-----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, NrsLsp8ZR/V84WQ0JiJSTZsZiKOPESAj8UdTfNSklGtD6p9+OiPS3GodkKIgmPSt AGw5QPQr26tI2Thnau6GMw== 0000950129-97-001062.txt : 19970318 0000950129-97-001062.hdr.sgml : 19970318 ACCESSION NUMBER: 0000950129-97-001062 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970317 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: WESTERN NATIONAL CORP CENTRAL INDEX KEY: 0000913202 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 752502064 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-12540 FILM NUMBER: 97558026 BUSINESS ADDRESS: STREET 1: 5555 SAN FELIPE ROAD STE 900 CITY: HOUSTON STATE: TX ZIP: 77056 BUSINESS PHONE: 7138887805 MAIL ADDRESS: STREET 1: 5555 SAN FELIPE STREET 2: SUITE 900 CITY: HOUSTON STATE: TX ZIP: 77056 10-K405 1 WESTERN NATIONAL CORPORATION - DATED 12/31/96 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 1-12540 WESTERN NATIONAL CORPORATION (Exact name of registrant as specified in its articles of incorporation) DELAWARE 75-2502064 (State of incorporation) (I.R.S. Employer Identification No.) 5555 SAN FELIPE ROAD, HOUSTON, TEXAS 77056 (Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 888-7800 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- Common Stock, Par Value $.001 per share New York Stock Exchange 7 1/8% Senior Notes due 2004 New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value based on published prices as of March 6, 1997, of Western National's voting stock held by non-affiliates was approximately $886.3 million. As of March 6, 1997, there were outstanding 62,509,412 shares of Western National common stock. ================================================================================ 2 INDEX PART I Item 1. Business.................................................... 1 Item 2. Properties.................................................. 20 Item 3. Legal Proceedings........................................... 20 Item 4. Submission of Matters to a Vote of Security Holders......... 20 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....................................... 21 Item 6. Selected Financial Data..................................... 22 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 24 Item 8. Consolidated Financial Statements and Supplementary Data.... 44 Report of Management........................................ 45 Report of Independent Accountants........................... 46 Consolidated Balance Sheet at December 31, 1996 and 1995.... 47 Consolidated Statement of Operations for the Years Ended December 31, 1996, 1995 and 1994.......................... 48 Consolidated Statement of Shareholders' Equity for the Years Ended December 31, 1996, 1995 and 1994.................... 49 Consolidated Statement of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994.......................... 50 Notes to Consolidated Financial Statements.................. 51 Report of Independent Accountants on Financial Statement Schedules................................................. 76 Financial Statement Schedules: Schedule I -- Condensed Financial Information of Registrant at December 31, 1996 and 1995 and for the Years Ended December 31, 1996, 1995 and 1994.................................................. 77 Schedule VI -- Reinsurance for the Years Ended December 31, 1996, 1995 and 1994................................... 82 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................. 82 PART III Item 10. Directors and Executive Officers of the Registrant.......... 83 Item 11. Executive Compensation...................................... 83 Item 12. Security Ownership of Certain Beneficial Owners and Management................................................ 83 Item 13. Certain Relationships and Related Transactions.............. 83 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................................................... 84
i 3 PART I ITEM 1. BUSINESS BACKGROUND Western National Corporation (the "Company") is a Delaware corporation organized in October 1993 to serve as the holding company for Western National Life Insurance Company ("Western"), a Texas life insurance company founded in 1944. Western is a leading provider of retirement annuity products, with $10.1 billion of assets at December 31, 1996. Unless the context otherwise requires, references to the "Company" are references to Western National Corporation and its consolidated subsidiaries. In a series of transactions consummated on February 15, 1994 (the "Reorganization"), the Company acquired all of the outstanding capital stock of Western from Conseco, Inc. ("Conseco") and issued to Conseco shares of common stock of the Company and a note. Conseco then sold approximately 35 million shares of common stock of the Company in a public offering, and the Company sold an additional 2.3 million shares of common stock in the same offering. In February 1994, the Company also issued $150 million principal amount of 7 1/8% Senior Notes due 2004 ("the Senior Notes"), and repaid its note to Conseco. In December 1994, AGC Life Insurance Company ("AGC Life"), a Missouri-domiciled life insurer, purchased the remaining shares of common stock held by Conseco. These shares represented approximately 40% of the Company's outstanding common stock. AGC Life is a wholly-owned subsidiary of American General Corporation, a Texas corporation ("AGC"). References to "American General" are references to AGC and its direct and indirect majority controlled subsidiaries. Currently, American General owns approximately a 46.2% equity interest in the Company. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Holding Company Liquidity and Capital". The historical financial and operating data for the Company are presented on a consolidated basis for the Company as if Western had been a part of the Company for all periods presented. The historical data for periods prior to February 15, 1994, when Western was owned by Conseco, does not, however, reflect the effects of the issuance of the Senior Notes or of the additional shares of Company common stock issued in the Reorganization. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Other Information". GENERAL Western develops, markets and issues annuity products through niche distribution channels. Nearly all of the $1.6 billion of premiums collected in the year ended December 31, 1996, were from the sale of annuity products. Western sells deferred annuities, including its proprietary fixed annuities, to the savings and retirement markets through financial institutions (principally banks and thrifts), and sells deferred annuities to both the tax-qualified and nonqualified retirement markets through personal producing general agents ("PPGAs"). Western also sells deferred annuities through its direct sales operations. Under a joint marketing arrangement with American General Life Insurance Company ("AGLIC"), Western markets and coinsures single premium immediate annuities ("SPIAs") through specialty brokers to the structured settlement market. Western also sells SPIAs (other than structured settlement SPIAs) through its financial institution and PPGA distribution channels. Western commenced sales of its first variable annuity product in fourth quarter 1995. The Company's operating income is primarily a function of its investment spread, total invested assets, and operating expenses. The Company generates a substantial portion of its earnings from the investment spread on its block of interest-sensitive annuity and other reserves, totaling $8.7 billion as of December 31, 1996. The stability of the in-force block is enhanced by policy restrictions on withdrawal of funds. At December 31, 1996, 20% of Western's in-force policies could not be surrendered, 48% could be surrendered only by incurring surrender charges, and 32% could be surrendered without penalty. Western had the right to change interest crediting rates at least annually, subject to minimum guaranteed rates, on approximately 78% 4 of its insurance liabilities at December 31, 1996. This ability to adjust interest crediting rates enables the Company to manage its investment spread in a variety of interest rate environments. The Company's headquarters are located in Houston, Texas. Western's annuity administration center is in Amarillo, Texas. Western is licensed to conduct life insurance operations in all states and the District of Columbia, with the exceptions of Maine, New Hampshire, New York, and Vermont. PRODUCTS AND DISTRIBUTION Western currently markets three basic types of fixed annuities: single premium deferred annuities ("SPDAs"), flexible premium deferred annuities ("FPDAs"), and SPIAs. Western introduced a variable annuity product in fourth quarter 1995. Premiums collected by Western during 1996 totaled approximately $1.6 billion, of which over 99% were from the sale of annuity products. Approximately 82% of premiums were collected through financial institutions, 9% through PPGAs, 8% through specialty brokers, and 1% through Western's direct marketing operations. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Sales". The individual annuity business is a growing segment of the savings and retirement industry. Annuities currently enjoy an advantage over certain other savings mechanisms, because the annuity buyer receives a tax-deferred accrual of interest during the accumulation period. See "-- Federal Income Taxation", below. The following table sets forth premium generated by distribution channel:
DECEMBER 31, ---------------------- 1996 1995 ---------- -------- (DOLLARS IN MILLIONS) Premiums and Deposits Collected: Financial institutions: Proprietary........................... $ 890.4 $ 37.1 Retail................................ 447.1 453.0 -------- ------ Total......................... 1,337.5 490.1 Personal producing general agents....... 147.6 156.4 Specialty sales......................... 134.3 68.4 Direct marketing........................ 6.1 5.5 -------- ------ Total premiums and deposits collected................... 1,625.5 720.4 Reinsurance ceded....................... (1.5) (0.9) -------- ------ Net premiums and deposits collected (1)............... $1,624.0 $719.5 ======== ======
- --------------- (1) Effective January 1, 1996, the Company revised the way it reports Premiums and Deposits Collected. Previously, internal exchanges were included in Premiums and Deposits Collected. Beginning January 1, 1996, internal exchanges are not included in Premiums and Deposits Collected, and prior periods have been adjusted to reflect this method of reporting. An internal exchange is the rollover of an existing policyholder's deposit to a revised contract with a new surrender charge period, on which there is generally reduced or no commission expense. Western had $194.6 million and $59.2 million of internal exchanges for 1996 and 1995, respectively. Financial Institutions. Western was ranked the number one provider of fixed annuities through financial institutions in 1996 by Kenneth Kehrer Associates, Inc. Western's financial institution sales for 1996 were $1.3 billion, up 173% from 1995 sales of $490.1 million. Of the $1.3 billion of financial institution sales in 1996, 67% were proprietary sales, and 33% were retail sales. Western finds financial institutions to be an attractive distribution channel for annuities and other insurance products because of (i) the relatively low marketing and administrative costs required to provide a broad distribution of Western's products, (ii) the record of persistency on products sold in this marketplace, 2 5 (iii) Western's ability to develop strong relationships with these institutions based on its product quality, efficient operations, and high level of customer and agent service, and (iv) Western's ability to develop custom-designed proprietary products. Western's proprietary annuity programs are the primary focus of its overall marketing strategy. Under these programs, Western and a distributing financial institution jointly develop a product to be offered solely through that institution, and jointly establish product specifications and target spreads. This process requires a mutual agreement regarding policy benefits, sales compensation, and profitability. In most cases, the distributing financial institution, subject to investment guidelines established and monitored by Western, manages Western's general account assets resulting from annuity sales to its customers and receives an investment management fee. Western is solely responsible for policy administration and insurance regulatory compliance, and retains the right to establish policy crediting rates. Western believes that it is currently the only insurance company with a proprietary fixed annuity program that also provides for the selling financial institution to manage the resulting assets. Because Western's proprietary program generally provides for the financial institution to receive an investment management fee based on the resulting assets, the financial institution has an economic interest in both the successful distribution of Western's annuities and in the persistency of such business. By year-end 1996, Western had established proprietary fixed annuity programs at a number of financial institutions, the largest of which is First Union Corp. of Charlotte, North Carolina ("First Union"). First Union began marketing Western non-proprietary fixed annuity products in mid-1995. In March 1996, Western and First Union launched a proprietary fixed annuity program. The Western/First Union proprietary annuity program resulted in approximately $606 million of premiums in 1996. Total collected premiums for all proprietary programs were $890.4 million in 1996. See "-- Sales", below. Development of additional proprietary fixed products will continue to be a focus for the Company during 1997. Total retail sales (non-proprietary sales) through financial institutions were $447.1 million in 1996, compared to $453.0 million in 1995. The lack of growth in this area is primarily due to Western's increased focus on its proprietary marketing program, and the conversion of major retail accounts to proprietary accounts. Management expects the trend towards proprietary relationships to continue in the future. At December 31, 1996, Western's financial institution channel included approximately 180 financial institutions, primarily banks and thrifts, with over 8,400 locations at which Western annuities were sold, representing an increase of over 2,400 available locations since December 31, 1995. While in prior years Western relied on marketing companies to develop new relationships and assist in licensing, training, and supervision, independent marketing companies have accounted for a decreasing percentage of sales, and direct sales relationships between Western and financial institutions have increased. Sales through independent marketing companies accounted for 100% of Western's financial institution sales in 1993, compared to approximately 25% in 1996. Deferred fixed annuities are sold at financial institutions primarily as an alternative to certificates of deposit. These fixed annuities require a purchase premium and typically have a guaranteed crediting rate for the first policy year that exceeds the minimum guaranteed rate. Minimum guaranteed rates currently range from 3% to 4%. After the first year, Western may change its crediting rate at least annually on substantially all of its financial institution products. The policyowner is generally permitted to withdraw the premium(s) paid plus the amount credited to his or her account, less a surrender charge for withdrawals during a surrender charge period of five to seven years from each premium payment. The surrender charge is initially 7% to 9% of the premium and decreases through the surrender charge period. Generally, Western's deferred fixed annuities allow partial withdrawals of either accumulated interest credited or up to 10% annually of the accumulation value, without incurring a surrender charge. The weighted average interest rate credited on Western's financial institution annuities at December 31, 1996 was 5.78%. The average premium per policy sold during 1996 through financial institutions was approximately $26,000. Personal Producing General Agent Sales. Western markets SPDAs and FPDAs through about 2,100 PPGAs and approximately 3,700 sub-agents. Independent general agents recruit, train and supervise this agent force. Western is one of several insurance companies that contract directly with agents. Western has 3 6 sought to maintain sales in this distribution channel by introducing new products and establishing relationships with marketing companies. These companies recruit, train, supervise and make products available to networks of PPGAs. Western competes on the strength and the quality of products and assets as well as on the quality of its customer and agent support systems. The FPDAs marketed by Western's PPGA agents are primarily Internal Revenue Code Section 403(b) tax-sheltered annuities ("TSAs"). TSAs are marketed to teachers and employees of not-for-profit organizations as tax-qualified salary reduction retirement programs. Western has approximately 1,700 payroll slots, principally in school systems in California and Texas, where it is authorized to market directly to employees and to receive premium payments through payroll reductions. Western's FPDAs provide for multiple, flexible premium payments and have a crediting rate declared by the Company that cannot fall below the 3% to 4% minimum guaranteed rate. The policyowner is permitted to withdraw all or part of the accumulation value, less a surrender charge for withdrawals during a surrender charge period of five to ten years. The initial surrender charge ranges from 6% to 10% of the policy value and decreases over the period. The weighted average interest rate credited on all Western FPDAs marketed through PPGAs was 5.56% at December 31, 1996. Premiums from FPDAs marketed through PPGAs decreased 27% in 1996, down to $67.7 million from $92.2 million in 1995. Such premiums accounted for 4% of premiums collected by Western in 1996. In January 1997, Western restructured its PPGA agency force so that one agency (the "Agency") acts as a managing general agent for substantially all of Western's PPGAs. The Agency is owned by former Western marketing officers. The Agency provides marketing support to Western's PPGAs, and receives a marketing allowance and a percentage of commissions on PPGA sales for its services. Western believes that this restructuring will reduce the costs associated with managing its PPGA agency force, without lessening the level of marketing support traditionally provided to its agents. Total premiums collected by Western relating to the PPGA distribution channel totaled $147.6 million for 1996, compared to $156.4 million for 1995. The decrease in this distribution channel for 1996 is primarily due to increased competition from equity-linked products, including variable annuities and equity-indexed annuities. See "-- Equity-Indexed Annuities", below. Specialty Broker Marketing. SPIAs accounted for $127.5 million, or 8%, of premiums collected by Western in 1996. Immediate annuities are designed to provide a series of periodic payments for a fixed length of time or for life, according to the annuitant's choice at the time of issue. Once the payments have begun, the amount, frequency and length of time for which they are payable are fixed, subject to any life contingencies. Since SPIAs are not generally subject to surrender or borrowing by the policyholder, they provide a highly predictable element of Western's liability mix. The implicit interest rate on SPIAs is based on market conditions when the policy is issued. Because SPIA policies may provide for payments over long periods of time (30 years or more), some SPIA policies are subject to the risk that the reinvestment of investment proceeds will be at lower rates than those assumed when the policies were issued. The weighted average implicit interest rate on outstanding SPIAs issued by Western was approximately 9.09% at December 31, 1996. One type of SPIA offered by Western is a structured settlement SPIA. Structured settlement SPIAs are usually sold as part of a settlement resulting from a personal injury claim or lawsuit to provide scheduled payments to an injured person (or his or her dependents) in lieu of lump sum cash settlements. Such structured settlement annuities are marketed through specialty brokers and units of major insurance brokers. Under the Internal Revenue Code, the periodic payments received as compensation for personal injury are excluded from the recipient's gross income. By purchasing an annuity, the self-insured company or casualty insurer is able to fix the total cost of the settlement and deduct for tax purposes the premium paid to purchase the annuity. Structured settlement annuities are generally long-term and cannot be surrendered. Western had a $1.3 billion block of in-force structured settlement business at December 31, 1996. To enhance its competitiveness in the ratings-sensitive structured settlement market, Western entered into a modified coinsurance agreement with American General Life Insurance Company ("AGLIC"). Western and AGLIC began the joint marketing of structured settlement SPIAs under this arrangement in 4 7 fourth quarter 1995. Under this agreement, SPIAs are issued by AGLIC, and Western administers the resulting blocks of business and coinsures 50% of such business. Western also provides marketing and underwriting services. The costs of the arrangement are split between AGLIC and Western, and Western receives a fee for its administrative services. Western's share of SPIA sales under this agreement totaled $90.9 million in 1996. During its term, the agreement is an exclusive arrangement for sales by each party in the structured settlement market. The agreement is terminable by either party on 90 days notice. Western also sells SPIAs (other than structured settlement SPIAs) through PPGAs and financial institutions. Additionally, Western issues supplemental contracts to its deferred annuity customers when they elect to annuitize their polices. The premium for a supplemental contract is generally the value of the existing Western deferred annuity policy. Premiums for SPIAs (other than structured settlement SPIAs) and supplemental contracts were $13.0 million and $23.2 million, respectively, in 1996, compared with $14.7 million and $24.5 million in 1995. Direct Sales. The Company sells annuity and life insurance products both for Western and for unrelated companies through Independent Advantage Financial and Insurance Services, Inc. ("IAF"), a direct marketing agency, which was acquired in July 1994. Sales through IAF of third-party products generated $2.5 million and $2.7 million of fee revenue in 1996 and 1995, respectively. In addition, Western's conservation unit, which is part of its direct sales operations, effected internal policy exchanges of $115.9 million for 1996 and $16.2 million for 1995. Variable Annuities. In the fourth quarter 1995, Western introduced a variable annuity product. A variable annuity is a separate account product in which the investment performance of the underlying assets is passed through to the policyholder. The variable annuity is available for sale by broker-dealers, financial institutions, PPGAs, and Western's direct marketing affiliate. Western's sales of variable annuities in 1996 were $6.1 million. The development of distribution channels for this product has not been a priority for Western in light of the strong sales levels of fixed products. Life Products. Life products accounted for less than 1% of premiums collected by Western in 1996. This amount reflects renewal premiums on ordinary life insurance. Western has not actively marketed traditional life insurance products for several years. Market Value Adjusted Annuities. Western has expanded its annuity portfolio by developing two market value adjusted ("MVA") annuities, which it intends to introduce in 1997, subject to receipt of required regulatory approvals. MVA annuities provide the policyowner with a multi-year interest rate guarantee. If the policy is surrendered before the end of the guarantee period, a market value adjustment and possibly a surrender penalty will apply. The adjustment may be positive or negative, and generally moves inversely to changes in interest rates. That is, if interest rates rise, the adjustment will act as an additional surrender penalty to decrease the policy value. Conversely, if interest rates decline more than a specified amount during the guarantee period, the market value adjustment will increase the policy value upon premature surrender. The Company cannot predict the level of sales these products may yield. Equity-Indexed Annuities. Equity-linked annuities have recently surged in popularity, due to the relatively low and stable interest rate environment coupled with the strong performance of the equity market. Most policies offered by the insurance industry to date base the policy value, at least in part, on changes in the value of the Standard & Poor's 500 Stock Index ("S&P Index"). Western currently has under development an equity-indexed annuity which, subject to receipt of all requisite regulatory approvals, it expects to make available for sale in the latter part of 1997 through financial institutions, PPGAs, and its direct marketing channel. The Company intends to hedge its exposure to equity index movements through the use of equity index linked derivative instruments. The Company cannot predict the level of sales this product may yield. Sales. Western's principal emphasis has been on generating profits through adequate pricing of its insurance products and maintaining appropriate investment spreads throughout the life of the policies sold. Western's operating income is primarily a function of its investment spread, total invested assets and operating expenses. Accordingly, a change in premiums collected in a single period does not directly cause income to 5 8 change, although continued increases or decreases in premiums will affect the level of assets on which investment spread is earned. For additional information with respect to revenues and operating income (loss), see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements contained in Item 8 herein. The table which follows sets forth the amount of total premiums collected by Western during each of the last five years:
DECEMBER 31, -------------------------------------------- 1996 1995 1994 1993 1992 -------- ------ ------ ------ ------ (DOLLARS IN MILLIONS) First-year Premiums and Deposits: Single premium deferred annuities (1)................................ $1,420.2 $559.5 $616.2 $404.3 $667.1 Flexible premium deferred annuities... 11.2 27.4 14.8 23.2 19.4 Single premium immediate annuities.... 127.5 64.4 50.5 57.0 76.8 Variable annuities.................... 6.1 -- -- -- -- Other................................. -- -- -- 6.4 -- -------- ------ ------ ------ ------ Total first-year.............. 1,565.0 651.3 681.5 490.9 763.3 -------- ------ ------ ------ ------ Renewal Premiums and Deposits: Flexible premium deferred annuities... 56.5 64.8 65.8 67.1 71.8 Life products......................... 4.0 4.3 4.6 5.0 5.6 -------- ------ ------ ------ ------ Total renewal................. 60.5 69.1 70.4 72.1 77.4 -------- ------ ------ ------ ------ Total premiums and deposits collected................... 1,625.5 720.4 751.9 563.0 840.7 Reinsurance ceded....................... (1.5) (0.9) (1.2) (2.0) (7.4) -------- ------ ------ ------ ------ Net Premiums and Deposits Collected (2)............... $1,624.0 $719.5 $750.7 $561.0 $833.3 ======== ====== ====== ====== ======
- --------------- (1) Includes certain deferred annuity products that allow for additional deposits, but generally have been utilized by policyholders as SPDAs. (2) Excludes $194.6 million and $59.2 million of premium known to have been received as the result of internal exchanges of SPDA policies in 1996 and 1995. Known internal exchanges prior to 1995 were not material. Total premiums and deposits collected in 1996 increased 126% to $1.6 billion from $720.4 million in 1995. Western's sales through financial institutions increased substantially over 1995 sales due principally to the launch of the proprietary fixed annuity program. The development of new bank relationships led to a significant increase in the number of bank locations at which Western products were sold. At December 31, 1996, Western products were sold at over 8,400 bank locations, representing an increase of over 2,400 locations since December 31, 1995. Western's 1996 sales in the financial institution market continued to reflect high levels of production from relatively few large bank distribution relationships. The largest five relationships accounted for 75% of financial institution sales in 1996 and 38% of such sales in 1995. Each of the largest five relationships accounted for the following percentage of sales in 1996: First Union 49%, Shawmut 9%, Home Savings of America 7%, First of America 6% and U.S. Bancorporation 4%. This increased concentration of sales makes Western's sales levels more vulnerable to the loss of any single major relationship, especially its relationship with First Union. If First Union terminated its relationship with Western and Western was unable to replace the sales volume it currently represents with other accounts, Western's sales levels and long-term profitability would be adversely affected. Western believes that its current business relationship with First Union is good. 6 9 The geographic distribution of premiums collected as a percentage of total direct collected premiums for each of the years ended December 31, 1996 and 1995 was as follows:
DECEMBER 31, -------------- STATE 1996 1995 ----- ----- ----- Florida................................. 22.1% 7.6% New Jersey.............................. 11.7 9.3 California.............................. 11.3 12.4 North Carolina.......................... 6.6 5.9 Georgia................................. 5.7 1.4 Michigan................................ 5.3 7.9 Connecticut............................. 4.1 7.7 Massachusetts........................... 3.9 6.1 Illinois................................ 3.0 4.5 Texas................................... 2.7 7.1 Ohio.................................... 2.5 3.3 Virginia................................ 2.5 0.5 Wisconsin............................... 2.0 1.1 Other (1)............................... 16.6 25.2 ----- ----- 100.0% 100.0% ===== =====
- --------------- (1) Includes all other states and the District of Columbia, each of which accounted for less than 2% of premiums collected in 1996. The strong increase in the percentage of sales in Florida and New Jersey reflects Western's sales through First Union and Home Savings affiliates in 1996. These organizations did not account for significant sales in prior years. Management expects that the geographic distribution of sales in 1997 will continue to shift as new sales relationships are formed. INSURANCE DATA The table below sets forth the change in contract values of annuities in force (net of reinsurance), excluding annuities and supplemental contracts with life contingencies, for the three years ended December 31, 1996:
IMMEDIATE ANNUITIES DEFERRED WITHOUT LIFE ANNUITIES CONTINGENCIES TOTAL --------- ------------- --------- (DOLLARS IN MILLIONS) December 31, 1993....................... $ 5,571.0 $402.9 $ 5,973.9 Deposits.............................. 696.7 32.0 728.7 Distributions......................... (595.5) (60.6) (656.1) Credited interest..................... 312.0 33.4 345.4 --------- ------ --------- December 31, 1994....................... $ 5,984.2 $407.7 $ 6,391.9 Deposits.............................. 651.7 38.1 689.8 Reinsurance recaptured................ 72.8 -- 72.8 Distributions......................... (921.9) (65.2) (987.1) Credited interest..................... 334.2 33.9 368.1 --------- ------ --------- December 31, 1995....................... $ 6,121.0 $414.5 $ 6,535.5 Deposits.............................. 1,491.6 48.0 1,539.6 Distributions......................... (1,129.7) (77.9) (1,207.6) Credited interest..................... 356.5 34.1 390.6 --------- ------ --------- December 31, 1996....................... $ 6,839.4 $418.7 $ 7,258.1 ========= ====== =========
7 10 Distributions (withdrawals, deaths, and annuitizations) in 1996 increased from the previous year primarily due to an increase in the amount of annuity deposits surrenderable without penalty. As a percentage of average deferred annuity liabilities, the average annualized distribution rate for 1996 was 17.4%, compared to 15.2% for 1995. Withdrawals in 1996 were somewhat higher than anticipated. Withdrawals tend to be sensitive to changes in market interest rates and alternative investment opportunities, and they will fluctuate from period to period. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Amortization related to operations". The Company believes that the increased withdrawal activity in 1996 reflects the fact that substantial blocks of annuities issued in 1991 exited surrender charge protection in 1996. Because Western's sales levels in late 1991 and continuing through 1992 and 1993 declined substantially from those prevailing in 1990 and the first half of 1991, the Company anticipates that withdrawal rates will continue to moderate somewhat over the next several quarters, provided interest rates do not increase substantially. Total fourth quarter 1996 withdrawals were $216.6 million, compared with $249.1 million in third quarter 1996, $296.4 million in second quarter 1996, and $231.5 million in first quarter 1996. The following table sets forth the deferred annuity account values, as of the dates indicated, that went or will go out of the surrender charge period in each of the years from 1995 through 2000 (dollars in millions):
ACCOUNT VALUES AS OF DECEMBER 31, YEAR THAT ACCOUNT VALUES EXIT --------------------------------- SURRENDER CHARGE PERIOD 1994 1995 1996 - ----------------------------- --------- --------- ------- 1995.................................................. $1,087.2 $ -- $ -- 1996.................................................. 1,099.3 1,082.3 -- 1997.................................................. 712.7 704.5 694.1 1998.................................................. 438.9 440.7 438.4 1999.................................................. 576.4 596.5 598.7 2000.................................................. 13.4 517.1 556.6
See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity for Insurance Operations" for additional information regarding the relationship between withdrawal activity and the cessation of the surrender charge period. In response to increased levels of withdrawals, Western instituted a conservation program in early 1995. This program resulted in $194.6 million and $59.2 million of internal exchanges in 1996 and 1995, respectively. Western anticipates continuation of its conservation program for the foreseeable future. OPERATIONS Western currently administers approximately 350,000 annuities and life insurance contracts at its administrative center in Amarillo, Texas. During 1995, Western launched a comprehensive re-engineering effort at its administrative center intended to improve both efficiency and effectiveness. This program included the restructure of work flow from a functional basis to a team-based approach, as well as the upgrading of certain operating systems. This program enables customer service representatives to deal with most customer or agent inquiries and service requests on a "one-stop" basis, without the need for referral to multiple departments. Through the implementation of optical disk imaging and other advanced technology, Western is further improving processing efficiency. Western possesses adequate administrative capacity to handle significant growth. Management intends to modify existing systems for the year 2000. Such costs are not expected to be significant. Western utilizes Conseco for certain data processing functions. The services agreement with Conseco pursuant to which data processing is provided can be terminated by either party at any time with 180 days advance written notice. However, Western has no current plans to terminate this agreement. 8 11 INVESTMENTS At December 31, 1996, the Company had invested assets with a total carrying value of approximately $9.4 billion. The Company's investment strategy is to maintain a largely liquid, investment grade fixed-income portfolio, provide adequate liquidity through active asset/liability management for expected liability cash flows and other requirements, and maximize return through active investment management. The Company's investment strategy places strong emphasis on active asset/liability management as a principal tool to mitigate variations in investment spread and disintermediation risk. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Investments". Western retains Conseco Capital Management, Inc. ("CCM") to assist in the management of its invested assets. Western pays CCM a total of 7.25 basis points annually on the market value of assets under their management (consisting of a 6.75 basis point investment management fee and a 0.5 basis point investment accounting fee). At December 31, 1996, approximately 90% of the portfolio was managed by CCM. Additionally, under its proprietary fixed annuity program, the net premiums from the sale of Western's proprietary fixed annuities (the "proprietary assets") are being managed by the respective selling institution's investment departments. Western pays the proprietary asset managers fees ranging between 10-25 basis points annually on the statutory value of assets under their respective management (plus a Conseco affiliate is paid 0.5 basis points annually for providing investment accounting services on proprietary accounts). All of Western's advisory agreements are terminable without cause or penalty upon ninety days written notice, with the exception of the agreement with CCM, which is currently subject to a $2.0 million early termination penalty through December 1, 1997 (thereupon, the penalty reduces to $0.6 million through October 1, 1998 and zero thereafter). Western has no current plans to terminate any of its investment advisory agreements. Below is a percentage breakdown of Western's investments by asset manager as of December 31, 1996 (at carrying value):
% OF TOTAL ASSET MANAGER INVESTED ASSETS ------------- --------------- Conseco Capital Management, Inc......... 90.1% Proprietary Asset Managers: First Union Capital Management Group.............................. 6.7 Griffin Financial Investment Advisors (Home Savings)..................... 1.3 First of America Investment Corporation........................ 1.1 Firstar Investment Research & Management Co...................... 0.4 Summit Bancorp Investment Management Division........................... 0.2 Star Bank Capital Management Division........................... 0.2 ----- Total proprietary assets......... 9.9 ----- Total invested assets......... 100.0% =====
Because new sales are concentrated in the proprietary accounts, the Company anticipates that the percentage of assets managed by proprietary account managers will increase over time. Investment income is a significant component of Western's total revenues. Profitability is significantly affected by spreads between the rates credited on insurance liabilities and the yield on invested assets. Substantially all credited rates on Western's SPDAs and FPDAs may be changed at least annually. At December 31, 1996, the interest rate credited on Western's total liability portfolio was 6.14% and the yield on Western's total investment portfolio was 8.27%. Within certain parameters, Western seeks to reasonably closely match the duration of its invested assets with the expected duration of benefit payments arising from insurance liabilities. At December 31, 1996, the effective asset duration was 5.2 years, compared to an estimated modified liability duration of 5.4 years. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Effects of Changing Interest Rates on Investments". 9 12 The amortized cost and carrying value of the Company's invested assets categorized by type as of December 31, 1996 were as follows:
CARRYING AS A % OF TOTAL AMORTIZED INVESTMENT CATEGORY VALUE CARRYING VALUE COST ------------------- -------- --------------- --------- (DOLLARS IN MILLIONS) Actively managed fixed maturities: U.S. Treasury securities and obligations of U.S. government corporations and agencies.......... $ 21.4 0.2% $ 20.8 Obligations of states and political subdivisions.................................. 222.0 2.4 224.1 Public utility securities........................ 1,242.2 13.2 1,251.6 Other corporate securities....................... 4,687.4 50.0 4,583.6 Asset-backed securities.......................... 351.9 3.8 349.3 Mortgage-backed securities....................... 2,317.6 24.7 2,309.0 -------- ----- -------- Total actively managed fixed maturities............................. 8,842.5 94.3 8,738.4 Held to maturity fixed maturities -- at amortized cost............................................. -- -- -- -------- ----- -------- Total fixed maturities................... 8,842.5 94.3 8,738.4 Equity securities.................................. -- -- -- Mortgage loans..................................... 122.7 1.3 122.7 Credit-tenant loans................................ 208.5 2.2 208.5 Policy loans....................................... 66.8 0.7 66.8 Other invested assets.............................. 25.6 0.3 24.7 Short-term investments............................. 110.0 1.2 110.0 -------- ----- -------- Total invested assets.................... $9,376.1 100.0% $9,271.1 ======== ===== ========
The difference in value between amortized cost and carrying value results from the application of Statement of Financial Accounting Standard No. 115 ("SFAS 115"), Accounting for Certain Investments and Debt and Equity Securities, which requires actively managed and held to maturity investments (collectively, "fixed maturities") to be carried at market value and amortized cost, respectively. Because changes in interest rates have a direct, inverse impact on market value of fixed income securities, given continuing fluctuations in interest rates, differences between carrying value and amortized cost should be expected to continue. See Note 2 to the Consolidated Financial Statements and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Investments" for further discussion. 10 13 The following table sets forth the quality of the Company's fixed maturities (which do not include short-term investments) as of December 31, 1996, classified in accordance with the highest rating by a nationally recognized statistical rating organization or, as to $159.1 million of fixed maturities (at fair value) not commercially rated, based on ratings assigned by the National Association of Insurance Commissioners ("NAIC"):
FAIR VALUE ------------------------------------- AS A % OF AS A % OF AS A % OF AMORTIZED CARRYING FAIR FIXED AMORTIZED TOTAL COMMERCIAL RATING COST VALUE VALUE MATURITIES COST INVESTMENTS ----------------- --------- -------- -------- ---------- ---------- ----------- (DOLLARS IN MILLIONS) AAA............................ $2,491.6 $2,498.9 $2,498.9 28.3% 100.3% 26.7% AA............................. 801.0 801.6 801.6 9.1 100.1 8.5 A.............................. 2,461.4 2,500.4 2,500.4 28.3 101.6 26.7 BBB+........................... 834.1 855.4 855.4 9.7 102.6 9.1 BBB............................ 991.8 1,009.2 1,009.2 11.4 101.8 10.8 BBB-........................... 553.3 558.3 558.3 6.2 100.9 5.9 -------- -------- -------- ----- ----- ----- Total investment grade.............. 8,133.2 8,223.8 8,223.8 93.0 101.1 87.7 -------- -------- -------- ----- ----- ----- BB+............................ 138.5 140.9 140.9 1.6 101.7 1.6 BB............................. 75.4 77.5 77.5 0.9 102.8 0.8 BB-............................ 165.2 171.7 171.7 1.9 103.9 1.8 B and below.................... 226.1 228.6 228.6 2.6 101.1 2.4 -------- -------- -------- ----- ----- ----- Total below investment grade... 605.2 618.7 618.7 7.0 102.2 6.6 -------- -------- -------- ----- ----- ----- Total fixed maturities......... $8,738.4 $8,842.5 $8,842.5 100.0% 101.2% 94.3% ======== ======== ======== ===== ===== =====
The NAIC assigns securities quality ratings and uniform prices called "NAIC Designations", which are used by insurers when preparing their annual statements. The NAIC assigns ratings to publicly-traded as well as privately-placed securities. The NAIC Designations range from Class 1 to Class 6, with Class 1 being the highest quality. For purposes of the table above and only for fixed maturities not commercially rated, any NAIC Class 1 securities would be included in the "A" rating category; Class 2, "BBB-"; Class 3, "BB-"; and Classes 4, 5 and 6, "B and below". The following table sets forth the amortized cost and estimated fair value of the Company's fixed maturities according to NAIC Designations, or the equivalent for $554.8 million of fixed maturities (at fair value) currently not rated by the NAIC, as of December 31, 1996:
AMORTIZED COST FAIR VALUE ------------------------------- ------------------------------- (DOLLARS AS A % OF (DOLLARS AS A % OF IN MILLIONS) FIXED MATURITIES IN MILLIONS) FIXED MATURITIES ------------ ---------------- ------------ ---------------- 1 AAA, AA, A...................... $5,165.9 59.2% $5,200.0 58.8% 2 BBB............................. 2,922.7 33.4 2,977.0 33.7 -------- ------ -------- ------ Total investment grade.......... 8,088.6 92.6 8,177.0 92.5 3 BB.............................. 347.5 4.0 357.3 4.1 4 B............................... 295.5 3.3 304.2 3.4 5 CCC, CC, C...................... 6.8 0.1 4.0 -- 6 CI, D........................... -- -- -- -- -------- ------ -------- ------ Total below investment grade................. 649.8 7.4 665.5 7.5 -------- ------ -------- ------ Total fixed maturities.......... $8,738.4 100.0% $8,842.5 100.0% ======== ====== ======== ======
(1) Comparisons between NAIC ratings and Standard & Poor's Corporation ratings are published by the NAIC. 11 14 For additional information regarding the Company's investment portfolio, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Investments" and Note 2 to the Consolidated Financial Statements. COMPETITION, RATINGS AND OTHER FACTORS AFFECTING BUSINESS The life insurance industry is highly competitive and consists of a large number of insurance companies, some of which have substantially greater financial resources, broader and more diversified product lines, and larger staffs than those available to the Company. Western's annuity products compete not only with products sold by other insurance companies but also with mutual fund products, traditional bank savings products, and other investment and savings alternatives. Such competition is based on many factors, including pricing and other terms, service provided to distribution channels and policyholders, and ratings. Financial institutions, school districts and brokers of structured settlement annuities, as well as policyholders, consider the ratings of an insurer in determining which insurer's annuity to market or purchase. Western is rated "A" (Excellent) by A.M. Best. Ratings for the industry currently range from "A++" (Superior) to "F" (Under Liquidation). Publications of A.M. Best indicate that the "A" rating is assigned to those companies that in A.M. Best's opinion have achieved excellent overall performance when compared to the norms of the insurance industry and that generally have demonstrated a strong ability to meet their respective policyholder and other contractual obligations. In evaluating a company's financial and operating performance, A.M. Best reviews the company's profitability, leverage, and liquidity as well as the company's book of business, the adequacy and soundness of its reinsurance, the quality and estimated market value of its assets, the adequacy of its reserves, and the experience and competence of its management. A.M. Best's ratings are based upon factors relevant to policyholders, agents, insurance brokers, and intermediaries; A.M. Best's ratings are not directed to the protection of investors. Western's A.M. Best's rating is currently under review with positive implications; however, Western cannot predict if or when such rating may be changed. At present, Western also has claims-paying or financial strength ratings of "AA-" (Very Good) from Standard & Poor's Corporation, "AA-" (Very Good) from Duff & Phelps Rating Company and "A2" (Good) from Moody's Investors Service. The Standard & Poor's rating reflects a one-level upgrade in September 1996 from "A+" (Good), and the Moody's rating reflects a three-level upgrade in early 1995 from "Baa2" (Adequate). Generally, rating agencies base their ratings on information furnished to them by the insurer and on investigations, studies and assumptions by the rating agencies. There is no assurance that any particular rating will continue for any given period or that it will not be changed or withdrawn entirely if, in the judgment of the rating agency, circumstances so warrant. Such ratings are not a recommendation to buy, sell or hold securities. If Western's ratings were downgraded from their current levels, sales of its products and the persistency of its in-force business could be adversely affected. In attempting to improve its ratings, the Company has taken and is taking steps to improve the factors believed by it to be of significance in achieving favorable ratings. However, there can be no assurance that it will be successful in obtaining higher ratings. Western believes that it is generally able to compete effectively because it (i) emphasizes specialized distribution channels, such as financial institutions, where its ability to respond rapidly to changing customer needs and to develop innovative marketing and product structures, such as its proprietary annuity program, provides a competitive edge, (ii) is experienced in establishing and cultivating relationships with the specialized distribution networks and the independent marketing companies operating in these markets, (iii) can offer competitive interest rates as a result of its lower-than-average operating costs and active investment portfolio management techniques, and (iv) has effective and efficient policyholder administrative services housed in its administration center in Amarillo, Texas. In addition, it has a focused management team that has made reinvigorating sales a high priority. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Sales". In recent years, the market for structured settlement annuities has been dominated by those insurers with the highest claims-paying ratings. As a result, Western had been relatively inactive in this market. In order to 12 15 re-enter this market with its existing ratings, Western entered into an agreement with AGLIC for the joint marketing of structured settlement SPIAs in 1995. See "-- Products and Distribution", above. UNDERWRITING Underwriting for deferred annuities is minimal. For certain structured settlement SPIAs, more significant underwriting is required. Agents obtain detailed medical information, including test results and medical history, which is evaluated by the medical director, who computes a life expectancy which is equated to an age higher than the current age of the annuitant. The price of the structured settlement SPIA is developed using the higher "rated" age and a mortality table, and reflects expectations about current and future investment performance. REINSURANCE Consistent with the general practice of the life insurance industry, Western has reinsured portions of the coverage provided by its insurance products with other insurance companies under agreements of indemnity reinsurance. Indemnity reinsurance agreements limit an insurer's maximum loss on a large or unusually hazardous risk and provide risk diversification. Indemnity reinsurance does not discharge the primary liability of the original, or primary, insurer. However, subject to certain statutory limitations, the primary insurer accounts for a reinsured risk as though the insurer were not liable for it, to the extent the risk is reinsured. Western limits its risk retention on life insurance policies to $0.8 million per policy or less. Western is also a party to two other reinsurance or coinsurance-type arrangements. In October 1995, Western and AGLIC entered into a modified coinsurance agreement. Under the agreement, AGLIC issues the policies, and 50% of each risk is reinsured to Western. Under this arrangement, Western reports its pro rata share of premiums and shares in its pro rata portion of the gain or loss on policies sold. See "-- Sales", above. Since 1994, Western has been a party to a standby reinsurance agreement for new annuity sales through selected financial institutions, which is triggered only if Western's risk-based capital ratio falls below a prescribed level. No reinsurance pursuant to this agreement has been triggered. At December 31, 1996, $826.7 million of policy reserves were subject to this standby arrangement. Effective October 1, 1995, Western recaptured $72.8 million of reserves which had previously been ceded to an affiliate of Conseco. These transactions terminated all existing reinsurance transactions between Western and Conseco affiliates. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation -- Reinsurance". REGULATION Federal/State Developments The major portion of Western's annuity sales are currently made through banks and thrifts. Although banks and thrifts are presently precluded by state and federal regulation from issuing insurance directly, legal and regulatory developments affecting the distribution of annuities and insurance products through financial institutions are unfolding rapidly. In January 1995, the United States Supreme Court ruled in Variable Annuity Life Insurance Company v. Nationsbank (the "VALIC Case") that the National Bank Act did not prohibit a national bank from acting as an agent to sell annuity products, as such is an activity incidental to the business of banking. Because most major banks interested in distributing annuities were already doing so, either directly, through affiliates, or through marketing companies, the VALIC Case did not have any significant impact on Western's business. Following the VALIC Case, a substantial unresolved legal issue remained concerning the interplay of state and federal law, including the extent to which federal banking law preempts state insurance regulatory laws, and the extent to which states may limit bank activities in the insurance arena under the McCarren-Ferguson Act (which generally provides that state insurance laws preempt federal laws that do not deal specifically with the business of insurance). In March 1996, the United States Supreme Court decided Barnett Bank of Marion County, N.A. v. Gallagher (the "Barnett Case"). At issue was the conflict between Section 92 13 16 of the National Banking Act, which permits national banks with offices located in places with fewer than 5,000 residents to sell insurance, and certain state anti-affiliation laws which prevent banks or their affiliates from selling insurance. Also before the court was the question of whether the reverse preemption provisions of the McCarren-Ferguson Act encompass state anti-affiliation laws dealing with the business of insurance. The Supreme Court in the Barnett Case ruled unanimously that Section 92 was in "irreconcilable conflict" with (and thus preempted) the state anti-affiliation statute at issue, and that the McCarren-Ferguson Act did not preserve the state statute. However, the Court ruled that a state may regulate the insurance sales activities of a national bank acting under Section 92 powers, provided that the state does not "significantly interfere" with the bank's exercise of these powers. As a result of the Barnett decision, many state legislatures and insurance departments have eliminated prohibitions that previously impeded insurance sales through financial institutions. Approximately 30 states have "wild card" or parity provisions, which are designed to effect the same treatment to state-chartered banks as national banks enjoy. In these jurisdictions, state-chartered banks have also benefited from the Barnett Case. Not surprisingly, litigation has ensued between financial institutions and insurance regulators in the aftermath of the Barnett ruling. In Texas, litigation is pending between the Insurance Commissioner and the Texas Bankers Association. The Texas Bankers Association opposes the Commissioner's interim procedures for banks selling insurance, which were promulgated in an attempt to comply with the Barnett opinion and limit bank sales of annuities to towns with fewer than 5,000 residents. The Office of the Comptroller of the Currency ("OCC") has filed a petition requesting permission to intervene in this case. In spite of the controversy surrounding the Supreme Court's decision, Western's sales through financial institutions have not been materially affected. The changes currently under way are more of form than substance as banks take advantage of selling structures and relationships not previously available to them. Some federal regulatory agencies, members of Congress and representatives of the banking industry have advocated legislative and regulatory changes, or additional changes in interpretation of existing laws and regulations, to broaden the ability of banks to participate in the underwriting of insurance products as well as the direct sale of such products. If such changes were to occur, Western could be faced with increased competition in its markets or the loss of certain marketing relationships. Consolidation of the financial services industries may be expected to continue into the foreseeable future, with financial institutions offering a broad spectrum of financial products, including insurance, to their customers. See "-- Federal Regulation", below. The Company believes that its annuity products will remain attractive to banks that wish to offer tax-deferred savings vehicles. Western's annuities offer banks and other financial institutions the advantages of fee income generation and the absence of balance sheet exposure. State Regulation Life insurance companies are subject to regulation and supervision by the states in which they are domiciled or transact business. State laws establish regulatory agencies with broad administrative and supervisory powers related to granting and revoking licenses to transact business, regulating trade practices, establishing guaranty associations, licensing agents, approving policy forms, filing premium rates on certain business, setting reserve requirements, determining the form and content of required financial statements, determining the reasonableness and adequacy of capital and surplus, and prescribing the maximum concentrations of certain classes of investments. The National Association of Insurance Commissioners ("NAIC"), an organization of state insurance regulators, attempts to standardize and coordinate state regulatory processes. It seeks to obtain these objectives by formulating model acts and regulations for adoption and implementation at the state level, establishing minimum regulatory standards and procedures, organizing multi-state responses to situations of a scope or magnitude exceeding the ability of a single state to respond, and providing a forum for the examination of and response to issues of public policy affecting the insurance industry and insurance consumers. Recent NAIC initiatives of particular concern to the Company have included: sales of insurance products by banks, federal involvement in the sales of insurance products, sales of annuities, market conduct, standardization of statutory accounting principles, the regulation of equity and other index annuities, and 14 17 different formulations of a model investment act. In prior periods, the NAIC has emphasized different matters and the Company anticipates that the focus will shift again in the future. It is not, however, possible to predict the impact of changing state regulations on the operations of the Company and Western, and it should be noted that unless enacted or adopted in a jurisdiction the model acts or regulations of the NAIC do not have the effect of law. Guideline 33. Effective December 31, 1995, the NAIC adopted an actuarial guideline that more precisely defines the methods to be used in determining minimum statutory reserves for annuity contracts. Under this guideline, known as Guideline 33, Western is required to calculate deferred annuity reserves assuming each policyholder will receive the contract benefits which generate the greatest present value. Western estimated the effect of Guideline 33 on in-force business as of December 31, 1996, to be an increase in statutory reserves of $47.5 million. Guideline 33 permits a three-year phase-in of the required total increase. Western absorbed $15.1 million of the required increase in 1995 and $16.5 million in 1996, and the remaining required reserves will be established in 1997. Western considers Guideline 33 to be extremely conservative as it requires the calculation of reserves to be based on the assumption that 100% of policyholders will annuitize at the point most costly for Western. Western's actual annuitization rates during 1996, 1995, and 1994 were less than 1%. The Guideline 33 adjustment affects only Western's statutory financial statements. For financial statements issued in accordance with Generally Accepted Accounting Principles ("GAAP"), policy reserves for deferred annuities are equal to policy accumulation values. However, under certain circumstances the reduction in statutory surplus resulting from the Guideline 33 adjustment may constrain the ability of an insurer to write new business while maintaining desired surplus ratios, or require the insurer to seek additional capital to maintain such ratios. New products introduced since 1993 have been designed to minimize the impact of this guideline. Adoption of the guideline has not constrained Western's sales efforts. Guaranty Fund. Western is required under the solvency or guaranty laws of most states in which it does business to pay guaranty association assessments (up to certain prescribed limits) to fund policyholder losses or liabilities of insurance companies that become insolvent. These assessments may be deferred or forgiven under most guaranty laws if they would threaten an insurer's financial strength and, in certain instances, may be offset against future premium taxes. Western incurred no net expenses relating to reserves for guaranty fund assessments in 1996. Incurred expenses relating to reserves for guaranty fund assessments were $27.6 million, and $5.7 million in 1995 and 1994, respectively. After incurring a special fourth quarter 1995 charge to increase its reserve for guaranty fund assessments, Western believes it is fully reserved for all known insolvencies, and therefore does not anticipate material additional charges for guaranty assessments, in the absence of any material new insurer insolvencies. At December 31, 1996, Western held reserves of $22.1 million for future assessments. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financial Condition -- Guaranty Association Assessments". Risk-Based Capital. The NAIC adopted model risk-based capital ("RBC") requirements, effective December 31, 1993, to evaluate the adequacy of statutory capital and surplus in relation to investment and insurance risks associated with (i) asset quality, (ii) mortality and morbidity, (iii) disintermediation and investments, and (iv) other business factors. The RBC formula is designed to be used by the state insurance departments as an early warning tool to identify possible weakly-capitalized companies for the purpose of initiating regulatory action. In addition, the formula defines a minimum capital standard which supplements the previously prevailing system of low, fixed minimum capital and surplus requirements on a state-by-state basis. The RBC requirements provide for four different levels of regulatory attention depending on the ratio of a company's total adjusted capital (defined as the total of its statutory capital, surplus, asset valuation reserve, and 50% of apportioned dividends) to its RBC. The "Company Action Level" is triggered if a company's total adjusted capital is less than 100% but greater than or equal to 75% of its RBC, or if total adjusted capital is less than 125% of RBC and a negative trend has occurred. The trend test calculates the greater of any decrease in 15 18 the margin (i.e., the amount in dollars by which a company's total adjusted capital exceeds its RBC) between the current year and the prior year and between the current year and the average of the past three years, and assumes that the decrease could occur again in the coming year. If a similar decrease in the margin in the coming year would result in an RBC of less than 95%, then the "Company Action Level" would be triggered. At the "Company Action Level", a company must submit to the regulatory authority a comprehensive plan which discusses proposed corrective actions to improve its capital position. The "Regulatory Action Level" is triggered if a company's total adjusted capital is less than 75% but greater than or equal to 50% of its RBC. At the "Regulatory Action Level", the regulatory authority will perform a special examination of the company and issue an order specifying corrective actions that must be followed. The "Authorized Control Level" is triggered if a company's total adjusted capital is less than 50% but greater than or equal to 35% of its RBC, and the regulatory authority may take any action it deems necessary, including placing the company under regulatory control. The "Mandatory Control Level" is triggered if a company's total adjusted capital is less than 35% of its RBC, and the regulatory authority is mandated to place the company under its control. Calculations using the NAIC formula at December 31, 1996, indicate that the ratio of total adjusted capital to RBC for Western was 265%, up from 234% at December 31, 1995. Western's RBC is more than twice the "Company Action Level". The Texas Department of Insurance ("TDI") follows its own RBC requirements, the stated purpose of which is to require a minimum level of capital and surplus to absorb the financial, underwriting, and investment risks assumed by an insurer. Under Texas' RBC regulations, Western must maintain a minimum level of capital and surplus determined by a calculation formula contained in the Texas regulations. Texas' RBC requirements differ from those adopted by the NAIC in two principal respects: (i) the elements used to determine minimum RBC levels in the respective calculation formulas differ, and (ii) the Texas regulations do not contain "Action Levels" (like those adopted by the NAIC) prescribing certain corrective actions if RBC threshold levels are not met, although the Commissioner of the TDI does have the power to take similar corrective actions if a company does not maintain the required minimum level of capital and surplus. Under current Texas regulations, an insurer has met RBC requirements if its admitted assets exceed its liabilities by at least 5%. At December 31, 1996, Western's admitted assets exceeded its liabilities by more than 6%. AVR and IMR. Statutorily required annual and quarterly financial filings require classifications of investments. The Asset Valuation Reserve ("AVR") account which consists of two main components: a "default component" to provide for future credit-related losses on fixed maturities and an "equity component" to provide for losses on all types of equity investments, including real estate. Western's maximum AVR balance as of December 31, 1996, would have been $171.9 million. However, the rules only require annual additions of up to 20% of the excess of the maximum balance over the current accumulated balance. Hence, Western's AVR balance was $109.0 million as of December 31, 1996, compared to $91.1 million as of December 31, 1995. The Company is also required to maintain an Interest Maintenance Reserve ("IMR"), which is credited with the portion of realized capital gains (losses) from the sale of fixed income securities attributable to changes in interest rates. The IMR is required to be amortized into earnings on a basis reflecting the remaining period to maturity of the fixed maturities sold. Western's IMR balance was $104.4 million and $105.3 million as of December 31, 1996, and December 31, 1995, respectively. Other. The Company is registered as a holding company system in Texas. Under Texas laws, the TDI regulates Texas-domiciled insurance holding company systems, including acquisitions, dividends, surplus debentures, the terms of affiliate transactions and other related matters. Texas law also limits the amount of dividends that may be paid by Western to the Company without prior regulatory approval. See "Item 5. Market for Registrant's Common Equity and Related Stockholder Matters". As part of its routine regulatory oversight process, the TDI conducts a triennial examination of the books, records and accounts of each insurance company domiciled in its jurisdiction. The triennial examination is generally conducted in cooperation with the insurance departments of two or three other states under guidelines promulgated by the NAIC. The TDI last conducted an examination of Western for the triennial period ended June 30, 1994, and issued its examination report during second quarter 1995. There were no material adverse findings, and all open matters were resolved in an order dated September 6, 1995. The triennial examination for the ensuing period has not yet been scheduled. 