. 6.23.6 Cash Flow Tests. As of May 31 and October 31 of each year, cause the present value of statutory net income (including earnings on capital, surplus and asset valuation reserve discounted at the portfolio earnings rate) calculated pursuant to the New York State Regulation 126 cash flow tests for American, and for American and FB Life on a combined basis, to be not less than zero in each of the following interest rate scenarios: (i) level; (ii) increase of 3.00%; and (iii) decrease of 3.00%. 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 in any material respect (other than as contemplated in the definition of "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; - -48- (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 (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 shall not, nor shall it permit any Subsidiary to, enter into any Derivatives Investments except that 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 American Investors Life Insurance Company, Inc. Fixed Income Investment Guidelines revised March, 1996, 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. - -49- 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 (5) 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 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 (30) 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 - -50-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 (30) 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 payment 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 thirty (30) days after the commencement thereof, (b) shall be suspended by such Governmental Authority for a period in excess of thirty (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. - -51- 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 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 (10) 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 - -52- (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. 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. - -53- 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 February 29, 1996 in favor of First Chicago. 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. - -54- 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 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 - -55-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. 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. - -56- 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. 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 - -57-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. 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 - -58-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 (30) 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 (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, - -59-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 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. - -60- 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 which are not Affiliates of the Borrower ("Purchasers") all or any part of its 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 - -61- 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. 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. AMVESTORS FINANCIAL CORPORATION By: 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: 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 $12,500,000 FLEET NATIONAL BANK By: Name: Title: Address: One Federal Street, MAOF0210 Boston, MA 02211 Telecopy: 617/346-5825 Telephone: 617/346-5827 $10,000,000 BOATMEN'S FIRST NATIONAL BANK OF KANSAS CITY By: Name: Title: Address: 14 West 10th Street, 5th Floor Kansas City, MO 64105 Telecopy: 816/691-7426 Telephone: 816/691-7569 Initial Aggregate Revolving Credit Commitment $35,000,000 EX-11 3
AMVESTORS FINANCIAL CORPORATION AND SUBSIDIARIES EXHIBIT 11 CALCULATION OF EARNINGS (LOSS) PER SHARE (000's Omitted, except per share data) For the Six Months Ended For the Quarter Ended June 30, June 30, 1996 1995 1996 1995 CALCULATION OF PRIMARY EARNINGS PER SHARE Earnings for primary earnings per share.......................... $ 9,690 7,087 2,269 3,571 Average number of shares outstanding........................ 11,506 10,063 12,838 10,073 Dilutive effect of stock options and warrants after application of treasury stock method........ 580 221 736 248 Average number of common shares and common equivalents outstanding......................... 12,086 10,284 13,574 10,321 Primary earnings per share................ $ .80 .69 .17 .35 CALCULATION OF FULLY DILUTED EARNINGS PER SHARE Earnings for fully diluted earnings per share............... $ 9,690 7,087 2,269 3,571 Shares used in calculating primary earnings per share.......... 12,086 10,284 13,574 10,321 Additional dilutive effect of stock options and warrants after application of treasury stock method........................ 187 85 97 60 Average number of common shares outstanding on a fully diluted basis................................ 12,273 10,369 13,671 10,381 Fully diluted earnings per share....... $ .79 .68 .17 .34 110
EX-27 4
7 1,000 6-MOS DEC-31-1995 JUN-30-1996 2,573,421 2,580,208 2,580,208 30,661 0 0 2,652,776 9,407 252,410 177,901 3,210,421 2,976,738 0 0 5,392 35,000 16,438 0 0 167,090 3,210,421 6,353 89,157 2,534 713 66,765 743 8,865 14,980 5,243 9,737 0 (47) 0 9,690 .80 .79 0 0 0 0 0 0 0
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