16 19 Most states, including Texas, have enacted legislation or adopted administrative regulations affecting the acquisition of control of insurance companies as well as transactions between insurance companies and persons controlling them or their commonly controlled affiliates. The nature and extent of such legislation and regulations currently in effect vary from state to state. However, most states require administrative approval of the acquisition of 10% or more of the outstanding shares of an insurance company incorporated in the state or the acquisition of 10% or more of the outstanding stock of an insurance holding company whose insurance subsidiary is incorporated in the state. The acquisition of 10% of such shares is generally deemed to be the acquisition of "control" for the purpose of the holding company statutes and requires not only the filing of detailed information concerning the acquiring parties and the plan of acquisition, but also administrative approval prior to the acquisition. For purposes of Texas law, Western is deemed to be an affiliate of American General. Federal Regulation Although the federal government does not directly regulate the business of insurance, federal legislation and administrative policies in several areas, including pension regulation, banking laws, securities laws, age and gender discrimination protection, financial services regulation and federal taxation, can significantly affect the insurance business. Amid the increased state and federal activity arising from the Barnett decision, the OCC issued two important letters relating to bank sales of insurance. These letters further solidify the role of financial institutions as a distribution channel for insurance products. The first, issued in October 1996, affirmed that state insurance laws that do not "discriminate against or have a disparate impact on banks" are not preempted. States may impose (i) licensing requirements based on product line and the character, experience and education of the agent; (ii) testing requirements; and (iii) consumer protection and market conduct standards. The second, issued in November 1996, clarified the Section 92 "small place" exemption by liberally construing the exemption as imposing no geographical boundaries on the customers who purchase insurance. An agency is "clearly" bona fide if agents will be managed and paid through the agency located in the small town, and use that location as their place of business for licensing purposes. In addition, in November 1996, the OCC adopted rules which defined procedures by which national banks may establish operating subsidiaries to conduct business activities "that are part of or incidental to the business of banking". At a minimum, the "operating subsidiary" rule opens the possibility of banks underwriting insurance. Federal legislation has been proposed which would provide expanded powers for the banking, insurance, and securities industries. Bills are currently before Congress to permit affiliates of bank holding companies to engage in insurance activities, reform the Glass-Steagall Act to allow the merger of commercial and investment banking, abolish the federal thrift charter, establish parity in interstate branching rights for state and national banks, and allow affiliation between stock and mutual insurance companies. Other federal legislative proposals may be anticipated which would similarly expand permitted banking activities to encompass the insurance business. The Company cannot assess the likelihood of passage of any such legislation, what the final terms of any proposal that is enacted might be, or what the ultimate impact on the Company of the adoption of any such proposals might be. The Company would note that certain thrift holding companies have had the ability under federal law to also own an insurance company for some time. FEDERAL INCOME TAXATION Policyholders of annuity products marketed and issued by Western enjoy certain income tax advantages as compared to holders of certain other savings investments such as certificates of deposit and taxable bonds. One important tax advantage is the deferral of income taxation on any increases in the contract values of these annuity and life insurance products until those values are received by the policyholder, instead of the current taxation of all earnings that is imposed on many other savings investments. A further tax benefit is that when annuity payments are paid to a policyholder under an annuity contract, the portions of the policyholder's income that are attributable to any accrued income under the contract at the time payments commence and to 17 20 all additional earnings under the contract during the annuity period are recognized as taxable income only ratably as payments are made under the contract. This treatment provides an income tax deferral as compared to the economic accrual methods that are generally required for other savings investments. These tax advantages for annuities and life insurance are provided in the Internal Revenue Code of 1986, as amended (the "Code"), and are generally followed in all states and other United States taxing jurisdictions. Accordingly, these tax advantages are subject to change by Congress and, as to state and local taxes, by the legislatures of the respective taxing jurisdictions. From time to time, Congress has considered proposals to revise or eliminate this tax deferral. If legislation were enacted to eliminate the tax deferral for certain annuities, such a change would have an adverse effect on the ability of Western to sell certain annuities. Numerous proposals have been advanced in Congress over the past years to modify existing federal tax law in various respects. Certain of these proposals would institute a so-called "flat tax" system that would lower the marginal tax rates of certain taxpayers, and could lower the relative value of the tax-deferral of inside buildup on insurance products, including annuities. Other proposals would expand the availability of other tax-deferred long-term savings vehicles, such as IRAs, and could result in increased competition for tax-deferred vehicles such as annuities. Still others would eliminate the income tax altogether, to be replaced by consumption-based taxes, thereby eliminating the relative value of tax deferral and increasing competition for long-term savings products such as annuities. It is impossible for the Company to predict when, if, or in what form, any such changes in tax law may be adopted, and whether any such changes will adversely affect the Company. The Labor Department's Advisory Council on Employee Welfare and Pension Benefit Plans has urged the 105th Congress to thoroughly consider the effect on retirement savings before voting on any tax reform proposals. Policyholders who purchase variable annuities receive tax treatment and deferral as described above for annuities generally. However, at the time of withdrawal, or receipt by the policyholder, the entire investment income is taxed at ordinary rates, and no capital gains treatment is available. Western sells tax-qualified 403(b) annuities to the tax-qualified retirement market. A tax-qualified 403(b) annuity is a retirement savings plan vehicle through which educators and employees of not-for-profit institutions are permitted under section 403(b) of the Code to defer income through a salary reduction program. A tax-qualified annuity purchased under section 403(b) is similar to contributions made to a pension plan, but with different rules on the maximum amount of current income which may be contributed by the participant on a pre-tax basis. Western is taxed as a life insurance company as provided in the Code. The Revenue Reconciliation Act of 1990 amended the Code to require a portion of the expenses incurred in selling insurance products to be deducted over a period of years, as opposed to immediate deduction in the year incurred. Since the change only affects the timing of the deductions, it does not affect tax expense as shown on Western's financial statements prepared in accordance with GAAP. However, the change will increase the tax provisions for statutory accounting purposes, which will reduce statutory surplus and, accordingly, decrease the maximum amount of cash dividends that may be paid by Western in certain conditions. The Code generally does not permit a life insurance company and a non-life insurance company such as the Company to file a consolidated tax return unless they have been members of the same affiliated group for tax purposes for at least five taxable years immediately preceding the taxable year for which the consolidated return is filed. The Company and Western have not met the five-year requirement. As a result, Western and the Company currently file separate tax returns. This inability to file a consolidated tax return may result in higher current tax payments to the extent that tax losses at the Company level cannot be used currently to offset taxable income at the Western level. EMPLOYEES The Company employs approximately 290 people, approximately 250 of which are employed by Western. None of these employees are covered by a collective bargaining agreement. The Company believes that it has good relations with its employees. 18 21 EXECUTIVE OFFICERS OF REGISTRANT The executive officers of the Company are:
EXECUTIVE OFFICER NAME AGE SINCE TITLE ---- --- --------- ----- Michael J. Poulos......................... 66 1993 Chairman of the Board, President, and Chief Executive Officer Richard W. Scott.......................... 43 1994 Vice Chairman, General Counsel, and Chief Investment Officer John A. Graf.............................. 37 1993 Vice Chairman and Chief Marketing and Administrative Officer Arthur R. McGimsey........................ 52 1993 Executive Vice President and Chief Financial Officer Michael J. Akers.......................... 47 1994 Executive Vice President and Chief Actuary
Officers are elected annually by the Board of Directors for one-year terms, subject to removal by the Board. The executive officers of the Company generally serve in comparable positions with Western. Mr. Poulos has been Chairman of the Board, President, and Chief Executive Officer of the Company since October 1993. Prior to joining the Company in 1993, Mr. Poulos was employed at American General for 23 years, including ten years as President, and retired as Vice Chairman in 1993. From 1979 until he joined the Company, Mr. Poulos also served as Chairman or Senior Chairman of American General's principal life insurance subsidiaries, including VALIC. Mr. Scott was named Executive Vice President and General Counsel and a director of the Company in February 1994. He was named Chief Investment Officer of the Company in 1995, and was named Vice Chairman in July 1996. From 1984 until he joined the Company, Mr. Scott was a partner of the Houston, Texas, office of the law firm of Vinson & Elkins L.L.P., where he specialized in corporate finance. Mr. Graf was named Executive Vice President and Chief Marketing Officer of the Company in November 1993, and was named Vice Chairman in July 1996, at which time he also assumed responsibility for the Company's administrative operations. He was Senior, Second or Assistant Vice President or Vice President, Marketing of Conseco and Western from November 1987 until the Reorganization, and has served as Chief Marketing Officer of Western since March 1993. From 1986 to 1987, Mr. Graf was Vice President of Skokie Federated Insurance, Inc., a subsidiary of Skokie Federal Savings, and from 1981 to 1986, he was a sales manager with John Hancock Mutual Life Insurance Co. Mr. McGimsey has been Executive Vice President and Chief Financial Officer since November 1993. From 1988 until he joined the Company, he was President of American Benefit Plan Administrators, Inc. (a third party administrator of benefit programs). From 1986 to 1988, Mr. McGimsey was Executive Vice President of American General Life Insurance Company and from 1984 to 1986, he served as Executive Vice President of Sun Life Insurance Company. From 1970 to 1984, Mr. McGimsey served in various management capacities with Integon Corp. (an insurance company). Mr. Akers joined the Company as Vice President and Chief Actuary in November 1993, and was named a Senior Vice President in July 1994. Mr. Akers was named an Executive Vice President of Western in February 1996, and of the Company in February 1997. From 1990 to 1993 he was Vice President -- Actuarial of Conseco. For 16 years prior thereto, Mr. Akers worked as an executive with an actuarial software development and data processing firm. Reference is made to the material incorporated by reference in "Item 11. Executive Compensation" of this report with respect to employment arrangements between the Company and the above officers. 19 22 ITEM 2. PROPERTIES The Company leases approximately 25,000 square feet in an office building in Houston, Texas. The lease expires in 2000. The Company owns a five-story office building located in downtown Amarillo, Texas, which serves as the Company's annuity administration center. This building has approximately 50,000 square feet of net usable space. The Company believes that its existing facilities are adequate to meet its current and future anticipated needs. ITEM 3. LEGAL PROCEEDINGS The Company is not a party to, and its property is not subject to, any material pending legal proceedings other than routine matters arising in the ordinary course of its business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS In the fourth quarter of 1996, no matters were submitted to a vote of the security holders. 20 23 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Prior to the Reorganization, all of the Company's common stock was owned by a subsidiary of Conseco. The common stock began trading on the New York Stock Exchange ("NYSE") under the symbol "WNH" on February 9, 1994. The following table sets forth the trading range on the NYSE Composite Tape, and dividends paid per share, for the common stock for the periods indicated:
HIGH LOW DIVIDENDS -------- -------- --------- 1995: First Quarter.......................................... $13 1/8 $10 7/8 $.04 Second Quarter......................................... 13 1/4 10 7/8 .04 Third Quarter.......................................... 14 1/4 11 5/8 .04 Fourth Quarter......................................... 16 1/4 13 1/2 .04 1996: First Quarter.......................................... $17 1/8 $15 1/8 $.04 Second Quarter......................................... 19 1/2 16 1/8 .04 Third Quarter.......................................... 19 1/4 15 7/8 .04 Fourth Quarter......................................... 19 7/8 17 1/8 .04 1997: First Quarter (through March 6, 1997).................. $25 5/8 $18 5/8 $.04
The closing price of the common stock on the NYSE Composite Tape on March 6, 1997, was $23 7/8 per share. On that date there were approximately 8,000 holders of common stock, including those known to the Company to be beneficial owners through participation in securities position listings. The Company's Board of Directors has established a policy of declaring regular quarterly cash dividends. The payment of dividends in the future is subject to the discretion of the Board of Directors and will depend upon general business conditions, legal and regulatory restrictions on the payment of dividends and other factors the Board of Directors deem relevant. The Company's general policy is to retain most of its earnings to finance the growth and development of its business. Future borrowing agreements of the Company may contain certain limitations on the payment of dividends. On September 17, 1996, the Company issued 7,254,464 shares of a newly-created class of Series A Participating Convertible Preferred Shares (the "Series A Preferred Stock") to American General for net cash proceeds of approximately $126 million. The Series A Preferred Stock shares pro rata on a share-for-share basis with the Company's existing common stock in dividends and in liquidation, subject to a $.001 per share liquidation preference. No dividend may be paid on shares of the Company's common stock unless a corresponding dividend is paid on the Series A Preferred Stock. Except as otherwise required by Delaware law, the Series A Preferred Stock has no voting power. The Series A Preferred Stock is not redeemable. The Series A Preferred Stock automatically converts with no further action on the part of the Company or its holder into common stock on a share-for-share basis, upon approval of the Company's common stockholders of the issuance of the common stock. The Company has agreed to submit to its shareholders a proposal providing for such conversion at its 1997 annual meeting of shareholders. The Certificate of Designation also contains anti-dilution provisions relating to conversion. Reference is made to the Company's Report on Form 8-K/A, dated September 17, 1996, for a more detailed description of the Series A Preferred Stock. As a result of this issuance, American General now owns 24,947,500 shares of common stock and 7,254,464 shares of Series A Preferred Stock, which are treated as common stock equivalents. American General's combined ownership of common stock and Series A Preferred stock represents a 46.2% equity interest in the Company. As a result of the Company's holding company structure, its ability to pay dividends and make required debt service payments depends ultimately upon the cash flow generated by Western's operating activities and 21 24 the ability of Western to pay dividends to the Company. Dividend payments by an insurance company, such as Western, are subject to statutory limitations and in certain cases to the approval of insurance regulatory authorities. Generally, annual dividends in excess of maximum amounts prescribed by state statutes (so-called "extraordinary dividends") may not be paid without the approval of the insurance commissioner of the insurance company's state of domicile. Western is domiciled in Texas and at present may not, without the prior approval of the TDI, pay dividends in any twelve-month period exceeding the greater of (i) statutory net gain from operations (excluding realized gains or losses on investments) for the preceding year or (ii) 10% of statutory surplus at the end of the preceding year. As of January 1, 1997, the amount payable as dividends by Western to the Company without prior TDI approval was $57.0 million. ITEM 6. SELECTED FINANCIAL DATA Reference is made to the audited Consolidated Financial Statements contained in Item 8 herein, including the consolidated balance sheets as of December 31, 1996 and 1995, the statements of operations for the fiscal years ended December 31, 1996, 1995 and 1994, the related Notes to the Consolidated Financial Statements, and to "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations". This information has been prepared on a basis that restates the accounts of Western and the Company as if Western had been a subsidiary of the Company for all periods presented. See Note 1 to the Consolidated Financial Statements. For periods prior to February 1994, this information and the Consolidated Financial Statements do not give effect to the issuance of $150 million of Senior Notes by the Company or to the issuance of 2.3 million shares of the Company's common stock in the Reorganization completed in February 1994. See "Item 1. Business -- Background" and Notes 1 and 16 to the Consolidated Financial Statements. Life Company Data is based upon statutory accounting practices that differ in certain respects from GAAP, and was derived from statutory financial statements filed with the state insurance regulatory departments. 22 25 SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31, ----------------------------------------------------- 1996 1995 1994 1993 1992 --------- -------- -------- -------- -------- (DOLLARS IN MILLIONS EXCEPT PER SHARE DATA) INCOME STATEMENT DATA: Total revenues.............................................. $ 800.6 $ 569.6 $ 615.6 $ 774.2 $ 653.2 Insurance policy income................................... 92.8 29.1 27.4 21.8 48.0 Net investment income..................................... 703.1 662.9 637.4 610.1 507.8 Equity in earnings of partnership investments............. 7.0 3.8 -- -- -- Net trading income........................................ -- -- 3.7 49.6 25.0 Net realized gains (losses)............................... (2.3) (126.2) (52.9) 92.7 72.4 Benefits and expenses....................................... 647.7 560.8 501.5 569.7 496.4 Amortization and change in future policy benefits related to realized gains (losses).............................. 0.6 (29.8) (16.8) 84.3 64.6 Income before income taxes.................................. 152.9 8.8 114.1 204.5 156.8 Net income.................................................. 99.4 7.3 73.3 130.0 102.2 Ratio of earnings to fixed charges(1)....................... 1.38x 1.02x 1.32x 1.60x 1.57x Ratio of earnings to fixed charges, excluding interest on annuities and financial products(2)....................... 8.01x 1.44x 7.75x 33.98x 26.70x BALANCE SHEET DATA (at period end): Total assets................................................ $10,095.5 $9,312.2 $8,321.2 $8,369.7 $7,640.6 Invested assets, at carrying value.......................... 9,376.1 8,845.2 7,452.6 7,918.1 5,787.9 Invested assets, at amortized cost.......................... 9,271.1 8,492.0 8,058.2 7,686.2 5,673.8 Insurance liabilities, with SFAS 115 adjustment............. 8,679.9 7,915.8 7,776.1 7,379.9 6,894.3 Insurance liabilities, without SFAS 115 adjustment.......... 8,679.9 7,879.5 7,776.1 7,343.0 6,869.5 Long-term debt.............................................. 148.0 147.8 147.7 -- -- Shareholders' equity, without SFAS 115 adjustment........... 875.7 659.3 662.6 723.1 608.6 Shareholders' equity(3)..................................... 914.8 784.5 339.4 760.9 622.3 ADDITIONAL DATA: Earnings, excluding net realized gains (losses), net of applicable expenses, amortization and taxes............... $ 101.3 $ 69.5 $ 94.2 $ 93.4 $ 80.6 Realized gains (losses) net of applicable amortization, expenses and taxes(4)..................................... (1.9) (62.2) (20.9) 36.6 21.6 Net income(4)............................................... 99.4 7.3 73.3 130.0 102.2 PER SHARE DATA: Earnings, excluding net realized gains (losses), net of applicable expenses, amortization and taxes............... $ 1.56 $ 1.11 $ 1.52 $ 1.56 $ 1.34 Realized gains (losses) net of applicable amortization, expenses, and taxes(4).................................... (.03) (.99) (.34) .61 .36 Net income(4)............................................... 1.53 .12 1.18 2.17 1.70 Book value (at period end) without SFAS 115 adjustment...... 12.58 10.58 10.63 12.05 10.14 Book value (at period end)(5)............................... 13.14 12.59 5.47 12.68 10.37 Cash dividends per common share(6).......................... .16 .16 .12 1.23 -- Common shares outstanding (at period end)(7)................ 62.4 62.3 62.3 60.0 60.0 LIFE COMPANY DATA: Premiums collected(8)....................................... $ 1,625.5 $ 720.4 $ 751.9 $ 563.0 $ 840.7 First year premiums and deposits: Single premium deferred annuities(8)(9)................. 1,420.2 559.5 616.2 404.3 667.1 Flexible premium deferred annuities..................... 11.2 27.4 14.8 23.2 19.4 Single premium immediate annuities...................... 127.5 64.4 50.5 57.0 76.8 Variable annuities...................................... 6.1 -- -- -- -- Other................................................... -- -- -- 6.4 -- Renewal premiums and deposits: Flexible premium deferred annuities..................... 56.5 64.8 65.8 67.1 71.8 Life products........................................... 4.0 4.3 4.6 5.0 5.6 Statutory capital and surplus............................... 572.4 426.1 375.7 372.8 388.9 Adjusted capital accounts (at period end)(10)............... 785.8 622.5 632.4 641.7 519.3
- --------------- (1) For purposes of this ratio, "fixed charges" consist of interest expense on annuities, financial products, investment borrowings, and notes payable, and "earnings" consist of income before income taxes plus the fixed charges, as defined. 23 26 (2) For purposes of this ratio, "fixed charges" consist of interest expense on investment borrowings and notes payable, and "earnings" consist of income before income taxes plus the fixed charges, as defined. (3) Reflects the effects of the marking to market the Company's fixed maturities portfolio and related adjustments, as required by SFAS 115. (4) The level of net realized gains (losses) is subject to fluctuation from period to period. The additional data is provided for analytical purposes disclosing the impact of these items on net income. (5) After giving effect to the adjustments required by SFAS 115. (6) Includes a one-time $73.8 million dividend to Conseco in 1993 and excludes a note in the amount of $150 million issued to Conseco in connection with the Reorganization which was accounted for as a dividend. (7) Excludes 7,254,464 outstanding shares of Series A Preferred Stock. (8) Excludes $194.6 million and $59.2 million of SPDA premium attributable to internal exchanges for 1996 and 1995, respectively. (9) Includes certain deferred annuity products that allow for additional deposits, but generally have been utilized as SPDAs. (10) Includes statutory capital and surplus, asset valuation reserve (AVR), and interest maintenance reserve (IMR) for the appropriate periods presented. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The following discussion should be read in conjunction with "Item 6. Selected Financial Data" and "Item 8. Consolidated Financial Statements and Supplementary Data". The historical financial and operating data for the Company are presented on a consolidated basis for the Company as if Western had been a part of the Company for all periods presented. The historical data for periods prior to February 15, 1994, when Western was owned by Conseco, does not, however, reflect the effects of the issuance of the Senior Notes or of the additional shares of Company common stock issued in the Reorganization. RESULTS OF OPERATIONS General The Company's operating earnings are primarily a function of its investment spread, the amount of its invested assets, and its operating expenses. Accordingly, management's principal emphasis is on generating profits through adequate pricing of its insurance products and maintaining appropriate investment spreads throughout the life of the policies sold. Investment spread is the excess of net investment income over interest credited to insurance liabilities, and is a function of the level of, and yield on, invested assets and the interest crediting rates on insurance liabilities. The Company's investment spread over recent periods has been maintained through a combination of active investment management and the ability to change rates credited on a majority of its insurance liabilities. Management adjusts crediting rates based upon pricing objectives, current investment performance, market interest rates, and competitive factors. Although Western has the right to adjust interest crediting rates on most products, such adjustments to crediting rates may not be sufficient to maintain targeted investment spreads in all economic and market-rate environments. Furthermore, competitive and other factors may limit Western's ability to adjust crediting rates. A narrowing of spreads may adversely affect operating results. Western believes that its policy structure, which generally provides for resetting of policy crediting rates at least annually and imposes withdrawal penalties during the first five to ten years a policy is in force, mitigates substantially the potentially adverse effects of interest rate changes, except in the case of sudden and dramatic changes in market rates. In first quarter 1996, Western revised the manner in which it reports investment spread on insurance liabilities. Western began excluding first-year bonus interest on certain deferred annuities, which is generally paid in lieu of commissions, from its average crediting rate calculations. Bonus interest is capitalized along with other acquisition expenses and amortized over the lifetime of the block of business. Prior periods have 24 27 been adjusted to reflect this change. Western believes that the exclusion of the capitalized bonus interest is more consistent with the presentation of interest expenses and acquisition expenses in its Statement of Operations. As of the last day of each quarter, Western determines investment spread on insurance liabilities by measuring the difference between the average yield on invested assets and the average base liability crediting rate on such date. Since first quarter 1994, investment spread, as so defined, has remained between approximately 1.91% and 2.13%, and stood at approximately 2.13% at December 31, 1996. In second quarter 1996, Western also began presenting its average spread on insurance liabilities for each quarter, which Western believes more accurately reflects its experience during the reported period. Average investment spread calculations exclude prepayment income and loss, income from the Company's investment in limited partnerships, and investment income from other non-scheduled sources. Average investment spread has remained between approximately 1.96% and 2.19% since first quarter 1994, and was 2.19% for fourth quarter 1996. Western generally expects to maintain a spread within the range of spreads it has achieved in recent years. The level of the investment spread varies over time as a result of market factors, competitive influences, crediting rates, and investment yields. Operating earnings (which exclude realized investment gains and losses, net of applicable adjustments to amortization, expenses and taxes) for the year were $101.3 million, or $1.56 per share, compared to $69.5 million, or $1.11 per share in 1995, and $94.2 million, or $1.52 per share, in 1994. Operating earnings for 1995 include a special charge of $21.0 million, or $.34 per share, reflecting an increase in reserves for future guaranty fund assessments (see "Guaranty Association Assessments", below) and adjustments made to the cost of policies purchased and produced (see "Amortization related to operations", below). Because the decision to realize investment gains or losses lies to a great degree in management's discretion, and may reflect tax or other considerations unrelated to core earning power, management believes that operating earnings are the best indication of earnings capacity for financial services organizations such as Western. The following table sets forth operating and net income for the three-year period ended December 31, 1996:
1996 1995 1994 ------ ------ ------ (DOLLARS IN MILLIONS) Operating revenues....................................... $802.9 $695.8 $664.8 Benefits and expenses, excluding special charge.......... 647.1 558.2 518.3 ------ ------ ------ Pre-tax operating income, excluding special charge....... 155.8 137.6 146.5 Income tax expense from operations, excluding special charge................................................. 54.5 47.1 52.3 ------ ------ ------ Net operating income before special charge............... 101.3 90.5 94.2 Special charge........................................... -- (21.0) -- ------ ------ ------ Net operating income after special charge................ 101.3 69.5 94.2 Realized investment gains (losses) net of amortization, expenses and taxes..................................... (1.9) (62.2) (20.9) ------ ------ ------ Net Income............................................... $ 99.4 $ 7.3 $ 73.3 ====== ====== ======
Discussion of Changes in the Statement of Operations for Years Ended December 31, 1996, 1995 and 1994 Net investment income. Net investment income, including the Company's equity earnings in partnerships and other equity-type investments, increased $43.4 million, or 7%, in 1996, to $710.1 million from $666.7 million in 1995. The 1995 figure reflects an increase of $29.3 million from the $637.4 million earned in 1994. This category of earnings, net of interest expense on short-term investment borrowings, was $699.0 million for 1996 compared to $657.5 million and $630.1 million for 1995 and 1994, respectively. The increase in net investment income for 1996 is partially attributable to an increase in the amount of invested assets, an increase in income resulting from a limited partnership, and from prepayment revenues, which is included in this category of earnings. Prepayment revenues resulted in $4.5 million of income in 1996 compared to prepayment revenues of $1.9 million and $3.1 million in 1995 and 1994, respectively. The amount of 25 28 prepayment revenues received by Western varies significantly from period to period based on both the composition of the portfolio and the level of and direction of changes in market interest rates. Generally, prepayment revenues will increase as market interest rates decline and decrease as market interest rates rise. The increases in investment income also reflect the beneficial effects of the realized losses recorded in 1994 and 1995, which enabled the Company to increase the effective yield on the assets sold, as well as generating tax refunds from the carryback of realized losses against prior period gains. The Company's equity share of net income in Conseco Capital Partners II, L.P. ("CCPII") for 1996 was $7.0 million, compared to $3.8 million for 1995. The Company committed to its investment in CCPII in third quarter 1994, and did not report any income from CCPII in 1994. CCPII was dissolved during the third quarter 1996. The Company has begun to invest in certain partnership investments that are intended to replace the investment income previously generated by CCPII. However, the Company anticipates that total partnership investments will not exceed approximately 1% of total invested assets. Partnership investments are likely to result in a higher degree of volatility in reported earnings than is typically the case with fixed income investments, and present a greater risk of loss, as they generally reflect equity claims on an issuer's capital structure junior to that of most fixed-income investments. Net investment income also increased in 1996 from earlier years because Western was more fully invested. During the second half of 1996, Western began to pre-invest in anticipation of future net cash flows, as such net cash flows from operations had increased. The percentage of cash flow that is pre-invested by Western is based on market conditions and varies from time to time. During fourth quarter 1996, the average daily amount outstanding reflecting such advance investments was approximately $116.0 million. The Company earns a positive spread on such advance investments so long as short-term rates are lower than the rates earned in such investments. The amount of cash flow that is pre-invested is not anticipated to exceed approximately 2% of invested assets, or approximately one month of premium flow. For 1996, net investment income also benefited from the substantially larger average balance of investment securities held by Western compared with 1995 and 1994. On an amortized cost basis, the investment portfolio, net of short-term investment borrowings, was approximately $9.1 billion as of year-end 1996, compared to $8.2 billion and $8.0 billion as of year-end 1995 and year-end 1994, respectively. The average portfolio yield (calculated based on amortized cost) was 8.2% for each of 1996 and 1995, and 8.1% for 1994. See "Investments", below, for a discussion of the factors affecting average portfolio yields for 1996, 1995, and 1994. Net realized investment gains (losses). Net realized investment losses were $2.3 million in 1996, compared to losses of $126.2 million in 1995 and $49.2 million in 1994. Net of related adjustments to amortization, reserves, related expenses, and taxes, net realized investment losses were $1.9 million in 1996, compared to net losses of $62.2 million in 1995 and $20.9 million in 1994. The level of investment gains and losses in the portfolio is dependent on general market conditions and market interest rates, as well as the amount of activity in the portfolio. Western follows an active strategy in the management of its portfolio, in which decisions to buy, sell, or hold securities are dictated principally by relative value analysis, rather than the gain (loss) to be realized on any given trade. Western generally intends to seek to operate its portfolio on a gain/loss neutral basis. Management elected to incur substantial realized losses in 1995 and 1994 in order to utilize certain capital loss tax carrybacks that would otherwise have expired at the end of 1995. Realized losses incurred in 1995 gave rise to $37.8 million of tax refund received in 1996. This program was initiated in 1994, and $26.4 million of the cash tax refund received in March 1995 was attributable to the 1994 losses. Amortization and change in future policy benefits related to realized gains and losses. As described in Note 1 to the Consolidated Financial Statements, the realization of investment gains and losses affects the timing of amortization of the cost of policies purchased and the timing of amortization of cost of policies produced. Additionally, the realization of investment gains may also require that insurance liabilities on certain life insurance products be increased. As a result of the net realized gains and losses from sales of fixed maturities, amortization of the cost of policies purchased decreased by $2.3 million in 1994; amortization of cost of policies produced increased by $0.6 million in 1996, decreased by $29.8 million in 1995, and decreased by $16.7 million in 1994. As a result of realized gains in 1994, insurance liabilities on certain life insurance products increased by $2.2 million in 1994. 26 29 Insurance policy and fee income. Insurance policy and fee income was $92.8 million, $29.1 million, and $27.4 million in 1996, 1995, and 1994, respectively. This income relates primarily to premiums from products with mortality and morbidity features such as traditional life insurance and certain SPIAs. It also includes surrender charge income, primarily from deferred annuities, and fee income from direct sales operations. The significant increase in this source of income in 1996 was primarily due to $71.1 million of premium income resulting from the modified coinsurance agreement entered into with AGLIC in fourth quarter 1995. The agreement provides for the parties to jointly market SPIA policies in the structured settlement market. The increase in 1995 from 1994 was primarily a result of fee income due to a direct sales operation that was purchased by the Company in the third quarter 1994. Insurance policy benefits and other liabilities. Total insurance policy benefits (including changes in future policy benefits), which relate solely to policies with mortality features, increased $61.8 million in 1996 from 1995, and increased $3.2 million in 1995 from 1994. The 1996 increase was primarily due to the modified coinsurance agreement entered into with AGLIC in fourth quarter 1995, which resulted in a recognition of $71.1 million of insurance policy benefits in 1996. Full-year 1996, 1995, and 1994 reflected favorable mortality experience of $3.9 million, $0.2 million, and $1.4 million, respectively. Interest expense on annuities and financial products. Interest expense on annuities and financial products was $381.7 million in 1996, representing an increase of $16.8 million, or 5%, from 1995, and increased by $20.7 million, or 6%, in 1995 from 1994. The increase in 1996 reflects an increase in reserves to $7.3 billion at year-end 1996 from $6.6 billion at year-end 1995, partially offset by lower crediting rates on insurance liabilities in 1996 compared to 1995. The increase in 1995 reflects an increase in reserves to $6.6 billion at year-end 1995 from $6.5 billion at year-end 1994 and slightly higher crediting rates in 1995 compared to 1994. The average rate credited on all insurance liabilities declined to approximately 6.1% at December 31, 1996, from 6.4% and 6.3% at year-end 1995 and 1994, respectively. Average crediting rates on annuities may increase if market interest rates rise, or if lower cost policies lapse, are repriced, or are replaced with policies having higher crediting rates. Conversely, if rates generally decrease, the average credited rate will generally tend to decrease over time as well. Amortization related to operations. Amortization of the cost of policies produced and purchased, which excludes the effects of realized gains (losses), increased by $4.5 million in 1996 over 1995, and increased by $17.0 million in 1995 over 1994. The increases in 1996 and 1995 amortization were the result of increases in the amount of in-force business and changes in assumptions made in fourth quarter 1995 concerning crediting rates on policyholder balances and expected lapses of certain out-of-surrender-charge blocks of business. Asset balances and amortization of costs of policies produced and purchased are reviewed annually for products governed by SFAS 97 and may be reviewed more frequently if circumstances dictate. This accounting standard requires that the asset balances and future amortization be unlocked; i.e., recomputed based on actual past experience and updated expectations of future experience. This unlocking may result in both one-time adjustments related to prior amortization as well as changes to ongoing amortization rates. Amortization for 1995 includes an unlocking adjustment of $19.7 million, of which $1.6 million was expensed in the first six months of 1995, due to actual lapses in excess of expected amounts for that period. The remaining $18.1 million, which was expensed in the fourth quarter of 1995, was based on the results of Western's annual unlocking study. Increased amortization in 1995 was partially offset due to an increase in the guaranty fund liability. Full year unlocking adjustments for 1994 totaled $1.6 million. No unlocking adjustments were made in 1996. While withdrawals for 1996 exceeded expected levels, improvement in spread effectively offset the effects of higher withdrawals. As a result, the annual unlocking study for 1996 revealed no need for an unlocking adjustment to 1996 scheduled amortization. The special fourth-quarter 1995 charge reflected principally adjustments to amortization resulting from refinements to persistency assumptions for policies sold from 1990 through 1992, and were based on actual 1995 experience. The policies sold from 1990 through 1992 were written at comparatively high interest crediting rates (in the 8% to 9% range), and then experienced substantial reductions in interest rates credited in subsequent periods. As a result, management believes that such policies may be more likely to lapse, despite the unavailability of superior interest rates in the market, than would be the case with later business, which has experienced, and is expected to continue to experience, a more level crediting rate history. The special fourth- 27 30 quarter 1995 charge also included adjustments related to estimated persistency for 1995 and beyond. Accordingly, Western does not anticipate the need for any additional material unlocking adjustments to amortization. However, such adjustments could become necessary if economic or other factors, such as a persistent high interest rate environment, were to result in persistency or spread experience substantially worse than that realized in 1995 and 1996. See "Risks of Changing Interest Rates", below. Scheduled amortization in future periods is expected to increase over prior periods (excluding amortization associated with the special fourth-quarter 1995 adjustment) as a result of new business written in 1996 and 1995 and the revisions of adjustments that led to the special fourth-quarter 1995 unlocking adjustment. The amount of amortization for future periods will depend on the level of sales, withdrawals, and realized gains (losses). Other operating costs and expenses. Other operating costs and expenses, excluding a special charge for guaranty fund assessments of $24.5 million taken in the fourth quarter 1995, decreased $4.0 million in 1996 compared to 1995. The lower operating costs and expenses for 1996 were due to a decrease in expenses relating to guaranty fund assessments of $5.1 million (excluding the special fourth quarter 1995 charge) for 1996 compared to 1995. See "Guaranty Association Assessments", below. Excluding the special charge for guaranty fund assessments taken in fourth quarter 1995, other operating costs and expenses increased by $4.0 million in 1995 over 1994 levels. The increase in 1995 was primarily due to $2.4 million of operating expenses relating to a direct sales operation purchased by the Company in third quarter 1994, and $1.6 million associated with higher post-Reorganization expenses. Interest expense on notes payable and investment borrowings. Interest expense of $21.8 million for 1996 was up from $19.9 million in 1995. Interest expense for 1996 and 1995 consisted of $8.1 million and $8.6 million, respectively, in interest expense on short-term investment borrowings (primarily mortgage dollar roll transactions whereby Western seeks to enhance yield by reinvesting the proceeds at higher rates), $3.0 million and $0.6 million, respectively, of interest on other short-term borrowings, and $10.7 million of interest expense relating to the Senior Notes for both years. Interest expense for 1995 increased $3.0 million from 1994, due principally to the fact that the Senior Notes were outstanding throughout the entire year in 1995, but for only 46 weeks in 1994. The amount of investment interest expense and other short-term interest expense may vary substantially from time to time based on the level of market interest rates and the volume of borrowings. Income taxes. Income taxes for 1996 were $53.5 million, compared to $1.5 million and $40.8 million in 1995 and 1994, respectively. The significantly lower level of income taxes for 1995 compared to 1996 and 1994 was primarily attributable to the Company's 1995 tax loss recovery program. See "Net realized investment gains (losses)", above. Additionally, increased operating earnings also contributed to a higher income tax level for 1996 compared to 1995. The components of income tax included in the consolidated balance sheet are as follows:
DECEMBER 31, ---------------------- 1996 1995 -------- --------- (DOLLARS IN MILLIONS) Deferred income tax liabilities: Western's operations...................................... $77.3 $ 51.0 Unrealized appreciation on invested assets................ 21.1 67.4 ----- ------ Deferred income tax liabilities............................. $98.4 $118.4 ===== ====== Deferred income tax assets: Company net operating loss carryforward..................... $13.4 $ 8.9 ----- ------ Deferred income tax assets.................................. $13.4 $ 8.9 ===== ======
The deferred income tax liability of $98.4 million at December 31, 1996, was partially the result of the temporary differences between tax and financial bases of the cost of policies produced, the cost of policies 28 31 purchased, and insurance liabilities. Also contributing to the tax liability were the temporary differences between tax and financial bases related to net unrealized appreciation of actively managed fixed maturities that are carried at market value in accordance with the requirements of SFAS 115. The deferred income tax asset of $13.4 million at December 31, 1996, is attributable to net operating losses incurred at the holding company level that cannot be utilized by Western since each is required to file separate federal income tax returns. Net operating losses at the holding company level totaled $38.3 million at December 31, 1996, and can be carried forward to offset future taxable income at the holding company level. If such net operating losses are not utilized, they will begin expiring in 2009. Management believes that it is more likely than not that the deferred tax asset of $13.4 million will be realized against future years' taxable income generated at the holding company level during the carryforward period. As of December 31, 1996, the consolidated federal income tax returns for 1993 and short period ending February 15, 1994, in which Western was included pursuant to a tax sharing agreement, are in the process of being audited. Management does not anticipate any material adjustment by the Internal Revenue Service. Net income. Net income in 1996 was $99.4 million, compared with $7.3 million and $73.3 million for 1995 and 1994, respectively. The increase in net income in 1996 from 1995 was primarily the result of the termination at the end of 1995 of the Company's realized tax loss recovery program and increases in operating revenues. See "Net realized investment gains (losses)", below. In addition, net income was reduced in 1995 due to the special after-tax charge of $21.0 million, which resulted from an increase in reserves for future guaranty fund assessments (see "Guaranty Association Assessments", below) and adjustments made to the deferred acquisition cost asset (see "Amortization related to operations", above). The decrease in net income in 1995 from 1994 was also primarily due to the Company's realized tax loss recovery program in 1995 and the special after-tax charge of $21.0 million in fourth quarter 1995. INVESTMENTS Western's investment strategy is to maintain a portfolio consisting largely of readily-marketable, investment grade fixed maturities, to provide adequate liquidity through active asset/liability management for expected liability cash flows and other requirements, and to maximize return through active investment management. Western's investment strategy places strong emphasis on active asset/liability management as a principal tool to mitigate variations in investment spread and disintermediation risk. At December 31, 1996, Western had total invested assets with a carrying value of approximately $9.4 billion. See "Item 1. Business -- Investments" and Note 2 to the Consolidated Financial Statements. The following table shows Western's investment performance for the three years ended December 31, 1996:
DECEMBER 31, -------------------------------- 1996 1995 1994 -------- -------- -------- (DOLLARS IN MILLIONS) Net investment income(1)............................. $ 710.1 $ 666.7 $ 637.4 Average net invested assets, at amortized cost(2).... 8,713.6 8,150.0 7,907.4 Yield on invested assets, at amortized cost.......... 8.2% 8.2% 8.1%
- --------------- (1) Includes equity in earnings of partnership investments. (2) Net of short-term investment borrowings and amounts due to brokers. The portfolio yield for 1996 and 1995 was approximately 8.2%, and was approximately 8.1% for 1994. Market interest rates rose by approximately 100 basis points in most maturity ranges during the first half of 1996, then declined by 25-30 basis points during the second half of the year. Although market interest rates were generally higher in 1996 than the levels prevailing in late 1995, changes in market rates affect Western's portfolio yield only slowly due to the relatively small volume of new investments in any one period relative to the size of the overall portfolio. In addition, because the portfolio includes a mix of securities with yields both above and below the average portfolio yield (as well as both above and below current market rates), changes 29 32 in portfolio yield will not necessarily parallel changes in market rates, except over longer periods of time. Securities that are sold or otherwise redeemed, or that are partially prepaid, may be yielding rates above and below the portfolio yield or current market rates. As part of Western's realized loss/tax recovery program in 1995, a majority of the portfolio sales transactions were concentrated in lower yielding issues; therefore, average portfolio yield remained relatively unchanged in 1995 despite the general decrease in market interest rates during that year. The creditworthiness of each issuer whose securities are held in the portfolio is evaluated periodically by Western and its portfolio managers, with special attention given to those securities with market values which have declined or appreciated materially for reasons other than changes in interest rates or other general market conditions. Available evidence is considered to evaluate the realizable value of the investment, including specific conditions of the issuing entity and its ability to comply with the material terms of the security. Evidence reviewed may include the recent operational results and financial position of the issuer, information about its industry, recent press releases and other information. If evidence does not exist to support a realizable value equal to or greater than the cost basis of the investment, and such decline in market value is determined to be other than temporary, the carrying amount would be written down to net realizable value. Any recoveries would not be recognized, except in the form of realized gains generated upon the sale, repayment, or other disposition of the investment. Investments in fixed maturities that are rated below investment grade by nationally recognized statistical rating organizations (or, if not rated by such firms, with NAIC Class Designations below 2) were 7.0% of fixed maturities and 6.6% of total invested assets as of December 31, 1996. Western currently plans to remain in the range of such percentages in the investment of its portfolio in below investment grade fixed maturities, although such percentages may vary by several percentage points from time to time. Individual investments in below investment grade corporate debt securities generally have greater risks than other individual corporate debt investments. Risk of loss upon default by the borrower is greater with below investment grade corporate debt securities because these securities generally are unsecured and often are subordinated to other creditors of the issuers. Furthermore, because the issuers usually have high levels of indebtedness, they are more sensitive to adverse economic conditions, such as recession or increasing interest rates, than are investment grade issuers. Western is aware of this risk exposure and monitors its below investment grade securities closely. At December 31, 1996, Western had no fixed maturities known to be in default of either a substantive nature (i.e., in default due to nonpayment of interest or principal) or technical nature (i.e., in default, but not as to the payment of interest or principal), which includes investments in grace periods or with waivers. During 1996, Western recorded writedowns of fixed maturities totaling $1.6 million for credit-related permanent impairments of value, compared to $6.4 million and $0.4 million in 1995 and 1994, respectively. If Western determines that changes in conditions dictate that an investment be disposed of, the security will be sold and any associated gain (loss) recognized. See "-- Results of Operations -- Net realized gains (losses)", above, for further discussions of the impact that such sales of investments and other related actions may have on future earnings of the Company. Mortgage Loans At December 31, 1996, Western had total mortgage loans of $122.7 million, or 1.3% of total invested assets, consisting of $89.6 million of commercial mortgages and $33.1 million of mortgage investments in junior and residual interests of CMOs ("CMO residuals"). Total mortgage loans at year-end 1996 increased by $36.2 million from year-end 1995. This increase reflects Western's reclassification during the second quarter 1996 of $43.5 million of investments from the credit-tenant loan category to the mortgage loan category. The reclassified investments represented credit-tenant loans on which the commercial credit rating of the tenant, Kmart Corp., was downgraded to below investment grade status by several rating services. Additionally, approximately 12% of the collateral underlying Western's CMO residuals were supported by Kmart Corp. credit at December 31, 1996. 30 33 Approximately 72% of the commercial mortgages were on properties located in four states -- Florida (24%), Texas (21%), North Carolina (15%) and Indiana (12%), respectively. No other state comprised greater than 7% of the total commercial mortgage loan balance. The CMO residuals are investment instruments that entitle Western to the excess cash flows arising from the difference between (i) the cash flows required to make principal and interest payments on the other tranches of the CMO and (ii) the actual cash flows received on the mortgage loan assets backing the CMO. If prepayments or credit losses on the underlying mortgage loan assets vary from projections, the total cash flows to Western could differ from projections. Changes in projected cash flows that impact the yields of the CMO residuals are recognized in investment income prospectively. If the carrying value of CMO residuals exceeds the projected cash flows discounted at a risk-free rate, the carrying value is adjusted to fair value and a realized loss is recognized. During 1996, Western had $0.2 million of realized losses on the disposition of mortgage loans, compared with none in 1995 or 1994. At December 31, 1996, Western had no nonperforming mortgage loans. Credit-Tenant Loans At December 31, 1996, Western held $208.5 million, or 2.2% of total invested assets, of credit-tenant loans ("CTLs"), compared to $249.7 million at year-end 1995. CTLs are mortgage loans for commercial properties which require, as stipulated by Western's underwriting guidelines, (i) the lease of the principal tenant to be assigned to Western (including the direct receipt by Western of the tenant's lease payments) and to produce adequate cash flow to fund the requirements of the loan and (ii) the principal tenant (or the guarantor of such tenant's obligations) to have a credit rating of generally at least "BBB" or its equivalent. The underwriting guidelines take into account such factors as: the lease terms on the subject property; the borrower's management ability, including business experience, property management capabilities and financial soundness; and such economic, demographic or other factors that may affect the income generated by the property or its value. The underwriting guidelines also require a loan-to-value ratio of 75% or less. Because CTLs are principally underwritten on the basis of the creditworthiness of the tenant rather than on the value of the underlying property, they are classified as a separate class of securities for financial reporting purposes. As with commercial mortgage loans, CTLs are additionally secured by liens on the underlying property. Partnership Investments In third-quarter 1994, the Company committed to a $25.0 million investment in CCPII, a limited partnership that invested in other insurance companies. CCPII was dissolved during the third quarter 1996. At the time of the dissolution of CCPII, the funded portion of the Company's $25.0 million commitment was $4.8 million. CCPII resulted in $7.0 million and $3.8 million of net investment income for the Company in 1996 and 1995, respectively. The Company has begun to invest in certain partnership investments that are intended to replace the investment income previously generated by CCPII. However, the Company anticipates that total partnership investments will not exceed approximately 1% of total invested assets. At year-end 1996, the Company's total commitment to partnership investments was $50.0 million, of which $1.1 million had been funded. Partnership investments are likely to result in a higher degree of volatility in reported earnings than is typically the case with fixed income investments, and present a greater risk of loss, as they generally reflect equity claims on an issuer's capital structure junior to that of most fixed-income investments. Investment Borrowings Western occasionally enters into mortgage dollar roll and reverse repurchase transactions (collectively, "dollar rolls") when earnings enhancement opportunities arise. Dollar rolls are agreements with an outside source, usually broker/dealers, to sell mortgage-backed securities and then, at a predetermined date, to buy back "substantially the same securities". Western's investment guidelines require that the original term of a dollar roll be no longer than thirty days and that all proceeds of such short-term transactions be invested in short-term investments. The securities involved must also have been issued, assumed or guaranteed by the 31 34 Government National Mortgage Association ("GNMA"), the Federal National Mortgage Association ("FNMA"), or the Federal Home Loan Mortgage Corporation ("FHLMC"). Western enters into dollar rolls whenever a positive spread can be realized from the implicit interest cost of the investment borrowings and the reinvestment of the proceeds in short-term financial instruments. Because both sides of the transaction are entered into on the basis of short-term money market rates, dollar rolls involve no duration risk while providing an enhancement to investment income. Western's dollar rolls are accounted for as short-term investment borrowings, with the proceeds included in short-term investments. At December 31, 1996, Western had $134.6 million of short-term investment borrowings outstanding under dollar rolls. The carrying values of Western's investment borrowings are assumed to approximate estimated fair value. PRE-INVESTMENT OF FUTURE CASH FLOWS Net investment income also increased in 1996 from earlier years because Western was more fully invested. During the second half of 1996, Western began to pre-invest in anticipation of future net cash flows, as such net cash flows from operations had increased. The percentage of cash flow that is pre-invested by Western is based on market conditions and varies from time to time. During fourth quarter 1996, the average daily amount outstanding reflecting such advance investments was approximately $116.0 million. The Company earns a positive spread on such advance investments so long as short-term rates are lower than the rates earned in such investments. The amount of cash flow that is pre-invested is not anticipated to exceed approximately 2% of invested assets, or approximately one month of premium flow. EFFECTS OF CHANGING INTEREST RATES ON INVESTMENTS Fixed maturities at December 31, 1996, were comprised primarily of debt securities of the U.S. government, public utilities and other corporations, asset-backed securities and mortgage-backed securities. Approximately 94.3% of Western's total invested assets are fixed maturities, with approximately 96.3% and 3.7% of the fixed maturities being fixed-rate and floating-rate instruments, respectively. The market values of fixed-rate securities are highly dependent on the external interest rate environment. Market values will normally increase when market interest rates fall, as in 1995, and decrease when market interest rates rise, as in 1996 and 1994. The following table illustrates the effects of changes in market interest rates on the market value of Western's fixed maturities for the periods indicated:
DECEMBER 31, -------------------------------- FIXED MATURITIES 1996 1995 1994 ---------------- -------- ---------- -------- (DOLLARS IN MILLIONS) Market value......................................... $8,842.5 $7,998.8 $7,001.1 Amortized cost....................................... 8,738.4 7,655.6 7,605.9 Market value as a percentage of amortized cost....... 101.2% 104.5% 92.0% 30-year U.S. Treasury Bond -- change in yield between year ends (in basis points)........................ 69 b.p. (193 b.p.) 153 b.p. 5-year U.S. Treasury Bond -- change in yield between year ends (in basis points)........................ 83 b.p. (246 b.p.) 263 b.p.
At December 31, 1996, Western's actively managed fixed maturities had net unrealized gains of $104.1 million, for a carrying value of 101.2% of amortized cost, compared to net unrealized gains of $342.2 million, for a carrying value of 104.5% of amortized cost, at December 31, 1995. Estimated fair values for fixed maturities are based primarily on estimates from nationally recognized pricing services and broker-dealer market makers. The amount of net unrealized gains in the portfolio at a given time can dramatically fluctuate due to changing market interest rates and credit factors. The 3.3% decline in net unrealized gains, as a percentage of amortized cost, between year-end 1996 and 1995, resulted principally from the moderate increase in market interest rates in 1996. Western anticipates that the carrying value of the portfolio relative to 32 35 amortized cost will continue to fluctuate, reflecting the effects of market interest rate changes on the market value of the portfolio. Western seeks to minimize the effects of changes in the market value of its portfolio on its reported operating earnings by following an active asset/liability management philosophy in its portfolio structure which seeks to match reasonably closely the average duration of the asset portfolio with the average duration of the liability portfolio. This is implemented through the active management of both asset and liability components. For example, Western can initiate securities transactions that will specifically alter the average asset duration to bring it in line with changes in the estimated liability duration. The following table illustrates asset and liability durations for the two years ended:
DECEMBER 31, -------------- 1996 1995 ---- ---- (IN YEARS) Asset duration (1).......................................... 5.3 5.3 Liability modified duration................................. 5.4 5.7
- --------------- (1) Excludes short-term investments. Including short-term investments, asset duration was approximately 5.2 and 5.1 years in 1996 and 1995, respectively. See "Item 1. Business -- Investments". Because Western earns income on the spread between its earned rate on assets and its credited rate on liabilities, a reasonably closely matched duration strategy has enabled Western to maintain consistent spread income in most market environments, despite wide fluctuations in market interest rates and the market value of Western's fixed income portfolio. The following table illustrates this stability over the past two years, showing average invested asset yield and average credited rate as of the last day of each of the quarters indicated:
Q4/96 Q3/96 Q2/96 Q1/96 Q4/95 Q3/95 Q2/95 Q1/95 ----- ----- ----- ----- ----- ----- ----- ----- Invested Asset Yield................ 8.27% 8.24% 8.22% 8.20% 8.25% 8.32% 8.30% 8.26% Investment Credited Rate............ 6.14 6.16 6.15 6.21 6.34 6.34 6.36 6.29 ---- ---- ---- ---- ---- ---- ---- ---- Investment Spread................... 2.13 2.08 2.07 1.99 1.91 1.98 1.94 1.97
This spread stability results in part from Western's ability to adjust crediting rates at least annually on approximately 78% of its annuity liabilities as of December 31, 1996. However, there are possible market environment scenarios that could impair the ability of Western to maintain spreads at historical levels. These would include sustained periods of exceptionally high interest rates following a rapid upward movement in the yield curve, particularly in a flat or inverted yield curve scenario (in which case liability duration would likely shorten relative to estimated asset duration, as interest rate-driven withdrawal activity increased; thereby placing pressure on the spread), or sustained periods of very low interest rates (e.g., medium-term corporate bond rates in the range of 5% or less), in which event, liability duration would tend to lengthen relative to asset duration, while Western's ability to reduce crediting rates would be constrained by contractual minimums (generally, 3% to 4%). However, Western views these scenarios as unlikely in light of current and anticipated economic conditions. One measure of the ability of Western to withstand changes in the external interest rate environment is provided by annual actuarial testing of the adequacy of statutory reserves in various interest rate scenarios. The two most extreme of the seven commonly used scenarios involves an assumed 300 basis point permanent parallel shift in the yield curve both upward and downward. At December 31, 1996, Western demonstrated its ability to withstand such scenarios without adding to its existing statutory reserves. The Company estimates that, based on the composition and structure of its fixed-maturities portfolio and the yield curve at December 31, 1996, a 100 basis point upward (downward) parallel shift in the then existing yield curve would result in an approximate 5% decrease (increase) in the market value of the fixed-maturities portfolio. Because of the composition and maturity structure of its portfolio, the market value of Western's 33 36 portfolio will tend to be most sensitive to changes in five to ten year maturity ranges. The following table illustrates the estimated percentage changes in the carrying value of Western's fixed income securities under different market interest rate scenarios:
INTEREST RATE SHIFTS AS OF DECEMBER 31, 1996 ----------------------------------------------- +300% +100% 0% -100% -300% ------- ------ ------ ------ ------ Total fixed maturities: Percent change in carrying value........ (11.09)% (4.84)% -- 4.98% 15.51% Option-adjusted duration................ 5.44 5.49 5.38 5.24 5.22 Mortgage-backed securities (excluding CMBS): Percent change in carrying value........ (12.48)% (4.24)% -- 4.03% 10.60% Option-adjusted duration................ 4.50 4.44 4.18 3.67 2.59 Commercial mortgage-backed securities: Percent change in carrying value........ (16.17)% (5.81)% -- 6.28% 20.44% Option-adjusted duration................ 5.72 5.93 6.04 6.15 6.36 Corporate securities with call features(1): Percent change in carrying value........ (16.32)% (5.53)% -- 5.44% 16.89% Option-adjusted duration................ 6.15 5.87 5.48 5.17 5.24
- --------------- (1) Call features include call, sink and put redemption options and conversion options. The interest rate scenario model assumes a parallel shift in the yield curve for all maturity ranges and fixed income asset classes alone, without consideration of changes in market interest rates due to credit quality or credit spread issues. Because different securities are more susceptible to changes in market interest rates in different maturity ranges, non-parallel shifts in the yield curve could lead to materially different results. However, changes in the market value of the portfolio do not directly impact operating earnings, as operating earnings are based principally on the spread between the book yield based on amortized cost of the assets over the rate paid on liabilities. The Company seeks to minimize the impact of changing rates on operating earnings by maintaining a reasonably close match between asset and liability durations. See prior table above that illustrates asset and liability durations for the two years ended December 31, 1996 and 1995. In addition, the ability of the Company to adjust crediting rates annually on over 75% of its insurance liabilities provides further tools to mitigate the effects of changing interest rates on the long-term profitability and value of the Company's franchise. Mortgage-Backed Securities Mortgage-backed securities ("MBS") are securitized pools of individual residential mortgages that are collateralized by the underlying mortgage loans. MBS are subject to risks associated with variable prepayments, principally due to both home sales and homeowner refinancings. Refinancings tend to accelerate in decreasing market rate environments (especially for mortgage rate drops of 100 basis points or more) and, accordingly, an MBS may have significantly different cash flow patterns than originally anticipated. As a result of this prepayment variability, the duration of MBS tends to shorten as market interest rates fall and lengthen as they rise. Because prepayments are based on par, faster-than-anticipated prepayments will increase (decrease) the effective yield of an MBS bought at a discount (premium) to par; with slower-than-anticipated prepayments having the opposite effect. There are two principal types of MBS: pass-throughs and collateralized mortgage obligations ("CMOs"). (Additionally, see discussion of commercial MBS below.) The principal distinctions between pass-throughs and CMOs involve the exposure of each to the prepayment risk associated with the underlying pools of mortgages and their respective coupon rate and maturity characteristics. As the name implies, a pass-through security passes through the monthly principal and interest payments on the underlying pool of mortgages. An investor in a pass-through security is exposed to the total prepayment risk associated with the underlying pool of mortgages. If prepayments are experienced on the underlying 34 37 collateral, they are directly passed on to the pass-through investor on a pro-rata basis. The total prepayment risk can be divided into two components: contraction risk and extension risk. Contraction risk is the risk that prepayments will occur when interest rates have declined, forcing an investor to reinvest unscheduled cash flows at lower interest rates. Conversely, extension risk results from the slowdown of prepayments when interest rates have increased, forcing an investor to realize less cash flows that otherwise could have been reinvested at higher interest rates. Pass-throughs issued, assumed and/or guaranteed by the Government National Mortgage Association (the "GNMA"), the Federal National Mortgage Association ("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC") are known as agency pass-throughs; the non- agency-backed issues are typically referred to as whole loans or private-labels. As the name implies, the relevant agency guarantees (at least implicitly) payment on agency pass-throughs, so there is effectively no credit risk to the security holder. A collateralized mortgage obligation ("CMO") is essentially a structured pass-through security on which the prepayment risk has been divided among classes of bonds (or tranches) with various coupons and maturity dates. Instead of distributing monthly cash flow on a pro-rata basis, the distribution of the principal repayment (both scheduled and unscheduled) is made on a prioritized basis, so as to redistribute prepayment risk among the various classes in the CMO structure (i.e., certain tranches, such as PACs and VADMs, offer more cash flow certainty and prepayment protection than pass-throughs, while others, such as supports, offer less). CMO structures consist of two major types: the first type provides for the redirection of principal payments only (e.g., sequentials, PACs, TACs and supports), while the second type provides for the redirection of both principal and interest (e.g., VADMs, Z-tranches, IOs and POs). Due to the multi-class structure of a CMO, a CMO is better able to provide for a wide range of investors' maturity and coupon requirements than is the case with a regular pass-through. In addition, in the case of CMOs using non-agency guaranteed collateral, the CMO structure may disproportionately allocate the risk of mortgagor payment default among different classes, with losses allocated to junior or support tranches, thus providing credit support to more senior tranches. Because defaults are generally treated as prepayments, high delinquency levels can shorten duration. Western manages the extent of MBS prepayment risk (and the accompanying duration risk) by (i) principally purchasing securities with "current" coupon rates, which are accordingly backed by collateral with lower prepayment sensitivities (e.g., MBS priced at or near par), (ii) typically avoiding securities with values heavily influenced by changes in prepayment rates (e.g., IOs and POs, or securities with significant premiums or discounts to par), and (iii) purchasing securities with prepayment protected structures (e.g., PACs, TACs and VADMs). At December 31, 1996, the aggregate amortized cost of the aggregate MBS portfolio was at a slight net discount to par of $13.2 million, or 99.4% of aggregate par value. Commercial mortgage-backed securities ("CMBS") are similar in structure to MBS (i.e., can either be pass-through securities or CMOs). The major distinction between CMBS and MBS is that whereas MBS are backed by residential mortgage loans (e.g., single-family housing), CMBS are collateralized by income-producing commercial properties such as multi-family properties, shopping centers, hotels and office buildings. CMBS also differ from MBS in that the structuring process for them is largely centered on the allocation of credit risk (versus prepayment risk) because CMBS are typically less exposed to prepayments due to call- protection features embedded in the underlying commercial mortgages. 35 38 At December 31, 1996, the aggregate carrying value of Western's MBS portfolio was $2.3 billion, or 24.7% of total invested assets, consisting of $1.3 billion of agency pass-throughs, $68.9 million of commercial MBS, and $922.5 million of CMOs. The following table sets forth the carrying value of Western's MBS portfolio by structural type and underlying collateral coupon rates as of December 31, 1996:
COLLATERAL COUPON CLASS ------------------------- 9.01% 7% AND 7.01- 8.01- AND MBS TYPE BELOW 8.00% 9.00% ABOVE TOTAL -------- ------ ------- ------ ------ -------- (DOLLARS IN MILLIONS) Agency pass-throughs....................... $815.7 $469.9 $29.7 $10.9 $1,326.2 Commercial MBS............................. 38.2 29.5 1.2 -- 68.9 CMOs: PACs, TACs and VADMs..................... 231.2 45.6 6.1 -- 282.9 Sequentials.............................. 48.6 141.5 94.5 53.3 337.9 Supports and other....................... 10.6 3.3 -- -- 13.9 Mezzanines and subordinates.............. 23.3 22.1 -- -- 45.4 Z-tranches............................... -- -- 28.0 -- 28.0 ARMs and floaters........................ (a) (a) (a) (a) 214.4 -------- Total CMOs.......................... 922.5 -------- Total MBS/CMOs................... $2,317.6 ========
- --------------- (a) The collateral coupon rates are not meaningful as they reset periodically in accordance with changes in market interest rates. See "Derivative Financial Instruments", below. Asset-Backed Securities Asset-backed securities ("ABS") are securitized pools of assets, such as manufactured housing loans and credit card receivables, that are collateralized by the underlying loans. ABS are typically structured similarly to CMOs or MBS pass-throughs (see "Mortgage-Backed Securities", above) , but are usually subject to less prepayment risk than MBS due to the generally less interest-sensitive prepayment rates of the underlying collateral. Senior-tranche ABS contain credit enhancement features which raise the quality of the ABS above that of the underlying assets, while junior tranches bear a disproportionate share of credit risk. At December 31, 1996, the aggregate carrying value of Western's ABS portfolio was $351.9 million, or 3.8% of total invested assets. The following table sets forth the carrying value of Western's ABS portfolio by collateral type as of December 31, 1996:
CARRYING VALUE ---------------------- (DOLLARS IN AS A COLLATERAL TYPE MILLIONS) % --------------- ----------- ----- Manufactured housing loans.............. $161.0 45.8% Credit card receivables................. 52.2 14.8 Home equity loans....................... 36.9 10.5 Home improvement loans.................. 23.6 6.7 Energy receivables...................... 16.7 4.7 Airplane leases......................... 13.5 3.8 Farm equipment leases................... 13.2 3.8 All other............................... 34.8 9.9 ------ ----- Total asset-backed securities.................. $351.9 100.0% ====== =====
Corporate Fixed-Income Securities with Early Redemption Featuures Bond issues, primarily corporates, may have "redemption" features, such as call or put options, that allow the issuer to prepay its obligations on or after certain "redemption" dates (collectively, "callable securities"). 36 39 Accordingly, callable securities, like MBS, are subject to contraction risk. Because a callable security will likely be exercised in a declining market interest rate environment, Western assumes for pricing purposes that the call option will be exercised on the date that will result in the lowest effective yield. The resulting yield, known as the "yield-to-call" or "yield-to-worst", may be less than the comparable "yield-to-maturity". At December 31, 1996, Western owned approximately $598.3 million, or 6.4% of total invested assets, of callable securities that had yields-to-worst that differed from yields-to-maturity by more than 50 basis points. Whether or not such securities will actually be called is normally a function of the cost to the issuer of the outstanding issue compared to its current new issue funding cost. Derivative Financial Instruments Western occasionally uses derivative financial instruments to alter interest rate exposure arising from mismatches between assets and liabilities. At December 31, 1996, approximately $324.2 million, or 3.7%, of Western's fixed maturities were floating-rate instruments. In an effort to reasonably closely match the average duration of assets and liabilities, Western has entered into interest rate swap contracts that effectively convert the floating-rate securities to fixed-rate instruments. Specifically, Western contracted with counterparties to exchange, at specified intervals, the difference between fixed-rate and floating-rate interest amounts calculated by reference to an agreed notional amount. Western has contracted to pay a floating rate and to receive a fixed rate, with the net difference charged or credited as an adjustment to investment income. Western's investment guidelines provide that all swap contracts must be either (i) with parties rated "A" or better by a nationally recognized statistical rating service, and/or (ii) secured by collateral approved by Western's Investment Committee. Western had outstanding interest rate swap agreements with total notional contract amounts of $330.0 million at December 31, 1996 and 1995, and which expire at various dates through October 1999. At December 31, 1996 and 1995, Western's average contractual floating-pay rates approximated 5.7% and 5.9%, respectively, and fixed-receipt rates approximated 7.3% for both years. Based on these rates, Western's interest rate swaps had an estimated fair value of a positive $4.4 million and $12.2 million at year-end 1996 and 1995, respectively. SALES Sales through financial institutions accounted for approximately two-thirds of Western's overall sales in 1996. Western sells deferred annuities through financial institutions and PPGAs. Sales through PPGAs include FPDAs sold as tax-qualified salary-reduction retirement programs (403(b) annuities) to teachers and employees of not-for-profit organizations. Western also markets structured settlement annuities pursuant to a modified coinsurance agreement with AGLIC. Additionally, Western sells products directly through its affiliate, IAF. In third quarter 1995, Western launched its first variable annuity product, which is sold through financial institutions, PPGAs, and direct marketing operations. Sales of variable annuities in 1996 were not material. See "Item 1. Business -- Products and Distribution". Insurance policy income shown on the Consolidated Financial Statements in accordance with generally accepted accounting principles consists of premiums received for (i) whole or term life products, (ii) immediate annuity and structured settlement annuity contracts which have life contingencies and (iii) insurance contracts with morbidity features. Western does not currently market any whole or term life products. For annuity contracts without life contingencies, premiums collected are not reported as revenues, but rather are reported as deposits to insurance liabilities. Revenues for products recognized as deposits to insurance liabilities are recognized over time in the form of investment income and surrender charges. Total premiums collected were $1.6 billion, $720.4 million and $751.9 million in the years ended December 31, 1996, 1995, and 1994, respectively. Sales through financial institutions, Western's primary distribution channel, were $1.3 billion in 1996, compared to $490.1 million in 1995 and $556.0 million in 1994. The increase in 1996 over 1995 reflects the success of Western's proprietary annuity arrangements. Proprietary sales through financial institutions for 1996 were $890.4 million, compared to $37.1 million for 1995. At year- 37 40 end 1996, Western had established proprietary annuity programs at a number of financial institutions, the largest of which is First Union. See "Item 1. Business -- Products and Distribution" for a discussion of the concentration of Western's sales. Retail sales in 1996 were $447.1 million, compared to $453.0 million for 1995. This decrease is due to the Company's increased focus on its proprietary marketing program and the conversion of major retail accounts to proprietary annuity programs. See "Item 1. Business -- Products and Distribution". Sales through PPGAs were $147.6 million in 1996, compared to $156.4 million, and $141.8 million in 1995 and 1994, respectively. See "Item 1. Business -- Products and Distribution". Western emphasizes generating profits through adequate pricing of its insurance products and maintaining appropriate investment spreads throughout the life of the policies sold. Western's operating income is primarily a function of its investment spread, total invested assets and operating expenses. Accordingly, a change in premiums collected in a single period does not directly cause income to change, although continued increases or decreases in premiums may affect the rate of growth of total assets on which investment spread is earned. REINSURANCE In conformity with industry practice, Western reinsures a portion of the business it sells. Under such reinsurance arrangements, Western will be liable under the reinsured policies in the event the reinsurer is unable to fulfill its obligations. In October 1995, Western and American General Life Insurance Company entered into a modified coinsurance agreement. Under the agreement, American General Life Insurance Company issues the policies, and 50% of each risk is reinsured to Western. Under this arrangement, Western reports its pro rata share of premiums and shares in its pro rata portion of the gain or loss on policies sold. See, "Business -- Products and Distributions". Additionally, Western is a party to a stand-by coinsurance agreement with an unaffiliated insurer under which the insurer has agreed to provide coinsurance for selected Western policies upon the occurrence of certain contingencies. Effective October 1, 1995, Western recaptured the remaining $72.8 million of business previously ceded to Conseco affiliates. This recapture resulted in no gain or loss to Western but increased invested assets on which investment spread could be earned. In this transaction, Western received assets with a fair market value approximately equal to statutory reserves, consisting primarily of fixed maturities which were recorded at fair value. The crediting rates on these contracts were consistent with the remaining SPDA contracts of Western which were not reinsured. The increase in Western's invested assets and insurance liabilities as a result of the 1995 recapture has had no material effect on Western's liquidity and capital resources. See "Financial Condition -- Liquidity for Insurance Operations". FOURTH QUARTER RESULTS Pre-tax operating earnings in the fourth quarter of 1996 were $44.0 million, compared to $33.5 million in the fourth quarter of 1995, excluding the fourth quarter 1995 special charge. The $10.5 million increase in the fourth quarter of 1996 is attributable to increased spread income of $8.8 million, favorable SPIA mortality of $2.8 million, and a net reduction in general expenses of $2.2 million related to the guaranty fund assessment, partially offset by increased scheduled amortization of $3.4 million. Operating earnings after-tax in the fourth quarter of 1996 were $28.4 million, compared to $23.0 million in 1995, excluding the special charge, and $2.0 million in 1995 including the special charge. The $5.4 million increase is a result of increased spread income of $5.7 million, favorable SPIA mortality of $1.8 million, and a net reduction in general expenses of $1.4 million related to the guaranty fund assessment, partially offset by increased scheduled amortization of $2.2 million. Net income for the fourth quarter of 1996 was $28.4 million, compared to a net loss in 1995 of $21.2 million. The $49.6 million increase reflects the impact of the fourth quarter 1995 special charge of 38 41 $21.0 million, a realized investment loss of $23.2 million in 1995, and is a result of an increase of $5.4 million in net operating earnings in 1996 compared to 1995. Sales, as measured by net premiums and deposits collected were $466.0 million in the fourth quarter, compared to $218.0 million in the corresponding 1995 quarter. The increase in fourth-quarter 1996 sales compared to the corresponding 1995 quarter is generally attributable to Western's proprietary annuity arrangements with certain financial institutions. See "Sales", above, and "Item 1. Business -- Products and Distribution". The following table summarizes the financial results for the fourth quarter of 1996 and 1995:
FOURTH QUARTER -------------------------- 1996 1995 ---------- ---------- (DOLLARS IN MILLIONS, EXCEPT FOR PER SHARE DATA) Revenues: Insurance policy income................. $ 33.7 $ 7.4 Net investment income................... 186.6 171.0 Net realized gains (losses)............. 0.4 (35.3) ------ ------ Total revenues................ 220.7 143.1 Benefits and expenses: Insurance policy benefits............... 27.7 25.1 Change in future policy benefits and other liabilities..................... 28.5 7.9 Interest expense on annuities and financial products.................... 100.5 94.2 Interest expense on notes payable....... 2.7 2.7 Interest expense on investment borrowings............................ 3.3 2.8 Amortization related to operations excluding special charge.............. 11.6 6.9 Amortization related to realized gains (losses).............................. 0.4 0.6 Other operating costs and expenses excluding special charge.............. 2.0 5.3 ------ ------ Total benefits and expenses excluding special charge.... 176.7 145.5 Income (loss) before income taxes and special charge........................ 44.0 (2.4) Income tax expense excluding special charge................................ (15.6) (2.2) ------ ------ Net income (loss) before special charge.............. 28.4 (0.2) Special after-tax charge...... -- (21.0) ------ ------ Net income (loss) after special charge.............. $ 28.4 $(21.2) ====== ====== Earnings per common share and common equivalent share: Weighted average shares................. 70.1 62.7 Net income (loss)............. $ .41 $(0.34) ====== ======
FINANCIAL CONDITION Liquidity for Insurance Operations Western's business generally provides adequate cash flow from premium collections and investment income to meet its liquidity. For the year ended December 31, 1996, statutory net cash flow from operations, premium collections, plus investment income, less benefits and expenses was $715.2 million. The liabilities related to insurance policies are primarily long term and generally are paid from future cash flows. Most assets are invested in bonds and other securities, most of which are readily marketable. Although there is no present need or intent to dispose of such investments, Western could liquidate portions of these investments if the need arose. To increase its return on investments and improve liquidity, Western may from time to time enter into dollar roll and reverse repurchase agreements or other short-term borrowings. Of Western's total insurance liabilities at December 31, 1996, 20% could not be surrendered, 48% could be surrendered only by incurring a surrender charge, and 32% could be surrendered without penalty. The extent of charges in the percentage of interest-sensitive reserves subject to withdrawal without penalty will 39 42 depend on the level of new sales, as well as on the level of policyholder withdrawals. In general, policy liabilities not subject to a surrender charge are more likely to be withdrawn by policyholders than are those that remain subject to such charges. Of those liabilities subject to surrender charge, the average remaining surrender charge period was approximately 3.2 years and the surrender charge averaged approximately 4.6% of accumulated policy value at December 31, 1996. The following table sets forth the deferred annuity account values, as of the dates indicated, that went or will go out of the surrender charge period in each of the years from 1995 through 2000 (dollars in millions):
ACCOUNT VALUES AS OF DECEMBER 31, YEAR THAT ACCOUNT VALUES EXIT --------------------------------- SURRENDER CHARGE PERIOD 1994 1995 1996 - ----------------------------- --------- --------- ------- 1995.................................................. $1,087.2 $ -- $ -- 1996.................................................. 1,099.3 1,082.3 -- 1997.................................................. 712.7 704.5 694.1 1998.................................................. 438.9 440.7 438.4 1999.................................................. 576.4 596.5 598.7 2000.................................................. 13.4 517.1 556.6
The payment characteristics of Western's insurance liabilities at December 31, 1996 were as follows (dollars in millions): Payments under contracts containing fixed payment dates: Due in one year or less................................... $ 170.4 Due after one year through five years..................... 668.9 Due after five years through ten years.................... 761.0 Due after ten years....................................... 3,770.6 -------- Total gross payments whose payment dates are fixed by contract...................................... 5,370.9 Less amounts representing future interest on such contracts................................................. 3,645.2 -------- Insurance liabilities whose payment dates are fixed by contract.................................................. 1,725.7 Insurance liabilities whose payment dates are not fixed by contract.................................................. 6,954.2 -------- Total insurance liabilities....................... $8,679.9 ========
Of the above insurance liabilities under contracts containing fixed payment dates, approximately 30% related to payments that will be made on such date only if the contract holder is living. Expected mortality is considered in determining the amount of this liability. The remainder of the insurance liabilities with fixed payment dates were payable regardless of the contract holder's survival. Approximately 20% of insurance liabilities were established or initially priced with reference to implicit interest rates ranging from 4% to 11%, fixed for the life of the contract. The remainder of the liabilities generally were subject to interest rates that may be reset, subject to minimum guaranteed rates, at least annually. Western believes that it has adequate short-term investments and readily marketable fixed maturities to cover the payments under contracts containing fixed payment dates plus any likely cash needs for surrenders. At December 31, 1996, Western had fixed maturities and short-term investments, net of investment borrowings, with a total market value of approximately $8.8 billion, or 95% of invested assets. Western believes that such investments could be readily sold or used to facilitate borrowings under dollar roll and reverse repurchase agreements. 40 43 Insurance departments in the states where Western does business require it to make annual and quarterly filings. These statutory filings require the establishment of two investment-related reserves, AVR and IMR. The AVR captures investment gains (losses) related to changes in creditworthiness and is increased or decreased at each reporting date based on a formula related to the quality and loss experience of Western's investment portfolio. The IMR captures all realized investment gains (losses) resulting from changes in interest rates and provides for subsequent amortization of such amounts into statutory net income on a basis reflecting the remaining life of the assets sold. Western reported the following amounts to regulatory agencies at December 31, 1996 and 1995:
DECEMBER 31, ---------------------- 1996 1995 --------- --------- (DOLLARS IN MILLIONS) Statutory capital and surplus............................... $572.4 $426.1 AVR......................................................... 109.0 91.1 IMR......................................................... 104.4 105.3 ------ ------ Total(1).......................................... $785.8 $622.5 ====== ======
- --------------- (1) Statutory accounting practices require that AVR and IMR be appropriated and reported as liabilities. The TDI, the NAIC and several other states evaluate the sufficiency of an insurer's capital by computing a risk-adjusted capital level that takes into consideration risks associated with the assets and insurance products of the insurer. Using the NAIC computations, Western's total adjusted capital was more than twice the "Company Action Level", as calculated at December 31, 1996, under the guidelines. See "Item 1. Business -- Regulation". Holding Company Liquidity and Capital At December 31, 1996, shareholders' equity, as adjusted for SFAS No. 115, was $914.8 million, or $13.14 per share, compared to $784.5 million, or $12.59 per share as of December 31, 1995. Shareholders' equity at December 31, 1996, reflects the issuance on September 17, 1996, of 7,254,464 shares (the "Preferred Shares") of Series A Preferred Stock to American General, which resulted in net proceeds to the Company of approximately $126 million. Reference is made to the Company's Report on Form 8-K/A, dated September 17, 1996, for a more detailed discussion of the Series A Preferred Stock and the related transactions with American General. The Company anticipates that Western's growth potential due to this infusion of capital will eventually offset the dilutive effects on earnings per share caused by the issuance. Without taking into account Western's growth potential due to the capital infusion, but assuming the proceeds are invested at Western's current portfolio rate, the issuance of the Series A Preferred Stock would result in a decrease in earnings per share of approximately $0.06 annually. Shareholders' equity is also affected by net adjustments made in the market value of the Company's investment portfolio as required under SFAS No. 115. See Note 2 to the Consolidated Financial Statements. Excluding the effects of SFAS No. 115, shareholders' equity would have been $875.7 million, or $12.58 per share, at December 31, 1996, compared with $659.3 million, or $10.58 per share, at December 31, 1995. In general, SFAS No. 115 requires that actively managed portfolios of marketable securities be marked to current market value, with the resulting unrealized gain or loss reported as an adjustment to shareholders' equity (see Note 2). Because no corresponding adjustment is made to liabilities, management of the Company is of the view that SFAS No. 115 distorts the true economic effects of changes in interest rates on the financial condition of financial services companies, and that resulting equity and book value determinations are not meaningful indicators of financial strength. Because SFAS No. 115 causes the Company's reported book value to vary substantially with changes in market interest rates, the Company expects its shareholders' equity to vary widely over time, increasing during periods of declining interest rates and decreasing during periods of rising interest rates. 41 44 Because Western is governed for insurance regulatory purposes by statutory accounting principles that do not give effect to the adjustments required by SFAS No. 115, the application of SFAS No. 115 does not affect Western's statutory operations or regulatory capital position. Prior to issuing the Preferred Shares to American General, the Company explored financing alternatives available in the private and public capital markets and considered the issuance of securities other than the Preferred Shares. Although the regulatory capital of Western was not constrained at the time of the sale of the Preferred Shares and management did not anticipate imminent capital constraints from growing premium volumes, the Company sought additional capital in the third quarter 1996 to support 1996 levels of premium growth and anticipated future asset growth. Additionally, the Company sought to strengthen its capitalization to enhance prospects for favorable rating agency action. See "Item 1. Business -- Competition, Ratings and Other Factors Affecting Business". The Company concluded that these objectives could best be achieved through the issuance of parent company equity, and that a private transaction with American General offered advantages in terms of transaction timing and certainty. The Company contributed the net proceeds from the sale of the Preferred Shares to Western. With the capital infusion from the Preferred Shares and the other financial alternatives available to the Company, including the credit agreement with First Union described below, management believes that its capital resources are more than sufficient to support anticipated premium and asset growth, as well as to continue to make common stock dividend payments and to meet its debt service obligations, for the next several years at least. Dividend payments by Western are subject to statutory limitations and in certain cases to the approval of the insurance regulatory authorities. The maximum dividend payment that Western may make without prior approval in 1997 is $57.0 million. Western did not pay a dividend to the Company in 1996. In June 1995, the Company entered into a five-year credit agreement with First Union National Bank of North Carolina, Texas Commerce Bank National Association, and certain other financial institutions (collectively referred to as the "Lenders"). Under that agreement, the Lenders had agreed to extend credit to the Company on a revolving basis, upon the Company's request, in an aggregate principal amount up to $100.0 million. On February 20, 1997, the Company and the Lenders replaced the $100.0 million credit agreement with a new five-year agreement that (i) provides for an aggregate principal amount of $150.0 million and (ii) allows the Company to request bid loans, in addition to committed loans based on either LIBOR plus a margin or First Union's prime rate. The credit agreement contains certain provisions that require the Company and its material subsidiaries to maintain specified levels of financial solvency during the term of the agreement. At December 31, 1996, the Company had $50.0 million outstanding under the revolving line of credit. Inflation Inflation has not had a significant impact on Western's operations in recent years. Changes In Accounting Principles In October 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS 123"). SFAS 123 establishes fair value based accounting and reporting standards for all transactions in which a company acquires goods or services by issuing equity investments, including stock-based compensation plans. Under SFAS 123, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. The fair value of stock options is determined using an option-pricing model. This statement encourages, but does not require, companies to adopt the fair value based method of accounting to recognize compensation expense for employee stock compensation plans. However, it does require a company to comply with the disclosure requirements set forth in the statement. For 1996, the Company utilized the accounting in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and made pro forma disclosures for 1996 and 1995 of net income as if the fair value based method of accounting defined in SFAS 123 had been applied. 42 45 In June 1996, the FASB issued Statement of Financial Accounting Standards No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities ("SFAS 125"). SFAS 125 establishes, among other things, new criteria for determining whether a transfer of financial assets in exchange for cash or other consideration should be accounted for as a sale or as a pledge of collateral in a secured borrowing. SFAS 125 also establishes new accounting requirements for pledged collateral. As issued, SFAS 125 is effective for all transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996. In December 1996, the FASB issued Statement of Financial Accounting Standards No. 127, Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125 ("SFAS 127"). SFAS 127 defers for one year the effective date of the requirements of SFAS 125 for repurchase agreements, dollar-rolls, the lending of securities, and similar transactions. The Company does not anticipate that adoption of SFAS 125 will have a material impact. Federal Income Taxes Western is taxed as a life insurance company as provided in the Code. The Revenue Reconciliation Act of 1990 amended the Code to require a portion of the expenses incurred in selling insurance products to be deducted over a period of years, as opposed to deducted immediately in the year incurred. Since the change only affects the timing of the deduction, it does not affect tax expense as shown on Western's financial statements prepared in accordance with GAAP. However, the change will increase the tax for statutory accounting purposes, which will reduce statutory surplus and, accordingly, decrease the maximum amount of cash dividends that may be paid by Western in certain conditions. See "Item 1. Business -- Federal Income Taxation". Pursuant to the Code, Western will not be eligible to be included in the Company's consolidated tax return until the 1999 tax year. This inability to file a consolidated tax return may result in higher current tax payments to the extent that tax losses at the Company level cannot be used currently to offset taxable income at the Western level. Guaranty Association Assessments Western may be required under the solvency or guaranty laws of most states in which it does business to pay assessments (up to certain prescribed limits) to fund policyholder losses or liabilities of insurance companies that become insolvent. Each year Western re-evaluates the sufficiency of its reserves for guaranty fund assessments. Western's evaluation is primarily based on the annual review conducted by the National Organization of Life and Health Insurance Guaranty Associations and distributed each December to all life insurance companies. Western estimates its total exposure to guaranty fund assessments for currently known insolvencies, net of discounts and premium tax credits, to be $43.2 million, of which Western had already paid $21.1 million as of December 31, 1996, leaving it with a net total estimated liability of $22.1 million which was fully provided for at such date. Western increased its reserves by $24.5 million in fourth quarter 1995 due principally to the failures of Executive Life, Guarantee Security Life, Corporate Life, Confederation Life, and National Heritage Life. Accordingly, Western believes that the reserve at December 31, 1996, of $22.1 million, is adequate for all known insolvencies, and does not anticipate the need for any material additions to this reserve, absent any new major life insurance company insolvency. Western incurred no net expenses relating to reserves for guaranty fund assessments in 1996, compared to $27.6 million and $5.7 million in 1995 and 1994, respectively. OTHER INFORMATION With respect to statements herein that may be construed as predictive of future performance, readers should be aware that performance may differ from that currently anticipated. Such differences may be either positive or negative and may be significant. Differences may arise from, among other things, changes in the economic, legal, and competitive environment in which the Company operates. 43 46 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Report of Management........................................ 45 Report of Independent Accountants........................... 46 Consolidated Balance Sheet as of December 31, 1996 and 1995...................................................... 47 Consolidated Statement of Operations for the years ended December 31, 1996, 1995 and 1994.......................... 48 Consolidated Statement of Shareholders' Equity for the years ended December 31, 1996, 1995 and 1994.................... 49 Consolidated Statement of Cash Flows for the years ended December 31, 1996, 1995 and 1994.......................... 50 Notes to Consolidated Financial Statements.................. 51 Report of Independent Accountants on Financial Statement Schedules................................................. 76 Financial Statement Schedules: Schedule I -- Condensed Financial Information of Registrant as of December 31, 1996 and 1995 and for the years ended December 31, 1996, 1995 and 1994........... 77 Schedule VI -- Reinsurance for the years ended December 31, 1996, 1995 and 1994................................ 82
44 47 REPORT OF MANAGEMENT To Our Shareholders: Management of Western National Corporation and its subsidiaries is responsible for the reliability of the financial information in this annual report. The consolidated financial statements are prepared in accordance with generally accepted accounting principles and the other financial information in this annual report, except where otherwise noted, is consistent with that of the consolidated financial statements. The integrity of the financial information relies in large part on maintaining a system of internal control that is established by management to provide reasonable assurance that assets are safeguarded and transactions are properly authorized, recorded and reported. Reasonable assurance is based upon the premise that the cost of controls should not exceed the benefits derived from them. Certain financial information presented depends upon management's estimates and judgments regarding the ultimate outcome of transactions which are not yet complete. Management believes these estimates and judgments are fair and reasonable in view of present conditions and available information. The Company engages independent accountants to audit its consolidated financial statements and express their opinion thereon. They have full access to each member of management in conducting their audits. Such audits are conducted in accordance with generally accepted auditing standards and include a review of internal controls, tests of the accounting records, and such other auditing procedures as they consider necessary to express an opinion on the Company's consolidated financial statements. The Audit Committee of the Board of Directors, composed solely of non-management directors, meets periodically with management and the independent accountants to review internal accounting controls, audit activities and financial reporting matters. The independent accountants have full and free access to the Audit Committee. Michael J. Poulos Arthur R. McGimsey Chairman of the Board, Executive Vice President and President and Chief Financial Officer Chief Executive Officer
45 48 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Western National Corporation: We have audited the accompanying consolidated balance sheet of Western National Corporation and its subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Western National Corporation and its subsidiaries as of December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Houston, Texas February 5, 1997 46 49 WESTERN NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET DECEMBER 31, 1996 AND 1995 (DOLLARS IN MILLIONS) ASSETS
1996 1995 --------- -------- Investments: Fixed maturities -- actively managed at fair value (amortized cost: 1996 -- $8,738.4; 1995 -- $7,654.5)... $ 8,842.5 $7,996.7 Fixed maturities -- held to maturity at amortized cost (fair value: 1995 -- $2.1)............................. -- 1.1 Equity securities at fair value (cost: 1995 -- $0.8)...... -- 0.8 Mortgage loans............................................ 122.7 86.5 Credit-tenant loans....................................... 208.5 249.7 Policy loans.............................................. 66.8 68.3 Other invested assets..................................... 25.6 24.5 Short-term investments.................................... 110.0 417.6 --------- -------- Total investments................................. 9,376.1 8,845.2 Accrued investment income................................... 156.6 131.7 Funds held by reinsurer and reinsurance receivables......... 98.0 1.8 Cost of policies purchased.................................. 50.4 35.8 Cost of policies produced................................... 380.2 228.7 Deferred income taxes....................................... 13.4 8.9 Other assets................................................ 20.8 60.1 --------- -------- Total assets...................................... $10,095.5 $9,312.2 ========= ======== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Insurance liabilities..................................... $ 8,679.9 $7,915.8 Notes payable............................................. 148.0 147.8 Investment borrowings and due to brokers.................. 156.3 257.3 Deferred income taxes..................................... 98.4 118.4 Other liabilities......................................... 98.1 88.4 --------- -------- Total liabilities................................. 9,180.7 8,527.7 Shareholders' equity: Preferred stock (par value $.001 per share; 50,000,000 shares authorized; issued and outstanding: 1996 -- 7,254,464; 1995 -- 0).......................... -- -- Common stock and additional paid-in capital (par value $.001 per share; 500,000,000 shares authorized; issued and outstanding: 1996 -- 62,441,423; 1995 -- 62,348,000).................................... 473.1 345.7 Unrealized appreciation of investments, net............... 39.1 125.2 Retained earnings......................................... 402.6 313.6 --------- -------- Total shareholders' equity........................ 914.8 784.5 --------- -------- Total liabilities and shareholders' equity........ $10,095.5 $9,312.2 ========= ========
The accompanying notes are an integral part of the consolidated financial statements. 47 50 WESTERN NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
1996 1995 1994 ------ ------- ------ Revenues: Insurance policy income................................... $ 92.8 $ 29.1 $ 27.4 Net investment income..................................... 703.1 662.9 637.4 Equity in earnings of partnership investments............. 7.0 3.8 -- Net trading income........................................ -- -- 3.7 Net realized gains (losses)............................... (2.3) (126.2) (52.9) ------ ------- ------ Total revenues.................................... 800.6 569.6 615.6 ------ ------- ------ Benefits and expenses: Insurance policy benefits................................. 109.6 108.3 104.7 Change in future policy benefits and other liabilities.... 74.6 14.1 14.5 Interest expense on annuities and financial products...... 381.7 364.9 344.2 Interest expense on notes payable......................... 10.7 10.7 9.6 Interest expense on investment and short-term borrowings............................................. 11.1 9.2 7.3 Amortization related to operations........................ 41.6 37.1 20.1 Amortization and change in future policy benefits related to realized gains (losses)............................. 0.6 (29.8) (16.8) Other operating costs and expenses........................ 17.8 46.3 17.9 ------ ------- ------ Total benefits and expenses....................... 647.7 560.8 501.5 ------ ------- ------ Income before income taxes........................ 152.9 8.8 114.1 Income tax expense.......................................... 53.5 1.5 40.8 ------ ------- ------ Net income........................................ $ 99.4 $ 7.3 $ 73.3 ====== ======= ====== Earnings per common share and common equivalent share: Weighted average shares................................... 64.9 62.5 62.1 Net income................................................ $ 1.53 $ 0.12 $ 1.18 ====== ======= ======
The accompanying notes are an integral part of the consolidated financial statements. 48 51 WESTERN NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (DOLLARS IN MILLIONS)
1996 1995 1994 ------ ------- ------- Preferred stock: Issuance of 7,254,464 shares of preferred stock ($.001 per share liquidation preference)............ $ -- $ -- $ -- ------ ------- ------- Balance, end of year.................. -- -- -- ------ ------- ------- Common stock and additional paid-in capital: Balance, beginning of year (as restated at December 31, 1995)................. 345.7 345.2 322.6 Issuance of 2,300,000 shares of common stock.............................. -- -- 23.7 Proceeds from issuance of 7,254,464 shares of preferred stock in excess of liquidation preference.......... 125.9 -- -- Issuance of shares of common stock related to restricted stock awards and options, and 401(k) matching (1996 -- 93,423 shares and 1995 -- 48,000 shares)..................... 1.5 0.5 -- ------ ------- ------- Balance, December 31, 1994, as previously reported................... 346.3 Reclassification of note receivable from officer for purchase of common stock.............................. (1.1) ------ ------- ------- Balance, end of year (as restated at December 31, 1995 and 1994)........... 473.1 345.7 345.2 ------ ------- ------- Unrealized appreciation (depreciation) of investments, net: Balance, beginning of year............ 125.2 (322.1) 37.8 Change in unrealized appreciation (depreciation), net.............. (86.1) 447.3 (359.9) ------ ------- ------- Balance, end of year.................. 39.1 125.2 (322.1) ------ ------- ------- Retained earnings: Balance, beginning of year............ 313.6 316.3 400.5 Net income......................... 99.4 7.3 73.3 Dividends on common stock held by the former parent prior to the initial public offering.......... -- -- (150.0) Dividends on common stock subsequent to the initial public offering ($.16, $.16 and $.12 per share in 1996, 1995, and 1994, respectively).................... (10.0) (10.0) (7.5) Dividends on preferred stock....... (0.4) -- -- ------ ------- ------- Balance, end of year.................. 402.6 313.6 316.3 ------ ------- ------- Total shareholders' equity.... $914.8 $ 784.5 $ 339.4 ====== ======= =======
The accompanying notes are an integral part of the consolidated financial statements. 49 52 WESTERN NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (DOLLARS IN MILLIONS)
1996 1995 1994 --------- --------- --------- Cash flows from operating activities: Net income............................ $ 99.4 $ 7.3 $ 73.3 Adjustments to reconcile net income to net cash provided by operating activities: Amortization and depreciation...... 43.5 7.8 1.1 Realized (gains) losses on investments, net................. (2.5) 119.4 47.1 Income taxes....................... 80.0 9.6 22.5 Increase in insurance liabilities...................... 8.2 116.0 22.3 Interest credited to insurance liabilities...................... 391.8 370.2 348.7 Fees charged to insurance liabilities...................... (4.4) (4.2) (4.7) Amortization (accrual) of investment income, net........... (27.3) 3.6 (14.3) Deferral of cost of policies produced......................... (120.7) (62.2) (57.4) Change in trading account securities....................... -- -- 60.8 Other.............................. (16.9) 9.2 11.7 --------- --------- --------- Net cash provided by operating activities....................... 451.1 576.7 511.1 --------- --------- --------- Cash flows from investing activities: Sales of investments.................. 3,086.8 3,151.8 3,482.8 Maturities and redemptions of investments........................ 431.0 376.3 441.6 Purchases of investments.............. (4,570.4) (3,682.7) (4,572.2) Acquisitions of subsidiaries.......... -- -- (0.3) Other................................. -- -- (1.1) --------- --------- --------- Net cash used in investing activities....................... (1,052.6) (154.6) (649.2) --------- --------- --------- Cash flows from financing activities: Deposits to insurance liabilities..... 1,711.3 747.2 728.8 Withdrawals from insurance liabilities........................ (1,402.7) (1,052.5) (662.2) Proceeds from preferred stock issuance, net...................... 125.9 -- -- Proceeds from common stock issuance, net................................ -- -- 23.7 Dividends on preferred stock.......... (0.4) -- -- Dividends on common stock............. (10.0) (10.0) (157.5) Proceeds from issuance of Senior Notes, net......................... -- -- 147.5 Proceeds from line of credit.......... 30.1 65.1 -- Payments on line of credit............ (37.7) (7.5) -- Other................................. -- (1.4) -- Investment borrowings, net............ (122.6) 226.6 (189.9) --------- --------- --------- Net cash provided by (used in) financing activities............. 293.9 (32.5) (109.6) --------- --------- --------- Net increase (decrease) in short-term investments........... (307.6) 389.6 (247.7) Short-term investments -- beginning of year.................................. 417.6 28.0 275.7 --------- --------- --------- Short-term investments -- end of year... $ 110.0 $ 417.6 $ 28.0 ========= ========= ========= Supplemental cash flow disclosure: Income taxes (refunded) paid, net..... $ (25.4) $ (4.7) $ 17.9 ========= ========= ========= Interest paid on notes payable and short-term and investment borrowings......................... $ 22.2 $ 19.3 $ 13.3 ========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 50 53 WESTERN NATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES: ORGANIZATION, NATURE OF OPERATIONS AND BASIS OF PRESENTATION Western National Corporation (the "Company") is a Delaware corporation organized in October 1993 to serve as the holding company for Western National Life Insurance Company ("Western"), a Texas life insurance company founded in 1944. Unless the context otherwise requires, references to the "Company" are references to Western National Corporation and its consolidated subsidiaries. In a series of transactions consummated on February 15, 1994 (the "Reorganization"), the Company acquired all of the outstanding capital stock of Western from Conseco, Inc. ("Conseco") and issued to a Conseco subsidiary 60 million shares of common stock of the Company and a note in the amount of $150 million (the "Conseco Note"). Conseco thereupon sold approximately 35 million shares of common stock of the Company in a public offering, and the Company sold an additional 2.3 million shares of common stock in the same offering. On February 22, 1994, the Company issued $150 million 7 1/8% Senior Notes due 2004 ("the Senior Notes"), and repaid the Conseco Note. (The issuance and repayment of the Conseco Note were treated as a dividend in the accompanying consolidated financial statements.) Western was a subsidiary of Conseco between its acquisition in 1987 and the consummation of the Reorganization. On December 23, 1994, AGC Life Insurance Company ("AGC Life"), a Missouri-domiciled life insurer, purchased the remaining shares of common stock held by Conseco. These shares represented approximately 40% of the Company's outstanding common stock. AGC Life is a wholly-owned subsidiary of American General Corporation, a Texas corporation ("AGC"). References to "American General" are references to AGC and its direct and indirect majority controlled subsidiaries. As of December 31, 1996, American General owned approximately a 46.2% equity interest in the Company. The increase in American General's equity interest was the result of the Company issuing preferred stock to American General in September 1996. See Note 8 for a description of the transaction involving the preferred stock. Western develops, markets and issues annuity products through niche distribution channels. Western sells deferred annuities, including its proprietary fixed annuities, to the savings and retirement markets through financial institutions (principally banks and thrifts), and sells deferred annuities to both the tax-qualified and nonqualified retirement markets through personal producing general agents ("PPGAs"). Western also sells deferred annuities through its direct sales operations. Under a joint marketing arrangement with American General Life Insurance Company ("AGLIC"), Western markets and coinsures single premium immediate annuities ("SPIAs") through specialty brokers to the structured settlement market. Western also sells SPIAs (other than structured settlement SPIAs) through its financial institution and PPGA distribution channels. Western commenced sales of its first variable annuity product in fourth quarter 1995. Sales of deferred annuities through financial institutions comprised 82%, 68%, and 74% of net premiums collected in 1996, 1995, and 1994, respectively. Sales through a single financial institution comprised 45% of net premiums collected in 1996. The accompanying consolidated financial statements include Western National Corporation and its subsidiaries. Intercompany balances and transactions have been eliminated. The consolidated statements of operations, changes in shareholders' equity and cash flows for the periods prior to the Reorganization are presented as if Western had been a part of the Company. As such, results of operations and cash flows of the Company and Western have been combined at historical values. Certain consolidated financial statement items have been reclassified to conform to the current year's presentation. OVERALL EFFECT OF ESTIMATES 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, the disclosure of contingent assets and liabilities at the date of the financial statements, and the 51 54 WESTERN NATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. INVESTMENTS Fixed maturity investments ("fixed maturities") are debt securities that have original maturities greater than one year and comprise investments such as U.S. Treasury securities, mortgage-backed securities, asset-backed securities, corporate bonds and redeemable preferred stocks. Equity securities include common and non-redeemable preferred stocks. The Company follows the provisions of Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities ("SFAS 115"), and, accordingly, classifies its fixed maturities and equity securities into the following categories: - Actively managed fixed maturities and equity securities are securities that may be sold prior to maturity due to changes that might occur in market interest rates, changes in prepayment risk, the Company's management of its income tax position, general liquidity needs, increase in loan demand, the need to increase regulatory capital or similar factors. Actively managed securities are carried at estimated fair value and the net unrealized gains (losses) are recorded as a component of shareholders' equity, net of tax and related adjustments described below. All of the Company's fixed maturities and equity securities were classified as actively managed as of December 31, 1996, compared to all but $1.1 million at December 31, 1995. - Held to maturity securities are those debt securities that the Company has the ability and positive intent to hold to maturity, and are carried at amortized cost. The Company may dispose of such securities under certain unforeseen circumstances, such as issuer credit deterioration or changes in regulatory requirements. The Company had no securities classified as held to maturity as of December 31, 1996, compared to $1.1 million at December 31, 1995. - Trading account securities are fixed maturity and equity securities that are bought and held primarily for the purpose of selling them in the near term. Trading account securities are carried at estimated fair value and the net unrealized gains (losses) are included as a component of net trading income. The Company had no trading account activities in 1996 or 1995. Changes in interest rates have a direct, inverse impact on the market value of fixed-income investments. It is reasonably possible that changes in interest rates will occur in the near term and, as a result of SFAS 115, such changes will have a material impact on the carrying value of actively managed fixed maturity and equity securities, with an offsetting effect to shareholders' equity, net of the related effects on cost of policies purchased and produced and deferred income taxes. Anticipated returns, including realized gains and losses, from the investment of policyholder balances are considered in determining the amortization of the cost of policies purchased and the cost of policies produced. When actively managed fixed maturity and equity securities are stated at fair value, an adjustment is made to the cost of policies purchased and the cost of policies produced equal to the change in amortization that would have been recorded if such securities had been sold at their fair value and the proceeds reinvested at current yields. Furthermore, if future yields expected to be earned on such securities decline, it may be necessary to increase certain insurance liabilities. Adjustments to such liabilities are required when their balances, in addition to future net cash flows including investment income, are insufficient to cover future benefits and expenses. Mortgage loans and credit-tenant loans are carried at amortized cost. Policy loans are carried at their current unpaid principal balance. Fees received and costs incurred in connection with Western's origination of these loans are deferred, and are amortized as yield adjustments over their remaining contractual lives in accordance with SFAS 91. Short-term investments, which principally include commercial paper, cash and 52 55 WESTERN NATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) other financial instruments with original maturities of typically ninety days or less, are carried at amortized cost. Discounts and premiums of investment securities to par are amortized as yield adjustments over the contractual lives of the underlying securities and callable corporate bonds. Principal prepayments can alter the cash flow pattern and yield of prepayment-sensitive investments such as mortgage-backed securities ("MBS"). The accretion of discount and amortization of premium takes into consideration actual and estimated principal prepayments. In the case of MBS, the Company utilizes estimated prepayment speed information obtained from published sources or from estimates developed by its investment advisors. The effects on the yield of a security from changes in principal prepayments are recognized retrospectively, except for interest only or residual interests in structured securities that are recognized prospectively. The degree to which a security is susceptible to yield adjustments is influenced by the difference between its carrying value and par, the relative sensitivity of the underlying assets backing the securities to changing interest rates, and the repayment priority of the securities in the overall securitization structure. Prepayments may also reduce future yield to the extent that proceeds are reinvested in a lower rate environment. Western manages these risks by (i) principally purchasing securities that are backed by collateral with lower prepayment sensitivity (such as seasoned MBS priced at or near par value), (ii) avoiding securities with values heavily influenced by changes in prepayments (such as interest-only and principal-only securities), and (iii) purchasing securities with prepayment protected structures. The specific identification method is used to account for the disposition of investments. The differences between the sales proceeds and the carrying values are reported as gains (losses), or in the case of prepayments, as adjustments to investment income. Declines in values of investments that are considered other than temporary are recognized as realized losses. Subsequent recoveries in value are recognized in income only when the investments are sold. Western occasionally uses derivative financial instruments to alter interest rate exposure arising from mismatches between assets and liabilities. Certain of Western's fixed maturities are floating-rate instruments. Western has entered into interest rate swap contracts that effectively convert the floating-rate securities to fixed-rate instruments. Specifically, Western contracts with counterparties to exchange, at specified intervals, the difference between fixed-rate and floating-rate interest amounts calculated by reference to an agreed notional amount. Western has contracted to pay a floating rate and receive a fixed rate, with the net difference charged or credited as an adjustment to investment income. Interest rate swaps are reported in the consolidated balance sheet at fair value, since they are hedged against investments reported at fair value. Gains or losses on early termination of interest rate swaps are recorded if the related hedged investments are sold. If the hedged investments are not sold, the gains or losses are deferred and amortized over the shorter of the remaining original terms of the interest rate swaps or hedged investments. Western's investment guidelines provide that all swap contracts must be either (i) with parties rated "A" or better by a nationally recognized statistical rating service, and/or (ii) secured by collateral approved by Western's Investment Committee. Western occasionally enters into mortgage dollar roll and reverse repurchase transactions (collectively, "dollar rolls") when earnings enhancement opportunities arise. Dollar rolls are agreements with an outside source, usually broker/dealers, to sell MBS and then, at a predetermined date, to buy back "substantially the same securities". Western's investment guidelines require that the original term of a dollar roll be no longer than thirty days and that all proceeds of such short-term transactions be invested in short-term investments. The securities involved must also have been issued, assumed or guaranteed by the Government National Mortgage Association ("GNMA"), the Federal National Mortgage Association ("FNMA"), or the Federal Home Loan Mortgage Corporation ("FHLMC"). Western enters into dollar rolls whenever a positive spread can be realized from the implicit interest cost of the investment borrowings and the reinvestment of the proceeds in short-term financial instruments. 53 56 WESTERN NATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Because both sides of the transaction are entered into on the basis of short-term, money-market rates, dollar rolls involve no duration risk while providing an enhancement to investment income. Western's dollar rolls are accounted for as short-term investment borrowings, with the proceeds included in short-term investments. The carrying values of Western's investment borrowings are assumed to approximate estimated fair value. Other invested assets include investments in limited partnerships. The Company follows the equity method of accounting for these investments. Limited partnership investments are likely to result in a higher degree of volatility in reported earnings than is typically the case with fixed income investments, and present a greater risk of loss, as they reflect claims on an issuer's capital structure junior to that of most fixed-income investments. COST OF POLICIES PURCHASED The cost of policies purchased represents the portion of Conseco's cost of acquiring Western in 1987 that was attributable to the value of the right to receive future cash flows from insurance contracts existing at the date of acquisition. The value of the cost of policies purchased is the actuarially determined present value of the projected future cash flows from the acquired policies. Expected future cash flows used in determining the cost of policies purchased are based on actuarially determined projections of future premium collections, mortality, surrenders, benefit payments, operating expenses, changes in insurance liabilities, investment yields on the assets held to back such policy liabilities and other factors. These projections take into account all factors known or expected at the valuation date based on the collective judgment of the management of the Company. Actual experience on purchased business may vary from projections due to differences in renewal premiums collected, investment spread, investment gains (losses), mortality and morbidity costs and other factors. These variances from original projections, whether positive or negative, are included in net income as they occur. To the extent that these variances indicate that future cash flows will differ from those reflected in the scheduled amortization of the cost of policies purchased, current and future amortization is adjusted. Therefore, when the Company sells fixed maturities and recognizes a gain (loss) it also reduces (increases) the future investment spread because the proceeds from the sale of investments are reinvested at a lower (higher) earnings rate and amortization is increased (decreased) to reflect the change in the incidence of cash flows. The discount rate used to determine such value is the current rate of return the Company would require to justify the investment. The cost of policies purchased is amortized (with interest at the same rate used to determine the discounted value of the asset) based on the incidence of the expected cash flows. Recoverability of the cost of policies purchased is evaluated regularly by comparing the current estimate of expected future cash flows (discounted at the rate of interest that accrues to the policies) to the unamortized asset balance by line of insurance business. If such current estimate indicates that the existing insurance liabilities, together with the present value of future net cash flows from the business, will not be sufficient to recover the cost of policies purchased, the difference is charged to expense. Amortization is also adjusted for the current and future years to reflect (i) the revised estimate of future cash flows and (ii) the revised interest rate (but not greater than the rate initially used and not lower than the rate of interest earned on invested assets) at which the discounted present value of such expected future profits equals the unamortized asset balance. Expected future cash flows used in determining the amortization pattern and recoverability of cost of policies purchased is based on historical gross profits and management's estimates and assumptions regarding future investment spreads, maintenance expenses, and persistency of the block of business. The accuracy of the estimates and assumptions is affected by several factors, including factors outside the control of management such as movements in interest rates and competition from other investment alternatives. It is reasonably possible that conditions affecting the estimates and assumptions will change and that such changes will result in future adjustments to cost of policies purchased. 54 57 WESTERN NATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) COST OF POLICIES PRODUCED Costs of producing new business (primarily commissions and certain costs of policy issuance and underwriting), which vary with and are primarily related to the production of new business, are deferred to the extent recoverable from future profits. Such costs are amortized with interest as follows: - For universal life-type contracts and investment-type contracts (including SPDAs and FPDAs), in relation to the present value of expected gross profits from these contracts, discounted using the interest rate credited to the policy; - For immediate annuities with mortality risks, in relation to the present value of benefits to be paid; - For traditional life contracts, in relation to future anticipated premium revenue using the same assumptions that are used in calculating the insurance liabilities. Recoverability of the unamortized balance of the cost of policies produced is evaluated regularly. For universal life-type contracts and investment-type contracts, the accumulated amortization is adjusted (whether an increase or a decrease) whenever there is a material change in the estimated gross profits expected over the life of a block of business in order to maintain a constant relationship between cumulative amortization and the present value (discounted at the rate of interest that accrues to the policies) of expected gross profits. For most other contracts, the unamortized asset balance is reduced by a charge to income only when the sum of the present value of future cash flows and the policy liabilities is not sufficient to cover such asset balance. Expected gross profits used in determining the amortization pattern and recoverability of cost of policies produced is based on historical gross profits and management's estimates and assumptions regarding future investment spreads, maintenance expenses, and persistency of the block of business. The accuracy of the estimates and assumptions is affected by several factors, including factors outside the control of management such as movements in interest rates and competition from other investment alternatives. It is reasonably possible that conditions affecting the estimates and assumptions will change and that such changes will result in future adjustments to cost of policies produced. INSURANCE LIABILITIES, RECOGNITION OF INSURANCE POLICY INCOME AND RELATED BENEFITS AND EXPENSES Reserves for universal life-type and investment-type contracts are based on the contract account balance, if future benefit payments in excess of the account balance are not guaranteed, or on the present value of future benefit payments when such payments are guaranteed. Additional increases to insurance liabilities are made if future cash flows, including investment income, are insufficient to cover future benefits and expenses. For investment contracts without mortality risk (such as deferred annuities and immediate annuities with benefits paid for a period certain) and for contracts that permit the Company or the insured to make changes in the contract terms (such as single premium whole life and universal life), premium deposits and benefit payments are recorded as increases or decreases in a liability account rather than as revenue and expense. Amounts charged against the liability account for the cost of insurance, policy administration and surrender penalties are recorded as revenues. Interest credited to the liability account and benefit payments made in excess of the contract liability account balance are charged to expense. Reserves for traditional and limited-payment contracts are generally calculated using the net level premium method and assumptions as to investment yields, mortality, withdrawals and dividends. The assumptions are based on projections of past experience and include provisions for possible adverse deviation. These assumptions are made at the time the contract is issued or, in the case of contracts acquired by purchase, at the purchase date. For traditional insurance contracts, premiums are recognized as income when due. Benefits and expenses are associated with earned premiums so as to result in their recognition over the premium-paying period of the 55 58 WESTERN NATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) contracts. Such recognition is accomplished through the provision for future policy benefits and the amortization of deferred policy acquisition costs. For contracts with mortality risk, but with premiums paid for only a limited period (such as single premium immediate annuities with benefits paid for the life of the annuitant), the accounting treatment is similar to traditional contracts. However, the excess of the gross premium over the net premium is deferred and recognized in relation to the present value of expected future benefit payments. Liabilities for incurred claims are determined using historical experience and represent an estimate of the present value of the ultimate net cost of all reported and unreported claims. Management believes these estimates are adequate. Such estimates are periodically reviewed and any adjustments are reflected in current operations. INCOME TAXES Pursuant to a tax sharing agreement, the Company was included in Conseco's consolidated tax return beginning January 1, 1993. Under the agreement, income taxes were allocated based upon separate return calculations with certain adjustments. Commencing with the income tax reporting period ended December 31, 1994, Western National Corporation and its non-life insurance subsidiaries file a consolidated tax return and Western files a separate life insurance company tax return. Deferred income taxes are provided for the future tax effects of temporary differences between the tax bases of assets and liabilities and their financial reporting amounts, measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company provides a valuation allowance, if necessary, to reduce deferred tax assets, if any, to their estimated realizable value. EARNINGS PER SHARE Earnings per common share is computed by dividing net income by the weighted average number of shares of common stock and common stock equivalents outstanding during the year and assuming the common shares issued in the Reorganization in 1994 were outstanding for all of 1994. 56 59 WESTERN NATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2. INVESTMENTS: The amortized cost, gross unrealized gains and losses, estimated fair value and carrying value of actively managed and held to maturity fixed maturities were as follows:
DECEMBER 31, 1996 ---------------------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR CARRYING COST GAINS LOSSES VALUE VALUE --------- ---------- ---------- --------- -------- (DOLLARS IN MILLIONS) Actively managed: U.S. Treasury securities and obligations of U.S. government corporations and agencies.................................. $ 20.8 $ 0.6 $ -- $ 21.4 $ 21.4 Obligations of states and political subdivisions.............................. 224.1 2.6 4.7 222.0 222.0 Public utility securities.................... 1,251.6 21.0 30.4 1,242.2 1,242.2 Other corporate securities................... 4,583.6 140.0 36.2 4,687.4 4,687.4 Asset-backed securities...................... 349.3 5.2 2.6 351.9 351.9 Mortgage-backed securities................... 2,309.0 28.4 19.8 2,317.6 2,317.6 -------- ------ ----- -------- -------- Total actively managed............... $8,738.4 $197.8 $93.7 $8,842.5 $8,842.5 ======== ====== ===== ======== ======== Held to maturity -- obligations of states and political subdivisions....................... $ -- $ -- $ -- $ -- $ -- ======== ====== ===== ======== ========
DECEMBER 31, 1995 ---------------------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR CARRYING COST GAINS LOSSES VALUE VALUE --------- ---------- ---------- --------- -------- (DOLLARS IN MILLIONS) Actively managed: U.S. Treasury securities and obligations of U.S. government corporations and agencies.................................. $ 57.8 $ 2.2 $ -- $ 60.0 $ 60.0 Obligations of states and political subdivisions.............................. 169.8 5.7 2.7 172.8 172.8 Public utility securities.................... 1,335.1 51.1 10.2 1,376.0 1,376.0 Other corporate securities................... 3,519.9 233.0 9.1 3,743.8 3,743.8 Asset-backed securities...................... 280.4 8.9 0.1 289.2 289.2 Mortgage-backed securities................... 2,291.5 70.3 6.9 2,354.9 2,354.9 -------- ------ ----- -------- -------- Total actively managed............... $7,654.5 $371.2 $29.0 $7,996.7 $7,996.7 ======== ====== ===== ======== ======== Held to maturity -- obligations of states and political subdivisions....................... $ 1.1 $ 1.0 $ -- $ 2.1 $ 1.1 ======== ====== ===== ======== ========
The following table sets forth the amortized cost and estimated fair value of fixed maturities as of December 31, 1996, based upon the source of the estimated fair value:
(DOLLARS IN MILLIONS) AMORTIZED ESTIMATED COST FAIR VALUE --------- ---------- Nationally recognized pricing services...................... $7,340.4 $7,416.1 Broker-dealer market makers................................. 1,176.4 1,204.8 Internally developed methods................................ 221.6 221.6 -------- -------- Total fixed maturities............................ $8,738.4 $8,842.5 ======== ========
57 60 WESTERN NATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table sets forth the quality of total fixed maturities as of December 31, 1996, classified in accordance with the highest rating by a nationally recognized statistical rating organization or, as to $159.1 million of fixed maturities not commercially rated, based on ratings assigned by the National Association of Insurance Commissioners ("NAIC") as follows (for purposes of the table, and only for fixed maturities (at fair value) not commercially rated: NAIC Class 1 securities are included in the "A" rating; Class 2, "BBB-"; Class 3, "BB-"; and Classes 4-6, "B" and below):
FAIR VALUE ------------------------------------ AS A % OF AS A % OF AS A % OF AMORTIZED CARRYING FAIR FIXED AMORTIZED TOTAL COMMERCIAL RATING COST VALUE VALUE MATURITIES COST INVESTMENTS ----------------- --------- -------- -------- ---------- --------- ----------- (DOLLARS IN MILLIONS) AAA.......................... $2,491.6 $2,498.9 $2,498.9 28.3% 100.3% 26.7% AA........................... 801.0 801.6 801.6 9.1 100.1 8.5 A............................ 2,461.4 2,500.4 2,500.4 28.3 101.6 26.7 BBB+......................... 834.1 855.4 855.4 9.7 102.6 9.1 BBB.......................... 991.8 1,009.2 1,009.2 11.4 101.8 10.8 BBB-......................... 553.3 558.3 558.3 6.2 100.9 5.9 -------- -------- -------- ----- ----- ---- Total investment grade............ 8,133.2 8,223.8 8,223.8 93.0 101.1 87.7 -------- -------- -------- ----- ----- ---- BB+.......................... 138.5 140.9 140.9 1.6 101.7 1.6 BB........................... 75.4 77.5 77.5 0.9 102.8 0.8 BB-.......................... 165.2 171.7 171.7 1.9 103.9 1.8 B and below.................. 226.1 228.6 228.6 2.6 101.1 2.4 -------- -------- -------- ----- ----- ---- Total below investment grade............ 605.2 618.7 618.7 7.0 102.2 6.6 -------- -------- -------- ----- ----- ---- Total fixed maturities....... $8,738.4 $8,842.5 $8,842.5 100.0% 101.2% 94.3% ======== ======== ======== ===== ===== ====
The amortized cost and estimated fair value of fixed maturities (all actively managed) by contractual maturity as of December 31, 1996, were as follows:
AMORTIZED ESTIMATED COST FAIR VALUE --------- ---------- (DOLLARS IN MILLIONS) Due in one year or less..................................... $ 66.7 $ 68.6 Due after one year through five years....................... 619.5 629.8 Due after five years through ten years...................... 2,437.9 2,482.6 Due after ten years......................................... 3,305.3 3,343.9 -------- -------- Subtotal.......................................... 6,429.4 6,524.9 Mortgage-backed securities.................................. 2,309.0 2,317.6 -------- -------- Total fixed maturities............................ $8,738.4 $8,842.5 ======== ========
Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations, with or without call or prepayment penalties, and because most mortgage-backed securities provide for periodic payments throughout their lives. 58 61 WESTERN NATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Net investment income for the years indicated consisted of the following:
1996 1995 1994 ------ ------ ------ (DOLLARS IN MILLIONS) Fixed maturities.......................................... $656.8 $610.1 $593.8 Equity securities......................................... 0.8 0.2 0.9 Mortgage loans............................................ 9.7 9.4 11.7 Credit-tenant loans....................................... 19.8 23.9 20.9 Policy loans.............................................. 4.1 4.4 4.4 Equity in earnings of partnership investments............. 7.0 3.8 -- Other invested assets..................................... 8.3 5.9 2.7 Short-term investments.................................... 6.8 13.6 11.9 ------ ------ ------ Gross investment income......................... 713.3 671.3 646.3 Investment expenses....................................... (3.2) (4.6) (8.9) ------ ------ ------ Net investment income and equity in earnings of partnership investments....................... $710.1 $666.7 $637.4 ====== ====== ======
The Company had no investments on nonaccrual status as of December 31, 1996, compared to $0.6 million and $13.6 million at December 31, 1995 and 1994, respectively. The Company had no fixed maturities in default as to the payment of principal or interest at December 31, 1996 and 1995, compared to $13.6 million at December 31, 1994. During 1996, 1995, and 1994, the Company recorded writedowns of fixed maturities totaling $5.6 million, $6.4 million, and $0.4 million, respectively. Of the $5.6 million in 1996, $1.6 million of the writedowns were related to value impairments for credit risk. The proceeds from sales of actively managed fixed maturities were $3.1 billion, $3.2 billion, and $3.5 billion for the years ended December 31, 1996, 1995, and 1994, respectively. During 1994, the Company transferred trading account securities with carrying values of $73.3 million to the actively managed fixed maturities category. The Company suspended trading account activities during 1994. Net trading income for the year ended December 31, 1994, was as follows (dollars in millions):
1994 ----- Gross trading gains......................................... $ 6.2 Gross trading losses........................................ (1.7) ----- Net realized gains from trading account securities before expenses.................................. 4.5 Trading expenses............................................ (0.8) ----- Net trading income................................ $ 3.7 =====
59 62 WESTERN NATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Net realized gains (losses) for the years indicated were as follows:
1996 1995 1994 ------ ------- ------ (DOLLARS IN MILLIONS) Fixed maturities: Gross realized gains.................................... $ 34.0 $ 17.8 $ 34.4 Gross realized losses................................... (25.6) (128.6) (80.4) Decline in net realizable value that is other than temporary............................................ (5.6) (6.4) (0.4) ------ ------- ------ 2.8 (117.2) (46.4) Equity securities......................................... -- 0.8 -- Mortgages loans........................................... (0.2) -- -- Other..................................................... -- (3.0) (0.7) ------ ------- ------ Net realized gains (losses) before expenses..... 2.6 (119.4) (47.1) Investment expenses....................................... (4.9) (6.8) (5.8) ------ ------- ------ Net realized gains (losses)..................... $ (2.3) $(126.2) $(52.9) ====== ======= ======
Changes in unrealized appreciation (depreciation) on investments carried at estimated fair value, net of the effects on other balance sheet accounts, were as follows:
1996 1995 1994 ------- ------- ------- (DOLLARS IN MILLIONS) Investments carried at estimated fair value: Actively managed fixed maturities..................... $(238.1) $ 947.5 $(837.2) Equity securities..................................... -- 0.4 (0.4) Other................................................. (10.1) 11.0 -- ------- ------- ------- Change in unrealized appreciation (depreciation), gross............................................ (248.2) 958.9 (837.6) Less effect on other balance sheet accounts: Cost of policies purchased............................ 18.9 (63.7) 44.9 Cost of policies produced............................. 68.3 (196.7) 215.9 Insurance liabilities................................. 36.3 (36.3) 36.9 Other liabilities..................................... (7.8) 25.8 (13.6) Deferred income taxes................................. 46.4 (240.7) 193.6 ------- ------- ------- Change in unrealized appreciation (depreciation), net.............................................. $ (86.1) $ 447.3 $(359.9) ======= ======= =======
60 63 WESTERN NATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) At December 31, 1996, the aggregate carrying value of Western's MBS portfolio was $2.3 billion, or 24.7% of total invested assets. The following table sets forth the carrying value of Western's MBS portfolio by structural type and underlying collateral coupon class as of December 31, 1996:
COLLATERAL COUPON CLASS ------------------------------------------ 9.01% 7% AND 7.01- 8.01- AND MBS TYPE BELOW 8.00% 9.00% ABOVE TOTAL -------- ------ ------ ----- ----- -------- (DOLLARS IN MILLIONS) Agency pass-throughs....................... $815.7 $469.9 $29.7 $10.9 $1,326.2 Commercial MBS............................. 38.2 29.5 1.2 -- 68.9 CMOs: PACs, TACs and VADMs..................... 231.2 45.6 6.1 -- 282.9 Sequentials.............................. 48.6 141.5 94.5 53.3 337.9 Supports and other....................... 10.6 3.3 -- -- 13.9 Mezzanines and subordinates.............. 23.3 22.1 -- -- 45.4 Z-tranches............................... -- -- 28.0 -- 28.0 ARMs and floaters........................ (a) (a) (a) (a) 214.4 -------- Total CMOs.......................... 922.5 -------- Total MBS........................ $2,317.6 ========
- --------------- (a) The collateral coupon rates are not meaningful as they reset periodically in accordance with changes in market interest rates. In addition, such security coupons have been swapped for fixed rate payments. Asset-backed securities ("ABS") are securitized pools of assets, such as manufactured housing loans and credit card receivables, that are collateralized by the underlying loans. ABS are typically structured similarly to CMOs or MBS pass-throughs, but are usually not subject to as much prepayment risk as MBS. Senior-tranche ABS contain credit enhancement features that raise the quality of the ABS above that of the underlying loans. At December 31,1996, the aggregate carrying value of Western's ABS portfolio was $351.9 million, or 3.8% of total invested assets. The following table sets forth the carrying value of Western's ABS portfolio by collateral type as of December 31,1996:
CARRYING VALUE -------------------- (DOLLARS IN AS A COLLATERAL TYPE MILLIONS) % --------------- ----------- ----- Manufactured housing loans.................................. $161.0 45.8% Credit card receivables..................................... 52.2 14.8 Home equity loans........................................... 36.9 10.5 Home improvement loans...................................... 23.6 6.7 Energy receivables.......................................... 16.7 4.7 Airplane leases............................................. 13.5 3.8 Farm equipment leases....................................... 13.2 3.8 All other................................................... 34.8 9.9 ------ ----- Total asset-backed securities..................... $351.9 100.0% ====== =====
At December 31, 1996, Western had total mortgage loans of $122.7 million, or 1.3% of total invested assets, consisting of $89.6 million of commercial mortgages and $33.1 million of mortgage investments in junior and residual interests of CMOs ("CMO residuals"). Total mortgage loans at year-end 1996 increased by $36.2 million from year-end 1995. This increase reflects Western's reclassification during the second quarter 1996 of $43.5 million of investments from the credit-tenant loan category to the mortgage loan 61 64 WESTERN NATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) category. The reclassified investments represented credit-tenant loans on which the commercial credit rating of the tenant, Kmart Corp., was downgraded to below investment grade status by several rating services. Additionally, approximately 12% of the collateral underlying Western's CMO residuals were supported by Kmart Corp. credit at December 31, 1996. The Company has not incurred any losses as a result of its investments involving Kmart Corp. Approximately 72% of the commercial mortgages were on properties located in four states -- Florida (24%), Texas (21%), North Carolina (15%) and Indiana (12%), respectively. No other state comprised greater than 7% of the total commercial mortgage loan balance. CMO residuals entitle Western to the excess cash flows arising from the difference between (i) the cash flows required to make principal and interest payments on the other tranches of the CMO and (ii) the actual cash flows received on the mortgage loan assets backing the CMO. If prepayments or credit losses on the underlying mortgage loan assets vary from projections, the total cash flows to Western could differ from projections. Changes in projected cash flows which impact the yields of the CMO residuals are recognized in investment income prospectively. The average yield of the Company's CMO residual was 9.5% at December 31, 1996. If the carrying value of CMO residuals exceed the projected cash flows discounted at a risk free rate, the carrying value is adjusted to fair value and a realized loss is recognized. During 1996, Western recognized $0.2 million of realized losses on mortgage loans, compared with none in 1995 and 1994. At December 31, 1996, Western had no nonperforming mortgage loans. At December 31, 1996, Western held $208.5 million, or 2.2% of total invested assets, of credit-tenant loans ("CTLs"), compared to $249.7 million at year-end 1995. CTLs are mortgage loans for commercial properties which require, as stipulated by Western's underwriting guidelines, (i) the lease of the principal tenant to be assigned to Western (including the direct receipt by Western of the tenant's lease payments) and to produce adequate cash flow to fund the requirements of the loan and (ii) the principal tenant (or the guarantor of such tenant's obligations) to have a credit rating of generally at least "BBB" or its equivalent. The underwriting guidelines take into account such factors as the lease terms on the subject property; the borrower's management ability, including business experience, property management capabilities and financial soundness; and such economic, demographic or other factors that may affect the income generated by the property or its value. The underwriting guidelines also require a loan-to-value ratio of 75% or less. Because CTLs are principally underwritten on the basis of the creditworthiness of the tenant rather than on the value of the underlying property, they are classified as a separate class of securities for financial reporting purposes. As with commercial mortgage loans, CTLs are additionally secured by liens on the underlying property. As part of its investment strategy, the Company enters into mortgage dollar roll and reverse repurchase transactions principally to increase investment earnings and improve liquidity. These transactions are terminable after thirty days and are accounted for as short-term investment borrowings, with the proceeds of such borrowings generally reinvested in short-term financial instruments. The borrowings are collateralized by mortgage-backed agency pass-throughs with fair values approximating the underlying loan value. Such borrowings were $134.6 million and $257.3 million as of December 31, 1996, and 1995, respectively. The Company had outstanding interest rate swap agreements with total notional contract amounts of $330.0 million at December 31, 1996 and 1995, and which expire at various dates through October 1999. At December 31, 1996 and 1995, Western's average contractual floating-pay rates approximated 5.7% and 5.9%, respectively, and fixed-receipt rates approximated 7.3% for both years. Based on these rates, the Company's interest rate swaps had an estimated fair value of a positive $4.4 million and $12.2 million at year-end 1996 and 1995, respectively. 62 65 WESTERN NATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company had no investments in any entity in excess of 10% of shareholders' equity, or $91.5 million, as of December 31, 1996, excluding investments issued, assumed or guaranteed by the U.S. government or U.S. government agencies. The Company's largest twenty non-U.S. government issuer concentrations were as follows:
ESTIMATED AMORTIZED FAIR ISSUER COST VALUE ------ --------- --------- (DOLLARS IN MILLIONS) 1. GTE Corporation............................................ $ 86.8 $ 83.5 2. Occidental Petroleum....................................... 75.9 81.0 3. Ontario Province........................................... 71.8 68.0 4. American Reinsurance....................................... 68.2 67.4 5. Telecommunications Inc./TCI International.................. 67.0 64.1 6. Paine Webber Group......................................... 66.3 68.8 7. May Department Stores...................................... 64.2 63.9 8. Philips Electronics NV..................................... 63.8 64.1 9. Salomon, Inc............................................... 62.9 64.8 10. BankAmerica Corporation.................................... 60.5 61.0 11. News America Holdings...................................... 59.1 62.7 12. Phillips Petroleum......................................... 57.6 64.5 13. American Airlines/AMR Corporation.......................... 55.3 61.5 14. Northern Indiana Public Service............................ 54.9 52.7 15. McDonnell Douglas.......................................... 54.2 58.7 16. Countrywide Credit......................................... 53.8 54.2 17. Dayton Hudson.............................................. 53.1 53.8 18. Wal-Mart Stores............................................ 52.3 52.8 19. Lehman Brothers............................................ 51.8 53.6 20. Commonwealth Edison........................................ 51.3 51.0 -------- -------- $1,230.8 $1,252.1 ======== ========
3. INSURANCE LIABILITIES: Insurance liabilities consisted of the following:
INTEREST DECEMBER 31, WITHDRAWAL MORTALITY RATE ------------------- ASSUMPTION ASSUMPTION ASSUMPTION 1996 1995 ---------- ---------- ---------- -------- -------- (DOLLARS IN MILLIONS) Future policy benefits: Investment contracts.......... N/A N/A (d) $7,274.3 $6,566.5 Limited-payment contracts..... None (b) 4%-11% 1,328.1 1,267.2 Traditional life insurance contracts.................. (a) (c) (e) 32.5 32.7 Universal life-type contracts.................. N/A N/A N/A 43.5 47.7 Claims payable and other policyholders' funds....... N/A N/A N/A 1.5 1.7 -------- -------- Total insurance liabilities......... $8,679.9 $7,915.8 ======== ========
- --------------- (a) Company experience (b) Principally the 1984 United States Population Table. 63 66 WESTERN NATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (c) Principally modifications of the 1965-70 Basic, Select and Ultimate Tables. (d) In 1996 and 1995, approximately 95% of this liability represented account balances where future benefits were not guaranteed and 5% represented the present value of guaranteed future benefits determined using interest rates ranging from 3% to 12%. (e) Various, ranging from 3% to 6% in 1996 and 1995. Realized gains on fixed maturities during 1994 reduced the expected future yields on the investment of policyholder balances to the extent that future cash flows on certain limited-payment contracts were insufficient to cover future benefits and expenses. Accordingly, an additional estimated insurance liability of $2.2 million was established by a charge to expense in 1994. No additions to liabilities were required in 1996 and 1995. 4. REINSURANCE: In the normal course of business, the Company seeks to limit its exposure to loss on any single policy and to recover a portion of benefits paid by ceding reinsurance to other insurance enterprises or reinsurers under excess coverage contracts. The Company has set its retention limit for acceptance of risk on life insurance policies at various levels up to $0.8 million. To the extent that reinsuring companies are unable to meet obligations under these agreements, the Company remains contingently liable. The Company evaluates the financial condition of its reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. Assets and liabilities relating to reinsurance contracts are reported gross of the effects of reinsurance. Reinsurance receivables and prepaid reinsurance premiums, including amounts related to insurance liabilities, are reported as assets. Direct and assumed life insurance in force totaled $561.5 million, $628.6 million and $706.3 million at December 31, 1996, 1995 and 1994, respectively, and ceded life insurance in force totaled $247.6 million, $286.1 million and $329.1 million at December 31, 1996, 1995 and 1994, respectively. The cost of ceded policies containing mortality risks totaled $1.5 million in 1996, and $1.3 million in 1995 and 1994. These costs were deducted from insurance premiums. Reinsurance recoveries netted against insurance policy benefits totaled $1.4 million, $4.5 million and $3.5 million in 1996, 1995 and 1994, respectively. Effective October 1, 1995, the Company recaptured certain annuity business with assets approximately equal to insurance liabilities of $72.8 million that had previously been ceded. In October 1995, Western and AGLIC entered into a modified coinsurance agreement. Under the agreement, AGLIC issues the SPIAs, and 50% of each risk is reinsured to Western. Under this arrangement, Western reports its pro rata share of premiums and shares in its pro rata portion of the gain or loss on policies sold. Pursuant to this arrangement in 1996, Western assumed $90.9 million of premiums. The arrangement resulted in $91.3 million of revenues and expenses for Western in 1996. As of December 31, 1996, the funds held by reinsurer and the insurance liabilities resulting from this agreement were $96.6 million. Since 1994, Western has been a party to a standby reinsurance agreement for new SPDA sales through selected financial institutions, which becomes effective only if Western's risk-based capital ratio falls below a prescribed level. No reinsurance pursuant to this agreement has become effective. 64 67 WESTERN NATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. NOTES PAYABLE: Notes payable consisted of the following:
DECEMBER 31, ---------------------- 1996 1995 -------- -------- (DOLLARS IN MILLIONS) Senior Notes due February 15, 2004, bearing interest at 7 1/8% per annum, not redeemable prior to maturity, net of unamortized discount of $2.0 million in 1996 and $2.2 million in 1995........................................... $148.0 $147.8
Additionally, included in other liabilities is $50.0 million and $57.6 million at December 31, 1996 and 1995, respectively, of outstanding borrowings under an unsecured credit agreement with a syndicate of banks, which matures in 2000 (the "Credit Agreement"). Under the Credit Agreement, the Company could borrow on a revolving basis an aggregate principal amount of up to $100.0 million as of December 31, 1996. Subsequent to year end, the borrowing base was increased to $150.0 million. At December 31, 1996, the interest rate under the Credit Agreement was either the agent bank's prime rate or LIBOR plus .375% (5.975% at December 31, 1996). The Credit Agreement contained certain provisions that required the Company to maintain specified levels of financial solvency during the term of the agreement, including provisions concerning its consolidated net worth, adjusted statutory capital and surplus, market capitalization, A.M. Best rating, and risk based capital levels. 6. INCOME TAXES: The components of income tax included in the consolidated balance sheet are as follows:
DECEMBER 31, --------------------- 1996 1995 ------- -------- (DOLLARS IN MILLIONS) Deferred income tax liabilities: Investments............................................... $ 21.1 $ 20.0 Cost of policies produced and purchased................... 143.6 118.4 Unrealized appreciation of investments.................... 21.1 67.5 ------ ------- Gross deferred income tax liabilities............. 185.8 205.9 Deferred income tax assets: Insurance liabilities..................................... 80.6 76.7 Net operating loss carryforward........................... 13.4 8.9 Other..................................................... 6.8 10.8 ------ ------- Gross deferred income tax assets.................. 100.8 96.4 ------ ------- Net deferred income tax assets (liabilities)................ (85.0) (109.5) Income tax receivable (included in other assets)............ -- 46.4 Income tax payable (included in other liabilities).......... (11.7) -- ------ ------- $(96.7) $ (63.1) ====== =======
Income tax expense was as follows:
1996 1995 1994 ----- ------ ----- (DOLLARS IN MILLIONS) Current tax provision (benefit)............................ $31.6 $(23.0) $(5.0) Deferred tax provision (benefit)........................... 21.9 24.5 45.8 ----- ------ ----- Income tax expense....................................... $53.5 $ 1.5 $40.8 ===== ====== =====
65 68 WESTERN NATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Net operating losses incurred by Western National Corporation cannot be utilized by Western since each files separate income tax returns. Net operating loss carryforwards of Western National Corporation were $38.3 million at December 31, 1996, and will expire beginning in 2009 if not previously utilized. Management believes that it is more likely than not that the related deferred tax asset of $13.4 million at December 31, 1996, will be utilized to offset future taxable income of Western National Corporation during the carryforward period. Income tax expense differed from that computed at the applicable federal statutory rate (35% during 1996, 1995, and 1994) for the following reasons:
1996 1995 1994 ----- ----- ----- (DOLLARS IN MILLIONS) Federal tax on income before income taxes at statutory rates..................................................... $53.5 $ 3.1 $39.9 State taxes................................................. 0.3 0.5 0.5 Various adjustments......................................... (0.3) (2.1) 0.4 ----- ----- ----- Income tax expense........................................ $53.5 $ 1.5 $40.8 ===== ===== =====
7. FAIR VALUE OF FINANCIAL INSTRUMENTS: Statement of Financial Accounting Standards No. 107, Disclosures about Fair Values of Financial Instruments ("SFAS 107") requires disclosures of fair value information about financial instruments, and includes assets and liabilities recognized or not recognized in the balance sheet, for which it is practicable to estimate their fair value. In instances where quoted market prices are not available, fair values are based on estimates using discounted cash flow or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rates and estimates of the amount and timing of future cash flows. SFAS 107 excludes certain insurance liabilities and other non-financial instruments from its disclosure requirements, such as the amount for the value associated with customer or agent relationships, the expected interest margin (interest earnings over interest credited) to be earned in the future on investment-type products, or other intangible items. Accordingly, the aggregate fair value amounts presented herein do not necessarily represent the underlying value of the Company; likewise, care should be exercised in deriving conclusions about the Company's business or financial condition based on the fair value information presented herein. The following methods and assumptions were used by the Company in determining estimated fair values of financial instruments: Fixed maturities and equity securities: The estimated fair values for fixed maturities are based on quoted market prices, where available. For fixed maturities not actively traded, the estimated fair values are determined using values obtained from independent pricing services or, in the case of private placements, are determined by discounting expected future cash flows using a current market rate applicable to the yield, credit quality, and maturity of the securities. The estimated fair values for equity securities are based on quoted market prices. Short-term investments: The carrying values approximate estimated fair value. Mortgage loans, credit-tenant loans, and policy loans: The estimated fair values for mortgage loans, CTLs and policy loans are determined by discounting future expected cash flows using interest rates currently being offered for similar loans to borrowers with similar credit ratings. Other invested assets: The estimated fair values are determined using quoted market prices for similar instruments. 66 69 WESTERN NATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Insurance liabilities for investment contracts: The estimated fair values are determined using discounted cash flow calculations based on interest rates currently being offered for similar contracts with maturities consistent with those remaining for the contracts being valued. The estimated fair values of the insurance liabilities for investment contracts were approximately equal to the carrying values as of December 31, 1996 and 1995, because interest rates credited on the vast majority of account balances approximate current rates paid on similar investments and are not generally guaranteed beyond one year. Fair values for the Company's insurance liabilities other than those for investment-type insurance contracts are not required to be disclosed. However, the estimated fair values of liabilities for all insurance contracts are taken into consideration in the Company's overall management of interest rate risk, which minimizes exposure to changing interest rates through the matching of investment maturities with amounts due under insurance contracts. Notes payable: The estimated fair value is determined by discounting future cash flows based on the Company's current incremental borrowing rate for similar types of borrowing arrangements. Investment borrowings: The carrying values approximate estimated fair value. The estimated fair values and carrying values of the Company's financial instruments were as follows:
DECEMBER 31, -------------------------------------------- 1996 1995 -------------------- -------------------- FAIR CARRYING FAIR CARRYING VALUE VALUE VALUE VALUE -------- -------- -------- -------- (DOLLARS IN MILLIONS) Assets: Fixed maturities and equity securities......................... $8,842.5 $8,842.5 $7,999.6 $7,998.6 Mortgage loans, credit-tenant loans and policy loans................... 396.2 398.0 400.0 404.5 Other invested assets................. 25.6 25.6 24.5 24.5 Short-term investments................ 110.0 110.0 417.6 417.6 Liabilities: Insurance liabilities for investment contracts.......................... 7,274.3 7,274.3 6,566.5 6,566.5 Notes payable......................... 150.0 148.0 150.0 147.8 Investment borrowings and due to brokers............................ 156.3 156.3 257.3 257.3
8. SHAREHOLDERS' EQUITY: Generally, the net assets of Western available for transfer to the Company are limited to the amounts by which Western's net assets, as determined in accordance with statutory accounting practices, exceed minimum statutory capital requirements. Under Texas law, dividends that can be paid by Western to the Company during any twelve-month period without prior regulatory approval cannot exceed the greater of statutory net gain from operations (excluding realized gains on investments) for the preceding year or 10% of statutory surplus at the end of the preceding year. In 1997, Western can transfer up to $57.0 million in the form of dividends to the Company without seeking prior regulatory approval. 67 70 WESTERN NATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The components of the balance sheet caption "unrealized appreciation of investments, net" in shareholders' equity are summarized as follows:
DECEMBER 31, 1996 DECEMBER 31, 1995 ------------------------------------ ------------------------------------ EFFECT OF EFFECT OF FAIR VALUE CARRYING FAIR VALUE CARRYING COST BASIS ADJUSTMENTS VALUE COST BASIS ADJUSTMENTS VALUE ---------- ----------- --------- ---------- ----------- --------- (DOLLARS IN MILLIONS) Investments: Actively managed fixed maturities..... $ 8,738.4 $104.1 $ 8,842.5 $ 7,654.5 $342.2 $ 7,996.7 Other invested assets................. 24.7 0.9 25.6 13.5 11.0 24.5 --------- ------ --------- --------- ------ --------- 8,763.1 105.0 8,868.1 7,668.0 353.2 8,021.2 Other Balance Sheet Items: Cost of policies purchased............ 71.5 (21.1) 50.4 75.8 (40.0) 35.8 Cost of policies produced............. 408.3 (28.1) 380.2 325.1 (96.4) 228.7 Insurance liabilities................. (8,679.9) -- (8,679.9) (7,879.5) (36.3) (7,915.8) Other liabilities..................... (102.5) 4.4 (98.1) (100.6) 12.2 (88.4) Deferred income tax liability......... (77.3) (21.1) (98.4) (50.9) (67.5) (118.4) ------ ------ Unrealized appreciation of investments, net................... $ 39.1 $125.2 ====== ======
On September 17, 1996, the Company issued 7,254,464 shares of convertible stock to a subsidiary of American General for an aggregate purchase price of $130.0 million. The Company incurred a discount in lieu of underwriting and other fees incident to a public offering and other direct issue costs totaling $4.1 million, resulting in net proceeds to the Company of $125.9 million. The preferred stock shares pro rata on a share-for-share basis with the Company's common stock in dividends and in liquidation, subject to a $.001 per share liquidation preference. No dividends may be paid on the Company's common stock unless a corresponding dividend is paid on the Company's preferred stock. The preferred stock automatically converts with no further action on the part of the Company or its holder into an equal number of shares of the Company's common stock upon approval of the common stock shareholders at the Company's 1997 Annual Meeting of Shareholders. The preferred stock is considered a common stock equivalent in deriving earnings per share. The proceeds from the issuance of preferred stock in excess of the liquidation preference has been recorded as a component of common shareholders' paid-in capital. In February 1994, the Company loaned approximately $1.1 million to an officer for the purchase of 100,000 shares of the Company's common stock under the terms of a promissory note bearing interest at the prime rate plus 1% with principal and accrued interest payable in February 1999. The note receivable is collateralized by the 100,000 shares purchased by the officer and has been recorded as a reduction to common stock and additional paid-in capital. The accompanying balance sheet as of December 31, 1995, and the statements of shareholders' equity for the years ended December 31, 1995 and 1994, have been restated to reflect the reclassification of the note receivable from other assets to common stock and additional paid-in capital. 9. STOCK AND INCENTIVE PLAN: The Western National Corporation 1993 Stock and Incentive Plan (the "1993 Plan") was adopted by the Company effective December 31, 1993, and will terminate on December 31, 2003. The 1993 Plan provides for the grant of any or all of the following types of awards: (i) stock options, including incentive stock options and non-qualified stock options; (ii) stock appreciation rights; (iii) restricted stock; (iv) incentive awards; and (v) performance awards. The number of shares of common stock that may be issued under the 1993 Plan, or 68 71 WESTERN NATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) as to which stock appreciation rights or other awards may be granted, may not exceed 5,000,000. Under the Plan, the maximum number of such shares awardable to an individual was limited to 1,350,000 in the year ended December 31, 1994, and 100,000 for any year thereafter. Options have a ten-year term and vest equally over a five-year period with the exception of 1.25 million options granted in 1994 which vest over a four-year period. The exercise price of options granted will not be less than the fair market value of the common stock at the date of grant. Shares issued under restricted stock awards vest one-third per year beginning on the third anniversary of the grant date. A summary of changes in common stock options is as follows:
SHARES ISSUABLE SHARES UNDER AVAILABLE OUTSTANDING FOR ISSUE OPTIONS PRICE PER SHARE ---------- ----------- --------------- Balance at December 31, 1993:........... 5,000,000 Options: Granted............................ (1,994,150) 1,994,150 $12.11 Forfeited.......................... 50,000 (50,000) $12.00 ---------- --------- Balance at December 31, 1994............ 3,055,850 1,944,150 $12.11 Options: Granted............................ (221,000) 221,000 $12.10 Exercised.......................... -- (3,000) $13.19 Forfeited.......................... 21,050 (21,050) $12.90 Restricted stock awards granted....... (45,000) -- ---------- --------- Balance at December 31, 1995............ 2,810,900 2,141,100 $12.06 Options: Granted............................ (211,000) 211,000 $17.12 Exercised.......................... -- (2,350) $17.30 Forfeited.......................... 8,900 (8,900) $15.10 Restricted stock awards granted....... (74,000) -- ---------- --------- Balance at December 31, 1996............ 2,534,800 2,340,850 $12.50 ========== =========
The shares exercisable for vested options and the corresponding weighted average exercise price was 971,110 shares and $12.08, and 458,330 shares and $12.07 at December 31, 1996 and 1995, respectively. The following table summarizes the information about stock options outstanding in December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ---------------------------------- ------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE RANGE OF REMAINING EXERCISE EXERCISE EXERCISE PRICES SHARES TERM PRICE SHARES PRICE --------------- --------- --------- -------- ------- -------- $12.00 to $15.00........................ 2,137,700 7.10 $12.10 971,110 $12.08 $15.01 to $18.63........................ 203,150 9.14 $18.43 -- -- --------- ---- ------ ------- ------ 2,340,850 7.28 $12.50 971,110 $12.08
The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS 123") in 1995 which, if fully adopted by the Company, would change the methods the Company applies in recognizing the cost of the Plan. Adoption of the cost recognition provisions of SFAS 123 is optional and the Company has decided not to elect those provisions. As a result, the Company continues to apply Accounting Principles Board Opinion No. 25 and 69 72 WESTERN NATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) related Interpretations ("APB 25") in accounting for the measurement and recognition of the Plan's cost. However, pro forma disclosures as if the Company adopted the cost recognition provisions of SFAS 123 effective with awards granted since January 1, 1995, are required. Under SFAS 123, compensation cost is measured at the grant date based on the fair value of the awards and is recognized over the service period, which is usually the vesting period. The fair value of options granted during 1996 and 1995 is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used to calculate fair values of options awarded in both 1996 and 1995: (i) average dividend yield of .2%, (ii) expected volatility of 25.3%, (iii) expected life of five years, and (iv) an estimated risk-free interest rate, which is different for grants awarded on different grant dates, ranging from 5.3% to 7.7%. The weighted average fair value of options granted was $5.08 and $3.80 during the years ended December 31, 1996 and 1995, respectively. The weighted average fair value of restricted stock awards granted was $17.14 and $12.38 during the years ended December 31, 1996 and 1995, respectively. The total amount of compensation expense recognized in the accompanying statements of operations under the provisions of APB 25 was $0.3 million and $0.1 million during the years ending December 31, 1996 and 1995, respectively. The pro forma disclosures as if the Company adopted the cost recognition requirements of SFAS 123 are presented below (in millions, except per share amounts):
1996 1995 ------------------------ ------------------------ AS REPORTED PRO FORMA AS REPORTED PRO FORMA ----------- --------- ----------- --------- Net income.............................. $99.4 $99.1 $7.3 $7.2 Earnings per common share and common equivalent share...................... $1.53 $1.53 $.12 $.12
The effects of applying SFAS 123 in this pro forma disclosure are not indicative of future amounts. SFAS 123 does not apply to awards prior to 1995 and additional awards in future years are anticipated. 10. COMMITMENTS AND CONTINGENCIES: COMMITMENTS The Company leases office space and equipment under noncancellable operating leases. The approximate future minimum lease rental commitments under such leases as of December 31, 1996 are as follows (dollars in thousands):
YEAR ENDING DECEMBER 31, ------------------------ 1997.............................................. $ 993 1998.............................................. 1,002 1999.............................................. 993 2000.............................................. 968 2001.............................................. 581 Thereafter........................................ 1,405 ------ $5,942 ======
Rent expense was $1,018,000, $752,000 and $788,000 in 1996, 1995, and 1994, respectively. At December 31, 1996, the Company's total commitment to limited partnership investments was $50.0 million, of which $1.1 million had been funded. 70 73 WESTERN NATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Until May 1, 1997, Western is committed to reimburse the WNL Series Trust for administrative expenses in excess of .12% of the market value of investments related to variable annuity policies issued by Western. During 1996, Western incurred approximately $0.6 million related to this commitment. Certain officers of the Company are employed pursuant to long-term employment agreements. The agreements provide, among other things, for base salaries plus bonuses and may be terminated at any time for any reason upon written notice to the other party, subject to, in the case of termination by the Company without cause, to the payment of contractually specified amounts to the terminated employee. In the event of termination following a "change in control" (as defined), certain additional amounts may become payable. CONTINGENCIES Assessments are levied on Western from time to time by guaranty fund associations of states in which it is licensed to provide for payment of covered claims or to meet other insurance obligations, subject to prescribed limits, of insolvent insurance enterprises. Assessments are allocated to an insurer based on the ratio of premiums written by an insurer to total premiums written in the state. The terms of the assessments depend on how each guaranty fund association elects to fund its obligations. Assessments levied by certain states may be recoverable through a reduction in future premium taxes. Western provides a liability, net of discount and estimated premium tax offsets, for estimated future assessments of known insolvencies. Included in other liabilities is a reserve for guaranty fund assessments of $22.1 million, $29.2 million and $7.4 million, at December 31, 1996, 1995, and 1994, respectively. Western determines guaranty fund liabilities by utilizing a report prepared annually by the National Organization of Life and Health Insurance Guaranty Associations which provides estimates of assessments by insolvency. Management believes the provision for guaranty fund assessments is adequate for all known insolvencies, and does not currently anticipate the need for any material additions to the reserve for known insolvencies. However, it is reasonably possible that the estimates on which the provision is based will change and that such changes will result in future adjustments. From time to time, the Company is involved in lawsuits which are related to its operations. In most cases, such lawsuits involve claims under insurance policies or other contracts of the Company. None of the lawsuits currently pending, either individually or in the aggregate, is expected to have a material effect on the Company's financial condition or results of operations. 11. EMPLOYEE BENEFIT PLANS: The Company sponsors a qualified defined contribution plan (the "Plan") covering all full-time employees. The Plan provides for the Company to match, with equivalent value of Company stock, 50% of a participant's voluntary contributions up to 4% of a participant's compensation (subject to certain Internal Revenue Code limitations). The Company can also elect to make additional discretionary contributions to the Plan. For 1996 and 1995, the Company made a matching contribution in an amount equal to 65% and 50%, respectively, of each participant's elective contributions, up to 6% of annual compensation (subject to Internal Revenue Code limitations). Subsequent to year end, the Company's matching contribution was increased to 75% for 1997 contributions. The Company's Supplemental Plan is an unfunded, nonqualified plan that provides to certain employees similar benefits that cannot be provided by a qualified defined contribution plan due to Internal Revenue Code limitations. Participants can also defer additional amounts of salary and bonus under the Supplemental Plan, but there is no employer match for such additional contributions. Expense recorded related to the Company's matching contributions under both plans was approximately $394,000, $232,000 and $92,000 in 1996, 1995 and 1994, respectively. 71 74 WESTERN NATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 12. RELATED PARTY TRANSACTIONS: See Note 4 for a description of the modified coinsurance agreement with AGLIC. The Company was an affiliate of Conseco through December 23, 1994. In 1994, the Company incurred $17.3 million of fees under investment management and service agreements with Conseco and its subsidiaries. Subsequent to 1994, Conseco has continued to provide investment accounting and investment advisory services for a substantial majority of the Company's portfolio. Total investment accounting and advisory fees incurred from Conseco and other advisors were $7.4 million and $7.9 million for the years ended December 31, 1996 and 1995, respectively. 13. OTHER OPERATING STATEMENT DATA: Insurance policy income consisted of the following:
1996 1995 1994 -------- ------- ------ (DOLLARS IN MILLIONS) Premiums collected...................................... $1,625.5 $ 720.4 $751.9 Reinsurance ceded....................................... (1.5) (0.9) (1.2) -------- ------- ------ Premiums collected, net............................... 1,624.0 719.5 750.7 Less premiums on universal life and investment contracts without mortality risk (which are recorded as additions to insurance liabilities)................... (1,613.4) (697.8) (729.6) -------- ------- ------ Direct premiums on products with mortality risk, recorded as insurance policy income................ 10.6 21.7 21.1 Reinsurance assumed..................................... 71.1 -- -- Amortization of deferred revenue........................ 0.5 0.5 0.4 Fees and surrender charges.............................. 4.4 4.2 4.8 Other income............................................ 6.2 2.7 1.1 -------- ------- ------ Insurance policy income............................... $ 92.8 $ 29.1 $ 27.4 ======== ======= ======
The changes in the cost of policies purchased were as follows:
1996 1995 1994 ----- ------ ------ (DOLLARS IN MILLIONS) Balance, beginning of year before effect of fair value adjustments of actively managed fixed maturities...... $75.8 $ 80.5 $ 83.1 Scheduled amortization................................ (4.3) (4.7) (4.9) Amortization related to realized gains and losses..... -- -- 2.3 ----- ------ ------ Balance, end of year before effect of fair value adjustments of actively managed fixed maturities...... 71.5 75.8 80.5 Effect of fair value adjustments of actively managed fixed maturities...................................... (21.1) (40.0) 23.7 ----- ------ ------ Balance, end of year.................................... $50.4 $ 35.8 $104.2 ===== ====== ======
72 75 WESTERN NATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The changes in the cost of policies produced were as follows:
1996 1995 1994 ------ ------ ------ (DOLLARS IN MILLIONS) Balance, beginning of year before effect of fair value adjustments of actively managed fixed maturities........ $325.1 $265.0 $200.5 Acquisition costs incurred.............................. 120.6 62.2 62.4 Scheduled amortization.................................. (37.3) (34.0) (15.1) Amortization related to realized gains and losses....... (0.6) 29.8 16.7 Amortization of deferred revenue........................ 0.5 0.5 0.5 Effects of reinsurance.................................. -- 1.6 -- ------ ------ ------ Balance, end of year before effect of fair value adjustments of actively managed fixed maturities........ 408.3 325.1 265.0 Effect of fair value adjustments of actively managed fixed maturities.............................................. (28.1) (96.4) 100.3 ------ ------ ------ Balance, end of year...................................... $380.2 $228.7 $365.3 ====== ====== ======
Based on current conditions and assumptions as to future events on all policies in force, approximately 6% to 7% of the cost of policies purchased as of December 31, 1996, excluding the effect of fair value adjustments for actively managed fixed maturities, is expected to be amortized in each of the next five years. The average discount rate for the cost of policies purchased was approximately 19% for the year ended December 31, 1996. 14. STATUTORY INFORMATION: Statutory accounting practices prescribed or permitted for Western by regulatory authorities differ from generally accepted accounting principles. Western reported the following amounts to regulatory agencies:
DECEMBER 31, ---------------------- 1996 1995 --------- --------- (DOLLARS IN MILLIONS) Statutory capital and surplus............................... $572.4 $426.1 Asset valuation reserve..................................... 109.0 91.1 Interest maintenance reserve................................ 104.4 105.3 ------ ------ Total............................................. $785.8 $622.5 ====== ======
Statutory accounting practices require that certain investment-related portions of surplus, called the asset valuation reserve ("AVR") and the interest maintenance reserve ("IMR"), be appropriated and reported as liabilities. The purpose of these reserves is to stabilize statutory surplus against fluctuations in the market value of investments. The AVR captures realized and unrealized investment gains and losses related to changes in creditworthiness. The IMR captures realized investment gains and losses on debt instruments resulting from changes in interest rates and provides for subsequent amortization of such amounts into statutory net income on a basis reflecting the remaining life of the assets sold. 73 76 WESTERN NATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table compares the pre-tax income determined on a statutory accounting basis with such income reported herein in accordance with generally accepted accounting principles:
1996 1995 1994 ------ ------- ------ (DOLLARS IN MILLIONS) Statutory net gain from operations........................ $ 65.3 $ 51.6 $ 68.8 IMR amortization........................................ (8.7) (8.7) (13.5) Realized gains (losses)................................. 15.1 (118.2) (39.4) ------ ------- ------ Pre-tax statutory income (loss) before transfers to and from and amortization of tax IMR........................ 71.7 (75.3) 15.9 Net effect of adjustments for generally accepted accounting principles................................... 81.2 84.1 98.2 ------ ------- ------ Pre-tax income, generally accepted accounting principles........................................... $152.9 $ 8.8 $114.1 ====== ======= ======
15. QUARTERLY FINANCIAL DATA (UNAUDITED): Earnings per common share for each quarter are computed independently of earnings per share for the year. Due to transactions affecting the number of shares outstanding during each quarter and due to the uneven distribution of earnings during the year, the sum of the quarterly earnings per share may not equal the earnings per share for the year.
1996 ----------------------------------------- 1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR. -------- -------- -------- -------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) Net investment income.................................. $169.5 $171.5 $175.5 $186.6 Revenues............................................... 187.9 190.0 202.7 220.0 Income before income taxes............................. 36.9 32.8 39.2 44.0 Net income............................................. 24.0 21.4 25.6 28.4 Net income per common share............................ $ .38 $ .34 $ .40 $ .41
1995 ----------------------------------------- 1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR. -------- -------- -------- -------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) Net investment income.................................. $161.4 $161.7 $170.2 $169.7 Revenues............................................... 134.5 138.4 153.7 143.0 Income (loss) before income taxes...................... 14.8 14.4 14.4 (34.8) Net income (loss)...................................... 9.5 9.5 9.5 (21.2) Net income (loss) per common share..................... $ .15 $ .15 $ .15 $ (.34)
Quarterly results of operations are based on numerous estimates, principally related to policy reserves, the amortization of cost of policies purchased, the amortization of cost of policies produced, and income taxes. Such estimates are revised quarterly and are ultimately adjusted to year-end amounts. When such revisions are determined, they are reported as part of operations of the current quarter. The Company recorded a provision for guaranty fund assessments of $24.5 million and amortization of cost of policies purchased and produced of $8.0 million from retrospective adjustments in the fourth quarter of 1995. 74 77 WESTERN NATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 16. PRO FORMA RESULTS OF OPERATIONS (UNAUDITED): Following are unaudited pro forma results of operations of the Company for the year ended December 31, 1994, as if the initial public common stock offering, issuance of Senior Notes and related transactions (described in Note 1) had occurred at the beginning of 1994, as compared with actual results of operations for 1996 and 1995:
(ACTUAL) (ACTUAL) (PRO FORMA) 1996 1995 1994 -------- -------- ----------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) Net investment income.................................... $703.1 $662.9 $637.4 Revenues................................................. 800.6 569.6 615.6 Income before income taxes............................... 152.9 8.8 112.9 Net income............................................... 99.4 7.3 72.5 Net income per common share.............................. $ 1.53 $ .12 $ 1.16
75 78 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES To the Board of Directors and Shareholders of Western National Corporation Our report on the consolidated financial statements of Western National Corporation and its subsidiaries is included on page 46 of this Form 10-K. In connection with our audits of such consolidated financial statements, we have also audited the related financial statement schedules listed in the index on page 44 of this Form 10-K. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND L.L.P. Houston, Texas February 5, 1997 76 79 WESTERN NATIONAL CORPORATION (PARENT COMPANY) SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT DECEMBER 31, 1996 AND 1995 (DOLLARS IN THOUSANDS) CONDENSED BALANCE SHEET ASSETS
1996 1995 ---------- ---------- Investments in and advances to subsidiaries................. $1,097,277 $ 944,988 Short-term investments...................................... 3,987 2,107 Current income tax receivable............................... -- 46,400 Deferred income taxes....................................... 14,034 8,542 Other assets................................................ 6,143 4,041 ---------- ---------- Total assets...................................... $1,121,441 $1,006,078 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Notes payable............................................. $ 148,030 $ 147,827 Payable to subsidiary..................................... 89 11,117 Other liabilities......................................... 58,457 62,637 ---------- ---------- Total liabilities................................. 206,576 221,581 Shareholders' Equity: Preferred stock........................................... 7 -- Common stock and additional paid-in capital............... 473,073 345,690 Unrealized appreciation of investments, net............... 39,138 125,244 Retained earnings......................................... 402,647 313,563 ---------- ---------- Total shareholders' equity........................ 914,865 784,497 ---------- ---------- Total liabilities and shareholders' equity........ $1,121,441 $1,006,078 ========== ==========
77 80 WESTERN NATIONAL CORPORATION (PARENT COMPANY) SCHEDULE I (CONTINUED) CONDENSED FINANCIAL INFORMATION OF REGISTRANT FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (DOLLARS IN THOUSANDS) CONDENSED STATEMENT OF OPERATIONS
1996 1995 1994 -------- -------- -------- Revenues: Net investment income..................................... $ 155 $ 84 $ 495 Expenses: Interest expense.......................................... 13,707 11,320 9,558 Other operating expenses.................................. 2,139 1,372 2,734 -------- -------- -------- 15,846 12,692 12,292 -------- -------- -------- Income before income taxes and equity in net income (loss) of subsidiaries........................................ (15,691) (12,608) (11,797) Income tax benefit.......................................... (5,492) (4,413) (4,129) -------- -------- -------- (10,199) (8,195) (7,668) -------- -------- -------- Equity in net income of subsidiaries........................ 109,563 15,451 80,894 -------- -------- -------- Net income................................................ $ 99,364 $ 7,256 $ 73,226 ======== ======== ========
78 81 WESTERN NATIONAL CORPORATION (PARENT COMPANY) SCHEDULE I (CONTINUED) CONDENSED FINANCIAL INFORMATION OF REGISTRANT FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (DOLLARS IN THOUSANDS) CONDENSED STATEMENT OF CASH FLOWS
1996 1995 1994 --------- --------- --------- Cash flows from operating activities: Net income............................................... $ 99,364 $ 7,256 $ 73,226 Adjustments to reconcile net income to net cash provided by operating activities: Amortization and depreciation......................... 653 375 171 Income taxes.......................................... (5,492) (4,413) (4,129) Amortization (accrual) of investment income, net...... -- (100) (73) Increase in other assets.............................. 122 (10,607) (702) Increase in other liabilities......................... 119 9,697 6,059 Equity in earnings of subsidiaries.................... (109,563) (15,451) (80,894) --------- --------- --------- Net cash used in operating activities............ (14,797) (13,243) (6,342) --------- --------- --------- Cash flows from investing activities: Sales of investments..................................... -- 3,679 -- Purchases of investments................................. -- -- (3,679) Issuance of note receivable -- officer................... -- -- (1,137) Collection (purchase) of subsidiary federal income tax recoverable........................................... 35,300 (36,900) -- Advances (to) from affiliates, net....................... 2,042 (1,240) -- Capital contribution to subsidiaries..................... (128,661) -- -- Acquisitions of subsidiaries............................. -- -- (300) --------- --------- --------- Net cash provided by (used in) investing activities...... (91,319) (34,461) (5,116) --------- --------- --------- Cash flows from financing activities: Proceeds from preferred stock issuance, net.............. 125,875 -- -- Proceeds from issuance of Senior Notes, net.............. -- -- 147,484 Proceeds from common stock issuance, net................. -- -- 23,636 Proceeds from line of credit............................. 30,100 65,100 -- Payments on line of credit............................... (37,700) (7,500) -- Dividends paid on common stock........................... (9,989) (9,975) (157,476) Dividends paid on preferred stock........................ (290) -- -- --------- --------- --------- Net cash provided by financing activities........ 107,996 47,625 13,644 --------- --------- --------- Net increase (decrease) in short-term investments.................................... 1,880 (79) 2,186 Short-term investments -- beginning of year................ 2,107 2,186 -- --------- --------- --------- Short-term investments -- end of year...................... $ 3,987 $ 2,107 $ 2,186 ========= ========= ========= Supplemental cash flow disclosure: Interest paid on notes payable........................... $ 13,728 $ 11,320 $ 5,438 ========= ========= =========
79 82 WESTERN NATIONAL CORPORATION (PARENT COMPANY) SCHEDULE I (CONTINUED) CONDENSED FINANCIAL INFORMATION OF REGISTRANT NOTES TO CONDENSED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION: Western National Corporation's investment in subsidiaries is stated at cost plus equity in undistributed earnings of subsidiaries since the date of acquisition. Western National Corporation's share of net income of its unconsolidated subsidiaries is included in income using the equity method. These financial statements should be read in conjunction with Western National Corporation's Consolidated Financial Statements. 2. SHAREHOLDERS' EQUITY: On September 17, 1996, the Company issued 7,254,464 shares of convertible stock to a subsidiary of American General for an aggregate purchase price of $130.0 million. The Company incurred a discount in lieu of underwriting and other fees incident to a public offering and other direct issue costs totaling $4.1 million, resulting in net proceeds to the Company of $125.9 million. The preferred stock shares pro rata on a share-for-share basis with the Company's common stock in dividends and in liquidation, subject to a $.001 per share liquidation preference. No dividends may be paid on the Company's common stock unless a corresponding dividend is paid on the Company's preferred stock. The preferred stock automatically converts with no further action on the part of the company or its holder into an equal number of shares of the Company's common stock upon approval of the common stock shareholders at the Company's 1997 Annual Meeting of Shareholders. The preferred stock is considered a common stock equivalent in deriving earnings per share. The proceeds from the issuance of preferred stock in excess of the liquidation preference has been recorded as a component of common shareholders' paid-in capital. In February 1994, the Company loaned approximately $1.1 million to an officer for the purchase of 100,000 shares of the Company's common stock under the terms of a promissory note bearing interest at the prime rate plus 1% with principal and accrued interest payable in February 1999. The note receivable is collateralized by the 100,000 shares purchased by the officer and has been recorded as a reduction to common stock and additional paid-in capital. The accompanying balance sheet as of December 31, 1995 has been restated to reflect the reclassification of the note receivable from other assets to common stock and additional paid-in capital. During 1996, the promissory note was contributed to a subsidiary of the Company. 3. NOTES PAYABLE: Notes payable consisted of the following:
DECEMBER 31, ---------------------- 1996 1995 -------- -------- (DOLLARS IN THOUSANDS) Senior Notes due February 15, 2004, bearing interest at 7 1/8% per annum, not redeemable prior to maturity, net of unamortized discount of $1,970 in 1996 and $2,173 in 1995...................................................... $148,030 $147,827
80 83 Additionally, included in other liabilities is $50.0 million and $57.6 million at December 31, 1996 and 1995, respectively, of outstanding borrowings under an unsecured credit agreement with a syndicate of banks, which matures in 2000 (the "Credit Agreement"). Under the Credit Agreement, the Company could borrow on a revolving basis an aggregate principal amount of up to $100.0 million as of December 31, 1996. Subsequent to year end the borrowing base was increased to $150.0 million. At December 31, 1996, the interest rate under the Credit Agreement was either the agent bank's prime rate or LIBOR plus .375% (5.975% at December 31, 1996). The Credit Agreement contained certain provisions that required the Company to maintain specified levels of financial solvency during the term of the agreement, including provisions concerning its consolidated net worth, adjusted statutory capital and surplus, market capitalization, A.M. Best rating, and risk based capital levels. 81 84 WESTERN NATIONAL LIFE INSURANCE COMPANY SCHEDULE VI REINSURANCE FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (DOLLARS IN MILLIONS)
1996 1995 1994 ------- ------- ------- Life insurance in force: Direct.................................................... $ 559.3 $ 626.0 $ 703.1 Assumed................................................... 2.2 2.6 3.2 Ceded..................................................... (247.6) (286.1) (329.1) ------- ------- ------- Net insurance in force............................ $ 313.9 $ 342.5 $ 377.2 ======= ======= ======= Percentage of assumed to net...................... 0.7% 0.7% 0.8% Premiums recorded as revenue for generally accepted accounting principles: Direct.................................................... $ 12.1 $ 23.0 $ 22.4 Assumed................................................... 71.1 -- -- Ceded..................................................... (1.5) (1.3) (1.3) ------- ------- ------- Net premiums...................................... $ 81.7 $ 21.7 $ 21.1 ======= ======= ======= Percentage of assumed to net...................... 87.0% --% --%
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. 82 85 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT This item is incorporated herein by reference to "Item 1. Business -- Executive Officers of Registrant", above, and to the Company's 1997 Proxy Statement, which will be filed with the Securities and Exchange Commission on or before March 31, 1997. ITEM 11. EXECUTIVE COMPENSATION This item is incorporated herein by reference to the 1997 Proxy Statement, which will be filed with the Securities and Exchange Commission on or before March 31, 1997. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT This item is incorporated herein by reference to the 1997 Proxy Statement, which will be filed with the Securities and Exchange Commission on or before March 31, 1997. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS This item is incorporated herein by reference to the 1997 Proxy Statement, which will be filed with the Securities and Exchange Commission on or before March 31, 1997. 83 86 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents have been filed as a part of this Report. 1. Reference is made to the consolidated financial statements of the Company included in Item 8 of this Report. 2. See Index to Financial Statements on page 43 for a list of financial statements included in this Report. 3. The following exhibits are being filed with this Report: 3.1 -- Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 4.1 of the Company's Report on Form 8-K for the quarter ended September 30, 1996). 3.2 -- Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996). 4.1 -- Indenture, dated as of February 15, 1994, between the Company and Shawmut Bank, N.A., as trustee, relating to the Company's 7 1/8 Senior Notes due 2004, including form of the Notes (incorporated by reference to Exhibit 4.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993). 4.2 -- Form of Common Stock Certificate (incorporated by reference to Exhibit 4.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993). 4.3 -- Certificate of Designation, Preferences and Rights and Limitations of the Series A Participating Convertible Preferred Stock of the Company (incorporated by reference to Exhibit 4.1 of the Report on Form 8-K/A of the Company dated September 17, 1996). 10.1 -- Employment Agreement, dated as of September 9, 1993, between Conseco, Inc. and Michael J. Poulos, February 8, 1994 Amendment, and February 15, 1994 Assignment and Assumption Agreement between Conseco, the Company and Michael J. Poulos (incorporated by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993). 10.2 -- Amendment to Employment Agreement, dated as of December 2, 1994, between the Company and Michael J. Poulos (incorporated by reference to Exhibit 10.3 of the Report on Form 8-K of the Company dated December 2, 1994). 10.3 -- Amendment to Employment Agreement, dated as of February 8, 1995, between the Company and Michael J. Poulos (incorporated by reference to Exhibit 10.4 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994). 10.4 -- Employment Agreement, dated as of February 8, 1994, between the Company and John A. Graf (incorporated by reference to Exhibit 10.20 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993). 10.5 -- Amendment to Employment Agreement, dated as of December 2, 1994, between the Company and John A. Graf (incorporated by reference to Exhibit 10.5 of the Report on Form 8-K of the Company dated December 2, 1994). 10.6 -- Employment Agreement, dated as of November 9, 1994, between the Company and Arthur R. McGimsey (incorporated by reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993). 10.7 -- Amendment to Employment Agreement, dated as of December 2, 1994, between the Company and Arthur R. McGimsey (incorporated by reference to Exhibit 10.6 of the Report on Form 8-K of the Company dated December 2, 1994).
84 87
10.8 -- Employment Agreement, dated as of February 8, 1994, between the Company and Richard W. Scott (incorporated by reference to Exhibit 10.22 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993). 10.9 -- Amendment to Employment Agreement, dated as of December 2, 1994, between the Company and Richard W. Scott (incorporated by reference to Exhibit 10.4 of the Report on Form 8-K of the Company dated December 2, 1994). *10.10 -- Termination Agreement, dated as of February 10, 1997, between the Company and Michael J. Akers. 10.11 -- Termination Agreement, dated as of May 15, 1996, between the Company and Bruce R. Abrams (incorporated by reference to Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996). 10.12 -- Consulting Agreement, as amended, dated as of November 4, 1993, between the Company and Alan Richards and March 15, 1994 modification, which provides that the services will be rendered through Alan Richards Consulting Inc. (incorporated by reference to Exhibit 10.23 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993). 10.13 -- Replacement Consulting Agreement, dated as of July 10, 1996, between the Company and Alan Richards Consulting, Inc. (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996). *10.14 -- WesternSave Plan, as amended. 10.15 -- Amended and Restated WesternSave Trust (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995). 10.16 -- Western National Corporation Supplemental Plan (incorporated by reference to Exhibit 10.37 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994). 10.17 -- Western National Corporation Supplemental Plan Trust Agreement (incorporated by reference to Exhibit 10.17 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995). 10.18 -- The Company's 1993 Stock and Incentive Plan, as amended (incorporated by reference to Exhibit 10.18 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995). *10.19 -- Western National Corporation Job Security Plan, as amended. 10.20 -- Shareholder's Agreement, as amended, between American General Corporation and the Company (incorporated by reference to Exhibits 10.2 and 10.3 of the Report on Form 8-K/A of the Company dated September 17, 1996). 10.21 -- Stock Purchase Agreement, dated as of September 13, 1996, between American General Corporation and the Company (incorporated by reference to Exhibit 10.1 of the Report on Form 8-K/A of the Company dated September 17, 1996). 10.22 -- Marketing Agreement between American General Life Insurance Company and Western National Life Insurance Company (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995). 10.23 -- Consolidated Federal Income Tax Agreement, dated February 21, 1989, among Conseco and certain subsidiaries, including Western, as amended (incorporated by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993).
85 88
10.24 -- Separation Agreement, dated February 8, 1994, between the Company and Conseco, together with February 15, 1994 Agreement for Assignment and Assumption of Structured Settlement Obligations between Conseco, the Company and Western, and March 23, 1994 Letter Agreement between Conseco, the Company and Western regarding structured settlement annuities (incorporated by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993). 10.25 -- Insurance Services Agreement, dated February 15, 1994, between the Company and Conseco (incorporated by reference to Exhibit 10.16 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993). 10.26 -- Amendment Agreement, dated as of December 2, 1994, between Conseco, Inc. and the Company (incorporated by reference to Exhibit 10.2 of the Report on Form 8-K of the Company dated December 2, 1994). 10.27 -- Second Amendment Agreement, dated as of November 10, 1995, between Conseco, Inc. and the Company (incorporated by reference to Exhibit 10.29 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995). 10.28 -- Investment Services Agreement, dated as of October 1, 1995, between Conseco, Inc. and WNL Investment Advisory Services, Inc. (incorporated by reference to Exhibit 10.29 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995). 10.29 -- Conseco Note, dated February 8, 1994 (incorporated by reference to Exhibit 10.25 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993). 10.30 -- Promissory Note and Security Agreement, dated February 15, 1994, between the Company and Michael J. Poulos (incorporated by reference to Exhibit 10.26 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993). 10.31 -- Credit Agreement, dated June 8, 1995, among Western National Corporation, First Union National Bank of North Carolina, and certain other financial institutions (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995). *10.32 -- Credit Agreement, dated February 20, 1997, among Western National Corporation, First Union National Bank of North Carolina, and certain other financial institutions. 10.33 -- Lease Agreement, dated October 26, 1993, between Western and Marathon Oil Company (incorporated by reference to Exhibit 10.15 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993). *11.1 -- Computation of Per Share Earnings. *12.1 -- Computation of Ratios of Earnings to Fixed Charges. *21.1 -- Subsidiaries of the Company. *23.1 -- Consent of Independent Accountants. *27.1 -- Financial Data Schedule
- --------------- * Filed herewith. 86 89 SIGNATURES Pursuant to the requirements of Section 13 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, this 13th day of March, 1997. WESTERN NATIONAL CORPORATION By: /s/ MICHAEL J. POULOS ---------------------------------- Michael J. Poulos, President Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
SIGNATURE TITLE (CAPACITY) DATE --------- ---------------- ---- /s/ MICHAEL J. POULOS Chairman of the Board, March 13, 1997 - ----------------------------------------------------- President Chief Executive Michael J. Poulos Officer and Director (Principal Executive Officer) /s/ ARTHUR R. MCGIMSEY Executive Vice President March 13, 1997 - ----------------------------------------------------- (Principal Financial Officer Arthur R. McGimsey and Principal Accounting Officer) /s/ DON G. BAKER Director March 13, 1997 - ----------------------------------------------------- Don G. Baker /s/ ALAN R. BUCKWALTER III Director March 13, 1997 - ----------------------------------------------------- Alan R. Buckwalter III /s/ ROBERT M. HERMANCE Director March 13, 1997 - ----------------------------------------------------- Robert M. Hermance /s/ SYDNEY F. KEEBLE, JR. Director March 13, 1997 - ----------------------------------------------------- Sydney F. Keeble, Jr. /s/ ALAN RICHARDS Director March 13, 1997 - ----------------------------------------------------- Alan Richards /s/ RICHARD W. SCOTT Director March 13, 1997 - ----------------------------------------------------- Richard W. Scott
87 90 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------- ----------- 3.1 -- Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 4.1 of the Company's Report on Form 8-K for the quarter ended September 30, 1996). 3.2 -- Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996). 4.1 -- Indenture, dated as of February 15, 1994, between the Company and Shawmut Bank, N.A., as trustee, relating to the Company's 7 1/8 Senior Notes due 2004, including form of the Notes (incorporated by reference to Exhibit 4.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993). 4.2 -- Form of Common Stock Certificate (incorporated by reference to Exhibit 4.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993). 4.3 -- Certificate of Designation, Preferences and Rights and Limitations of the Series A Participating Convertible Preferred Stock of the Company (incorporated by reference to Exhibit 4.1 of the Report on Form 8-K/A of the Company dated September 17, 1996). 10.1 -- Employment Agreement, dated as of September 9, 1993, between Conseco, Inc. and Michael J. Poulos, February 8, 1994 Amendment, and February 15, 1994 Assignment and Assumption Agreement between Conseco, the Company and Michael J. Poulos (incorporated by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993). 10.2 -- Amendment to Employment Agreement, dated as of December 2, 1994, between the Company and Michael J. Poulos (incorporated by reference to Exhibit 10.3 of the Report on Form 8-K of the Company dated December 2, 1994). 10.3 -- Amendment to Employment Agreement, dated as of February 8, 1995, between the Company and Michael J. Poulos (incorporated by reference to Exhibit 10.4 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994). 10.4 -- Employment Agreement, dated as of February 8, 1994, between the Company and John A. Graf (incorporated by reference to Exhibit 10.20 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993). 10.5 -- Amendment to Employment Agreement, dated as of December 2, 1994, between the Company and John A. Graf (incorporated by reference to Exhibit 10.5 of the Report on Form 8-K of the Company dated December 2, 1994). 10.6 -- Employment Agreement, dated as of November 9, 1994, between the Company and Arthur R. McGimsey (incorporated by reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993). 10.7 -- Amendment to Employment Agreement, dated as of December 2, 1994, between the Company and Arthur R. McGimsey (incorporated by reference to Exhibit 10.6 of the Report on Form 8-K of the Company dated December 2, 1994). 10.8 -- Employment Agreement, dated as of February 8, 1994, between the Company and Richard W. Scott (incorporated by reference to Exhibit 10.22 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993). 10.9 -- Amendment to Employment Agreement, dated as of December 2, 1994, between the Company and Richard W. Scott (incorporated by reference to Exhibit 10.4 of the Report on Form 8-K of the Company dated December 2, 1994).
91
EXHIBIT NUMBER DESCRIPTION ------- ----------- *10.10 -- Termination Agreement, dated as of February 10, 1996, between the Company and Michael J. Akers. 10.11 -- Termination Agreement, dated as of May 15, 1996, between the Company and Bruce R. Abrams (incorporated by reference to Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996). 10.12 -- Consulting Agreement, as amended, dated as of November 4, 1993, between the Company and Alan Richards and March 15, 1994 modification, which provides that the services will be rendered through Alan Richards Consulting Inc. (incorporated by reference to Exhibit 10.23 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993). 10.13 -- Replacement Consulting Agreement, dated as of July 10, 1996, between the Company and Alan Richards Consulting, Inc. (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996). *10.14 -- WesternSave Plan, as amended. 10.15 -- Amended and Restated WesternSave Trust (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995). 10.16 -- Western National Corporation Supplemental Plan (incorporated by reference to Exhibit 10.37 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994). 10.17 -- Western National Corporation Supplemental Plan Trust Agreement (incorporated by reference to Exhibit 10.17 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995). 10.18 -- The Company's 1993 Stock and Incentive Plan, as amended (incorporated by reference to Exhibit 10.18 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995). *10.19 -- Western National Corporation Job Security Plan, as amended. 10.20 -- Shareholder's Agreement, as amended, between American General Corporation and the Company (incorporated by reference to Exhibits 10.2 and 10.3 of the Report on Form 8-K/A of the Company dated September 17, 1996). 10.21 -- Stock Purchase Agreement, dated as of September 13, 1996, between American General Corporation and the Company (incorporated by reference to Exhibit 10.1 of the Report on Form 8-K/A of the Company dated September 17, 1996). 10.22 -- Marketing Agreement between American General Life Insurance Company and Western National Life Insurance Company (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995). 10.23 -- Consolidated Federal Income Tax Agreement, dated February 21, 1989, among Conseco and certain subsidiaries, including Western, as amended (incorporated by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993).
92
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.24 -- Separation Agreement, dated February 8, 1994, between the Company and Conseco, together with February 15, 1994 Agreement for Assignment and Assumption of Structured Settlement Obligations between Conseco, the Company and Western, and March 23, 1994 Letter Agreement between Conseco, the Company and Western regarding structured settlement annuities (incorporated by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993). 10.25 -- Insurance Services Agreement, dated February 15, 1994, between the Company and Conseco (incorporated by reference to Exhibit 10.16 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993). 10.26 -- Amendment Agreement, dated as of December 2, 1994, between Conseco, Inc. and the Company (incorporated by reference to Exhibit 10.2 of the Report on Form 8-K of the Company dated December 2, 1994). 10.27 -- Second Amendment Agreement, dated as of November 10, 1995, between Conseco, Inc. and the Company (incorporated by reference to Exhibit 10.29 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995). 10.28 -- Investment Services Agreement, dated as of October 1, 1995, between Conseco, Inc. and WNL Investment Advisory Services, Inc. (incorporated by reference to Exhibit 10.29 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995). 10.29 -- Conseco Note, dated February 8, 1994 (incorporated by reference to Exhibit 10.25 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993). 10.30 -- Promissory Note and Security Agreement, dated February 15, 1994, between the Company and Michael J. Poulos (incorporated by reference to Exhibit 10.26 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993). 10.31 -- Credit Agreement, dated June 8, 1995, among Western National Corporation, First Union National Bank of North Carolina, and certain other financial institutions (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995). *10.32 -- Credit Agreement, dated February 20, 1997, among Western National Corporation, First Union National Bank of North Carolina, and certain other financial institutions. 10.33 -- Lease Agreement, dated October 26, 1993, between Western and Marathon Oil Company (incorporated by reference to Exhibit 10.15 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993). *11.1 -- Computation of Per Share Earnings. *12.1 -- Computation of Ratios of Earnings to Fixed Charges. *21.1 -- Subsidiaries of the Company. *23.1 -- Consent of Independent Accountants. *27.1 -- Financial Data Schedule
- --------------- * Filed herewith. EX-10.10 2 TERMINATION AGREEMENT - MICHAEL J. AKERS 1 EXHIBIT 10.10 EXECUTION COPY TERMINATION AGREEMENT TERMINATION AGREEMENT ("Agreement"), dated as of the 10th day of February 1997, between WESTERN NATIONAL CORPORATION, a Delaware corporation ("Company"), and Michael J. Akers (hereinafter called "Executive"). RECITALS WHEREAS, Executive is employed by Company in an executive or managerial capacity; and WHEREAS, Company desires to provide Executive with certain payments in the event Executive's employment is terminated following the occurrence of certain events as specified herein; PROVISIONS NOW, THEREFORE, in consideration of the foregoing and the mutual covenants contained herein, the parties agree as follows: 1. TERM. This Agreement shall terminate upon the first to occur of (i) Executive reaching the normal retirement age for executive officers of the Company as in effect from time to time; (ii) the payment to Executive of the Termination Amount contemplated by Section 3 hereof; (iii) the termination of Executive's employment other than as a result of a Control Termination as defined herein; or (iv) February 10, 1999. 2. CONTROL TERMINATION. (a) The term "Control Termination" as used herein shall mean the occurrence during the term of this Agreement of (a) termination of Executive's employment by the Company in anticipation of or following a "change in control" of the Company (as defined below), or (b) termination of Executive's employment by Executive following a "change in control" of the Company (as defined below) upon the occurrence of any of the following events: (i) significant change in the nature or scope of Executive's authorities or duties from in effect prior to a "change in control", a reduction in his total compensation from that in effect prior to a "change in control", or a breach by the Company of any other provision of this Agreement; or (ii) reasonable determination by Executive that, as a result of a change in circumstances significantly affecting his position, he is unable to exercise the authorities, powers, function or duties attached to his position as in effect prior to the "change in control"; or 2 (iii) the location of Executive's principal place of employment is moved outside the standard metropolitan statistical geographic area in which it was located immediately prior to the "change in control"; or (iv) any reduction in benefit or bonus payment levels from those in effect prior to a "change in control" shall be implemented. (b) The term "change in control" shall mean a change in control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934 (the "Act") as revised effective January 20, 1987, or, if Item 6(e) is no longer in effect, any regulations issued by the Securities and Exchange Commission pursuant to the Act which serve similar purposes; PROVIDED THAT, without limitation, (x) such a "change in control" shall be deemed to have occurred if and when either (A) except as provided in (y) below, any "person" (as such term is used in Sections 13(d) and 14(d) of the Act) is or becomes a "beneficial owner" (as such term is defined in Rule 13d-3 promulgated under the Act), directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding securities entitled to vote with respect to the election of its Board of Directors or (B) as the result of a tender offer, merger, consolidation, sale of assets, or contest for election of directors, or any combination of the foregoing transactions or events, individuals who were members of the Board of Directors of the Company immediately prior to any such transaction or event shall not constitute a majority of the Board of Directors following such transaction or event, and (y) no "change in control" shall be deemed to have occurred if and when any such person becomes, with the approval of the Board of Directors of the Company, the beneficial owner of securities of the Company representing 25% or more but less than 50% of the combined voting power of the Company's then outstanding securities entitled to vote with respect to the election of its Board of Directors and in connection therewith represents, and at all times continues to represent, in a filing, as amended, with the Securities and Exchange Commission on Schedule 13D or Schedule 13G (or any successor Schedule thereto) that "such person has acquired such securities for investment and not with the purpose nor with the effect of changing or influencing the control of the Company, nor in connection with or as a participant in any transaction having such purpose or effect", or words of comparable meaning and import. The designation by any such person, with the approval of the Board of Directors of the Company, of a single individual to serve as a member of, or observer at meetings of, the Company's Board of Directors, shall not be considered "changing or influencing the control of the Company" within the meaning of this 3 paragraph, so long as such individual does not constitute at any time more than one-third of the total number of directors serving on such Board. Notwithstanding the foregoing, any action taken or omitted to be taken by American General Corporation, a Texas corporation ("AG") or its majority controlled subsidiaries in accordance with and during the term of the Shareholder's Agreement, as amended, between the Company and AG, including, but not limited to, the acquisition of up to an aggregate 79% of the shares of Common Stock of the Company from time to time outstanding, and the designation by AG of not more than two individuals as directors of the Company (so long as such two individuals do not constitute more than one-third of the entire board), shall not constitute a "change in control" hereunder; provided that the acquisition by any person other than AG or a majority controlled subsidiary of AG of securities representing more than 25% of the outstanding voting securities of the Company shall not be deemed to be an action taken or not taken by AG or a majority controlled subsidiary of AG within the meaning of this Section. 3. CONTROL TERMINATION. In the event of a Control Termination of this Agreement, Executive shall be paid a lump sum severance allowance (the "Termination Amount") in an amount which is equal to salary payments for 24 calendar months at the higher of (x) the rate of base salary that was in effect at the date of such Control Termination; or (y) the rate of base salary that was in effect for the calendar year preceding the year in which the "change in control" resulting in such Control Termination occurred. The Company shall be entitle to withhold all such taxes or other amounts as may be required in accordance with applicable law from the payment provided for in this Section. 4. TAX INDEMNITY PAYMENTS. To the extent that any payments made to Executive pursuant to Sections 3 or 6 constitute an "excess parachute payment", as such term is defined in Section 280G(b)(1) of the Internal Revenue Code, as amended (the "Code"), or any successor Code section providing for analogous treatment, the Company shall pay to Executive an amount equal to (x) divided by (y), where (x) is the aggregate dollar amount of excise taxes Executive becomes obligated to pay on such "excess parachute payments" pursuant to Section 4999 of the Code or any successor Code section providing for analogous treatment, and (y) is 1-[.2 + the maximum federal income tax rate for single individuals applicable for the year in which Executive receives the payment provided under this Section]; it being the intent of this Section that if Executive incurs any such excise tax, the payments to him shall be grossed up in full for such excise tax, so that the amount he retains after paying all federal income taxes due with respect to payments to him under this Agreement is the same as what he would have retained if Section 280G of the Code had not been applicable. 5. OPTION VESTING. In the event of a Control Termination of this Agreement, all outstanding options held by Executive immediately prior to such Control Termination to 4 purchase shares of Company common stock under the Company Stock Option Plan shall thereupon become 100% vested in Executive. 6. CHARACTER OF TERMINATION PAYMENTS. All amounts payable to Executive upon any Control Termination shall be considered severance pay in consideration of past services rendered on behalf of the Company and his continued service from the date hereof to the date he becomes entitled to such payments. Executive shall have no duty to mitigate his damages by seeking other employment and, should Executive actually receive compensation from any such other employment, the payments required hereunder shall not be reduced or offset by any such other compensation. 5 7. ARBITRATION OF DISPUTES. Any controversy or claim arising out of or relating to this Agreement or the breach thereof shall be settled by arbitration in the state and country where the principal executive offices of the Company are then located, by three arbitrators, one of whom shall be appointed by the first two arbitrators. If the first two arbitrators cannot agree on the appointment of a third arbitrator, the third arbitrator shall be appointed by the Chief Judge of the United States District Court for the District which includes such county where the Company's principal executive offices are located. The arbitration shall be conducted in accordance with the rules of the American Arbitration Association, except with respect to the selection of arbitrators which shall be as provided in this Section. Judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. 8. NOTICES. Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and if sent by telephone facsimile transmission, personal or overnight couriers, or registered mail, with confirmation of receipt, to his principal residence as shown in the Company's employment records, in the case of Executive, or to its principal executive offices to the attention of its chief legal officer, in the case of the Company. 9. WAIVER OF BREACH AND SEVERABILITY. The waiver by either party of a breach of any provision of this Agreement by the other party shall not operate or be construed as a waiver of any subsequent breach by either party. In the event any provision of this Agreement is found to be invalid or unenforceable, it may be severed from the Agreement and the remaining provisions of the Agreement shall continue to be binding and effective. 10. ENTIRE AGREEMENT. This instrument contains the entire agreement of the parties and supersedes all prior agreements, whether written or oral, between them. This agreement may not be changed orally, but only by an instrument in writing signed by the party against whom enforcement of any waiver, change, modification, extension or discharge is sought. 11. BINDING AGREEMENT; GOVERNING LAW. This Agreement shall be binding upon and shall inure to the benefit of the parties and their lawful successors in interest and shall be construed in accordance with and governed by the laws of the State of Texas. 12. ASSIGNMENT. This Agreement is a personal services contract of Executive and he may not assign or delegate any of his rights or obligations hereunder without the prior written consent of the Company. 13. HEADINGS. The headings in this Agreement are for convenience only and shall not be used to interpret or construe its provisions. 14. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 6 15. NO CONTRACT OF EMPLOYMENT. This Agreement does not and shall not be construed as a contract of employment, or as obligating the Company to employ Executive for any period of time. Executive acknowledges that he is an employee at will of the Company and that the Company retains the unilateral right to terminate Executive's employment at any time, with or without cause. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. WESTERN NATIONAL CORPORATION By: /s/ Michael J. Poulos ----------------------- Michael J. Poulos President Michael J. Akers By: /s/ Michael J. Akers ---------------------- Michael J. Akers Executive EX-10.14 3 WESTERNSAVE PLAN, AS AMENDED 1 EXHIBIT 10.14 WESTERNSAVE PLAN (Effective April 1, 1994) 2 TABLE OF CONTENTS
Page ---- ARTICLE 1 ESTABLISHMENT AND PURPOSE OF PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE 2 DEFINITIONS 2.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2.2 Gender and Number . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 ARTICLE 3 PARTICIPATION 3.1 Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 3.2 Termination of Participation . . . . . . . . . . . . . . . . . . . . . . . . . 8 3.3 Reemployment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 3.4 Cessation of Eligible Status . . . . . . . . . . . . . . . . . . . . . . . . . 9 ARTICLE 4 EMPLOYEE CONTRIBUTIONS 4.1 Employee Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 4.2 Dates of Election . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 ARTICLE 5 EMPLOYER CONTRIBUTIONS 5.1 Employer Matching Contributions . . . . . . . . . . . . . . . . . . . . . . . 10 5.2 Discretionary Employer Contributions . . . . . . . . . . . . . . . . . . . . . 10 5.3 Allocation of Annual Employer Contributions and Forfeitures . . . . . . . . . . . . . . . . . . . . . . . 11 5.4 Restoration of Forfeited Amounts Upon Reemployment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 5.5 Rollover Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 ARTICLE 6 LIMITATIONS 6.1 Limitations on Annual Account Additions . . . . . . . . . . . . . . . . . . . 13 6.2 Maximum Amount of Before-Tax Deposits . . . . . . . . . . . . . . . . . . . . 15 6.3 Actual Deferral Percentage Tests . . . . . . . . . . . . . . . . . . . . . . . 16 6.4 Adjustment to Actual Deferral Percentage Tests . . . . . . . . . . . . . . . . 18 6.5 Maximum Contribution Percentage . . . . . . . . . . . . . . . . . . . . . . . 20
(i) 3 6.6 Adjustment For Excessive Contribution Percentage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 6.7 Limit on Total Contribution of Employer; Precluding Excess Allocations . . . . . . . . . . . . . . . . . . . . . . . 23 ARTICLE 7 CREDITING OF CONTRIBUTIONS AND DEPOSITS TO INVESTMENT FUNDS 7.1 Investment of Participant Accounts . . . . . . . . . . . . . . . . . . . . . . 23 7.2 Participant's Choice of Investments . . . . . . . . . . . . . . . . . . . . . 24 7.3 Change of Prior Investments . . . . . . . . . . . . . . . . . . . . . . . . . 24 ARTICLE 8 ACCOUNTS 8.1 Separate Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 8.2 Valuation of Separate Accounts . . . . . . . . . . . . . . . . . . . . . . . . 25 8.3 Determination of Fund Performance . . . . . . . . . . . . . . . . . . . . . . 25 8.4 Voting of Western Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 ARTICLE 9 WITHDRAWALS DURING EMPLOYMENT 9.1 After-Tax Deposit Account Withdrawals . . . . . . . . . . . . . . . . . . . . 25 9.2 Withdrawals After Age 59 1/2 . . . . . . . . . . . . . . . . . . . . . . . . . 26 9.3 Hardship Withdrawals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 9.4 Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 ARTICLE 10 DISTRIBUTIONS 10.1 Retirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 10.2 Death . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 10.3 Permanent Disability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 10.4 Other Termination of Employment . . . . . . . . . . . . . . . . . . . . . . . 30 10.5 Designation of Beneficiary . . . . . . . . . . . . . . . . . . . . . . . . . . 31 10.6 Timing of Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 10.7 Manner of Benefit Distribution . . . . . . . . . . . . . . . . . . . . . . . . 32 10.8 Manner of Distribution and Timing of Death Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 10.9 Limitation on Benefits and Distributions . . . . . . . . . . . . . . . . . . . 34 10.10 Distributions Payable to Incompetents . . . . . . . . . . . . . . . . . . . . 34 10.11 Distribution of Before-Tax Deposits . . . . . . . . . . . . . . . . . . . . . 35 ARTICLE 11 NONASSIGNABILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
(ii) 4 ARTICLE 12 TRUST AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 ARTICLE 13 MANAGEMENT AND ADMINISTRATION 13.1 Administrator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 13.2 Claims Review Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 13.3 Delegation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 13.4 Expenses of Administration . . . . . . . . . . . . . . . . . . . . . . . . . . 37 ARTICLE 14 COMPANY AND EMPLOYER RIGHTS 14.1 Company's Interest in Trust . . . . . . . . . . . . . . . . . . . . . . . . . 37 14.2 Inspection of Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 14.3 Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 14.4 Employment Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 14.5 Company and Employer Liability . . . . . . . . . . . . . . . . . . . . . . . . 38 ARTICLE 15 PARTICIPATING EMPLOYERS 15.1 Adoption By Other Employers . . . . . . . . . . . . . . . . . . . . . . . . . 38 15.2 Requirements of Participating Employers . . . . . . . . . . . . . . . . . . . 39 15.3 Designation of Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 15.4 Employee Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 15.5 Participating Employer's Contribution . . . . . . . . . . . . . . . . . . . . 40 15.6 Discontinuance of Participation . . . . . . . . . . . . . . . . . . . . . . . 40 15.7 Administrator's Authority . . . . . . . . . . . . . . . . . . . . . . . . . . 41 15.8 Participating Employer Contribution For Affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 ARTICLE 16 CONDITION OF QUALIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 ARTICLE 17 TERMINATION 17.1 Event of Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 17.2 Effect of Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 ARTICLE 18 TRANSFERS, MERGERS AND CONSOLIDATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
(iii) 5 ARTICLE 19 SUCCESSORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 ARTICLE 20 INTERPRETATION OF AGREEMENT 20.1 Interpretation of Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 20.2 Forms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 20.3 Applicable Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 APPENDIX I TOP-HEAVY PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
(iv) 6 WESTERNSAVE PLAN ARTICLE 1 ESTABLISHMENT AND PURPOSE OF PLAN Effective as of April 1, 1994, Western National Corporation, a Delaware Corporation (the "Company"), adopts the WesternSave Plan in recognition of the contribution made to its successful operation by its employees and for the exclusive benefit of its eligible employees. The Plan is intended to meet the requirements of the Internal Revenue Code of 1986 (the "Code"), and the Employee Retirement Income Security Act of 1974 ("ERISA"), as both may be amended from time to time. Except as otherwise noted below, this Plan, made and entered on this 23rd day of March, 1994, shall be effective as of April 1, 1994. The provisions of the Plan, as set forth herein, shall apply only to Participants who terminate employment on or after April 1, 1994. ARTICLE 2 DEFINITIONS 2.1 DEFINITIONS. Wherever used in the Plan, the following terms shall have the meanings set forth below unless the context clearly indicates otherwise: (a) ACCOUNT: The bookkeeping account established and maintained by the Administrator for each Participant with respect to his interest in the Trust. (b) ADMINISTRATOR: The Administrator of the Plan is the Company. (c) AFFILIATE: Any corporation which is a member of a controlled group of corporations (as defined in Code Section 414(b)) which includes the Employer; any trade or business (whether or not incorporated) which is under common control (as defined in Code Section 414(c)) with the Employer; any organization (whether or not incorporated) which is a member of an affiliated service group (as defined in Code Section 414(m)) which includes the Employer; and any other entity required to be aggregated with the Employer pursuant to Regulations under Code Section 414(o). 1 7 (d) BOARD: The Board of Directors of the Company. (e) BREAK-IN-SERVICE: A Break-In-Service means a 12-month period during which a Participant performs no services for the Employer. (f) COMPENSATION: The amount of compensation actually paid to the Participant by the Employer which is reportable on the Participant's IRS Form W-2, excluding payments for group term life insurance, moving expenses, tuition expenses and automobile expenses. Compensation shall include before-tax deposits and any salary reduction contributions made on behalf of a Participant under a plan which qualifies under Code Section 401(k) and/or Code Section 125. Notwithstanding the foregoing, Compensation shall not include (a) any payments made pursuant to an insurance agent or agency contract, or (b) any insurance commissions for personal production. Compensation shall not include any amounts in excess of $200,000, as adjusted pursuant to Subsections 415(b)(1)(A) and 415(d)(l) of the Code. In applying this limitation, the family group of a Highly Compensated Participant who is subject to the Family Member aggregation rules of Code Section 414(q)(6) because such Participant is either a "five percent owner" of the Employer or one of the ten (10) Highly Compensated Participants paid the greatest "415 Compensation" during the year, shall be treated as a single Participant, except for this purpose, family members shall include only the affected Participant's spouse and any lineal descendants who have not attained age nineteen (19) before the close of the year. If, as a result of the application of such rules the adjusted $200,000 limitation is exceeded, then the limitation shall be prorated among affected Family Members in proportion to each such Family Member's Compensation prior to the application of this limitation. (g) COMPANY: Western National Corporation, a Delaware corporation. (h) CREDITED SERVICE: Credited Service means a Participant's years of employment with the Employer. For purposes of calculating Credited Service, years of employment with Western National Corporation, any Affiliate thereof, and any entity which is 40% or at any time was owned by or a 40% owner of Western National Corporation shall be recognized. A Participant's period of employment by an Employer is measured from the date a Participant first completes an Hour of Service, and anniversaries of that date, to the date of a Participant's termination of employment for any reason; provided, however, if a Participant who 2 8 has a termination of employment resumes employment with an Employer prior to having a Break-In-Service, such termination of employment shall be disregarded and his employment shall be treated as continuous through the date he resumes his employment. In calculating a Participant's Credited Service, all periods of employment with the Employer shall be considered, except service performed prior to 5 consecutive 1-year Breaks-In-Service unless the Participant is reemployed and the prior service is reinstated in accordance with Section 3.3. For purposes of the Section, an Hour of Service shall mean: (1) Each hour for which an Employee is paid, or entitled to payment, for the performance of duties for an Employer. These hours shall be credited to the Employee for the computation period in which the duties are performed, (2) Each hour for which an Employee is paid, or entitled to payment, by an Employer on account of a period of time during which no duties are performed (irrespective of whether the employment relationship is terminated) due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military leave or leave of absence. No more than 501 hours shall be credited under this subsection for any single continuous period of absence (whether or not such period occurs in a single computation period), (3) Each hour for which back pay, irrespective of mitigation of damages, is either awarded or agreed to by an Employer. The same shall not be credited both under paragraph (1) or (2), as the case may be, and under this paragraph (3). These hours shall be credited to the Employee for the computation period or periods to which the award or agreement pertains rather than the computation period in which the award, agreement or payment is made, (4) Solely for purposes of determining whether an Employee has a Break-In-Service under Section 2.1(e), each hour, based on the number of hours per week that the Employee would have normally worked, or a pro rata portion thereof, during which an Employee is absent from work (i) by reason of the pregnancy of the Employee, (ii) by reason of the birth of a child of the Employee, (iii) by reason of the placement of a child with the Employee, or (iv) due to the caring of a child during the period immediately after the birth, placement or adoption of the child by the Employee. Not more than 501 Hours-of-Service shall be credited to any Employee under this paragraph for any one occurrence. Such hours shall be credited to the computation period during which the event occurs to the extent necessary to prevent a Break-In-Service, 3 9 and to the extent not so necessary, to the next following computation period, and (5) Each hour, other than hours credited under paragraphs (1), (2), (3) and (4), during any customary period of work, based on a forty-hour week or pro rata portion thereof, during which the employee is laid off, is on an Employer approved leave of absence or sick or disability leave, or is on jury or military duty. (6) The provisions of Department of Labor regulations 2530.2006(b) and (c) are incorporated by reference. (i) EMPLOYEE: Any person who is employed by the Company, and any person who is employed by any Participating Employer, excluding any independent contractor and excluding any individual who is included within a unit of employees covered by a collective bargaining agreement for whom retirement benefits were the subject of good faith bargaining, unless the collective bargaining agreement provides for said individual's participation in this Plan. Any leased employee employed by the Company and any leased employee employed by any Participating Employers shall be treated as an Employee; provided, however, that for purposes of this Plan, benefits provided by the leasing organization which are attributable to services performed for the Employer shall be treated as provided by the Employer and shall reduce the benefits provided for such leased employee under this Plan. A "leased employee" means any person who is not an employee of the Employer, and provides services to the Employer if (1) such services are provided pursuant to an agreement between the Employer and any other person (the "leasing organization"), (2) such person has performed such services for the Employer (or for the Employer and related persons determined in accordance with Section 414(n) of the Code) on a substantially full-time basis for a period of at least one year, and (3) such services are of a type historically performed in the business field of the Employer, by employees. However, a leased employee shall not be treated as an Employee if (1) such leased employee is included in a plan which is maintained by the leasing organization which meets the following requirements, (i) a money purchase pension plan with a nonintegrated employer contribution rate for each participant of at least ten percent contribution, (ii) immediate participation, and (iii) full and immediate vesting, and (2) leased employees do not constitute more than twenty percent of the Employer's non-highly compensated work force. "Non-highly compensated work force" shall be determined in accordance with Section 414(n) of the Code. 4 10 (j) EMPLOYER: The Company and such Participating Employers as have adopted the Plan with the consent of the Board. (k) FORMER PARTICIPANT: A person who has been a Participant, but who has ceased to be a Participant for any reason. (1) HIGHLY COMPENSATED PARTICIPANT: Means an individual described in Section 414(q) of the Code and the Regulations thereunder, and generally means an Employee who performed services for the Employer during the determination year and is in one or more of the following groups: (1) Employees who at any time during the determination year or look-back year were five percent owners of the Employer. Five percent owner means any person who owns (or is considered as owning within the meaning of the Code Section 318) more than five percent of the outstanding stock of the Employer or stock possessing more than five percent of the total combined voting power of all stock of the Employer or, in the case of an unincorporated business, any person who owns more than five percent of the capital or profits interest in the Employer. In determining percentage ownership hereunder, employers that would otherwise be aggregated under Code Sections 414(b), (c), (m) and (o) should be treated as separate employers. (2) Employees who received Compensation during the look-back year from the Employer in excess of $75,000. (3) Employees who received Compensation during the look-back year from the Employer in excess of $50,000 and were in the Top Paid Group of Employees for the Plan Year. (4) Employees who during the look-back year were officers of the Employer (as that term is defined within the meaning of the Regulations under Code Section 416) and received Compensation during the look- back year from the Employer greater than 50 percent of the limit in effect under Code Section 415(b)(1)(A) for any such Plan Year. The number of officers shall be limited to the lesser of: (i) 50 employees; or (ii) the greater of 3 employees or 10 percent of all employees. For purposes of determining the number of officers, Employees excluded from the definition of Top Paid Group below shall be excluded, but such Employees shall still be considered for 5 11 the purpose of identifying the particular Employees who are officers. If the Employer does not have at least one officer whose annual Compensation is in excess of 50 percent of the Code Section 415(b)(1)(A) limit, then the highest paid officer of the Employer will be treated as a Highly Compensated Employee. (5) Employees who are in the group consisting of the 100 Employees paid the greatest Compensation during the determination year and are also described in (2) (3) or (4) above when these paragraphs are modified to substitute determination year for look-back year. The determination year shall be the Plan Year for which testing is being performed, and the look-back year shall be the immediately preceding twelve-month period. The dollar threshold amounts specified in (2) and (3) above shall be adjusted at such time and in such manner as is provided in Regulations. In the case of such an adjustment, the dollar limits which shall be applied are those for the calendar year in which the determination year or look-back year begins. Highly Compensated Employee shall include a former Employee who had a separation year prior to the determination year and was a Highly Compensated Employee in the year of separation from service or in any determination year after attaining age 55. Notwithstanding the foregoing, an Employee who separated from service prior to 1987 will be treated as a Highly Compensated Employee only if during the separation year (or year preceding the separation year) or any year after the Employee attains age 55 (or the last year ending before the Employee's 55th birthday), the Employee either received Compensation in excess of $50,000 or was a five percent owner. "Top Paid Group" means the top 20 percent of employees who performed services for the Employer during the applicable year, ranked according to the amount of Compensation received from the Employer during such year. For the purpose of determining the number of active Employees in any year, the following Employees shall be excluded; however, such Employees shall still be considered for the purpose of identifying the particular Employees in the Top Paid Group: (i) Employees with less than six (6) months of service; (ii) Employees who normally work less than 17 1/2 hours per week; 6 12 (iii) Employees who normally work less than six (6) months during a year; and (iv) Employees who have not yet attained age 21. In addition, if 90 percent or more of the Employees of the Employer are covered under agreements the Secretary of Labor finds to be collective bargaining agreements between Employee representatives and the Employer, and the Plan covers only Employees who are not covered under such agreements, then Employees covered by such agreements shall be excluded from both the total number of active Employees as well as from the identification of particular Employees in the Top Paid Group. The foregoing exclusions set forth in this Section shall be applied on a uniform and consistent basis for all purposes for which the Code Section 414(q) definition is applicable. (m) NON-HIGHLY COMPENSATED PARTICIPANT: Any Participant or Former Participant who is neither a Highly Compensated Participant nor included as a family member with a Highly Compensated Participant for purposes of Section 414(q)(6)(B) of the Code. (n) PARTICIPANT: An Employee who meets the participation requirements of Section 3.1. (o) PERMANENT DISABILITY: A Participant's total and permanent disability, as determined in accordance with the long term disability plan applicable to the Participant. Except to the extent such exclusion results in prohibited discrimination against non-highly compensated employees, Permanent Disability shall not be deemed to have occurred if it results from a Participant's engagement in a criminal activity, habitual drunkenness, addiction to narcotics, or from an intentionally self-inflicted injury. (p) PLAN YEAR: Plan Year means the period beginning on April 1 and ending on December 31 for the first plan year, which shall constitute a short Plan Year, and then the twelve month period beginning on January 1 and ending on December 31. (q) TRUST: Shall mean the legal entity created by the trust agreement between the Company and Trustee, fixing the rights and liabilities of each with respect to managing and controlling the trust funds for the purposes of the Plan. 7 13 (r) TRUSTEE: The individual or individuals, bank or trust company which at a particular time shall be the trustee under the Trust. (s) VALUATION DATE: The last day of each calendar quarter and such other dates as may be designated by the Administrator in a uniform and nondiscriminatory manner. 2.2 GENDER AND NUMBER. Except as otherwise indicated by the context, masculine terminology shall include the feminine and the singular shall include the plural. ARTICLE 3 PARTICIPATION 3.1 PARTICIPATION. Each Employee shall be eligible to become a Participant in the Plan on the first day of the calendar quarter immediately following the date he has completed six months of service or on the first day of any calendar quarter thereafter. Eligible Employees shall become Participants in the Plan upon the first day of the calendar quarter immediately following completion of the enrollment application prescribed by the Plan Administrator. 3.2 TERMINATION OF PARTICIPATION. Subject to the provisions of Section 3.4 hereof an individual shall cease to be a Participant when he terminates employment with all Employers hereunder. 3.3 REEMPLOYMENT. A former Employee's eligibility to participate in the Plan and the reinstatement of his Credited Service following his reemployment by the Employer shall be governed by the following rules: (a) RETURN PRIOR TO 5 CONSECUTIVE BREAKS-IN-SERVICE. The former Employee shall resume participation in the Plan and his Credited Service shall be reinstated immediately upon his reemployment if he was a Participant in the Plan prior to his departure and he is reemployed by the Employer prior to incurring 5 consecutive 1-year Breaks-In-Service. If the former Employee terminated employment after completing at least six months of service but prior to becoming a Participant, his Credited Service will be reinstated and he will become a Participant as of the later of his date of reemployment or the day on which he would have become a Participant if his employment had not been terminated as long as he is reemployed prior to incurring 5 consecutive 1-year Breaks-In-Service. 8 14 (b) RETURN AFTER 5 CONSECUTIVE BREAKS-IN-SERVICE If a former Employee had a nonforfeitable right to all or a portion of his Account at the time of his termination of employment, his Credited Service will be reinstated and he shall resume participation in the Plan immediately upon his reemployment if he is reemployed by the Employer after incurring 5 consecutive 1-year Breaks-In-Service. If the former Employee did not have a nonforfeitable right to any portion of his Account at the time of his termination, he shall be considered a new Employee for all purposes if the number of his consecutive 1- year Breaks-In-Service equal or exceed the greater of (1) 5 years or (2) the aggregate number of years of Credited Service before such breaks. If such former Participant's years of Credited Service before his termination exceed the greater of (1) 5 years or (2) the number of consecutive 1-year Breaks-In-Service after such termination, his Credited Service will be reinstated and the Participant shall participate immediately. In determining a former Employee's aggregate number of years of Credited Service before the consecutive Breaks-In-Service, years of Credited Service disregarded in accordance with this Section as the result of prior periods of consecutive Breaks-In-Service shall not be considered. Except as noted above, for participation purposes a former Employee will be treated as a new Employee, and his prior Credited Service shall be disregarded upon his reemployment. 3.4 CESSATION OF ELIGIBLE STATUS. If any Participant does not suffer a Break-In-Service but ceases to be an Employee, such Participant shall not be credited with any Employer contributions or forfeitures for continuous service during the period in which he ceases to be an eligible Participant; however, such Participant shall receive credit for vesting purposes for continuous service during the period in which he is not an eligible Participant. ARTICLE 4 EMPLOYEE CONTRIBUTIONS 4.1 EMPLOYEE CONTRIBUTIONS. Subject to the limitations of Article 6, each Participant may make contributions to the Plan, only by payroll deduction, in any whole percentage of his Compensation, between zero percent (0%) and fifteen percent (15%), as he elects. The first four percent (4%) of each Participant's Compensation contributed as provided above must be contributed as before-tax deposits. The remaining eleven percent (11%) can be contributed as before-tax deposits or after-tax deposits or a combination thereof in the Participant's sole discretion. The before-tax and after-tax deposits elected by the Participant will be deducted from his Compensation for each payroll period and shall 9 15 be paid by the Employer to the Trust within 30 days after the end of the month in which it is deducted. 4.2 DATES OF ELECTION. (a) A Participant may elect to make before-tax deposits and after-tax deposits, as provided in Section 4.1, by authorizing payroll deductions at least thirty (30) days prior to the beginning of any calendar quarter. (b) A Participant may change his before-tax deposit percentage or after-tax deposit percentage to any other percentage authorized under Section 4.1 by giving the Employer notice at least thirty (30) days prior to the beginning of any calendar quarter. (c) A Participant may discontinue before-tax deposits and/or after-tax deposits, as provided by Section 4.1, at any time by giving the Employer notice at least thirty (30) days prior to the discontinuance. ARTICLE 5 EMPLOYER CONTRIBUTIONS 5.1 EMPLOYER MATCHING CONTRIBUTIONS. The Employers shall contribute to the Plan, in Company stock or in cash to be used to purchase Company stock, for each Plan Year an amount equal to fifty percent (50%) of the before-tax deposits of each Participant who is active and contributing to the Plan pursuant to Section 4.1 on the last day of the Plan Year or who is on an authorized leave of absence or who terminated employment due to death, disability, or retirement on or after Normal Retirement Age during the Plan Year, provided, however, no contribution shall be made with respect to before- tax deposits in excess of four percent (4%) of such Participant's Compensation in any Plan Year. In addition, the Employer may contribute to the Plan for any Plan Year such additional amount or percentage in cash or Company stock based on all or a portion of before-tax deposits of each Participant who is active and contributing to the Plan pursuant to Section 4.1 on the last day of the Plan Year or who is on an authorized leave of absence or who terminated employment due to death, disability or retirement on or after Normal Retirement Age during the Plan Year as the Employer determines in its sole discretion. In the event contributions pursuant to this section are made in Company stock, the number of shares of Company stock to be contributed shall be determined by using the average price of Company stock for that Plan Year which shall be determined by averaging the closing prices of Company stock each day to obtain a monthly average price and 10 16 averaging the monthly average prices to obtain an annual average price. 5.2 DISCRETIONARY EMPLOYER CONTRIBUTIONS. The Employers may make, in cash or Company stock, a discretionary contribution to the Trust in such amount, if any, as determined by the Board. In the event contributions pursuant to this section are made in Company stock, the number of shares of Company stock to be contributed shall be determined by using the average price of Company stock for that Plan Year which shall be determined by averaging the closing prices of Company stock each day to obtain a monthly average price and averaging the monthly average prices to obtain an annual average price. 5.3 ALLOCATION OF ANNUAL EMPLOYER CONTRIBUTIONS AND FORFEITURES. As of the last day of each Plan Year, each eligible Participant's allocable share, if any, of the Employer's contributions for that Plan Year shall be credited to his Account. As of the last day of the Plan Year, any amount which becomes a forfeiture during the Plan Year, shall first be used, in accordance with Section 15.2(d), if applicable, to reinstate previously forfeited Accounts of former Participants, if any, in accordance with Section 5.4, and the remaining forfeitures, if any, shall be used to reduce contributions which would otherwise be made by the forfeiting Participant's Employer. Discretionary Employer contributions for the Plan Year, if any, arising under the Plan during that year shall be allocated among the Accounts of those Participants who are employed on the last day of the Plan Year and those Participants who terminated employment during the Plan Year due to retirement, disability or death, in the ratio that each Participant's Compensation for the Plan Year bears to all Participant's Compensation for that Plan Year. 5.4 RESTORATION OF FORFEITED AMOUNTS UPON REEMPLOYMENT. If a person: (a) who was a Participant on or after April 1, 1975 who terminated participation nonvested, is reemployed by an employer before he incurs 5 consecutive 1-year Breaks-In-Service, or (b) who terminated participation partially vested is reemployed by the Employer before he incurs a break longer than the longer of (i) the length of the person's prior service with the Employer or (ii) five (5) consecutive 1-year Breaks-In-Service, 11 17 he shall receive a special allocation equal to the amount forfeited, if any, from such Participant's Account upon the Participant's prior termination of employment. The special allocation will be made as of the end of the Plan Year in which the Participant is reemployed and shall be in addition to the contributions described above. The source of the special allocation shall first be any forfeitures occurring during the Plan Year and, if that source is insufficient, then the Employer shall make a special contribution to the Participant's Account in an amount sufficient to cover the special allocation. However, for Participants who terminated participation partially vested and who are reemployed as provided above, the special contribution shall be allocated to a separate subaccount and the reemployed Participant's vested interest in the subaccount at the relevant time shall be an amount ("X") determined by the formula: X = P(AB + (R x D)) - (R x D) For purposes of applying this formula: P is the nonforfeitable percentage at the relevant time, AB is the Account balance at the relevant time, D is the amount of the distribution, and R is the ratio of the Account balance at the relevant time to the Account balance after distribution. 5.5 ROLLOVER CONTRIBUTIONS. A Participant who receives or is credited with a distribution described in Subsection (a), (b) or (c) of this Subsection may, but need not, make a special contribution to this Plan, which contribution will hereafter be referred to as a "Rollover Contribution." In making a Rollover Contribution, the Participant must transfer, or direct the transfer of, cash equal to the value of all or part of the property the Participant received or is entitled to receive in the distribution to the Trustee, to the extent the fair market value of such property exceeds an amount equal to after-tax contributions made by the Participant to the plan from which the distribution is being made. In addition, prior to the acceptance of a Rollover Contribution, the Employer may require the submission of such evidence as the Employer deems necessary or desirable to enable it to determine whether the transfer qualifies as a Rollover Contribution. If the Employer determines subsequent to any Rollover Contribution that any such Rollover Contribution did not in fact qualify as such, the value of such Rollover Contribution shall be immediately distributed to the Participant. For purposes of this Subsection 5.5, the following shall be eligible to be treated as a Rollover Contribution: (a) A distribution to a Participant from an employee's trust described in Code Section 401(a), which trust is exempt from 12 18 tax under Code 501(a), or from an annuity plan qualified under Code Section 403(a), which distribution qualifies for rollover treatment pursuant to the Code, which was received by the Participant not earlier than 60 days prior to the date the Rollover Contribution is credited to the Trust; or (b) A distribution to a Participant from an Individual Retirement Account or an Individual Retirement Annuity (other than an endowment contract) within the meaning of Code Section 408(a) or 408(b), the assets of which are derived solely from a rollover or transfer thereto of a prior distribution to the Participant described in (a) above, which was received by the Participant not earlier than 60 days prior to the date the Rollover Contribution is credited to the Trust; or (c) A distribution directly to the Plan from an eligible retirement plan (as defined in Code Section 401(a)(31)(D)) of all or any portion of the balance to the credit of the Participant, except that the following amounts shall not be included: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of the distributee or the distributee's designated beneficiary, or for a specified period of ten years or more; any distribution to the extent such distribution is required under Section 401(a)(9) of the Code; and that portion of any distribution that would not have been includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities) if it would have been distributed directly to the Participants. A Rollover Contribution and all amounts attributable thereto shall be fully vested and nonforfeitable at all times, and shall be subject to applicable provisions of the Plan. ARTICLE 6 LIMITATIONS 6.1 LIMITATIONS ON ANNUAL ACCOUNT ADDITIONS. (a) ANNUAL ACCOUNT ADDITIONS. The term "Annual Account Additions" means, for any Participant for any Plan Year, the sum of (1) Employer and Affiliate contributions made for the Participant under "any defined contribution plan" for the Plan Year, including before-tax deposits and Matching Contributions hereunder; and 13 19 (2) the Participant's after-tax contributions to "any defined contribution plan"; and (3) forfeitures, if any, allocated to the Participant for the year under "any defined contribution plan"; and (4) contributions allocated on the Participant's behalf to a medical account described in Code Section 415(1)(1) or 419A(d)(2), although the percentage limit described in Sub- section (b)(2) below shall not apply to such amounts; but shall not include any Rollover Contributions or loan repayments under the Plan. "Any defined contribution plan" means this Plan and all other defined contribution plans of the Affiliates considered as one plan. (b) LIMITATION. Notwithstanding the foregoing provisions of this Article 6, the Annual Account Additions of a Participant for any Plan Year, which shall be the limitation year, shall not exceed the lesser of -- (1) the greater of $30,000 or one-fourth of the defined benefit dollar limitation set forth in Code Section 415(b) in effect for such Plan Year, or (2) 25 percent of the Participant's compensation as defined in Subsection (c) below, for such Plan Year. (c) COMPENSATION. The term "compensation" as used in this Section 6.1 means compensation as defined in Code Section 415(c)(3) and Treasury regulation thereunder, which generally means amounts actually paid during a limitation year which are the Participant's wages, salary, fees for personal services actually rendered in the course of employment with the Employer or other Affiliate, including amounts described in Treasury Regulation 1.415-2(d)(1), and excluding amounts which are reduced pursuant to a salary reduction arrangement and other amounts described in Treasury Regulation l.415- 2(d)(2). Such "compensation" may not exceed $200,000 or such higher annual amount as may be determined by the Secretary of the Treasury. (d) REDUCTION IN ANNUAL ACCOUNT ADDITIONS. If in any Plan Year a Participant's Annual Account Additions exceed the 14 20 applicable limitation determined under Subsection (b) above, by reason of a reasonable error in estimating a Participant's compensation or otherwise, such excess (referred to herein as the "Annual Account Excess") shall not be allocated to the Participant's Account, but shall be treated in the following manner: (1) The Participant's after-tax contributions, if any, under "any defined contribution plan" shall be refunded, up to the amount of the Annual Account Excess. (2) If there is any remaining Annual Account Excess after the application of paragraph (1) above, the Participant's before-tax deposits and any Employer Matching Contributions relating thereto for that year shall be reduced proportionately, up to the remaining amount of the Annual Account Excess, and such before-tax deposits shall be returned to the Participant. (3) If there is any remaining Annual Account Excess after the application of paragraphs (1) and (2) above, the Participant's share of Employer or other Affiliate contributions allocated to the Participant under any other defined contribution plan for that year shall be reduced in accordance with such plan, up to the remaining amount of the Annual Account Excess. (4) Any reduction in such a Participant's allocation of Employer Matching Contributions under paragraph (2) above shall be deemed to be a forfeiture for such Plan Year and used to reduce Employer Matching Contributions. (e) DUAL PLAN LIMITATION. If in any Plan Year a Participant is both an active participant in any defined contribution plan and a participant of any "qualified" defined benefit plan of the Employer or Other Affiliate, the sum of the defined benefit plan fraction (as defined in Code Section 415(e)(2)) and the defined contribution plan fraction (as defined in Code Section 415(e)(3)) shall not exceed the number one. It is intended to reduce the Annual Account Additions under the defined contribution plan to the extent possible, if necessary, to prevent the sum of the defined benefit plan fraction and the defined 15 21 contribution fraction from exceeding 1.0, before reducing the accrued benefits under any defined benefit plan. 6.2 MAXIMUM AMOUNT OF BEFORE-TAX DEPOSITS. In no event shall a Participant's aggregate before-tax deposits for any calendar year, when combined with all other elective pre-tax deferrals under Code Section 402(g) on behalf of the Participant, exceed $7,000 (or such higher annual amount as may be determined by the Secretary of the Treasury to reflect increases in the cost of living). The annual limit shall be reduced as provided under Section 9.3 following a Participant's hardship withdrawal. To the extent that such a Participant's before-tax deposits exceed the applicable dollar limit for a calendar year, such deposits shall be treated as income to the Participant for such calendar year. Such excess deferral, adjusted for earnings or losses thereon, shall be distributed to the Participant not later than April 15 of the calendar year following the calendar year in which such excess deferral was made. Any such distribution of earnings on excess deferrals shall be treated as income to the Participant in the year of distribution. 6.3 ACTUAL DEFERRAL PERCENTAGE TESTS. The limits described in this Section 6.3 apply to before-tax deposits made pursuant to Section 4.1. Notwithstanding any provision to the contrary in this Plan concerning the amount, availability, or allocation of before-tax deposits, no amount of before-tax deposits shall be allocated to a Participant's Account in excess of the limits contained in this Section 6.3. (a) Actual Deferral Percentage means for each Plan Year the average of the ratios (ADR) (calculated separately for each active Participant) of: (1) the amount of before-tax deposits of each such Participant for such Plan Year, to (2) such Participant's Compensation; provided, however, that if a Highly Compensated Participant also participates in another qualified retirement plan with a salary reduction feature maintained by the Employer under Sections 401(a) and 401(k) of the Code, such Participant's Actual Deferral Percentage shall be determined as if all such qualified plans with a salary reduction feature ending within the same calendar year were a single plan. 16 22 (b) In the case of a Participant who is a Highly Compensated Participant and who is either a 5% owner or one of the 10 most Highly Compensated Participants and thereby subject to the family aggregation rules of Code Section 414(q)(6), the ADR for the family group (which is treated as one Highly Compensated Participant) is the greater of: (1) the ADR determined by combining the contributions and compensation of all eligible family members who are highly compensated without regard to family aggregation, and (2) the ADR determined by combining the contributions and compensation of all eligible family members. Except to the extent taken into account in the preceding sentence, the contributions and compensation of all family members are disregarded in determining the actual deferral percentages for the groups of Highly Compensated Participant and Non-Highly Compensated Participants. (c) In the case of a Highly Compensated Participant whose ADR is determined under the family aggregation rules, the determination of the amount of excess contributions shall be made as follows: (1) If the Highly Compensated Participant's ADR is determined by combining the contributions and compensation of all family members, then the ADR is reduced in accordance with the "leveling" method described in Section 1.401(k)-1(f)(2) of the regulations and the excess contributions for the family unit are allocated among the family members in proportion to the contributions of each family member that have been combined. (2) If the Highly Compensated Participant's ADR is determined by combining the contributions and compensation of only those family members who are highly compensated without regard to family 17 23 aggregation, then the ADR is reduced in accordance with the leveling method but not below the ADR of eligible non-highly compensated family members. Excess contributions are determined by taking into account the contributions of the eligible family members who are highly compensated without regard to family aggregation and are allocated among such family members in proportion to their contributions. If further reduction of the ADR is required, excess aggregate contributions resulting from this reduction are determined by taking into account the contributions of all eligible family members and are allocated among such family members in proportion to their contributions. (d) The Actual Deferral Percentage test described hereinafter shall be made as of the end of each Plan Year. The Administrator in its discretion may choose to make the Actual Deferral Percentage test more frequently than annually. Any excess deferral described in Section 6.2 shall be included in the computation of the Actual Deferral Percentage notwithstanding the distribution of any portion thereof, unless otherwise provided under rules prescribed by the Secretary of the Treasury. For any Plan Year, the Actual Deferral Percentage for the group of Highly Compensated Participants must not exceed the greater of: (1) 125 percent of such percentage for all Participants; or (2) the lesser of two hundred percent (200%) of such percentage for the Non-Highly Compensated Participants, or such percentage for the Non- Highly Compensated Participants plus two (2) percentage points. The provisions of Code Section 401(k)(3) and Regulation l.401(k)- 1(b) are incorporated herein by reference. However, for Plan Years beginning after December 31, 1988, in order to prevent 18 24 the multiple use of the alternative method described in this paragraph and in Code Section 401(m)(9)(A), any Highly Compensated Participant eligible to make before-tax deposits pursuant to Section 4.1 and to make after-tax deposits contributions or to receive Employer matching contributions under this Plan or under any other plan maintained by the Employer shall have his Actual Contribution Percentage reduced pursuant to Regulation l.401(m)-2, the provisions of which are incorporated herein by reference. If two or more qualified plans which include a salary reduction feature described in Code Section 401(k) are considered as one plan for purposes of Code Sections 401(a)(4) or 410(b), the salary reduction feature included in such plans shall be treated as one salary reduction arrangement for purposes of the Actual Deferral Percentage test. For Plan Years beginning after December 31, 1989, plans may be aggregated in order to satisfy Section 401(k) of the Code only if they have the same Plan Year. In the event the Actual Deferral Percentage test is not met as of the end of any Plan Year, the provisions of Section 6.4 shall apply. 6.4 ADJUSTMENT TO ACTUAL DEFERRAL PERCENTAGE TESTS. In the event the Actual Deferral Percentage test is not met as of the end of any Plan Year, the Administrator shall take the actions called for in this Section 6.4. Excess Contributions with respect to any Participant are before-tax deposits which do not meet the Actual Deferral Percentage test described in Section 6.3. If it appears that there will be Excess Contributions as of the end of any Plan Year, the Administrator shall inform the Employer. The Employer, in its discretion, may make a supplemental contribution which shall be allocated to the Accounts of Participants who are Non-Highly Compensated Participants. Any such supplemental contribution shall be allocated in a uniform and nondiscriminatory manner in an amount sufficient to eliminate any Excess Contributions. Such supplemental contribution by the Employer must be made, if at all, within the first two and one-half months after the close of the Plan Year in which the Excess Contributions arose. Such supplemental contribution shall be treated for all purposes as a before-tax deposit. The allocation of a portion of any such supplemental contribution to the Account of an affected Participant is subject to the Code Section 415 limits. If the Employer chooses to make a supplemental contribution 19 25 in an amount less than that required to completely eliminate all Excess Contributions, the remaining Excess Contributions shall be disposed of in the manner hereinafter described. Should the Employer not choose to make a supplemental contribution for the purpose of eliminating any Excess Contributions, or if Excess Contributions remain after a supplemental contribution has been made, the before-tax deposits of the Participants who are Highly Compensated Participants shall be reduced to the extent necessary so that the Actual Deferral Percentage test set forth in Section 6.3 is met as of the end of the applicable Plan Year. Such reduction shall be accomplished first by determining the maximum deferral for the group of Participants who are Highly Compensated Participants permitted by the Actual Deferral Percentage test. Next, the before-tax deposits of such Participants whose individual Actual Deferral Percentage exceeded the Maximum Actual Deferral Percentage available to the group of Highly Compensated Participants shall be reduced in the order of individual Actual Deferral Percentages beginning with the highest of such percentage in accordance with procedures adopted by the Administrator until the test set forth in Section 6.3 is met. The Administrator shall cause the amount of Excess Contributions (and income allocable thereto) attributable to each affected Participant to be returned to such Participant not later than the end of the Plan Year following the Plan Year as of which the Excess Contributions arose. However, the Administrator shall use its best efforts to cause the amount of Excess Contributions (and any income allocable thereto) attributable to each affected Participant to be returned to such Participant within two and one-half months following the end of the Plan Year as of which the Excess Contributions arose. The income allocable to the Excess Contributions of each affected Participant is equal to the sum of (a) the income allocable to the Account of the affected Participant for the applicable Plan Year, and (b) the income allocable to the Account of the affected Participant for the period between the end of the applicable Plan Year and the date of distribution with the sum of (a) and (b) being multiplied by a fraction. The numerator of the fraction is the Excess Contribution attributable to each affected Participant and the denominator of the fraction is the closing balance (inclusive of any income), as of the end of the applicable Plan Year, of the Participant's Account containing the Excess Contributions. 6.5 MAXIMUM CONTRIBUTION PERCENTAGE. The limits described in this Section 6.5 apply to matching Employer contributions and after-tax contributions. Notwithstanding any provision to the contrary in this Plan concerning the amount, availability, or 20 26 allocation of matching Employer contributions, no amount of such contributions shall be allocated to the Account of any Participant in excess of the limits contained in this Section 6.5. (a) Actual Contribution Percentage means for each Plan Year the average of the ratios (ACR) (calculated separately for each Participant) of: (1) the amount of matching Employer contributions and after-tax contributions of each such Participant for such Plan Year, to (2) such Participant's Compensation; provided, however, that if a Highly Compensated Participant who also participates in another qualified retirement plan maintained by the Employer to which matching contributions, employee contributions, or elective deferrals are made, such active Participant's Actual Contribution Percentage shall be determined by aggregating all Employer matching contributions and after- tax contributions in plans which end within the same calendar year. The ACR of a Participant who is subject to the family aggregation rules of Code Section 414(q)(6) shall be determined consistent with Sections 6.3(b) and (c). (b) The Actual Contribution Percentage test described hereinafter shall be made as of the end of each Plan Year. The Administrator in its discretion may choose to make the Actual Contribution Percentage test more frequently than annually. For any Plan Year, the Actual Contribution Percentage for the group of Highly Compensated Participants must not exceed the greater of: (1) 125 percent of such percentage for all other Participants; or (2) the lesser of two hundred percent (200%) of such percentage for the Non-Highly Compensated Participants, or such percentage for the Non-Highly Compensated Participants plus two (2) percentage points. However, for 21 27 Plan Years beginning after December 31, 1988, to prevent the multiple use of the alternative method described in this paragraph and Code Section 401(m)(9)(A), any Highly Compensated Participant eligible to make before-tax deposits pursuant to Section 4.1 or any other cash or deferred arrangement maintained by the Employer and to make after-tax deposits or to receive matching contributions under this Plan or under any other plan maintained by the Employer shall have his Actual Contribution Percentage reduced pursuant to Regulation l.401(m)-2. The provisions of Code Section 401(m) and Regulations 1.401(m)-l(b) and 1.401(m)-2 are incorporated herein by reference. If two or more qualified plans which include matching contributions, employee contributions, or elective deferrals are considered as one plan for purposes of Code Section 410(b), such plans shall be treated as one plan for purposes of the Actual Contribution Percentage test. For Plan Years beginning after December 31, 1989, plans may be aggregated in order to satisfy Section 401(m) of the Code only if they have the same Plan Year. In the event the Actual Contribution Percentage test is not met as of the end of any Plan Year, the provisions of Section 6.6 shall apply. 6.6 ADJUSTMENT FOR EXCESSIVE CONTRIBUTION PERCENTAGE. In the event the Actual Contribution Percentage test is not met as of the end of any Plan Year, the Administrator shall take the actions called for in this Section 6.6. Excess Aggregate Contributions with respect to any Participant are matching Employer contributions and after-tax deposits which do not meet the Actual Contribution Percentage test described in Section 6.5. If it appears that there will be Excess Aggregate Contributions as of the end of any Plan Year, the Administrator shall inform the Employer. The Employer, in its discretion, may make an additional matching Employer contribution which shall be allocated to the Accounts of all Participants who are not Highly Compensated Employees. In lieu of making an additional matching Employer contribution, the Employer may make a supplemental contribution which shall be allocated to the Accounts of all active Participants who are not Highly Compensated Employees. Any additional matching Employer contribution or supplemental contribution shall be allocated in a uniform and nondiscriminatory manner in an amount sufficient to eliminate any Excess Aggregate 22 28 Contributions. Such additional Matching Employer contribution or supplemental contribution by the Employer must be made, if at all, within the first two and one-half months after the close of the Plan Year in which the Excess Aggregate Contributions arose. Any additional matching Employer contribution shall be treated for all purposes as a matching Employer contribution and any supplemental contribution shall be treated for all purposes as an After-Tax Employee Contribution. The allocation of either an additional matching Employer contribution or a supplemental contribution to the Participant Account of an affected Participant is subject to the Code Section 415 limits. If the Employer chooses to make an additional matching Employer contribution, a supplemental contribution, or a combination of both in an amount less than that required to completely eliminate all Excess Aggregate Contributions, the remaining Excess Aggregate Contributions shall be disposed of in the manner hereinafter described. Should the Employer not choose to make an additional matching Employer contribution, a supplemental contribution, or a combination of both for the purpose of eliminating any Excess Aggregate Contributions or if Excess Aggregate Contributions remain after any such contributions have been made, the matching Employer contributions and/or after-tax deposits of the Participants who are Highly Compensated Participants shall be reduced to the extent necessary so that the Actual Contribution Percentage test set forth in Section 6.5 is met as of the end of the applicable Plan Year. Such reduction shall be accomplished first by determining the maximum contribution for the group of Participants who are Highly Compensated Participants permitted by the Actual Contribution Percentage test. Next, the matching Employer contributions and/or after-tax deposits of such Participants whose individual Actual Contribution Percentage exceeded the maximum Actual Contribution Percentage available to the group of Highly Compensated Participants shall be reduced in the order of individual Actual Contribution Percentage beginning with the highest of such percentages in accordance with procedures adopted by the Administrator until the test set forth in Section 6.5 is met. The Administrator shall cause the amount of Excess Aggregate Contributions (and any income allocable thereto) attributable to each affected Participant to be returned to such Participant not later than the end of the Plan Year following the Plan Year as of which the Excess Aggregate Contributions arose. However, the Administrator shall use its best efforts to cause the amount of Excess Aggregate Contributions (and any income allocable thereto) attributable to each affected Participant to be returned 23 29 to such Participant within two and one-half months following the end of the Plan Year as of which the Excess Aggregate Contributions arose. The income allocable to the Excess Aggregate Contributions of each affected Participant is equal to the sum of (a) the income allocable to the Account of the affected Participant for the applicable Plan Year, and (b) the income allocable to the Account of the affected Participant for the period between the end of the applicable Plan year and the date of distribution, with the sum of (a) and (b) being multiplied by a fraction. The numerator of the fraction is the Excess Aggregate contribution attributable to each affected Participant and the denominator of the fraction is the closing balance (inclusive of any income), as of the end of the applicable Plan Year, of the Account containing the Excess Aggregate Contribution. 6.7 LIMIT ON TOTAL CONTRIBUTION OF EMPLOYER: Precluding~ Excess Allocations. The total contributions of the Employer, as determined under Sections 4.1, 5.1 and 5.2, for any Plan Year shall not exceed the maximum tax deductible contribution permitted by law. In addition, in no event will the amount allocated to a Participant's Account in any Plan Year exceed the limitations set forth in this Article 6. ARTICLE 7 CREDITING OF CONTRIBUTIONS AND DEPOSITS TO INVESTMENT FUNDS 7.1 INVESTMENT OF PARTICIPANT ACCOUNTS. Employer Matching Contributions shall be invested and reinvested in the Western Stock Fund. Except as otherwise provided elsewhere, each Participant shall direct the investment and reinvestment all other contributions and deposits pursuant to this section. If a Participant fails to elect to direct the investment and reinvestment of that portion of his Account subject to investment direction, the Trustee shall invest one hundred percent (100%) of that portion of such Participant's Account as is subject to investment direction in the Money Market Fund. The following funds are currently available: (a) Western Stock Fund; (b) Equity Fund; (c) Money Market Fund; (d) Interest Income Fund; (e) Corporate Bond Fund; and 24 30 (f) Government Securities Fund. 7.2 PARTICIPANT'S CHOICE OF INVESTMENTS. At least 30 days prior to the beginning of each calendar quarter, a Participant may elect in writing that all future contributions subject to investment direction be invested, in five percent (5%) increments, in one or more of the investment funds established pursuant to Section 7.1. If a Participant fails to make any election, 100% of his contributions subject to investment direction shall be invested in the Money Market Fund. 7.3 CHANGE OF PRIOR INVESTMENTS. At least 30 days prior to the beginning of each calendar quarter, each Participant may reallocate all or a portion of his assets subject to investment direction from one investment fund established pursuant to Section 7.1 to another such investment fund, in five percent (5%) increments: provided, however, that any limitations on transfers imposed by investments in the Interest Income Fund shall apply. The Administrator may, in its sole discretion, designate more frequent investment transfer dates if the Administrator deems it appropriate in light of the market volatility to which the investment alternatives may reasonably be expected to be subject. ARTICLE 8 ACCOUNTS 8.1 SEPARATE ACCOUNTS. The Administrator shall maintain the following subaccounts: (a) a Before-Tax Deposit Account for each Participant who elects to direct the Employer to make before-tax deposits on his behalf pursuant to Section 4.1 and/or who makes Rollover contributions or a trustee-to- trustee transfer pursuant to Section 5.5: (b) a Western Company Match Account shall be maintained for each Participant for Employer matching contributions allocated to a Participant's Account pursuant to the provisions of Sections 5.1; (c) a Discretionary Employer Contribution Account shall be maintained for each Participant for annual discretionary employer contributions allocated to a Participant's Account pursuant to the provisions of Section 5.2; 25 31 (d) a pre-1987 After-Tax Deposit Account shall be maintained for each Participant for any After-Tax Deposits made prior to January 1, 1987; and (e) a Post-1986 After-Tax Deposit Account shall be maintained for each Participant for any After-Tax Deposits pursuant to the provisions of Section 4.1. The Administrator shall also create such other subaccounts as it deems necessary or desirable. 8.2 VALUATION OF SEPARATE ACCOUNTS. As of each Valuation Date, the Administrator shall adjust the previous Account balances for before-tax deposits, matching contributions, discretionary employer contributions, after- tax contributions, earnings, gains or losses, withdrawals, expenses, Participant loans and any Participant rollover and transfer contributions in order to obtain new Account balances. 8.3 DETERMINATION OF FUND PERFORMANCE. For purposes of determining Account values, each Account's share of the income, appreciation and depreciation of each Investment Fund as of any Valuation Date shall be that proportion of the total income, appreciation or depreciation of such Investment Fund during such period that the average balance of such accounts during such period bears to the average balance of all such accounts in such investment fund during such period. The value of each account, each Investment Fund, and the Trust fund as of the end of any period shall be the fair market value of such account or fund. The total before-tax deposits and after-tax deposits for the period will be reflected in said determination. 8.4 VOTING OF WESTERN STOCK. Voting, tender and similar rights shall be passed through to Participants and beneficiaries as provided pursuant to the provisions of the Trust. ARTICLE 9 WITHDRAWALS DURING EMPLOYMENT 9.1 AFTER-TAX DEPOSIT ACCOUNT WITHDRAWALS. Each active Participant who has made After-Tax Deposits may withdraw such deposits by submitting at any time, but not more often than once in any six month period, a written request to the Plan Administrator specifying the amount to be withdrawn. Payment shall be made to the Participant as soon as practicable following the Valuation Date next following the date the request is filed with the Plan Administrator. The withdrawal may not exceed the lesser of the 26 32 value of the Participant's After-Tax Deposit Accounts or his total After-Tax Deposits, and may not be less than the lesser of (i) $1,000 or (ii) the maximum after-tax deposit withdrawal as determined above. Any such withdrawal will be taken from the Participant's Pre-1987 After-Tax Deposit Account and Post-1986 After-Tax Deposit Account, in the following order: (a) Pre-1987 after-tax deposit contributions; (b) Post-1986 after-tax deposit contributions and earnings; and (c) Earnings on pre-1987 after-tax deposit contributions. After-Tax Deposit Account Withdrawals under this Section 9.1 shall be charged against the value of the withdrawing Participant's subaccount in each of the Investment Funds proportionally. 9.2 WITHDRAWALS AFTER AGE 59 1/2. An active Participant who has attained age 59 1/2 may withdraw all or a portion of his vested Account balance determined as of the Valuation Date immediately following the date of the request. Payment shall be made to the Participant as soon as practicable following the Valuation Date next following the Participant's submission of his written request for distribution to the Plan Administrator. Each Participant shall be allowed only one such withdrawal. Any such withdrawal will be taken from the Participant's Account in the following order: (a) Pre-1987 after-tax contributions; (b) Post-1986 after-tax contributions and earnings; (c) Earnings on pre-1987 after-tax contributions; (d) Before-tax deposits (including rollovers) and earnings; (e) Employer matching contributions and earnings; and (f) Employer annual discretionary contributions and earnings. Post-59 1/2 withdrawals under this Section 9.2 shall be charged against the value of the withdrawing Participant's subaccount in each of the Investment Funds proportionally. 9.3 HARDSHIP WITHDRAWALS. Upon the request of a Participant made in accordance with such uniform and nondiscriminatory rules as the Administrator may prescribe, the Administrator shall permit a Participant to make a hardship withdrawal from his Before-Tax Deposit Account from the Plan prior to the Participant's termination of employment or Permanent Disability if (a) the withdrawing Participant is either under 59 1/2 years of age on the date the withdrawal is being made or has previously made a 27 33 withdrawal after age 59 1/2 pursuant to Section 9.2 hereof, and (b) the Trustee, in accordance with the provisions of Internal Revenue Regulation Section l.401(k)-1(d)(2) and with the following paragraph, finds that such withdrawal is necessary because of the Participant's immediate and heavy financial need. The maximum amount that can be withdrawn under this Section 9.3 shall be the lesser of (a) the amount which the Trustee, in accordance with the provisions of Internal Revenue Regulation Section l.401(k)-l(d)(2) and with the following paragraph, deem to be necessary to meet the immediate and heavy financial need of the withdrawing Participant created by the hardship, and (b) the value of the Participant's Before-Tax Deposit Account determined on the last Valuation Date reduced by the appreciation on any before-tax deposits credited to the Participant's Before-Tax Deposit Account subsequent to December 31, 1988. For purposes of this Section, a distribution will be deemed to be on account of immediate and heavy financial need if the distribution is on account of: (1) Medical expenses described in Code Section 213(d) incurred by the Employee, the Employee's spouse, or any dependents of the Employee (as defined in Code Section 152); (2) Purchase (excluding mortgage payments) of a principal residence for the Employee; or (3) Payment of tuition for the next year of post-secondary education for the Employee, his or her spouse, children, or dependents. (4) The need to prevent the eviction of the Employee from his principal residence or foreclosure on the mortgage of the Employee's principal residence. Further, a distribution will be deemed to be necessary to satisfy the immediate and heavy financial need if the distribution is not in excess of the amount necessary to relieve the need and cannot be satisfied from other resources that are reasonably available to the Employee including other withdrawals and loans currently available under all plans maintained by the Employer; provided, however, a Participant may obtain a hardship withdrawal without obtaining all loans for which the Participant is eligible if the Participant certifies to the Trustee that the receipt of a loan would increase the amount of the Participant's immediate financial need and would therefore not serve to relieve the Participant's immediate financial need. 28 34 Hardship withdrawals under this Section 9.3 shall be charged against the value of the withdrawing Participant's sub-account in each of the Investment Funds proportionally. Any such hardship withdrawal will be taken from the Participant's Account in the following order: (a) Pre-1987 after-tax contributions; (b) Post-1986 after-tax contributions and earnings; (c) Earnings on pre-1987 after-tax contributions; and (d) Before-tax deposits (including rollovers) and earnings. Any Participant receiving a hardship distribution must certify and agree to satisfy all of the following conditions: (a) The distribution is not in excess of the amount of the Participant's immediate and heavy financial need; (b) The Participant has obtained all distributions, other than hardship distributions, and all non-taxable loans currently available under all plans maintained by the Employer or its Affiliates; (c) The Participant's before-tax deposits and after-tax deposits shall be suspended for at least twelve (12) months after the receipt of the hardship distribution; and (d) The Participant shall not be eligible to make any before-tax deposits until the first day of the first Plan Year following the first anniversary of the date on which the hardship distribution was made. 9.4 LOANS. Upon request of a Participant, made with the consent of the Participant's spouse, if applicable, in accordance with such uniform rules as the Administrator may prescribe, the Administrator will permit the Plan to make a loan to a Participant provided that: (a) Only active Participants will be eligible to request a loan. (b) The minimum amount a Participant can request is $1,000. (c) A Participant cannot have more than one (1) outstanding loan at any time. 29 35 (d) A Participant must wait a minimum of six (6) months between new loan requests. (e) The interest rate shall be based on the prime rate and shall be reset on the first business day of every month. The interest rate and term of the loan will be set as the date the loan is made and will not be changed during the life of the loan. (f) A Participant can pay off a loan in full at any time during the life of the loan without penalty. However, no partial prepayments will be accepted. (g) The Participant's obligation is represented by a negotiable promissory note which shall provide for level amortization with payments to be made not less frequently than quarterly over a period not to exceed four (4) years and six (6) months after the date of such loan unless the loan is to be used by the Participant to acquire any dwelling unit which within a reasonable time (determined at the time the loan is made) is to be used as a principal residence of the Participant, and calling for payments to be made by payroll deduction and for a period not to exceed ten (10) years. (h) The Participant agrees that any unpaid balance of the loan, including accrued interest thereon, may be deducted from any distribution of his Account to which the Participant or his beneficiary may be entitled, and if the amount of such distribution is not sufficient to repay the remaining principal and interest of any such loan, the Participant or his personal representative shall be liable for and continue to make payments on any balance still due, which payments may be withheld by the Employer from any Compensation due that Participant; (i) The amount loaned plus interest due thereon over the term of the indebtedness is not more than the lesser of (i) $50,000 reduced by the excess, if any, of the highest outstanding balance of loans from the Plan to the Participant during the one year period ending on the day before the date on which such loan is made, over the outstanding balance of loans from the Plan to the Participant on the date on which such loan was made, and (ii) 1/2 of the Participant's vested Account balance, excluding the value of that portion of the Account attributable to Employer contributions; and (j) The written consent of the Participant's spouse must be obtained within the 90 day period prior to the date the loan was made. 30 36 Loans made to a Participant under this Section 9.4 shall constitute a separate earmarked investment of the Account of the Participant to whom the loan is being made. The amount of the loan shall be charged pro rata against the value of said Participant's subaccounts in the following order and shall be returned in the Participant's subaccounts in the reverse order: (a) Pre-1987 after-tax contributions; (b) Post-1986 after-tax contributions and earnings; (c) Earnings on pre-1987 after-tax contributions; and (d) Before-tax deposits (including rollovers) and earnings. Amounts paid to the Plan by the Participant in repayment of an outstanding loan shall be credited to and invested in the Participant's Account in each of the Investment Funds in accordance with the Participant's direction covering new deposits for the Plan year in which said amounts are repaid, or if none, in accordance with the Participant's next preceding direction. ARTICLE 10 DISTRIBUTIONS 10.1 RETIREMENT. The Account of a Participant whose employment is terminated on or after his sixtieth (60) birthday shall be nonforfeitable and such Account will be distributed to the Participant as provided in Sections 10.6 and 10.7. 10.2 DEATH. Subject to Section 10.5, the designated beneficiary of a Participant or beneficiary who dies during a Plan Year shall be eligible to receive the full value of the Participant's or beneficiary's Account as provided in Section 10.8. 10.3 PERMANENT DISABILITY. The Account of a Participant whose employment is terminated due to Permanent Disability shall be nonforfeitable and such Account will be distributed to the Participant for his benefit as provided in Sections 10.6 and 10.7 provided his Permanent Disability is established to the satisfaction of the Administrator. 10.4 OTHER TERMINATION OF EMPLOYMENT. If a Participant's employment is terminated other than in accordance with Sections 10.1 through 10.3, he shall be eligible to receive the sum of the following as provided below: (a) The full value of his Before-Tax Deposit and After-Tax Deposit Accounts, if not previously withdrawn; and 31 37 (b) A percentage (determined as of the date of his termination) of the value of his Western Company Match Account and Discretionary Employer Contribution Account, if any, as determined below:
Completed Years of Vested Credited Service Percentage - ------------------ ---------- Less than 5 years 0% After 5 or more years 100%
The non-vested portion of a Participant's Account shall be forfeited after the Participant has suffered a Break-In-Service, but is subject to reinstatement in accordance with Section 5.4. The vested portion of the Participant's Western Company Match Account, Discretionary Employer Contribution Account and the Participant's Before-Tax Deposit and After-Tax Deposit Accounts, will be distributed to the Participant as provided in Sections 10.6 and 10.7. 10.5 DESIGNATION OF BENEFICIARY. (a) The Participant's spouse shall automatically be the designated beneficiary to receive any distributions by reason of his death and shall be paid in the manner prescribed in Section 10.8. However, if there is no spouse, or if the spouse has consented then distribution by reason of the Participant's death shall be made to his designated beneficiary in the manner prescribed in Section 10.8. (b) If there shall be a failure of all designated beneficiaries (because of prior death, failure to designate in the manner herein provided, or otherwise) with respect to any Participant the amount payable hereunder after the death of such Participant shall be paid and distributed, in the order named, to each of the following as shall be living on the date of any distribution: (1) Such Participant's spouse; (2) His descendants, PER STIRPES; (3) His parents in equal shares; and (4) His brothers and sisters in equal shares and their descendants, PER STIRPES. 32 38 If no such person shall be living on the date of any distribution, such amount shall be payable to the estate of the last survivor of said persons. (c) The Trustee shall be fully protected in making their distributions to the next successor designated beneficiary or taker if, within six (6) months after any date fixed for distribution they have no actual knowledge that a predecessor designated beneficiary or taker survived, or was existing on, such date. 10.6 TIMING OF DISTRIBUTIONS. The distribution of a Participant's Account pursuant to Sections 10.1 and 10.3 will commence as soon as practicable following the end of the calendar quarter in which he terminates employment if the vested Account is not and never was in excess of $3,500. If the vested Account is or ever was in excess of $3,500, distribution shall commence on the later of (i) as soon as practicable following the end of the calendar quarter in which he terminates employment, or (ii) as soon as practicable following the Participant's request for distribution. Further, distribution to an alternate payee pursuant to a qualified domestic relations order, as defined in Code Section 414 (p), may be made as soon as practicable following the alternate payee's written request for distribution. Provided, however, notwithstanding anything herein to the contrary, payment of benefits shall commence not later than the sixtieth (60th) day after the close of the Plan Year in which the latest of the following events occur: (i) the Participant attains age sixty-five (65) or, if earlier, his Normal Retirement Age; (ii) ten (10) Plan Years have elapsed from the time the Participant commenced participation in the Plan; or (iii) the Participant terminates his service with the Employer. Further, a Participant's benefits shall commence not later than April 1 of the calendar year following the calendar year in which he attains age seventy and one half (70 1/2). 10.7 MANNER OF BENEFIT DISTRIBUTION. (a) Except as otherwise provided herein, all distributions shall be made in a lump sum. The distribution of a Participant's Account pursuant to Sections 10.1 and 10.3, if the Account exceeds or ever exceeded $3,500 shall be made in any of the following forms as the Participant in his sole discretion shall select: (1) an immediate lump sum; 33 39 (2) a lump sum distribution payable as soon as practicable following the end of the calendar quarter during which the former Participant attains age 60; or (3) quarterly installments of $300 or more over a period of up to two years as determined by the Participant. Elections to defer distribution pursuant to (a) (2) above are final and may not be modified. Installment distribution elections pursuant to (a) (3) above may be modified to accelerate distributions at the option of the Participant. If a Participant's Account is to be distributed in other than a lump sum, the amount to be distributed each year must be at least an amount equal to the quotient obtained by dividing the Participant's entire interest by the life expectancy of the Participant or joint and last survivor expectancy of the Participant and his beneficiary. Life expectancy and joint and last survivor expectancy are computed by the use of the return multiples contained in Section 1.72-9 of the income tax regulations. Further, if the Participant's spouse is not the beneficiary, the method of distribution selected must assure that more than 50 percent of the present value of the amount available for distribution is paid within the life expectancy of the Participant. (b) If a Participant's Account exceeds or ever exceeded $200, in lieu of receiving a distribution as provided in Subsection 10.7(a), a Participant shall have the option of electing to have all or a part of that portion of such distribution as is an "eligible rollover distribution" and which, but for the transfer, would be includible in the Participant's gross income, paid directly to an "eligible retirement plan" if such Participant specifies the "eligible retirement plan" to which such distribution is to be paid in accordance with such rules and regulations as the Trustee shall adopt. For purposes of this Section, an "eligible rollover distribution" has the meaning given such term by Code Section 402(f)(2)(A) and an "eligible retirement plan" has the meaning given such term by Code Section 402(c)(8)(B), except that a qualified trust shall be considered an eligible retirement plan only if it is a defined contribution plan, the terms of which permit the acceptance of transfers. (c) Installment distributions shall be made in cash and charged against the value of the withdrawing Participant's subaccount in each of the Investment Funds proportionately. Such installments shall be taken from the Participant's Account in the following order: 34 40 (1) Tax Deferred Account (including rollovers); (2) Pre-1987 After-Tax Account; (3) Post-1986 After-Tax Account; (4) Company Match Account; and (5) Discretionary Contribution Account. Lump sum distributions will be made in cash; provided, however, Participants who elect immediate lump sum distributions pursuant to (a)(1) above whose Accounts are invested in the Western National Stock Fund at the time distribution is to commence may elect to receive cash or the number of shares equal to the value of the selected Investment Fund. The minimum number of shares that can be elected from either of the above Funds is 50. For purposes of determining the number of shares to distribute, the shares shall be valued on the last day of the calendar quarter ending immediately prior to the calendar quarter in which distribution is to be made. 10.8 MANNER OF DISTRIBUTION AND TIMING OF DEATH DISTRIBUTIONS. The distribution of a deceased Participant's Account will be made as soon as possible after the end of the calendar quarter during which the benefits become due if the deceased Participant's Account is not and never was in excess of $3,500. If the deceased Participant's Account exceeds or ever exceeded $3,500, distribution shall be made as soon as practicable after the end of the calendar quarter during which the beneficiary requests distribution. Payments will be made in a lump sum; provided, however, notwithstanding anything herein to the contrary, if the distribution of a Participant's Account has begun pursuant to Section 10.7(a) (3) and the Participant dies after the required commencement date under Section 10.6 but before the Participant's entire Account has been distributed, the remaining portion of the Participant's Account shall be distributed at least as rapidly as under the method in effect on the date of the Participant's death. If a Participant dies before he receives distribution of his accounts, the Participant's Account shall be distributed within 5 years after the date of the Participant's death. If the Participant designates his surviving spouse as his beneficiary, however, the distribution need not be made earlier than the date on which the Participant would have attained age 70 1/2. If the surviving spouse dies before distribution is made, this Section 10.8 shall be applied as if the surviving spouse was the Participant. 35 41 10.9 LIMITATION ON BENEFITS AND DISTRIBUTIONS. All rights and benefits, including elections, provided to a Participant in this Plan shall be subject to the rights afforded to any "alternate payee" under a "qualified domestic relations order" as those terms are defined in Code Section 414(p). 10.10 DISTRIBUTIONS PAYABLE TO INCOMPETENTS. If any person entitled to distribution payments hereunder shall be under a legal disability or, in the sole judgment of the Administrator shall otherwise be unable to apply such payments to his own best interest and advantage, the Administrator in the exercise of his discretion, may direct all or any portion of such payments to be made in any one or more of the following ways: (a) Directly to such person; (b) To his legal guardian or conservator; or (c) To his spouse or to any other person, to be expended for his benefit. The decision of the Administrator will, in each case, be final and binding upon all persons, and the Administrator shall not be obliged to see to the proper application or expenditure of any payment so made. Subject to the claims review provisions of Section 13.2, any payment made pursuant to the power herein conferred upon the Administrator shall operate as a complete discharge of all obligations under the Plan as to such payments. 10.11 DISTRIBUTION OF BEFORE-TAX DEPOSITS. Except as otherwise provided in Section 6.4, in no event may a Participant's before-tax deposits be distributed earlier than: (a) a Participant's separation from service, death, or disability. (b) termination of the Plan without establishment of a successor plan; (c) the date of the sale by the Employer of substantially all the assets (within the meaning of section 409(d)(2) of the Code) used by the Employer in a trade or business of the Employer with respect to an Employee who continues employment with the corporation acquiring such assets. (d) the date of the sale by the Employer of the Employer's interest in a subsidiary (within the meaning of section 36 42 409(d)(3) with respect to an Employee who continues employment with such subsidiary; or (e) the attainment of age 59 1/2. ARTICLE 11 NONASSIGNABILITY It is a condition of the Plan to which all rights of any person shall be subject, that payments hereunder shall be made only to those persons entitled thereto under the terms of this Plan, and no right or interest in the Plan or Trust shall be transferable or assignable; such right or interest may not be anticipated, charged or encumbered, and shall not be subject to or reached by any legal or equitable process (including execution, garnishment, attachment, pledge or bankruptcy) in satisfaction of any debt, liability, or obligation prior to its receipt; provided, however, that notwithstanding any provisions of the Plan or Trust to the contrary, compliance with a domestic relations order of a court of competent jurisdiction which the Administrator finds to be a "qualified domestic relations order" within the meaning of the Code shall not be prohibited hereunder and shall satisfy all provisions of the Plan and Trust. ARTICLE 12 TRUST AGREEMENT The Company has entered into the Trust with the Trustee establishing a Trust to fund and implement the Plan. The Trust shall be deemed to form a part of the Plan and any and all rights and benefits which may accrue to any person under the Plan shall be subject to all of the terms and provisions thereof. ARTICLE 13 MANAGEMENT AND ADMINISTRATION 13.1 ADMINISTRATOR The Company shall be the Administrator of the Plan. The Administrator, and its delegates, shall have full power and authority, within the limits of the Plan, to supervise the operation and administration of the Plan. The Administrator, and its delegatees, shall from time to time establish rules for the administration of the Plan including the establishment of procedures for making claims and appealing decisions under the Plan. The Administrator, and its delegatees, shall have the exclusive and final right to interpret the Plan, and decide any matters arising hereunder in the administration and the operation of the Plan, in its complete discretion, and any interpretations or decisions so made will be conclusive and binding on any persons 37 43 having an interest in the Plan. The Company shall be deemed to be the "named fiduciary" under the Plan within the meaning of ERISA, and the Administrator shall be deemed to be the "named plan administrator." 13.2 CLAIMS REVIEW PROCEDURE. A Participant or beneficiary shall make all claims for benefits under the Plan in writing addressed to the Administrator at the address of the Administrator. Each claim shall be reviewed by the Administrator within a reasonable time after it is submitted, but in no event longer than 90 days after it is received by the Administrator. If a claim is wholly or partially denied, the claimant shall be sent written notice of such fact within 14 days of the denial. The denial notice, which shall be written in a manner calculated to be understood by the claimant, shall contain (a) the specific reason or reasons for the denial, (b) specific reference to pertinent Plan provisions on which the denial is based, (c) a description of any additional material information necessary for the claimant to perfect his claim and an explanation of why such material or information is necessary, and (d) an explanation of the Plan's claim review procedure. Within 60 days after receipt by the claimant of written notice of the denial, the claimant or his duly authorized representative may appeal such denial by filing a written application for review with the Company. Such application shall be addressed to the Company and may include a statement of the issues and other comments. Each such application shall state the grounds upon which the claimant seeks to have the claim reviewed. The claimant or his representative shall have access to all pertinent documents relative to the claim for the purpose of preparing the application. The individual or individuals appointed by the Company shall then review the decision and notify the claimant in writing of the results of the redetermination within 60 days of receipt of the application for review, which decision shall be in writing, written in a manner calculated to be understood by the claimant and include specific reasons for the decision and specific reference to the pertinent Plan provisions on which the decision is based. The 60 day period for the decision of the individual or individuals appointed by the Company may be extended if specific circumstances require an extension of time for processing, in which case the decision shall be rendered as soon as possible, but no later than 120 days after receipt of the application for review. 13.3 DELEGATION. The Administrator shall have the right, from time to time, to delegate in writing to any person or persons, subject to such terms, conditions and restrictions as they may prescribe, such of its rights, powers, authorities, discretions and 38 44 duties hereunder, except those dealing with interpretation of the provisions of the Plan, as it shall determine; and all actions taken by any such person or persons pursuant to and in accordance with any such delegations shall be effective and binding upon all parties to the same extent as though taken by the Administrator. 13.4 EXPENSES OF ADMINISTRATION. All expenses and liabilities incurred in connection with the administration of the Plan may be paid by the Employer, but if not so paid shall be paid from the Trust. ARTICLE 14 COMPANY AND EMPLOYER RIGHTS 14.1 COMPANY'S INTEREST IN TRUST. The Trust and Plan hereby created shall be maintained for the exclusive benefit of Participants and their beneficiaries, and is intended to qualify under Code Sections 401(a) and 501(a) and under ERISA, as amended from time to time. In no event shall the Company or any other employer have any right, claim, or beneficial or reversionary interest in any Trust assets, and the Trustee shall make no payment or other distribution to the Company or any other employer except to repay loans made by the Company to the Trust and interest thereon, or taxes which the Company or any other employer is obligated to withhold and remit to tax collecting agencies and to return to the Company or any other employer a contribution made by a mistake of facts within one year of such contribution; but nothing contained in the Trust agreement shall be construed to impair the Company's right to see to the proper administration of the Trust in accordance with Plan provisions. 14.2 INSPECTION OF RECORDS. The Company shall have the right to have the books, accounts and records of the Trustee examined at any time, or from time to time, by such accountants, attorneys, agents or employees as the Company may select, and to make such copies of, or extracts from, such books, accounts and records as the Company desires. The cost of such examination and report shall be paid by the Company. 14.3 AMENDMENT. The Company alone reserves the right by action of the Board to amend the Plan at any time, and from time to time, except that no amendment shall be made to the Plan which reduces a Participants' accrued benefit. The Company shall promptly notify the Trustee of any amendment. However, the Trustee's duties and responsibilities may not be increased without their consent, and no such amendment shall vest in the Company or any other employer any right, title or interest in and to Trust assets, divest Participants or their beneficiaries of any vested 39 45 rights in their accounts, or allow any part of Trust assets to be used for, or diverted to, purposes other than for the exclusive benefit of Participants and their beneficiaries within the meaning of the Code and ERISA, as amended from time to time, except to the extent necessary to conform the Plan and Trust to the requirements of any applicable future legislation, regulation or other rule of law. 14.4 EMPLOYMENT RIGHTS. This Plan shall not be construed to create a contract of employment between an Employer and any Participant, to create a right in any Participant to be continued in employment, or to limit an Employer's right to discharge any Participant with or without cause. 14.5 COMPANY AND EMPLOYER LIABILITY. Neither the Company nor any other Employer does in any manner guarantee that the Trust will not sustain losses, that Trust assets will not depreciate or that the value of the Trust may not otherwise be reduced. ARTICLE 15 PARTICIPATING EMPLOYERS 15.1 ADOPTION BY OTHER EMPLOYERS. Notwithstanding anything herein to the contrary, with the consent of the Company, any other corporation or entity, whether an Affiliate or not, may adopt this Plan and all of the provisions hereof, and participate herein and be known as a Participating Employer, by a properly executed separate document or by executing this document evidencing said intent and will of such Participating Employer. 15.2 REQUIREMENTS OF PARTICIPATION EMPLOYERS. (a) Each such Participating Employer shall be required to use the same Trustee as provided in this Plan. (b) The Trustee may, but shall not be required to, commingle, hold and invest as one Trust all contributions made by the Company and Participating Employers, as well as all increments thereof. (c) The transfer of any Participant from or to an Employer participating in this Plan, whether he be an Employee of the Company or a Participating Employer, shall not affect such Participant's rights under the Plan, and all amounts credited to such Participant's Account as well as his accumulated service time with the transferor or predecessor, and his length of participation in the Plan, shall continue to his credit. 40 46 (d) All rights and values forfeited by termination of employment shall inure only to the benefit of the Employee-Participants of the Participating Employer by which the forfeiting Participant was employed, except if the forfeiture is for an Employee whose Employer is a member of an affiliated or controlled group, then said forfeiture shall be allocated, based on Compensation to all Participant's Accounts or Participating Employer who are members of the affiliated or controlled group. Should an Employee of one ("First") Employer be transferred to anassociated ("Second") Employer (the Employer, an affiliate or subsidiary), such transfer shall not cause his Account balance (generated while an Employee of "First" Employer) in any manner or by any amount to be forfeited. Such Employee's Participant Account balance for all purposes of the Plan, including length of service, shall be considered as though he had always been employed by the "Second" Employer and as such had received contributions, forfeitures, earnings or losses, and appreciation or depreciation in value of assets totaling amount so transferred. (e) Any expenses of the Trust which are to be paid by the Employer or borne by the Trust shall be paid by each Participating Employer in the same proportion that the total amount standing to the credit of all Participants employed by such Employer bears to the total amount standing to the credit of all Participants. 15.3 DESIGNATION OF AGENT. Each Participating Employer shall be deemed to be a part of this Plan; provided, however, that with respect to all of its relations with the Trustee and Administrator for the purpose of this Plan, each Participating Employer shall be deemed to have designated irrevocably the Company as its agent. Unless the context of the Plan clearly indicates the contrary, the word "Employer" shall be deemed to include each Participating Employer as related to its adoption of the Plan. 15.4 EMPLOYEE TRANSFERS. It is anticipated that an Employee may be transferred between Participating Employers, and in the event of any such transfer, the Employee involved shall carry with him his accumulated service and eligibility. No such transfer shall effect a termination of employment hereunder, and the Participating Employer to which the Employee is transferred shall thereupon become obligated hereunder with respect to such Employee in the same manner as was the Participating Employer from whom the Employee was transferred. 15.5 PARTICIPATING EMPLOYER'S CONTRIBUTION. All contributions made by a Participating Employer, as provided for in this Plan, shall be determined separately by each Participating 41 47 Employer, and shall be paid to and held by the Trustee for the exclusive benefit of the Employees of such Participating Employer and the beneficiaries of such Employees, subject to all the terms and conditions of this Plan. Any forfeiture by an Employee of a Participating Employer subject to allocation during each Plan Year shall be allocated only for the exclusive benefit of the Participants of such Participating Employer in accordance with the provisions of this Plan. On the basis of the information furnished by the Administrator, the Trustee shall keep separate books and records concerning the affairs of each Participating Employer hereunder and as to the accounts and credits of the Employees of each participating Employer. The Trustee may, but need not, register contracts so as to evidence that a particular Participating Employer is the interested Employer hereunder, but in the event of an Employee transfer from one Participating Employer to another, the employing Employer shall immediately notify the Trustee thereof. 15.6 DISCONTINUANCE OF PARTICIPATION. Any Participating Employer shall be permitted to discontinue or revoke its participation in the Plan. At the time of any such discontinuance or revocation, satisfactory evidence thereof and of any applicable conditions imposed shall be delivered to the Trustee. The Trustee shall thereafter transfer, deliver and assign contracts and other Trust assets allocable to the Participants of such Participating Employer to such new Trustee as shall have been designated by such Participating Employer, in the event that it has established a separate pension plan for its Employees. If no successor is designated, the Trustee shall retain such assets for the employees of said Participating Employer. In no such event shall any part of the corpus or income of the Trust as it relates to such Participating Employer be used for or diverted for purposes other than for the exclusive benefit of the Employees of such Participating Employer. 15.7 ADMINISTRATOR'S AUTHORITY. The Administrator shall have authority to make any and all necessary rules or regulations, binding upon all Participating Employers and all Participants, to effectuate the purpose of this Article. 15.8 PARTICIPATING EMPLOYER CONTRIBUTION FOR AFFILIATE. If any Participating Employer is prevented in whole or in part from making a contribution to the Trust which it would otherwise have made under the Plan by reason of having no current or accumulated earnings or profits, or because such earnings or profits are less than the contribution which it would otherwise have made, then, pursuant to Code Section 404(a)(3)(B), so much of the contribution which such Participating Employer was so prevented from making may 42 48 be made, for the benefit of the participating employees of such Participating Employer, by the other Participating Employers who are members of the same affiliated group within the meaning of Code Section 1504 to the extent of their current or accumulated earnings or profits, except that such contribution by each such other Participating Employer shall be limited to the proportion of its total accumulated earnings or profits remaining after adjustment for its contribution of the Plan made without regard to this paragraph which the total prevented contribution bears to the current and accumulated earning or profits of all the Participating Employers remaining after adjustment for all contributions made to the Plan, without regard to this paragraph. A Participating Employer on behalf of whose employees a contribution is made under this paragraph shall not reimburse the contributing Participating Employers. ARTICLE 16 CONDITION OF QUALIFICATION This Plan is established and contributions thereto are made on the condition that it shall be approved and qualified by the Internal Revenue Service as meeting the requirements of the Internal Revenue Code and Regulations issued thereunder with respect to employee benefit plans. If it is determined by the Internal Revenue Service that this Plan is not so approved and qualified and if this Plan is not amended so as to be approved and qualified or if the Company elects to litigate the issue of qualification and if it is finally determined that this Plan is not qualified or if the Company abandons the litigation, then at the Company's election the interest of all then living Participants and beneficiaries under this Plan shall cease and terminate to the same extent as though this Plan had not been executed and the Trustees shall pay to the Company all amounts in the Trust less the costs and expenses of the Trust. ARTICLE 17 TERMINATION 17.1 EVENT OF TERMINATION. The Company alone reserves the right to terminate the Plan and Trust by giving written notice to the Trustee at any time, in which event there shall be no Employer duty to make contributions to the Trust for the year in which such notice is given. A permanent discontinuance of Employer contributions shall constitute a termination of the Plan as to the Employees of the Employer. However, the Employer reserves the right to suspend its contribution for any year, without terminating 43 49 the Plan, by providing written notice to the Trustee not less than thirty days prior to the beginning of such year. 17.2 EFFECT OF TERMINATION. Upon the termination or partial termination of the Plan and Trust, each Participant affected by such termination or partial termination or his beneficiary or beneficiaries, as to the case may be, shall be entitled to 100% of his account, determined on the termination date as if it were a Valuation Date. Distribution, in the event of a termination or partial termination of the Plan, shall be made by the Trustee in one sum or in substantially equal installments during a period not exceeding one year following such termination. In the case of complete termination, when all Trust assets have been distributed, the Trustee shall be discharged, but the Trust shall nevertheless continue as a legal entity during the period for the purpose of distributing all property to the persons entitled thereto. ARTICLE 18 TRANSFERS, MERGERS AND CONSOLIDATIONS The Plan may not merge or consolidate with, or transfer its assets or liabilities to, any other plan unless each Participant would (if the Plan then terminated) receive a benefit immediately after the merger, consolidation or transfer which is equal to or greater than the benefit he would have been entitled to receive immediately before the merger, consolidation or transfer (if the Plan had then terminated). ARTICLE 19 SUCCESSORS This Plan shall be binding upon all persons entitled to distributions hereunder, their respective heirs, next-of-kin and legal representatives; and upon the Employer, its successors and assigns. ARTICLE 20 INTERPRETATION OF AGREEMENT 20. 1 INTERPRETATION OF PLAN. The Administrator may, from time to time, adopt resolutions for carrying out the purposes of the Plan. All questions of interpretation of the Plan, or amendments thereto, or the resolutions pertaining thereto, or relating to any matter of accounting, values, profits or any other matters or differences which may arise, shall be determined solely by the Administrator, and except as otherwise provided in Section 14.1, the decisions of the Administrator shall be final and conclusive upon all Participants and their beneficiaries hereunder. 44 50 20.2 FORMS. The Administrator may prescribe or provide for appropriate forms to be used by Participants of the Plan. 20.3 APPLICABLE LAW. Since the Company's principal office and the Administrator's domicile are in the State of Texas and since it is contemplated that the situs of administration of the Plan will continue in such State, all rights under the Plan shall be governed, construed and administered in accordance with the laws of the State of Texas to the extent such law is not superseded by ERISA. WESTERN NATIONAL CORPORATION By: /s/ Richard W. Scott ------------------------------ Its: Richard W. Scott Executive Vice President ATTEST: /s/ Dwight L. Cramer - -------------------- Dwight L. Cramer Secretary 45 51 APPENDIX I TOP-HEAVY PROVISIONS (I) TOP-HEAVY PROVISIONS. If the Plan is or becomes a Top-Heavy Plan in any Plan Year, the provisions of this Appendix I will supersede any conflicting provisions in the Plan. (II) DEFINITIONS OF TERMS. For purposes of this Appendix I, the following words and terms shall have the respective meanings hereinafter set forth unless a different meaning is clearly required by context. (a) DETERMINATION DATE. For any Plan Year subsequent to the first Plan Year, the last day of the preceding Plan Year. For the first Plan Year of the Plan, the last day of that year. (b) DETERMINATION PERIOD. The Plan Year containing the determination Date and the four preceding Plan Years. (c) KEY EMPLOYEE. Any Employee or former Employee (and the Beneficiaries of such Employee) who at any time during the Determination Period was: (1) An officer of the Employer or its Affiliates whose annual Compensation is greater than fifty percent (50%) of the amount in effect under Code Section 415(b)(1)(A) for such Plan Year; provided, however, that no more than the lesser of: (A) 50 Employees, or (B) the greater of (i) three (3) Employees or (ii) ten percent (10%) of all Employees, shall be treated as officers, and such officers shall be those with the highest annual Compensation in the five-year period. (2) An owner (or considered an owner under Section 318 of the Internal Revenue Code) of one of the ten largest interests in the Employer if such individual's Compensation exceeds the dollar limitation under Section 415(c)(1)(A) of the Internal Revenue Code (if two (2) Employees have the same interest in the Employer, the Employee having greater annual Compensation shall be treated as having a larger interest); (3) A five percent (5%) owner of the Employer; or 46 52 (4) A one percent (1%) owner of the Employer who has an annual Compensation of more than One Hundred Fifty Thousand Dollars ($150,000). The determination of who is a Key Employee will be made in accordance with Section 416(i)(1) of the Internal Revenue Code and the regulations thereunder. (d) NON-KEY EMPLOYEE. An Employee who is not a Key Employee. (e) PERMISSIVE AGGREGATION GROUP. The Required Aggregation Group of plans plus any other plan or plans of the Employer which, when considered as a group with the Required Aggregation Group, would continue to satisfy the requirements of Sections 401(a)(4) and 410 of the Internal Revenue Code. (f) PRESENT VALUE OF ACCRUED BENEFITS. Present Value of Accrued Benefits shall be based on the interest and mortality rates specified in the defined benefit plan for determining the top-heavy status of the Plan. If the defined benefit plan does not specifically provide for this determination, the Present Value of Accrued Benefits shall be based on 5% interest per annum and, on the 1984 Unisex Pension mortality tables. (g) REQUIRED AGGREGATION GROUP. (1) Each Qualified Plan of the Employer in which at least one Key Employee participates; and (2) Any other Qualified Plan of the Employer which enables a plan described in (1) to meet the requirements of Section 401(a)(4) and 410 of the Internal Revenue Code. (h) TOP-HEAVY PLAN. This Plan is a Top-Heavy Plan if any of the following conditions exist: (1) If the Top-Heavy Ratio for this Plan exceeds sixty percent (60%) and this Plan is not part of any Required Aggregation of Group or Permissive Aggregation Group of plans; (2) If this Plan is a part of a Required Aggre- gation Group of plans (but which is not part of a Permissive Aggregation Group) and the Top-Heavy Ratio for the group of plans exceeds sixty percent (60%); or (3) If this Plan is a part of a Required Aggregation Group of plans and part of a Permissive Aggregation Group 47 53 and the Top-Heavy Ratio for the Permissive Aggregation Group exceeds sixty percent (60%). (i) TOP-HEAVY RATIO: (1) If the Employer maintains one or more defined contribution plans (including any Simplified Employee Pension Plan) and the Employer has never maintained any defined benefit plan which has covered or could cover a Participant in this Plan, the Top-Heavy Ratio is a fraction, the numerator of which is the sum of the Accounts of all Key Employees as of the Determination Date (including any part of any account distributed in the five- year period ending on the Determination Date and any amount distributed in the five-year period ending on the Determination Date from a terminated plan which, if it has not been terminated, would have been part of a Required Aggregation Group), and the denominator of which is the sum of all Accounts (including any part of any Account distributed in the five-year period ending on the Determination Date) of all Participants as of the Determination Date. However, if an individual has not been an Employee with respect to the Plan and has not received Compensation from the Employer during the five-year period ending on the Determination Date, the Account of that individual shall be disregarded. Both the numerator and denominator of the Top-Heavy Ratio are adjusted to reflect any contribution which is due but unpaid as of the Determination Date. (2) If the Employer maintains one or more defined contribution plans (including any Simplified Employee Pension Plan) and the Employer maintains or has maintained one nor more defined benefit plans which have covered or could cover a Participant in this Plan, the Top-Heavy Ratio is a fraction, the numerator of which is the sum of Accounts under the defined contribution plans for all Key Employees and the Present Value of Accrued Benefits under the defined benefit plans for all Key Employees, and the denominator of which is the sum of the Accounts under the defined contribution plans for all Participants and the Present Value of Accrued Benefits under the defined benefit plans for all Participants. Both the numerator and denominator of the Top-Heavy Ratio are adjusted for any distribution of an Account or an Accrued Benefit made in the five-year period ending on the Determination 48 54 Date and any contribution due but unpaid as of the Determination Date, and any amount distributed in the five-year period ending on the Determination Date from a terminated plan which, if it had not been terminated, would have been part of a Required Aggregation Group. However, if an individual has not been an Employee with respect to the Plan and has not received Compensation from the Employer during the five-year period ending on the Determination Date, the Account and the Accrued Benefit of that individual shall be disregarded. (3) For purposes of (1) and (2) above, the value of Accounts and the Present Value of Accrued Benefits will be determined as of the most recent Valuation Date that falls within or ends with the twelve- monthly period ending on the Determination Date. The Accounts and Accrued Benefits of a Participant who is not a Key Employee but who was a Key Employee in a prior year will be disregarded. The calculation of the Top-Heavy Ratio, and the extent to which Distributions, Rollovers, and Transfers are taken into account will be made in accordance with Section 416 of the Internal Revenue Code and the regulations thereunder. Deductible Employee Contributions will not be taken into account for purposes of computing the Top-Heavy Ratio. When aggregating plans, the value of Accounts and Present Value of Accrued Benefits will be calculated with reference to the Determination Dates that fall within the same calendar year. (III) MINIMUM VESTING SCHEDULE. For any Plan Year in which this is a Top-Heavy Plan, the following vesting schedule shall apply: 49 55
Years of Vested Percentage Service (Nonforfeitable) ------- ---------------- 0-1 0% 2 20% 3 40% 4 60% 5 80% 6 or more 100%
The minimum vesting schedule applies to all accounts within the meaning of Section 411(a)(7) of the Internal Revenue Code except those attributable to Employee contributions, including allocations credited before the Effective Date of Section 416 and allocations credited before the Plan became a Top-Heavy Plan. Further, no reduction in vested Accounts may occur in the event the Plan's status as a Top-Heavy Plan changes for any Plan Year. However, this section does not apply to the Account of any Employee who does not have an Hour-of-Service after the Plan has initially become a Top-Heavy Plan and such Employee's Account attributable to Employer contributions will be determined without regard to this section. If the vesting schedule under the Plan shifts in or out of the above schedule for any Plan Year because of a change in Top-Heavy Plan status, such shift is an amendment to the vesting schedule and the election below applies: (a) If the vesting schedule under this Plan is amended, each Participant who has completed at least three (3) years of Credited Service may elect, during the election period specified in Section III(b), to have the vested percentage of his or her Account determined without regard to such amendment. (b) For the purpose of Section III(a), the election period shall begin as of the date on which the amendment changing the vesting schedule is adopted, and shall end on the latest of the following dates: (1) The date occurring sixty (60) days after the Plan amendment is adopted; or (2) The date which is sixty (60) days after the day on which the Plan amendment becomes effective; or (3) The date which is sixty (60) days after the day the Participant is issued written notice of the Plan amendment by the Plan Administrator; or 50 56 (4) Such later date as may be specified by the Plan Administrator. The election provided for in this Section III shall be made in writing and shall be irrevocable when made. For the purposes of Section III and IV, years of Credited Service shall not include: (a) years of Credited Service before age 18; or (b) years of Credited Service during which the Employer did not maintain the Plan or a predecessor plan. (IV) CHANGE IN TOP-HEAVY STATUS. If the Plan becomes a Top-Heavy Plan and subsequently ceases to be a Top-Heavy Plan, the vesting schedule in Section III shall continue to apply in determining the vested percentage of any Participant who had at least three (3) years of Credited Service as of the last day of the last Plan Year during which the Plan is a Top-Heavy Plan. For Participants with less than three (3) years of Credited Service, the schedule in Section III shall apply only to their Accounts as of the last day of the last Plan Year during which the Plan is a Top-Heavy Plan. (V) MAXIMUM BENEFIT EXCEPTION. Notwithstanding anything herein to the contrary, in any Plan Year in which a Non-Key Employee is a Participant in a Plan that is Top-Heavy, the minimum contribution benefit shall be made in accordance with the provisions of Code Section 416(c)(2). (VI) NONDUPLICATION OF TOP-HEAVY MINIMUM BENEFITS. Not- withstanding anything herein to the contrary, in any Plan Year in which a Non- Key Employee is a Participant in both this Plan and a defined benefit plan, and both such plans are Top-Heavy Plans, the Employer shall not be required to provide a Non-Key Employee with both the full separate minimum defined contribution plan allocations and the full separate defined benefit plan benefit. Therefore, the Employer may satisfy the minimum benefit requirement of Internal Revenue Code Section 416(c)(1)(E) for the Non-Key Employee by providing any combination of benefits and/or contributions that satisfy any one of the four safe harbor rules of Regulation 1.416-l(m-12) 51 57 (VII) MINIMUM BENEFIT. (a) Except as otherwise provided in (c) and (d) below, the Employer contributions and forfeitures allocated on behalf of any Participant who is a Non-Key Employee shall not be less than the lesser of three percent (3%) of such Participant's Compensation or in the case where the Employer has no defined benefit plan which designates this Plan to satisfy Section 401 of the Code, the largest percentage of Employer contributions and forfeitures, as a percentage of the first $200,000 (adjusted as permitted under Code Section 415(d)) of the Key Employee's Compensation, allocated on behalf of any Key Employee for that Plan Year. The minimum allocation is determined without regard to any social security contribution. This minimum allocation shall be made even though, under other Plan provisions, the Participant would not otherwise be entitled to receive an allocation, or would have received a lesser allocation for the Plan Year because of (i) the Participant's failure to complete 1,000 Hours of Service, or (ii) the Participant's failure to make mandatory Employee contributions to the Plan, or (iii) Compensation less than a stated amount. (b) For purposes of computing the minimum allocation, Compensation will mean compensation as defined in Regulation Section 1.416-1. (c) The provision in (a) above shall not apply to any Participant who was not employed by the Employer on the last day of the Plan Year. (d) The provision in (a) above shall not apply to any Participant to the extent the Participant is covered under any other plan or plans of the Employer and the Employer has provided in such other plan or plans that the minimum allocation or benefit requirement applicable to top-heavy plans will be met in the other plan or plans. 52 58 AMENDMENT NO. 1 TO THE WESTERNSAVE PLAN This Amendment No. 1 to the WesternSave Plan is made this 8th day of August, 1994 by Western National Corporation (the "Employer"). R E C I T A L S Effective April 1, 1994, the Employer adopted the WesternSave Plan (the "Plan"), intending that it comply with the applicable provisions of the Internal Revenue code. The Employer, pursuant to the powers reserved to it in the Plan hereby adopts this Amendment No. 1 to the Plan effective April 1, 1994. AMENDMENT 1. Section 2.1(f) of the Plan is hereby amended by adding the following paragraphs to the end thereof to read as follows: In addition to other applicable limitations set forth in the Plan, and notwithstanding any other provision of the Plan to the contrary, for Plan Years beginning on or after January 1, 1994, the annual compensation of each Employee taken into account under the Plan shall not exceed the SBRA '93 annual compensation limit. The SBRA '93 annual compensation limit is $150,000, as adjusted by the Commissioner for increases in the cost-of-living in accordance with Code Section 401(a)(17)(B). The cost-of-living adjustment in effect for a calendar year applies to any period, not exceeding 12 months, over which compensation is determined (determination period) beginning in such calendar year. 2. Section 10.7 of the Plan is hereby amended by adding a new subsection 10.7(c) to immediately follow subsection 10.7(b) to read as follows: (c) Notwithstanding any provision of the Plan to the contrary that would otherwise limit a distributee's election under this subsection, a distributee may elect, at the time and in the manner prescribed by the Administrator, to have any portion of an eligible rollover distribution paid directly to an eligible retirement Plan specified by the distributee in 1 59 a direct rollover. For purposes of this subsection, the following terms shall have the following meaning: (1) ELIGIBLE ROLLOVER DISTRIBUTION. An eligible rollover distribution is an distribution of all or any portion of the balance to the credit of the distributee, except that an eligible rollover distribution does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of the distributee or the distributee's designated beneficiary, or for a specified period of ten years or more; any distribution to the extent such distribution is required under Code Section 401(a)(9); and the portion of any distribution that is not includible in gross income (determined without regard to the exclusion of net unrealized appreciation with respect to employer securities). (2) ELIGIBLE RETIREMENT PLAN. An eligible retirement plan is an individual retirement account described in Code Section 408(a), an individual retirement annuity described in Code Section 408(b), an annuity plan described in Code Section 403(a), or a qualified trust described in Code Section 401(a), that accepts the distributee's eligible rollover distribution. However, in the case of an eligible rollover distribution to the surviving spouse, an eligible retirement plan is an individual retirement account or individual retirement annuity. (3) DISTRIBUTEE. A distributee includes an Employee or former Employee. In addition, the Employee's or former Employee's surviving spouse and the Employee's or former Employee's spouse or former spouse who is the alternate payee under a qualified domestic relations order, as defined in Code Section 414(p), are distributee with regard to the interest of the spouse or former spouse. (4) DIRECT ROLLOVER. A direct rollover is a payment by the Plan to the eligible retirement Plan specified by the distributee. If a distribution is one to which Code Sections 401(a)(11) and 417 do not apply, such distribution may commence less than 30 days after the notice required under Section 1.411(a)-11(c) of the Income Tax Regulations is given, provided that: (i) The Administrator clearly informs the Employee that the Employee has a right to a period of at least 30 days after receiving the notice to consider the decision of whether or not to elect distribution and, if applicable, a particular distribution option; and (ii) the Employee, after receiving the notice, affirmatively elect a distribution. 2 60 3. Section VII(a) of Appendix I of the Plan is hereby amended by adding a new sentence immediately following the first sentence thereof to read as follows: Compensation may not exceed $150,000, as adjusted by the Commissioner for increases in the cost-of-living in accordance with Code Section 401(a)(17)(B). 4. In all other respects the Plan, as amended herein, is hereby ratified and confirmed. IN WITNESS WHEREOF, Western National Corporation has caused this agreement to be executed upon the signatures of its duly qualified officers who have hereto set their hands as of the date first set forth above. WESTERN NATIONAL CORPORATION ATTEST: By: /s/ Michael J. Poulos ----------------------------- /s/ Dwight L. Cramer Michael J. Poulos, President - -------------------- Dwight L. Cramer, Secretary 3 61 AMENDMENT NO. 2 OF THE WESTERNSAVE Plan This Amendment No. 2 to the WesternSave Plan is made this 8th day of February, 1995 by Western National Corporation (the "Employer"). R E C I T A L S Effective April 1, 1994, the Employer adopted the WesternSave Plan (the "Plan"), amended by an Amendment No. 1 effective April 1, 1994, intending that it comply with the applicable provisions of the Internal Revenue Code. The Employer, pursuant to the powers reserved to it in the Plan hereby adopts this Amendment No. 2 to the Plan effective April 1, 1994. AMENDMENT 1. The first sentence of Section 2.1(i) of the Plan is hereby amended to read as follows: Any person who is employed by the Company, and any person who is employed by any Participating Employer excluding any independent contractor. 2. Section 3.1 of the Plan is hereby amended to read as follows: 3.1 PARTICIPATION. Each Employee, other than an Employee who is included in a unit of employees covered by a collective bargaining agreement for whom retirement benefits were the subject of good faith bargaining unless the collective bargaining agreement provides for said individual's participation in this Plan, shall be eligible to become a Participant in the Plan on the first day of the calendar quarter immediately following the date he has completed six months of service or on the first day of any calendar quarter thereafter. Eligible Employees shall become Participants in the Plan upon the first day of the calendar quarter immediately following completion of the enrollment application prescribed by the Plan Administrator. For purposes of this Section 3.1, an Employee will be deemed to have completed six months of service if he is in the employment of the Employer on the day which is six months after his employment commencement date. Employment commencement date shall be the first day that the Employee is entitled to be credited with an Hour of Service. 3. Subsection 6.1(c) of the Plan is hereby amended by adding the following sentence at the end thereof to read as follows: 4 62 Provided, however, for Plan Years beginning on or after January 1, 1994, such compensation shall not exceed $150,000, as adjusted by the Commissioner for increases in the cost-of-living in accordance with Code Section 401(a)(17)(B). 4. Subsection 6.1(d) of the Plan is hereby amended to read as follows: (D) REDUCTION IN ANNUAL ACCOUNT ADDITIONS. If in any Plan Year a Participant's Annual Account Additions exceed the applicable limitation determined under Subsection (b) above, by reason of a reasonable error in estimating a Participant's compensation, as a result of the allocation of forfeitures, or under other limited facts and circumstances that the Commissioner finds justify the availability of the rules set forth in Regulation 1.415-6(b)(6), such excess (referred to herein as the "Annual Account Excess") shall be treated in the following manner: (1) The Participant's after-tax contributions, if any, under "any defined contribution plan" shall be refunded, up to the amount of the annual Account Excess. (2) If there is any remaining Annual Account Excess after the application of paragraph (1) above, the Participant's before-tax deposits and any Employer Matching Contributions relating thereto for that year shall be reduced proportionately, up to the remaining amount of the Annual Account Excess, and such before-tax deposits shall be returned to the Participant. (3) If there is any remaining Annual Account Excess after the application of paragraphs (1) and (2) above, the Participant's share of Employer or other Affiliate contributions allocated to the Participant under any other defined contribution plan for that year shall be reduced in accordance with such plan, up to the remaining amount of the Annual Account Excess. (4) Any reduction in such a Participant's allocation of Employer matching contributions under paragraph (2) above shall be deemed to be a forfeiture for such Plan Year and used to reduce Employer matching contributions. 5. The fourth paragraph of Section 6.4 is hereby amended to read as follows: The Administrator shall cause the amount of Excess Contributions (and income allocable thereto) attributable to each affected Participant to be returned to such Participant not later than the end of the Plan Year following the Plan Year as of which the Excess Contributions arose. Any matching contributions which relate to any such returned before-tax deposits shall be 5 63 forfeited. Forfeitures of Excess Contributions shall be allocated in accordance with Section 5.3, however, no such forfeiture may be allocated to a Highly compensated Participant whose contributions are reduced pursuant to this Section 6.4. The Administrator shall use its best efforts to cause the amount of Excess Contributions (and any income allocable thereto) attributable to each affected Participant to be returned to such Participant within two and one-half (2 1/2) months following the end of the Plan Year as of which the Excess Contributions arose. The income allocable to the Excess Contributions of each affected Participant is equal to the sum of (a) the income allocable to the Account of the affected Participant for the applicable Plan Year, and (b) the income allocable to the Account of the affected Participant for the period between the end of the applicable Plan Year and the date of distribution with the sum of (a) and (b) being multiplied by a fraction. The numerator of the fraction is the Excess Contribution attributable to each affected Participant and the denominator of the fraction is the closing balance (inclusive of any income), as of the end of the applicable Plan Year, of the Participant's Account containing the Excess Contributions. 6. The second paragraph of Section 6.6 of the Plan is hereby deleted in its entirety and a new paragraph is hereby added to read as follows: If it appears that there will be Excess Aggregate Contributions as of the end of any Plan Year, the Administrator shall inform the Employer. The Employer, in its discretion, may make an additional matching Employer contribution which shall be allocated to the Accounts of all Participants who are not Highly Compensated Employees. In lieu of making an additional matching Employer contribution, the Employer may make a supplemental contribution to be allocated to the Accounts of all Non-Highly Compensated Participants. Any additional matching Employer contribution or supplemental contribution made shall first be allocated to the Participant who received the least amount of Compensation from the Employer during the Plan Year for which the additional matching Employer contribution or supplemental contribution is made, in an amount up to ten percent (10%) of such Participant's Compensation for such Plan Year. In the event that the additional matching Employer contributions or supplemental contributions made on behalf of such Participant does not enable the Plan to pass the Actual Contribution Percentage test, then failsafe contributions will be allocated to the Participant with the next lowest Compensation for such Plan Year in an amount up to ten percent (10%) of such Participant's Compensation for such Plan Year. This allocation procedure will be repeated until the Actual Contribution Percentage test is satisfied. The allocation of an additional matching Employer 6 64 contribution or a supplemental contribution to the Participant Account of an affected Participant is subject to the Code Section 415 limits. If the Employer chooses to make an additional matching Employer contribution or a supplemental contribution in an amount less than that required to completely eliminate all Excess Aggregate Contributions, the remaining Excess Aggregate Contributions shall be disposed of in the manner hereinafter described. 7. Article 16 of the Plan is hereby amended to read as follows: ARTICLE 16 CONDITION OF QUALIFICATION This Plan is established and contributions thereto are made on the condition that it shall be initially approved and qualified by the Internal Revenue Service as meeting the requirements of the Internal Revenue Code and Regulations issued thereunder with respect to employee benefit plans. If it is determined by the Internal Revenue Service that this Plan is not so approved and initially qualified and if this Plan is not amended so as to be approved and initially qualified or if the Company elects to litigate the issue of initial qualification and if it is finally determined that this Plan is not initially qualified or if the Company abandons the litigation, then at the Company's election the interest of all then living Participants and beneficiaries under this Plan shall cease and terminate to the same extent as though this Plan had not been executed and the Trustee shall pay to the Company all amounts in the Trust less the costs and expenses of the Trust. 8. The first sentence of Section 17.2 of the Plan is hereby amended to read as follows: Except as otherwise provided in Section 10.11, upon the termination or partial termination of the Plan and Trust, each Participant affected by such termination or partial termination or his beneficiary or beneficiaries, as the case may be, shall be entitle to 100% of his account, determined on the termination date as if it were a Valuation Date. 9. Subsection II(g)(2) of the Appendix I of the Plan is hereby amended to read as follows: (2) Any other Qualified Plan of the Employer which is necessary to enable a plan described in (1) above to meet the requirements of Code Section 401(a)(4) or 410. 10. In all other respects the Plan, as amended herein, is hereby ratified and confirmed. 7 65 IN WITNESS WHEREOF, Western National Corporation has caused this agreement to be executed upon the signatures of its duly qualified officers who have hereto set their hands as of the date first set forth above. WESTERN NATIONAL CORPORATION ATTEST: By: /s/ Michael J. Poulos ----------------------------- /s/ Dwight L. Cramer Michael J. Poulos, President - ----------------------- Dwight L. Cramer, Secretary 8 66 EXECUTION COPY AMENDMENT NO. 3 TO THE WESTERNSAVE PLAN WHEREAS, WESTERN NATIONAL CORPORATION (the "Company") has heretofore adopted the WESTERNSAVE PLAN (the "Plan") for the benefit of its eligible employees; and WHEREAS, the Company desires to amend the Plan in certain respects; NOW, THEREFORE, the Plan shall be amended as follows, effective as herein provided: I. Effective as of January 1, 1994: 1. The following shall be added to the end of the first paragraph of Section 2.1(f) of the Plan: "Further, for purposes of Section 4.1 only, Compensation shall not include any bonus payments." 2. The words "active and contributing to the Plan pursuant to Section 4.1 on the last day of the Plan Year or who is on an authorized leave of absence" shall be deleted in each place such words appear in Section 5.1 of the Plan and the words "an Employee on the last day of the Plan Year" shall be substituted therefor in each such place. 3. Section 9.4(a) of the Plan shall be deleted and the following shall be substituted therefor: "(a) A loan may be requested only by (1) any Participant who is an Employee or (2) any Participant no longer employed by the Employer, a beneficiary of a deceased Participant or an alternate payee under a qualified domestic relations order, as that term is defined in Section 414(p)(8) of the Code, who retains an Account balance under the Plan and who is a party-in-interest, as that term is defined in section 3(14) of ERISA, as to the Plan. An individual who is eligible to request a loan under this paragraph shall be hereinafter referred to as a `Participant' for purposes of this Section 9.4." 4. The following shall be added to the end of Section 13.1 of the Plan: "The Administrator may from time to time and in its discretion, which discretion shall be exercised in a uniform and nondiscriminatory manner, reduce or waive one or more of the 30-day notice periods set forth in Sections 4.2, 7.2, and 7.3." -1- 67 II. Effective as of January 1, 1995: A. The cross-reference to "Section 5.4" in Section 5.3 of the Plan shall be deleted and a cross-reference to "Section 10.4(b)" shall be substituted therefor. B. Section 5.4 of the Plan shall be deleted and the following shall be substituted therefor: "5.4 INTENTIONALLY OMITTED." C. The second, third, and fourth sentences of Section 7.1 of the Plan shall be deleted and the following shall be substituted therefor: "Except as otherwise provided elsewhere, each Participant shall designate, in accordance with the procedures established from time to time by the Administrator, the manner in which all other amounts allocated to his Account shall be invested from among the investment funds made available from time to time by the Administrator for such purpose. With respect to the portion of a Participant's Account as is subject to investment direction, such Participant may designate one of such investment funds for all of such amounts subject to investment direction or he may split his investment designation among such investment funds in such increments as the Administrator may prescribe. If a Participant fails to properly elect to direct the investment and reinvestment of that portion of his Account subject to investment direction, then such portion of his Account shall be invested in the investment fund or funds designated by the Administrator from time to time in a uniform and nondiscriminatory manner." D. The second sentence of Section 7.2 of the Plan shall be deleted and the following shall be substituted therefor: "If a Participant fails to make a proper election, 100% of his contributions subject to investment direction shall be invested in the investment fund or funds established pursuant to Section 7.1 and designated by the Administrator from time to time in a uniform and nondiscriminatory manner." E. The proviso set forth in the first sentence of Section 7.3 of the Plan shall be deleted and the following shall be substituted therefor: ";provided, however, that any limitations on transfers imposed by an investment fund established pursuant to Section 7.1 shall apply." -2- 68 F. Section 10.4 of the Plan shall be deleted and the following shall be substituted therefor: "10.4 OTHER TERMINATION OF EMPLOYMENT; FORFEITURES. (a) If a Participant's employment is terminated other than in accordance with Sections 10.1 through 10.3, he shall be eligible to receive the sum of the following as provided below: (1) The full value of his Before- Tax Deposit and After-Tax Deposit Accounts, if not previously withdrawn; and (2) A percentage (determined as of the date of his termination) of the value of his Western Company Match Account and Discretionary Employer Contribution Account (hereinafter referred to in this Section 10.4 collectively as the `Employer Contribution Accounts') as determined below:
COMPLETED YEARS VESTED OF CREDITED SERVICE PERCENTAGE ------------------- ----------- Less than 1 year 0% 1 year 20% 2 years 40% 3 years 60% 4 years 80% 5 years or more 100%
The Participant's Before-Tax Deposit and After-Tax Deposit Accounts and the vested portion of the Participant's Employer Contribution Accounts will be distributed as provided in Sections 10.6 and 10.7. (b) (1) With respect to a Participant who terminates employment with the Employer with a vested percentage in his Employer Contribution Accounts that is less than 100% and either is not entitled to a distribution from the Plan or receives a distribution from the Plan of the balance of his vested interest in his Account in the form of a lump sum distribution by the close of the second Plan Year following the Plan Year in which his employment is terminated, the forfeitable amount credited to the terminated Participant's Employer Contribution Accounts as of the Valuation Date next preceding the date his benefit begins to be paid from the Trust (his `Benefit Commencement Date') shall become a forfeiture as of his Benefit Commencement Date (or as of his date of termination of employment if no amount is payable from the Trust on behalf of such Participant with such Participant being considered to have received a -3- 69 distribution of zero dollars on his date of termination of employment). (2) In the event that an amount credited to a terminated Participant's Employer Contribution Accounts becomes a forfeiture pursuant to Paragraph (b)(1) above, the terminated Participant shall, upon subsequent reemployment with the Employer prior to incurring five consecutive 1-year Breaks-in-Service, have the forfeited amount restored to such Participant's Employer Contribution Accounts, unadjusted by any subsequent gains or losses of the Trust. Any such restoration shall be made as of the last day of the Plan Year in which such Participant's reemployment occurs. Notwithstanding anything to the contrary in the Plan, forfeited amounts to be restored by the Employer pursuant to this Paragraph shall be charged against and deducted from forfeitures for the Plan Year in which such amounts are restored that would otherwise be available to reduce Employer contributions to the Plan. If such forfeitures otherwise available are not sufficient to provide such restoration, the portion of such restoration not provided by forfeitures shall be charged against and deducted from Employer contributions otherwise available for allocation to other Participants in accordance with the second paragraph of Section 5.3, and any additional amount needed to restore such forfeited amounts shall be provided by an additional Employer contribution (which shall be made without regard to current or accumulated earnings and profits). (3) With respect to a Participant whose vested percentage in his Employer Contribution Accounts is less than 100% and who makes a withdrawal from or receives a termination distribution from his Employer Contribution Accounts other than a lump sum distribution by the close of the second Plan Year following the Plan Year in which his employment is terminated, any amount remaining in his Employer Contribution Accounts shall continue to be maintained as a separate account. At any relevant time, such Participant's nonforfeitable portion of his separate account shall be determined in accordance with the following formula: X=P(AB + (R X D)) - (R X D) For purposes of applying the formula: X is the nonforfeitable portion of such separate account at the relevant time; P is the Participant's vested percentage in his Employer Contribution Accounts at the relevant time; AB is the balance of such separate account at the relevant time; R is the ratio of the balance of such separate account at the relevant time to the balance of such separate account after the withdrawal or distribution; and D is the amount of the withdrawal or distribution. For all other purposes of the Plan, a -4- 70 Participant's separate account shall be treated as an Employer Contribution Account. Upon his incurring five consecutive 1-year Breaks-in-Service, the forfeitable portion of a terminated Participant's separate account and Employer Contribution Accounts shall be forfeited as of the end of the Plan Year during which the terminated Participant incurred his fifth such consecutive 1-year Break-in- Service. (4) With respect to a Participant who terminates employment with the Employer with a vested percentage in his Employer Contribution Accounts greater than 0% but less than 100% and who is not otherwise subject to the forfeiture provisions of Paragraph (b)(1) or (b)(3) above, the forfeitable portion of his Employer Contribution Accounts shall be forfeited as of the end of the Plan Year during which the terminated Participant incurs his fifth consecutive 1-year Break-in-Service." G. The first sentence of Section 14.3 of the Plan shall be deleted and the following shall be substituted therefor: "The Company alone reserves the right to amend the Plan at any time, and from time to time, except that no amendment shall be made to the Plan which reduces a Participant's accrued benefit. An amendment to the Plan shall be made by action of the Board; provided, however, that amendments to the Plan which do not have a significant cost impact on the Employers and amendments necessary to maintain the Plan in compliance with applicable law, including, without limitation, ERISA and the Code, may be made at the direction of the President of the Company or any other senior executive officer of the Company." III. Effective as of April 1, 1995, the second and third sentences of Section 4.1 of the Plan shall be deleted and the following shall be substituted therefor: "Such contributions can be contributed as before-tax deposits or after-tax deposits or a combination thereof (in whole percentage increments) in the Participant's sole discretion." IV. As amended hereby, the Plan is specifically ratified and reaffirmed. IN WITNESS WHEREOF, the undersigned has caused these presents to be executed this 8th day of February, 1995. WESTERN NATIONAL CORPORATION /s/ Dwight L. Cramer - ------------------------- Dwight L. Cramer Secretary BY: /s/ MICHAEL J. POULOS ------------------------------- MICHAEL J. POULOS, PRESIDENT -5- 71 AMENDMENT NO. 4 TO THE WESTERNSAVE PLAN WHEREAS, WESTERN NATIONAL CORPORATION (the "Company") has heretofore adopted the WESTERNSAVE PLAN (the "Plan") for the benefit of its eligible employees; and WHEREAS, the Company desires to amend the Plan in certain respects; NOW, THEREFORE, the Plan shall be amended as follows, effective as of October 1, 1995: 1. The word "Trustee" shall be deleted in each place such word appears in Section 9.3 of the Plan and the word "Administrator" shall be substituted therefor in each such place. 2. The words ", except those dealing with interpretation of the provisions of the Plan," shall be deleted from Section 13.3 of the Plan. 3. As amended hereby, the Plan is specifically ratified and reaffirmed. IN WITNESS WHEREOF, the undersigned has caused these presents to be executed this 29th day of September, 1995. WESTERN NATIONAL CORPORATION By: /s/ Richard W. Scott ------------------------------------------ Richard W. Scott, Executive Vice President -1- 72 AMENDMENT NO. 5 TO THE WESTERNSAVE PLAN WHEREAS, WESTERN NATIONAL CORPORATION (the "Company") has heretofore adopted the WESTERNSAVE PLAN (the "Plan") for the benefit of its eligible employees; and WHEREAS, the Company desires to amend the Plan in certain respects; NOW, THEREFORE, the Plan shall be amended as follows: I. Effective as of April 1, 1994: 1. The first sentence of Section 4.1 of the Plan shall be deleted and the following shall be substituted therefor: "Subject to the limitations of Article 6, each Participant may elect to make contributions to the Plan, only by payroll deduction, in any whole percentage of his Compensation, between zero percent (0%) and fifteen percent (15%) (or, with respect to a Participant who is a Highly Compensated Participant, such lesser percentage as may be prescribed from time to time by the Administrator)." 2. The following sentence shall be added to the end of Section 4.1 of the Plan: "In order to satisfy the restrictions set forth in Article 6 for any Plan Year, the before-tax and/or after-tax deposit elections, as applicable, of affected Participants pursuant to this Article may be reduced by the Administrator on a temporary and prospective basis in such manner as the Administrator shall determine." 3. The following new Section 7.4 shall be added to the Plan: "7.4 TIMING OF INVESTMENTS. Notwithstanding that contributions shall be allocated and credited to each Participant's Account as of the dates determined pursuant to Sections 4.1 and 5.3, such contributions shall be invested and reinvested in accordance with this Article 7 as soon as administratively feasible after the receipt of such contributions by the Trustee." 4. The first sentence of Section 9.4(e) of the Plan shall be deleted and the following shall be substituted therefor: "The loan shall bear interest at the prime rate of interest established by Texas Commerce Bank, N.A. on the first business day of the calendar month during which the loan is made." 5. The words "plus interest due thereon over the term of the indebtedness" shall be deleted from Section 9.4(i) of the Plan. -1- 73 6. The first paragraph of Section 10.6 of the Plan shall be deleted and the following shall be substituted therefor: "The distribution of a Participant's Account pursuant to Sections 10.1, 10.3, and 10.4 shall be equal to the value of such Account as of, and shall commence as soon as administratively feasible after, the Valuation Date coincident with or next succeeding the date the Participant becomes entitled to a distribution if the vested Account is not and never was in excess of $3,500. If the vested Account is or ever was in excess of $3,500, then the distribution shall be based upon the value of such Account as of, and shall commence as soon as administratively feasible after, the Valuation Date coincident with or next succeeding the later of (1) the date a Participant terminates employment or has established Permanent Disability pursuant to Section 10.3 or (2) the date a Participant requests a distribution on the form prescribed by the Administrator. Any distribution to an alternate payee pursuant to a qualified domestic relations order, as defined in Code Section 414(p), shall be made in accordance with the terms and provisions of such order. " 7. Paragraph 2 of Amendment No. 1 to the WesternSave Plan is corrected to clarify that the subsection added thereby shall be designated as Section 10.7(d) of the Plan and the existing Section 10.7(c) of the Plan shall be retained. 8. The second paragraph of Section 10.7(c) of the Plan shall be deleted and the following shall be substituted therefor: "Lump sum distributions shall be made in cash except that a Participant who is to receive an immediate lump sum distribution may elect to have the whole shares of Company common stock that are allocated to his Account distributed in-kind (with the value of any fractional shares to be distributed in cash)." 9. The first two sentences of Section 10.8 of the Plan shall be deleted and the following shall be substituted therefor: "The distribution of a deceased Participant's Account pursuant to Section 10.2 shall be equal to the value of such Account as of, and shall be made as soon as administratively feasible after, the Valuation Date coincident with or next succeeding the date such Account first becomes distributable if the Account is not and never was in excess of $3,500. If such deceased Participant's Account is or ever was in excess of $3,500, then the distribution shall be equal to the value of such Account as of, and shall be made as soon as administratively feasible after, the Valuation Date coincident with or next succeeding the date the beneficiary requests a distribution on the form prescribed by the Administrator." 10. The following new paragraph shall be added to the end of Section 10.8 of the Plan: "Lump sum distributions shall be made in cash except that a Participant's designated beneficiary or legal representative may elect to have the whole shares of Company common stock that are allocated to the Participant's Account distributed in-kind (with the value of any fractional shares to be distributed in cash)." II. Effective as of January 1, 1996: -2- 74 1. Section 5.1 of the Plan shall be deleted and the following shall be substituted therefor: "5.1 EMPLOYER MATCHING CONTRIBUTIONS. (a) For the Period Beginning on January 1, 1996, and Ending on September 30, 1996. For the period beginning on January 1, 1996, and ending on September 30, 1996 (the 'Initial Period'), the Employers shall contribute to the Trust, on behalf of each Participant who is an Employee on the last day of the Initial Period or who terminated employment during the Initial Period due to death, disability, or retirement on or after Normal Retirement Age, an aggregate number of shares of common stock of the Company equal in value (determined based upon the closing price of a share of common stock of the Company on the last day of the Initial Period) to sixty- five percent (65%) of the before-tax deposits made on behalf of such Participant for the Initial Period; provided, however, that no contribution shall be made with respect to before-tax deposits in excess of six percent (6%) of such Participant's Compensation for the Initial Period. (b) FROM AND AFTER OCTOBER 1, 1996. For each calendar quarter beginning on or after October 1, 1996, the Employers shall contribute to the Trust, on behalf of each Participant who is an Employee on the last day of such calendar quarter or who terminated employment during such calendar quarter due to death, disability, or retirement on or after Normal Retirement Age, an amount equal to fifty percent (50%) (or such greater percentage as may be authorized from time to time by the Board) of the before-tax deposits made on behalf of such Participant for such calendar quarter; provided, however, that no contribution shall be made with respect to before-tax deposits in excess of four percent (4%) (or such greater percentage as may be authorized from time to time by the Board) of such Participant's Compensation for such calendar quarter. Employer matching contributions pursuant to this Section 5.1(b) shall be made in cash, in whole shares of common stock of the Company, or in any combination of cash and whole shares of such common stock (as determined by the Company in its sole discretion). Shares of common stock of the Company that are so contributed shall be valued at the closing price of such stock on the New York Stock Exchange, Inc. as reported by The Wall Street Journal in the New York Stock Exchange Composite Transactions for the date the contribution is made, which shall be the last business day of the calendar quarter to which the contribution relates." 2. The second sentence of Section 5.2 of the Plan shall be deleted and the following shall be substituted therefor: "In the event that contributions pursuant to this Section are made in shares of common stock of the Company, the shares of stock so contributed shall be valued at the closing price of such stock on the New York Stock Exchange, Inc. as reported by The Wall Street Journal in the New York Stock Exchange Composite Transactions for the date the contribution is made (or the next preceding regular business date if the contribution is not made on a regular business date)." 3. Section 5.3 of the Plan shall be deleted and the following shall be substituted therefor: -3- 75 "5.3 ALLOCATION OF EMPLOYER CONTRIBUTIONS AND USE OF FORFEITURES. (a) EMPLOYER MATCHING CONTRIBUTIONS. As of the last day of the Initial Period (as such term is defined in Section 5.1(a)), each eligible Participant's allocable share, if any, of the Employer's matching contribution made pursuant to Section 5.1(a) for the Initial Period shall be credited to his Account. As of the last day of each calendar quarter that begins after the end of the Initial Period, each eligible Participant's allocable share, if any, of the Employer's matching contribution made pursuant to Section 5.1(b) for such calendar quarter shall be credited to his Account. (b) EMPLOYER DISCRETIONARY CONTRIBUTIONS. The Employer discretionary contribution, if any, made pursuant to Section 5.2 for a Plan Year shall be allocated as of the last day of such Plan Year to the Accounts of the Participants who (1) were employed by an Employer on such last day of such Plan Year or (2) terminated employment during such Plan Year on or after Normal Retirement Age or by reason of disability or death. The allocation to each such eligible Participant's Account shall be that portion of such Employer discretionary contribution which is in the same proportion that such Participant's Compensation for such Plan Year bears to the total of all such Participants' Compensation for such Plan Year. (c) FORFEITURES. Any amounts that are forfeited under any provision hereof during a Plan Year shall first be used to reinstate previously forfeited Accounts in accordance with Section 10.4(b), and any remaining amounts shall be applied to reduce Employer matching contributions next coming due pursuant to Section 5.1." 4. The third sentence of Section 9.2 of the Plan shall be deleted. 5. Clause (a) of the first sentence of Section 9.3 of the Plan shall be deleted and the following shall be substituted therefor: "(a) the withdrawing Participant is under 59 1/2 years of age on the date the withdrawal is being made, and" III. Effective as of January 1, 1997: 1. The second paragraph of Section 2.1(f) of the Plan shall be deleted. 2. Sections 2.1(l) and (m) of the Plan shall be deleted and the following shall be substituted therefor: "(l) HIGHLY COMPENSATED PARTICIPANT: For Plan Years beginning after December 31, 1996, each Employee who performs services during the Plan Year for which the determination of who is highly compensated is being made (the 'Determination Year') and who: (1) is a five-percent owner of the Employer (within the meaning of Code Section 416(i)(1)(A)(iii)) at any time during the Determination Year or the twelve-month period immediately preceding the Determination Year (the 'Look-Back Year'); or (2) for the Look-Back Year -4- 76 (i) receives compensation (within the meaning of Code Section 414(q)(4), 'compensation' for purposes of this paragraph) in excess of $80,000 (with such amount to be adjusted automatically to reflect any cost-of-living adjustments authorized by Code Section 414(q)(1)) during the Look-Back Year, and, (ii) if the Administrator elects the application of this clause for such Look-Back Year, is a member of the top 20% of Employees for the Look-Back Year (other than Employees described in Code Section 414(q)(5)) ranked on the basis of compensation received during the year. For purposes of the preceding sentence, (a) all employers aggregated with the Employer under Code Section 414(b), (c), (m), or (o) shall be treated as a single employer, (b) a former Employee who had a separation year (generally, the Determination Year such Employee separates from service) prior to the Determination Year and who was an active Highly Compensated Employee for either such separation year or any Determination Year ending on or after such Employee's fifty-fifth birthday shall be deemed to be a Highly Compensated Employee, and (c) the Administrator may elect, in accordance with the provisions of applicable Treasury regulations, rulings, and notices, to make the Look-Back Year calculation for a Determination Year on the basis of the calendar year ending with or within the applicable Determination Year (or, in the case of a Determination Year that is shorter than twelve months, the calendar year ending with or within the twelve-month period ending with the end of the applicable Determination Year). To the extent that the provisions of this Paragraph are inconsistent or conflict with the definition of a 'highly compensated employee' set forth in Code Section 414(q) and the Treasury regulations issued thereunder, the relevant terms and provisions of Code Section 414(q) and the Treasury regulations thereunder shall govern and control. (m) NON-HIGHLY COMPENSATED PARTICIPANT: Any Participant or Former Participant who is not a Highly Compensated Participant." 3. Section 6.3 of the Plan shall be deleted and the following shall be substituted therefor: "6.3 ACTUAL DEFERRAL PERCENTAGE TESTS. In further restriction of the Participants' elections provided in Article 4 to make before-tax deposits, it is specifically provided that one of the 'actual deferral percentage' tests set forth in Code Section 401(k)(3) and the Treasury regulations thereunder must be met in each Plan Year. If multiple use of the alternative limitation (within the meaning of Code Section 401(m)(9) and Treasury regulation section 1.401(m)-2(b)) occurs during a Plan Year, such multiple use shall be corrected in accordance with the provisions of Treasury regulation section 1.401(m)-2(c); provided, however, that if such multiple use is not eliminated by making supplemental contributions pursuant to Section 6.4 herein, then the 'actual contribution percentages' of Highly Compensated Participants participating in the Plan shall be reduced, and the excess contributions distributed, in accordance with the provisions of Section 6.4 and applicable Treasury regulations, so that there is no such multiple use." -5- 77 4. The last two sentences of the third paragraph of Section 6.4 of the Plan shall be deleted and the following shall be substituted therefor: "The amount of such reduction shall be determined by reducing before-tax deposits made pursuant to Article 4 on behalf of Highly Compensated Participants in order of the highest dollar amounts contributed on behalf of, or by, a Highly Compensated Participant as set forth in Code Section 401(k)(8)." 5. Section 6.5 of the Plan shall be deleted and the following shall be substituted therefor: "6.5 MAXIMUM CONTRIBUTION PERCENTAGE. In restriction of the Employer matching contributions pursuant to Section 5.1 and after- tax deposits pursuant to Article 4, it is specifically provided that one of the 'actual contribution percentage' tests set forth in Code Section 401(m) and the Treasury regulations thereunder must be met in each Plan Year. The Administrator may elect, in accordance with applicable Treasury regulations, to treat before-tax deposits made pursuant to Article 4 as Employer matching contributions made pursuant to Section 5.1 for purposes of meeting this requirement." 6. The last two sentences of the fourth paragraph of Section 6.6 of the Plan shall be deleted and the following shall be substituted therefor: "The amount of such reduction shall be determined by reducing first any after-tax deposits made pursuant to Article 4, and then to the extent necessary, any Employer matching contributions made pursuant to Section 5.1 on behalf of Highly Compensated Participants in order of the highest dollar amount contributed on behalf of, or by, a Highly Compensated Participant as set forth in Code Section 401(m)(6)." 7. The last sentence of Section 10.6 of the Plan shall be deleted and the following shall be substituted therefor: "Contrary provisions in the Plan notwithstanding, payment of benefits shall commence at a date which is in compliance with the provisions of Code Section 401(a)(9) and applicable Treasury regulations and shall in no event be later than April 1 of the calendar year following the later of (a) the calendar year in which the Participant attains age 70 1/2 or (b) the calendar year in which such Participant terminates employment with the Employer and its Affiliates; provided, however, that clause (b) shall not apply in the case of a Participant who is a 5-percent owner (as defined in Code Section 416) with respect to the Plan Year ending in the calendar year in which the Participant attains age 70 1/2." IV. Effective as of February 3, 1997, Section 4.1 of the Plan shall be deleted and the following shall be substituted therefor: "4.1 EMPLOYEE CONTRIBUTIONS. Subject to the limitations of Article 6, each Participant may elect to make contributions to the Plan, only by payroll deduction, in any whole percentage of his Compensation, between zero percent (0%) and fifteen percent (15%) (or, with respect to a Participant who is a Highly Compensated Participant, such lesser percentage as may be prescribed from time to time by the Administrator). Such contributions can be contributed as before-tax deposits or after-tax deposits or a combination thereof (in whole percentage increments) in the -6- 78 Participant's sole discretion. The before-tax and after-tax deposits elected by the Participant shall be deducted from his Compensation for each payroll period and shall be paid by the Employer to the Trust as of the earliest date on which such contributions can reasonably be segregated from the Employer's general assets; provided, however, that in no event shall such date occur later than the fifteenth (15th) business day of the month following the month in which such contribution amounts would otherwise have been payable to the Participant in cash. In order to satisfy the restrictions set forth in Article 6 for any Plan Year, the before-tax and/or after-tax deposit elections, as applicable, of affected Participants pursuant to this Article may be reduced by the Administrator on a temporary and prospective basis in such manner as the Administrator shall determine." V. As amended hereby, the Plan is specifically ratified and reaffirmed. IN WITNESS WHEREOF, the undersigned has caused these presents to be executed this 21st day of November, 1996. WESTERN NATIONAL CORPORATION BY: /s/ MICHAEL J. POULOS ------------------------------- MICHAEL J. POULOS, PRESIDENT -7- EX-10.19 4 WESTERN NATIONAL CORP. JOB SECURITY PLAN 1 EXHIBIT 10.19 EXECUTION COPY WESTERN NATIONAL CORPORATION JOB SECURITY PLAN (CASH PAYMENT AND CONTINUATION OF WELFARE BENEFITS) EFFECTIVE DATE JULY 26, 1994 2 INDEX 1. PURPOSE OF THE PLAN . . . . . . . . . . . . . . . . . . . . . . . 1 2. ELIGIBILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 3. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 (a) "Adjusted Service Date" . . . . . . . . . . . . . . . . . . . 1 (b) "Annual Salary" . . . . . . . . . . . . . . . . . . . . . . . 1 (c) "Cause" . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 (d) "Change of Control" . . . . . . . . . . . . . . . . . . . . . 2 (e) "Change of Control Date" . . . . . . . . . . . . . . . . . . . 3 (f) "Code" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 (g) "Employer" . . . . . . . . . . . . . . . . . . . . . . . . . . 4 (h) "ERISA" . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 (i) "Involuntary Termination of Employment" . . . . . . . . . . . 4 (j) "Severance Payment" . . . . . . . . . . . . . . . . . . . . . 4 (k) "Year of Service" . . . . . . . . . . . . . . . . . . . . . . 4 4. PAYMENT CONDITIONS . . . . . . . . . . . . . . . . . . . . . . . . 5 5. SEVERANCE PAYMENT . . . . . . . . . . . . . . . . . . . . . . . . 5 6. CONTINUATION OF WELFARE BENEFITS . . . . . . . . . . . . . . . . . 6 7. PAYMENT TERMS . . . . . . . . . . . . . . . . . . . . . . . . . . 6 8. NO PAYMENT OFFSETS . . . . . . . . . . . . . . . . . . . . . . . . 6 9. AMENDMENT, TERMINATION AND BINDING EFFECT . . . . . . . . . . . . 6 10. PLAN ADMINISTRATION . . . . . . . . . . . . . . . . . . . . . . . 7 11. EMPLOYER CONTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . 8 12. ADOPTION BY EMPLOYERS . . . . . . . . . . . . . . . . . . . . . . 8 13. GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . . . 9 14. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . 9 15. EFFECTIVE DATE . . . . . . . . . . . . . . . . . . . . . . . . . . 9
-i- 3 WESTERN NATIONAL CORPORATION JOB SECURITY PLAN 1. PURPOSE OF THE PLAN: THIS JOB SECURITY PLAN has been established by Western National Corporation ("WNC") and its subsidiaries to provide for severance payments to eligible employees whose employment with WNC or its subsidiaries terminates due to certain conditions created by a change of control of WNC or its subsidiaries. 2. ELIGIBILITY: A full-time salaried or hourly-paid employee who meets all of the following requirements is eligible to receive benefits under this Plan if the employee: Is employed by WNC or one of its wholly-owned subsidiaries that has adopted the plan on or before the Change of Control Date; Is employed on the Change of Control Date (including an employee who is on an unpaid leave of absence or on disability status); Has a normal work week of 30 or more hours; and Has an Involuntary Termination of Employment within 24 months after the Change of Control Date. Notwithstanding the foregoing, temporary employees shall not be eligible to receive benefits under this Plan. 3. DEFINITIONS: (a) "ADJUSTED SERVICE DATE" shall mean the initial or adjusted date of employment used in computing an employee's Years of Service, PROVIDED that in all instances employment shall be deemed to have commenced on the earliest of (i) employee's employment by Western National Life Insurance Company or WNC, (ii) employee's employment by Conseco, Inc. ("Conseco") or any employer at any time affiliated with Conseco or (iii) employee's employment by any employer that is or was subsequently acquired by Conseco. This date is determined based upon the practices and procedures of the Employer on the Change of Control Date. (b) "ANNUAL SALARY" consists of current base salary, including the annualized amount of any current employee (but not employer) contributions to any Code Section 401(k) plan and any current salary reduction pursuant to an agreement under a Code Section 125 plan. Annual -1- 4 salary shall be the higher of such amount computed (i) on the date of the Involuntary Termination of Employment and (ii) on the Change of Control Date. Annual Salary does not include items such as overtime, expense reimbursements, commissions, overrides or payments made by the Employer for benefit plan coverage. A "WEEK'S SALARY" shall mean Annual Salary divided by fifty-two (52). A "MONTH'S SALARY" shall mean Annual Salary divided by twelve (12). (c) "CAUSE" shall mean (1) an act or acts of dishonesty taken by the employee and intended to result in personal enrichment of the employee or a third party at the expense of the Employer or (2) violations of the Employer's policies and procedures by the employee that are significant, and either grossly negligent or willful and deliberate on the employee's part, or that, in any case, result in substantial injury, financial or otherwise, to the Employer or physical harm or threat of physical harm to any other person. A SIGNIFICANT violation of Employer policies and procedures, as referred to above, is defined as a meaningful deviation from standards included in the job description for the employee's position, or any other generally recognized and accepted Employer procedures, manuals or other documentation. Examples of significant violations of Employer policies and procedures include but are not limited to the following: (1) repeated failure to meet minimum job performance standards; (2) failure to appear for work in a timely manner without justifiable reasons; (3) deliberate misuse of Employer property; (4) substance abuse on Employer premises or while on Employer business; and (5) gross or chronic insubordination. (d) "CHANGE OF CONTROL" shall mean the occurrence of any one or more of the following events: (1) WNC shall (i) merge or consolidate with or into another corporation or entity or enter into a share exchange between shareholders of WNC and another corporation or entity and following such merger, consolidation or share exchange less than seventy percent (70%) of the outstanding voting securities of the surviving or resulting corporation or entity shall then be owned in the aggregate by the former shareholders of WNC, other than (x) affiliates (within the meaning of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of WNC or (y) any party to such merger, consolidation or share exchange, and any affiliate of any such party or (ii) sell, lease, exchange or otherwise dispose of all or substantially all of WNC's property and assets in one transaction or a series of related transactions to one or more other corporations or entities that are not subsidiaries of WNC; (2) the shareholders of WNC adopt a plan of liquidation; (3) any corporation, person or group (within the meaning of Sections 13(d) or 14(d)(2) of the Exchange Act) (other than WNC, any of WNC's subsidiaries, any employee benefit plan of WNC and/or one or more of its subsidiaries or any person or entity organized, appointed or established pursuant to the terms of any such employee benefit plan) becomes the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of voting securities of WNC representing forty-one percent (41%) or more of the total number of votes eligible to be cast at any election of directors of WNC; or -2- 5 (4) as a result of, or in connection with, any tender offer or exchange offer, share exchange, merger, consolidation or other business combination, sale, lease, exchange or other disposition of all or substantially all of WNC's assets, a contested election, or any combination of the foregoing transactions, the persons who were directors of WNC on July 1, 1994 (the "Incumbent Board") shall cease to constitute a majority of the Board of Directors of WNC or any successor to WNC, provided that any person becoming a director subsequent to July 1, 1994 whose election, or nomination for election by WNC's shareholders was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board (either by a specific vote or by approval of a proxy statement of WNC in which such person is named as a nominee for director without objection to such nomination) shall be, for purposes of the Plan, considered as though such person were a member of the Incumbent Board. Notwithstanding the foregoing, no "Change of Control" shall be deemed to have occurred with respect to any employee who, after giving effect to a reorganization, recapitalization, spin-off, or other transaction, however structured, is employed by a corporation (or other entity) (the "Continuing Corporation"), (x) at least 70% of the outstanding voting securities of the ultimate parent entity of which (or of the Continuing Corporation, if there is no such ultimate parent entity) are beneficially owned in the aggregate, directly or indirectly through one or more intermediaries, by the former shareholders of WNC, other than affiliates (within the meaning of the Exchange Act) of WNC, and (y) at least a majority of the directors of the ultimate parent entity of which (or of the Continuing Corporation, if there is no such ultimate parent entity) are members of the Incumbent Board (determined as provided in Subparagraph (4), above); provided, however, that this exception shall apply only if the ultimate parent entity of the Continuing Corporation (if there is such ultimate parent entity) and the Continuing Corporation shall have adopted the Plan or a plan substantially similar to the Plan (the "Substitute Plan") as an employer on or prior to the effective date of such reorganization, recapitalization, spin-off, or other transaction, however structured, with such ultimate parent entity (or the Continuing Corporation, if there is no such ultimate parent entity) to be substituted for WNC for purposes of determining the occurrence of a Change of Control under the Plan with respect to employees of the Continuing Corporation or for all purposes under the Substitute Plan. Moreover, for purposes of this Plan, upon the creation of the Continuing Corporation, no subsequent Change of Control of WNC shall be deemed to be a Change of Control of the Continuing Corporation unless its ultimate parent entity shall be WNC. The "ULTIMATE PARENT ENTITY" of any corporation or other entity is that entity (i) which either alone or through one or more majority- owned subsidiaries, beneficially owns (within the meaning of the Exchange Act) 50% or more of the outstanding voting securities of such corporation or other entity (based upon voting power in an election of directors), and (ii) as to which there is no corporation or other entity which beneficially owns (within the meaning of the Exchange Act) 50% or more of its outstanding voting securities (based upon voting power in an election of directors). -3- 6 (e) "CHANGE OF CONTROL DATE" shall mean, with respect to a Change of Control, the date of, but immediately prior to the time of, consummation of a merger, consolidation, share exchange or sale, lease, exchange or disposition of property and assets referred to in Subparagraph 3(d)(1), the date of any shareholder adoption of a plan of liquidation referred to in Subparagraph 3(d)(2), the date on which the event described in Subparagraph 3(d)(3) occurs, or the date of the change in constituency of the Board of Directors of WNC, as described in Subparagraph 3(d)(4), as the case may be. (f) "CODE" shall mean the Internal Revenue Code of 1986, as amended. (g) "EMPLOYER" shall mean WNC and any other corporations that are wholly-owned subsidiaries of WNC and that adopt this Plan pursuant to Paragraph 12. (h) "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. (i) "INVOLUNTARY TERMINATION OF EMPLOYMENT" shall mean any termination of employment unless such termination is due to: (1) death; (2) voluntary resignation; or (3) Cause. Notwithstanding the foregoing, an "Involuntary Termination of Employment" shall include any termination of employment (including, without limitation, a voluntary resignation) subsequent to the Change of Control Date attributable to any one or more of the following factors: (1) reduction in Annual Salary or reassignment to a lower salary grade; (2) a fundamental reduction in the nature and scope of one's job responsibility or authority; (3) relocation of regular assigned workplace by more than 25 additional miles from residence; or (4) reduction in eligibility to participate in employee benefit plans. (j) "SEVERANCE PAYMENT" shall mean the severance payment made pursuant to Paragraph 5 of this Plan to each eligible employee who satisfies the payment conditions set forth in Paragraph 4 of this Plan. -4- 7 (k) "YEAR OF SERVICE" shall mean any full year of employment by an employer described under "Adjusted Service Date", or portion thereof consisting of at least six months, from an employee's Adjusted Service Date to the date of the employee's Involuntary Termination of Employment. 4. PAYMENT CONDITIONS: Eligible employees who are employed by an Employer on a Change of Control Date and who, at any time within twenty-four (24) months immediately following such Change of Control Date, suffer an Involuntary Termination of Employment shall receive the Severance Payment described in Paragraph 5 hereof and the benefits described in Paragraph 6 hereof; provided, however, that in no event shall an employee be entitled to more than one Severance Payment under this Plan. 5. SEVERANCE PAYMENT: The Employer shall make a Severance Payment to each eligible employee who satisfies the conditions of Paragraph 4 in an amount equal to the greater of the following: (a) four Month's Salary; (b) three Week's Salary for each of such employee's Years of Service (up to a maximum of 104 Week's Salary); or (c) one Month's Salary for each $10,000 of such employee's Annual Salary (or portion thereof) up to a maximum of 24 Month's Salary. Payments under this Plan are subject to required tax withholding (federal income tax, FICA, and where applicable, state and local taxes). An employee's Severance Benefit shall be increased by a cash payment equal to the value of employee's accrued but unused vacation for the current year. An employee's Severance Payment under this Plan will be reduced by any payments made to such employee under any other severance plan maintained by the Employer. Notwithstanding anything in this Paragraph 5 to the contrary, if the employee is a "disqualified individual" (as defined in Section 280G(c) of the Code), and the Severance Payment provided for in this Paragraph, together with any other payments which the employee has the right to receive from the Employer (or its affiliates), would constitute a "parachute payment" (as defined in Section 280G(b)(2) of the Code), Employer shall pay to employee an additional amount equal to (x) divided by (y), where (x) is the aggregate dollar amount of excise taxes employee becomes obligated to pay with respect to such "parachute payment" pursuant to Section 4999 of the Code or any successor Code section providing for analogous treatment, and (y) is 1 - (.2 + the maximum federal income tax rate for single individuals applicable for the year in which employee receives such payment); it being the intent hereof that if employee incurs any such excise tax, the payments to employee shall be grossed up in full for such excise tax, so that the -5- 8 amounts he retains after paying all federal income taxes due with respect to such "parachute payment" is the same as what he would have retained if Section 4999 of the Code had not been applicable. The determinations to give effect to this paragraph shall be made by the Employer in good faith, and such determination shall be conclusive and binding on the employee. 6. CONTINUATION OF WELFARE BENEFITS: In addition to the Severance Payment, an employee who satisfies the conditions set forth in Paragraph 4 shall also receive an extension of coverage equal to the number of weeks/months (rounded up to the nearest month) used to calculate the Severance Payment. This extension shall apply to the Employer's medical, dental, life, family accident and long-term disability plans, which coverages shall be the same as or reasonably comparable to those in which the employee was enrolled immediately prior to the Change of Control Date. However, the extension period will immediately end upon an employee's obtainment of new employment and eligibility for similar benefits coverage and the employee shall promptly report such eligibility to the Employer. The cost of this coverage will be the same as it would have been if employment had continued throughout the extension period. The first two months' cost will be deducted from the Severance Payment. Starting with the third month of the extension period, the cost will be billed monthly to the employee. Benefits coverage may be terminated by the employee effective on the first of any month. Long-term disability benefits will not commence during the extension period. Nothing herein shall be deemed or interpreted to affect adversely in any way the rights of such eligible employees to health care continuation coverage as required pursuant to Part 6 of Title I of ERISA. 7. PAYMENT TERMS: Severance Payments shall be made in a single lump sum within two weeks (14 days) after the date of the employee's Involuntary Termination of Employment. 8. NO PAYMENT OFFSETS: Except to the extent expressly provided for herein, the Employer's obligation to make Severance Payments and otherwise to perform its obligations under this Plan shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or other right which the Employer may have against eligible employees or others; PROVIDED, HOWEVER, that any payment under Section 5 hereof shall be reduced by the amount of salary based severance compensation triggered by a Change of Control under the terms of any other agreement between employee and Employer (or any affiliate). In no event shall any eligible employee be obligated to seek other employment by way of mitigation of the amounts payable under this Plan, and benefits amounts payable hereunder shall not be reduced (except to the limited extent contemplated by Paragraph 6) by any remuneration from other employment any such employee may secure. -6- 9 9. AMENDMENT, TERMINATION AND BINDING EFFECT: This Plan may be amended from time to time, or terminated and discontinued at any time, in each case at the discretion of the Board of Directors of WNC. Notwithstanding the foregoing, (a) this Plan may not be amended to reduce benefits or rights to benefits or terminated by the Employer within twelve (12) months from the effective date of this Plan; PROVIDED, HOWEVER, that if a Change of Control occurs within such twelve-month period, then this Plan may not be amended or terminated within twenty-four (24) months following the Change of Control Date and (b) no amendment shall be made, nor shall this Plan be terminated in a manner, which would reduce the benefits or rights to benefits of any employee who satisfies the conditions of Paragraph 4 prior to the later of the adoption or the effective date of such amendment or termination. All the terms of this Plan, whether so expressed or not, shall be binding upon the respective successors and assigns of the Employer and shall inure to the benefit of and be enforceable by the Employer's eligible employees, and their respective heirs, personal representatives, successors and assigns. Notwithstanding anything herein to the contrary, an employee may waive any and all rights under this Plan in writing. 10. PLAN ADMINISTRATION: (a) PLAN ADMINISTRATOR. The Plan Administrator shall be the Executive Committee of the Board of Directors of WNC ("Executive Committee"), which shall have full power and authority to administer this Plan, to interpret its provisions, and to render decisions on any claims made pursuant to the terms of this Plan. (b) PROCESSING OF CLAIMS. (1) No claim form shall be used in applying for benefits under this Plan. The applicable Employer shall be required to notify each eligible employee of benefits payable under this Plan. (2) Subparagraph 10(b)(1) above notwithstanding, any employee who believes that he or she is being denied any benefit provided under this Plan shall have the right to file a written claim with the Plan Administrator. All such claims shall be submitted on a form provided by the Plan Administrator which shall be signed by the claimant and shall be considered filed on the date the claim is received by the Plan Administrator. Upon receipt of such a claim and in the event the claim is denied, the Plan Administrator shall, within a reasonable period of time, provide such claimant a written statement which shall be delivered or mailed to the claimant by certified or registered mail to such claimant's last known address, and that statement shall contain the following: (i) the specific reason or reasons for the denial of benefits; -7- 10 (ii) a specific reference to the pertinent provisions of this Plan upon which the denial is based; (iii) a description of any additional material or information which is necessary to perfect the claim and an explanation of why such material or information is necessary; and (iv) an explanation of the review procedure provided below. (3) Within 60 days after receipt of a notice of a denial of benefits as provided in Subparagraph 10(b)(2) above, the claimant or such claimant's authorized representative may request, in writing, to appear before the Plan Administrator for a review of the claim. In conducting its review, the Plan Administrator shall consider any written statement or other evidence presented by the claimant or authorized representative in support of the claim. The Plan Administrator shall give the claimant and the authorized representative reasonable access to all pertinent documents necessary for the preparation of the claim. (4) Within 60 days after receipt by the Plan Administrator of a written request for review of the claim, or in the event of special circumstances which require an extension of time for processing such application for review, but not later than 120 days after receipt of such application, the Plan Administrator shall provide written notification of its decision to the claimant by personal delivery or by certified or registered mail to such claimant's last known address. The decision of the Plan Administrator shall be in writing and shall include the specific reasons for the decision and shall be presented in a manner calculated to be understood by the claimant and shall contain references to all relevant Plan provision on which the decision was based. The decision of the Plan Administrator shall be final and conclusive, except as otherwise provided by law. 11. EMPLOYER CONTRIBUTIONS: Severance Payments made under this Plan shall be made from the general funds of the Employer at the time and in such amounts as determined under Paragraphs 5 and 7. 12. ADOPTION BY EMPLOYERS: Any Employer may, with the approval of the Board of Directors or Executive Committee thereof, adopt this Plan pursuant to appropriate written resolutions of its board of directors and by executing and delivering to WNC an adoptive instrument in which the Employer agrees to be bound by all the terms of this Plan with respect to its eligible employees. The adoption agreement shall become, as to such adopting Employer and its employees, a part of this Plan as then amended or thereafter amended. It shall not be necessary for the adopting Employer to sign or execute the original or an amended Plan document. The effective date of this Plan for any such Employer shall be that stated in the adoption agreement, and from and after such effective date such Employer shall assume all the rights, obligations, and liabilities under this Plan. The -8- 11 administrative powers and control of the Executive Committee as provided in this Plan, and the sole right to amend this Plan by the Board of Directors of WNC, shall not be diminished by reason of the participation of any such Employer in this Plan. Nevertheless, any Employer may, with the consent of the Executive Committee, incorporate in its adoption agreement specific provisions relating to the operation of this Plan, and such provisions shall become a part of this Plan as to such Employer only. 13. GOVERNING LAW: This Plan shall be governed by and construed in accordance with the laws of the State of Texas except to the extent preempted by federal law. 14. MISCELLANEOUS: If an employee shall obtain any money judgment or otherwise prevail with respect to any litigation brought by the employee or the Employer to enforce or interpret any provision contained herein, the Employer, to the fullest extent permitted by applicable law, hereby indemnifies the employee for his reasonable attorneys' fees and disbursements incurred in such litigation and hereby agrees (a) to pay in full all such fees and disbursements and (b) to pay prejudgment interest on any money judgment obtained by the employee from the earliest date that payment to him should have been made under this Plan until such judgment shall have been paid in full, which interest shall be calculated at the prime or base rate of interest announced by Texas Commerce Bank Houston, Texas (or any successor thereto) and shall change when and as any such change in such prime or base rate shall be announced by Texas Commerce Bank. It is intended by the foregoing that attorneys' fees and disbursements incurred in litigation will not be recoverable in the case of an employee who is adjudicated to either have been terminated for Cause or otherwise not be entitled to benefits under this Plan. 15. EFFECTIVE DATE This Plan shall be effective as of July 26, 1994. ATTEST: WESTERN NATIONAL CORPORATION By: /s/ Dwight L. Cramer By: /s/ Michael J. Poulos ------------------------- ----------------------------------------- Dwight L. Cramer Michael J. Poulos Corporate Secretary Chairman of the Board, President and Chief Executive Officer Date: August 1, 1994 Date: August 1, 1994 -9- 12 EXECUTION COPY WESTERN NATIONAL CORPORATION AMENDMENT NO. 1 JOB SECURITY PLAN (CASH PAYMENT AND CONTINUATION OF WELFARE BENEFITS) EFFECTIVE DATE AUGUST 1, 1995 13 WESTERN NATIONAL CORPORATION JOB SECURITY PLAN AMENDMENT NO. 1 This Amendment No. 1 (the "Amendment") to the Job Security Plan (the "Plan") of Western National Corporation (the "Corporation"), effective as of August 1, 1995, was duly adopted by the Board of Directors of the Corporation at a meeting held on July 25, 1995. 1. CHANGE OF CONTROL. The definition of "Change of Control" set forth in Section 3(d) of the Plan shall be and hereby is amended by the addition of the following paragraph after the third paragraph of such Section 3(d): Further notwithstanding, no "Change of Control" shall be deemed to have occurred as a result of (i) an increase in the percentage ownership of American General Corporation or any subsidiary ("American General") thereof in voting securities of the Corporation which results from (i) any purchase by American General of shares of Common Stock of the Corporation in compliance with the terms and provisions of that certain Shareholder's Agreement, dated December 2, 1994, between the Corporation and American General, provided that after such transaction American General does not own more than 79 percent of the voting securities of the Corporation, or (ii) an increase in the percentage ownership of American General of the voting securities of the Corporation which results from any open-market or privately negotiated repurchases of voting securities of the Corporation by the Corporation other than in a "Rule 13e-3 transaction", as such term is defined in SEC Rule 13e-3 under the Exchange Act. 2. PLAN EXTENDED. Section 9 of the Plan shall be and hereby is amended so that clause (a) of the second sentence of such section shall provide, in part that "this Plan may not be amended to reduce benefits or rights to benefits or terminated by the Employer within twelve (12) months from the effective date of this Amendment". 3. MISCELLANEOUS. a. All capitalized terms used but no defined herein shall have the meaning ascribed to them in the Plan. b. Except as amended hereby, the Plan shall remain in full force and effect. 14 Executed as of this 25th day of July, 1995. Western National Corporation By: /s/ Michael J. Poulos -------------------------------------------- Michael J. Poulos Chairman of the Board, President and Chief Executive Officer ATTEST: By: /s/ Dwight L. Cramer -------------------------- Dwight L. Cramer Corporate Secretary 15 WESTERN NATIONAL CORPORATION AMENDMENT NO. 2 JOB SECURITY PLAN (CASH PAYMENT AND CONTINUATION OF WELFARE BENEFITS) EFFECTIVE DATE AUGUST 1, 1996 16 WESTERN NATIONAL CORPORATION JOB SECURITY PLAN AMENDMENT NO. 2 This Amendment No. 2 (the "Amendment") to the Job Security Plan (the "Plan") of Western National Corporation (the "Corporation"), effective as of August 1, 1996, was duly adopted by the Board of Directors of the Corporation at a meeting held on July 23, 1996. 1. PLAN EXTENDED. Section 9 of the Plan shall be and hereby is amended so that clause (a) of the second sentence of such section shall provide, in part that "this Plan may not be amended to reduce benefits or rights to benefits or terminated by the Employer within twelve (12) months from the effective date of this Amendment". 2. MISCELLANEOUS. a. All capitalized terms used but no defined herein shall have the meaning ascribed to them in the Plan. b. Except as amended hereby, the Plan shall remain in full force and effect. Executed as of this 23rd day of July, 1996. Western National Corporation By: /s/ Michael J. Poulos ------------------------------------------ Michael J. Poulos Chairman of the Board, President and Chief Executive Officer ATTEST: By: /s/ Dwight L. Cramer ------------------------------- Dwight L. Cramer Corporate Secretary 17 WESTERN NATIONAL CORPORATION AMENDMENT NO. 3 JOB SECURITY PLAN (CASH PAYMENT AND CONTINUATION OF WELFARE BENEFITS) EFFECTIVE DATE MARCH 1, 1997 18 WESTERN NATIONAL CORPORATION JOB SECURITY PLAN AMENDMENT NO. 3 This Amendment No. 3 (the "Amendment") to the Job Security Plan (the "Plan") of Western National Corporation (the "Corporation"), effective as of March 1, 1997, was duly adopted by the Board of Directors of the Corporation at a meeting held on February 11, 1997. 1. PLAN EXTENDED. Section 9 of the Plan shall be and hereby is amended so that clause (a) of the second sentence of such section shall provide, in part that "this Plan may not be amended to reduce benefits or rights to benefits or terminated by the Employer within twelve (12) months from the effective date of this Amendment." 2. MISCELLANEOUS. a. All capitalized terms used but not defined herein shall have the meaning ascribed to them in the Plan. b. Except as amended hereby, the Plan shall remain in full force and effect. Executed as of this 11th day of February, 1997. Western National Corporation By: /s/ Michael J. Poulos ------------------------------------------ Michael J. Poulos Chairman of the Board, President and Chief Executive Officer ATTEST: By: /s/ Dwight L. Cramer ------------------------------ Dwight L. Cramer Corporate Secretary EX-10.32 5 CREDIT AGREEMENT DATED 02/20/97 1 EXHIBIT 10.32 EXECUTION COPY U.S. $150,000,000 CREDIT AGREEMENT AMONG WESTERN NATIONAL CORPORATION AS BORROWER, FIRST UNION NATIONAL BANK OF NORTH CAROLINA AND OTHER LENDERS NAMED HEREIN, AS LENDERS, FIRST UNION NATIONAL BANK OF NORTH CAROLINA, AS AGENT, AND TEXAS COMMERCE BANK NATIONAL ASSOCIATION, AS CO-AGENT FEBRUARY 20, 1997 2 TABLE OF CONTENTS
Page ---- ARTICLE I DEFINITIONS 1.1 Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -1- 1.2 Use of Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -17- 1.3 Cross References; Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -17- 1.4 Accounting Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -18- 1.5 Other Definitional Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -18- ARTICLE II REVOLVING CREDIT FACILITY 2.2 Committed Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -19- 2.3 Bid Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -20- 2.4 Disbursements; Funding Reliance; Domicile of Loans . . . . . . . . . . . . . . . . . . . . . . . -23- 2.5 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -23- 2.6 Termination and Reduction of Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . -24- 2.7 Mandatory Payment and Prepayment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -24- 2.8 Voluntary Prepayment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -25- 2.9 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -25- 2.10 Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -27- 2.11 Interest Periods. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -27- 2.12 Conversions and Continuations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -28- 2.13 Method of Payments; Computations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -29- 2.14 Recovery of Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -30- 2.15 Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -31- 2.16 Pro Rata Treatment; Sharing of Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . -31- 2.17 Increased Costs; Change in Circumstances; Illegality; etc. . . . . . . . . . . . . . . . . . . . -31- 2.18 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -33- 2.19 Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -35- ARTICLE III CONDITIONS OF CLOSING AND BORROWING 3.1 Conditions of Closing and Initial Borrowing . . . . . . . . . . . . . . . . . . . . . . . . . . -35- 3.2 Conditions to All Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -38- 3.3 Waiver of Conditions Precedent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -38-
3 ARTICLE IV REPRESENTATIONS AND WARRANTIES 4.1 Corporate Organization and Power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -38- 4.2 Certain Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -39- 4.3 Litigation; Government Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -39- 4.4 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -39- 4.5 Conflicts With Other Instruments, Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -40- 4.6 Governmental Compliance; Insurance Licenses . . . . . . . . . . . . . . . . . . . . . . . . . . -40- 4.7 Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -40- 4.8 Margin Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -40- 4.9 Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -40- 4.10 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -41- 4.11 Ownership of Properties, Subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -41- 4.12 Business Locations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -41- 4.13 Accuracy of Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -41- 4.14 Subsidiaries; Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -41- 4.15 Investment Company Act; Public Utility Holding Company Act . . . . . . . . . . . . . . . . . . . -41- 4.16 Employee Plans; ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -41- 4.17 Financial Statements of the Borrower and its Insurance Subsidiary. . . . . . . . . . . . . . . . -42- 4.18 SAP Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -43- 4.19 Solvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -44- 4.20 Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -44- 4.21 Assets for Conduct of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -45- 4.22 Trade Relations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -45- 4.23 Securities Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -45- 4.24 Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -45- 4.25 Employees and Labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -45- 4.26 Reinsurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -46- 4.27 Policies of Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -46- ARTICLE V AFFIRMATIVE COVENANTS 5.1 Repayment of Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -46- 5.2 Performance Under Loan Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -46- 5.3 Reports, Certificates and Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . -46- 5.4 Corporate Existence; Foreign Qualification . . . . . . . . . . . . . . . . . . . . . . . . . . . -50- 5.5 Books, Records and Inspections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -50- 5.6 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -51- 5.7 Taxes and Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -51- 5.8 Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -51- 5.9 COBRA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -51- 5.10 Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -51-
4 5.11 Maintenance of Permits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -51- 5.12 Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -51- 5.13 Interest Rate Protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -51- ARTICLE VI NEGATIVE COVENANTS 6.1 Consolidated Net Worth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -51- 6.2 Adjusted Statutory Capital and Surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -52- 6.3 Ratio of Consolidated Indebtedness to Total Capitalization . . . . . . . . . . . . . . . . . . . -52- 6.4 Risk Based Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -52- 6.6 Limitation on Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -52- 6.7 Reinsurance Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -52- 6.8 Limitation on Lines of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -52- 6.9 Mergers, Consolidations and Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -53- 6.10 Change in Ownership; Issuance of Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -53- 6.11 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -53- 6.12 Business Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -53- 6.13 Transactions with Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -54- 6.14 Restricted Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -54- 6.15 Stock of Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -54- 6.16 Negative Pledge Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -54- 6.17 Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -54- 6.18 Certain Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -54- 6.19 Hazardous Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -55- ARTICLE VII EVENTS OF DEFAULT 7.1 Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -55- ARTICLE VIII RIGHTS AND REMEDIES AFTER EVENT OF DEFAULT; INTERCREDITOR PROVISIONS 8.1 Rights and Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -58- 8.2 Set-off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -58- 8.3 Intercreditor Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -59- 8.4 Rights and Remedies Cumulative; Non-waiver; Etc . . . . . . . . . . . . . . . . . . . . . . . . -60-
5 ARTICLE IX THE AGENT 9.1 Appointment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -60- 9.2 Nature of Duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -60- 9.3 Exculpatory Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -61- 9.4 Reliance by Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -61- 9.5 Non-Reliance on Agent and Other Lenders . . . . . . . . . . . . . . . . . . . . . . . . . . . . -61- 9.6 Notice of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -62- 9.7 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -62- 9.8 The Agent in its Individual Capacity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -62- 9.9 Successor Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -63- 9.10 Co-Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -63- ARTICLE X ASSIGNMENTS AND PARTICIPATIONS 10.1 Assignments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -63- 10.2 Participations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -64- 10.3 Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -65- ARTICLE XI MISCELLANEOUS 11.1 Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -65- 11.3 Governing Law; Consent to Jurisdiction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . -66- 11.4 Arbitration; Preservation and Limitation of Remedies . . . . . . . . . . . . . . . . . . . . . . -67- 11.5 Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -68- 11.6 Indemnification of the Agent and the Lenders . . . . . . . . . . . . . . . . . . . . . . . . . . -68- 11.7 Waivers by the Borrower . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -69- 11.8 Assignment and Sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -69- 11.9 Amendment or Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -69- 11.10 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -70- 11.11 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -70- 11.12 Binding Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -70- 11.13 Execution in Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -70- 11.14 Conflict of Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -70- 11.15 Injunctive Relief . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -70- 11.16 Syndication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -71-
6 EXHIBITS Exhibit A-1 Form of Committed Loan Note Exhibit A-2 Form of Bid Loan Note Exhibit B-1 Form of Notice of Committed Borrowing Exhibit B-2 Form of Notice of Conversion/Continuation Exhibit C-1 Form of Bid Request Exhibit C-2 Form of Invitation for Bids Exhibit C-3 Form of Bid Exhibit D Form of Assignment and Acceptance Exhibit E-1 Form of Compliance Certificate (GAAP Financial Statements) Exhibit E-2 Form of Compliance Certificate (Statutory Financial Statements) Exhibit F Form of Funding Loss Methodology Exhibit G Form of Opinion of Borrower's Counsel SCHEDULES Schedule 4.3 Claims Against Borrower Schedule 4.6 Good Standing and Jurisdictions of Insurance Subsidiary Schedule 4.12 Borrower Affiliate Offices Schedule 4.14 Subsidiaries and Affiliates Schedule 4.16 Employee Plans Disclosures Schedule 4.20 Environmental Matters Schedule 4.26 Reinsurance Agreements Schedule 6.6 Existing Liens Schedule 6.8 Life Insurance Lines of Business Schedule 6.12 Business Activities Schedule 6.16 Negative Pledge Agreements
7 EXECUTION COPY CREDIT AGREEMENT THIS CREDIT AGREEMENT, dated as of the 20th day of February, 1997 (the "Credit Agreement" or the "Agreement"), is by and between WESTERN NATIONAL CORPORATION, a Delaware corporation with its principal offices in Houston, Texas (the "Borrower"); and FIRST UNION NATIONAL BANK OF NORTH CAROLINA, a national banking association with its principal offices in Charlotte, North Carolina ("First Union"), the financial institutions listed on the signature pages hereof, and the other banking and financial institutions that may become a party hereto pursuant to ARTICLE X hereof (collectively the "Lenders"); FIRST UNION, as agent for the Lenders (in such capacity, the "Agent"); and TEXAS COMMERCE BANK NATIONAL ASSOCIATION, a national banking association with its principal offices in Houston, Texas (the "Co-Agent"). RECITALS A. The Borrower has requested the Lenders to extend credit to it on a revolving basis in an aggregate principal amount of up to $150,000,000 to be used (i) to repay the Borrower's outstanding senior revolving credit facility and (ii) to provide funds for general corporate purposes. B. The Lenders are willing to extend such revolving credit pursuant to the terms and subject to the conditions set forth herein. AGREEMENT NOW, THEREFORE, for 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 1.1 Defined Terms. For purposes of this Credit Agreement, in addition to the terms defined elsewhere herein, the following terms shall have the meanings set forth below: "Absolute Rate" shall have the meaning given to such term in SECTION 2.3(C)(V). "Absolute Rate Auction" shall mean a solicitation of Bids setting forth Absolute Rates pursuant to SECTION 2.3. 8 "Absolute Rate Loan" shall mean, at any time, any Bid Loan that bears interest at such time at an Absolute Rate established pursuant to an Absolute Rate Auction. "Account Designation Letter" shall mean a letter from the Borrower to the Agent, duly completed and signed by an Authorized Officer and in form and substance satisfactory to the Agent, listing any one or more accounts to which the Borrower may from time to time request the Agent to forward the proceeds of any Loans made hereunder. "Adjusted LIBOR Rate" shall mean, at any time with respect to any Loan, a rate per annum equal to the LIBOR Rate plus the LIBOR Committed Margin, each as in effect at such time. "Adjusted Statutory Capital and Surplus" shall mean, as to the Insurance Subsidiary, as of any date, the sum of the amount of statutory capital and surplus as shown on page 3, column 1, line 38 of the Annual Statement, plus the amount of any asset valuation reserve maintained by the Insurance Subsidiary in accordance with SAP set forth on page 3, column 1, line 24.1 of the Annual Statement, or the sum of such amounts determined in a consistent manner for any date other than one as of which an Annual Statement is prepared. "Admitted Assets" shall mean, as to the Insurance Subsidiary, as of any date, the total amount shown on page 2, column 1, line 24 of the Annual Statement of the Insurance Subsidiary, or an amount determined in a consistent manner for any date other than one as of which an Annual Statement is prepared. "Affiliate" shall mean, as to any Person, each of the Persons that directly or indirectly, through one or more intermediaries, owns or controls, or is controlled by or under common control with, such Person. For the purpose of this definition, "control" means the possession, direct or indirect, of the power to direct or cause the direction of management and policies, whether through the ownership of voting securities, by contract or otherwise, provided that in any event: (i) any Person which owns directly or indirectly 20% or more of the Securities having ordinary voting power for the election of directors or other governing body of a corporation or 20% or more of the partnership or other ownership interests of any other Person (other than as a limited partner of such other Person) will be deemed to control such corporation or other Person, and (ii) each director and officer of the Borrower or Insurance Subsidiary shall be deemed to be an Affiliate of the Borrower. "Agent" shall mean First Union and any successor agents appointed pursuant to ARTICLE IX. "Agreement" shall mean this Credit Agreement, together with any amendments, modifications and supplements hereto and restatements hereof, in whole or in part. "Aggregate Unutilized Commitments" shall mean, at any time, (i) the sum of the Commitments at such time less (ii) the sum of the aggregate principal amount of Loans outstanding at such time. "Annual Statement" shall mean an annual financial statement of the Insurance Subsidiary as required to be filed with the insurance commissioner (or similar authority) of its state of domicile, together with all exhibits and schedules filed therewith, prepared in conformity with SAP. -2- 9 "Assignment and Acceptance" shall mean an Assignment and Acceptance Agreement between any Lender and an Eligible Assignee, pursuant to which such Lender assigns to such assignee, and the assignee accepts, all or a portion of such Lender's rights and obligations under this Credit Agreement, substantially in the form of EXHIBIT D hereto. "Authorized Officer" shall mean the president or chief financial officer of the Borrower or any other officer of the Borrower authorized by resolution of the board of directors of the Borrower to engage in the activity specified herein with respect to such officer and whose signatures and incumbency shall have been certified to the Agent pursuant to SECTION 3.2(A)(IV). "Bankruptcy Code" shall mean 11 U.S.C. Sections 101 et seq., as amended from time to time, and any successor statute. "Base Rate" shall mean the higher of (i) the per annum interest rate publicly announced from time to time by First Union in Charlotte, North Carolina, to be its prime or base rate (which may not necessarily be its best lending rate), as adjusted to conform to changes as of the opening of business on the date of any such change in such prime or base rate, or (ii) 0.5% per annum plus the Federal Funds Rate, as adjusted to conform to changes as of the opening of business on the date of any such change in the Federal Funds Rate. "Base Rate Loan" shall mean, at any time, any outstanding Committed Loan that bears interest at such time at the Base Rate as in effect at such time. "Bid" shall mean an offer by a Lender to make one or more Bid Loans in accordance with the provisions of SECTION 2.3. "Bid Borrowing" shall mean the incurrence by the Borrower on a single date of any one or more Bid Loans of a single Type and as to which a single Interest Period is in effect, in accordance with the provisions of SECTION 2.3. "Bid Loan Notes" shall mean the promissory notes of the Borrower in substantially the form of EXHIBIT A-2, together with any amendments, modifications and supplements thereto, substitutions therefor and restatements thereof. "Bid Loans" shall have the meaning given to such term in SECTION 2.1(B). "Bid Request" shall have the meaning given to such term in SECTION 2.3(A). "Borrower" shall mean Western National Corporation, a Delaware corporation, and its successors and assigns. "Borrower Affiliate" shall mean any of the Borrower or any of its Material Subsidiaries. "Borrowing" shall mean a Committed Borrowing or a Bid Borrowing. "Borrowing Date" shall mean, with respect to any Borrowing, the date on which such Borrowing is made. -3- 10 "Business Day" shall mean (i) for all purposes other than as covered by clause (ii) below, any day excluding Saturday, Sunday and any day that shall be in the City of Charlotte, North Carolina, a legal holiday or a day on which banking institutions are authorized by law or other governmental actions to close, and (ii) with respect to all determinations and notices in connection with, and payments of principal and interest on, LIBOR Loans, any day that is a Business Day described in clause (i) and that is also a day for trading by and between banks in Dollar deposits in the London interbank market. "Capital Lease" shall mean any lease of any property that would, in accordance with Generally Accepted Accounting Principles, be required to be classified and accounted for as a capital lease on a balance sheet of the lessee. "Cash Equivalents" shall mean (i) securities issued or unconditionally guaranteed by the United States of America or any agency or instrumentality thereof, backed by the full faith and credit of the United States of America and maturing within one year, (ii) securities issued by any state of the United States of America or any political subdivision or public instrumentality thereof, maturing within one year and having a rating of at least A or the equivalent thereof by S&P or at least A2 or the equivalent thereof by Moody's, (iii) commercial paper issued by any Person organized under the laws of the United States of America or any state thereof, maturing in no more than 270 days and having a rating of at least A-1 or the equivalent thereof by S&P or at least P-1 or the equivalent thereof by Moody's, (iv) repurchase transactions in which the Borrower Affiliate lends cash to a primary dealer and the primary dealer collateralizes the borrowing of the cash with securities defined in clause (i) above, provided that such primary dealer shall have a rating on its public debt of at least A or the equivalent thereof by S&P or at least A2 or the equivalent thereof by Moody's, (v) time deposits and certificates of deposit that are insured by the Federal Deposit Insurance Corporation (the "FDIC") or any successor instrumentality of the government of the United States of America up to the applicable limit on insurance granted by the FDIC or such other instrumentality with respect to such instruments (it being understood that the amount invested in such instrument may not exceed the limit on such insurance), maturing within one year and issued by a bank or trust company organized under the laws of the United States of America or any state thereof and having combined capital and surplus of at least $250,000,000 and (vi) money market funds substantially all of whose assets are comprised of securities of the types described in clauses (i) through (iii) above. "Change in Ownership" shall mean the acquisition by any Person and its Affiliates or any "Person" as defined in Section 13(d) of the Securities and Exchange Act of 1934 and the regulations promulgated thereunder of Stock representing twenty percent (20%) or more of the voting control of the Borrower. This term shall not include acquisitions of Stock by American General Corporation. "Closing" shall mean the execution and delivery of this Credit Agreement and the other Loan Documents contemplated hereby by the parties hereto or thereto, as the case may be and the satisfaction of all conditions set forth in ARTICLE III, other than the conditions of SECTIONS 3.1(G) and 3.2(A) which shall be satisfied contemporaneously with and prior to, respectively, the initial Borrowing hereunder. "Closing Date" shall mean the date the Closing occurs. "Committed Borrowing" shall mean the incurrence by the Borrower (including as a result of conversions and continuations of outstanding Committed Loans pursuant to SECTION 2.12) on a single date of a group of Committed Loans of a single Type and, in the case of LIBOR Committed Loans, as to which a single Interest Period is in effect. -4- 11 "Committed Loan Notes" shall mean the promissory notes of the Borrower in substantially the form of EXHIBIT A- 1, together with any amendments, modifications and supplements thereto, substitutions therefor and restatements thereof. "Committed Loans" shall have the meaning given to such term in SECTION 2.1(A). "Commitment" shall mean, at any time for any Lender, the amount set forth opposite such Lender's name on its signature page hereto under the heading "Commitment" or, if such Lender has entered into one or more Assignment and Acceptances, the amount set forth for such Lender at such time in the Register maintained by the Agent pursuant to SECTION 10.1(B) as such Lender's "Commitment," as such amount may be reduced at or prior to such time pursuant to the terms hereof. "Company Action Level RBC" shall mean, as to the Insurance Subsidiary, as of any date, twice the amount shown on line 28, column 1 of the schedule of Five Year Historical Data of the Annual Statement, or the amount determined in a consistent manner for any date other than one as of which an Annual Statement is prepared. "Compliance Certificate" shall mean a certificate duly executed by an Authorized Officer substantially in the form of EXHIBIT E-1 or E-2, as applicable, with such changes as the Agent may from time to time reasonably request, for the purpose of monitoring the Borrower's compliance herewith. "Consolidated Indebtedness" shall mean the Indebtedness (excluding up to $50,000,000 of Net Investment Borrowings) of Borrower and its Subsidiaries determined on a consolidated basis in accordance with Generally Accepted Accounting Principles. "Consolidated Net Worth" shall mean, as to the Borrower, the net worth of the Borrower and its Subsidiaries determined on a consolidated basis in accordance with Generally Accepted Accounting Principles, but without regard to the requirements of FAS 115. "Contingent Liability" shall mean any agreement, undertaking or arrangement by which any Person guarantees, endorses, acts as surety for or otherwise becomes or is contingently liable for (by direct or indirect agreement, contingent or otherwise, to provide funds for payment, to supply funds to, or otherwise to invest in, a debtor, or otherwise to assure a creditor against loss) the debt, obligation or other liability of any other Person (other than by endorsements of instruments in the course of collection), or for the payment of dividends or other distributions upon the shares of any other Person or undertakes or agrees (contingently or otherwise) to purchase, repurchase or otherwise acquire or become responsible for any Indebtedness, obligation or liability or any security therefor, or to provide funds for the payment or discharge thereof (whether in the form of loans, advances, stock purchases, capital contributions or otherwise), or to maintain the solvency, assets, level of income, or other financial condition of any other Person, or to make payment or transfer property to any other Person other than for value received; provided, however, that (i) the obligations of any Person under Reinsurance Agreements, (ii) miscellaneous indemnity and reimbursement obligations of any Person entered into in the ordinary course of business which, in the aggregate, are not material, and (iii) the obligations of Conseco Annuity Guarantee Corporation assumed in the ordinary course of the structured settlement annuity business of an Insurance Subsidiary shall not be deemed to be Contingent Liabilities of such Subsidiary or the Borrower for the purposes of this Credit Agreement. -5- 12 "Contractual Obligation" shall mean, relative to any Person, any obligation, commitment or undertaking under any agreement or other instrument to which such Person is a party or by which it or any of its property is bound or subject. Contractual Obligations shall not include purported obligations under any agreement or instrument that are reasonably contested in good faith by such Person. "Default" shall mean any of the events or conditions specified in ARTICLE VII, regardless of whether there shall have occurred any passage of time or giving of notice or both that would be necessary to constitute such event or condition an Event of Default. "Default Rate" shall mean, with respect to any Loan, an interest rate equal to the sum of (i) the higher of the Base Rate for such Loan or the Adjusted LIBOR Rate, plus (ii) the Utilization Fee Rate, if applicable, plus (iii) two (2) percentage points, but in no event to exceed the Highest Lawful Rate, if applicable. "Department" shall mean, with respect to the Insurance Subsidiary, the Texas Department of Insurance or such other Governmental Authority of its state of domicile charged with regulating insurance companies or insurance holding companies. "Dollars" or "$" shall mean dollars of the United States of America. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, and any successor statute of similar import, together with the regulations thereunder, as amended, reformed or otherwise modified and in effect from time to time. References to sections of ERISA shall be construed to also refer to successor sections. "ERISA Event" shall mean, with respect to any Person, (a) a Reportable Event (other than a Reportable Event not subject to the provision for 30-day notice to the Pension Benefit Guaranty Corporation under regulations issued under Section 4043 of ERISA), (b) the withdrawal of such Person or any Affiliate of such Person from an Employee Plan during a plan year in which it was a "substantial employer" as defined in Section 4001(a)(92) of ERISA if such withdrawal would have a Material Adverse Effect on such Person, (c) the filing of a notice of intent to terminate an Employee Plan under a distress termination or the treatment of a Plan amendment as a distress termination under Section 4041(c) of ERISA, (d) the institution of proceedings to terminate an Employee Plan by the Pension Benefit Guaranty Corporation under Section 4042 of ERISA, (e) the failure to make required contributions that would result in the imposition of a lien under Section 412 of the Internal Revenue Code or Section 302 of ERISA, or (f) any other event or condition which constitutes grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Employee Plan. "Eligible Assignee" shall mean (i) a commercial bank organized under the laws of the United States or any state thereof and having total assets in excess of $5,000,000,000 and total capital in excess of $500,000,000, (ii) a commercial bank organized under the laws of any other country that is a member of the OECD or a political subdivision of any such country and having total assets in excess of $5,000,000,000 and total capital in excess of $500,000,000, provided that such bank is acting through a branch or agency located in the United States, in the country under the laws of which it is organized or in another country that is also a member of the OECD, (iii) the central bank of any country that is a member of the OECD, (iv) a finance company, mutual funds, insurance company or other financial institution that is engaged in making, purchasing or otherwise investing in commercial loans in the ordinary course of its -6- 13 business and having total assets in excess of $3,000,000,000, (v) any Affiliate of an existing Lender or (vi) any other Person (other than an Affiliate of the Borrower) approved by the Agent and the Borrower, which approval shall not be unreasonably withheld. "Employee Plan" shall mean any "employee benefit plan" within the meaning of Section 3(3) of ERISA maintained by the Borrower or its Subsidiaries. "Environmental Law" shall mean any federal, state or local law, statute, ordinance, rule, regulation, permit, license, approval, interpretation, order, guidance or other legal requirement (including without limitation any subsequent enactment, amendment or modification) relating to the protection of human health or the environment, including, but not limited to, any requirement pertaining to the manufacture, processing, distribution, use, treatment, storage, disposal, transportation, handling, reporting, licensing, permitting, investigation or remediation of materials that are or may constitute a threat to human health or the environment. Without limiting the foregoing, each of the following is an Environmental Law: the Comprehensive Environmental Response, Compensation, and Liability Act (42 U.S.C. Section 9601 et seq.) ("CERCLA"), the Hazardous Material Transportation Act (49 U.S.C. Section 1801 et seq.), the Resource Conservation and Recovery Act (42 U.S.C. Section 6901 et seq.) ("RCRA"), the Federal Water Pollution Control Act (33 U.S.C. Section 1251 et seq.), the Clean Air Act (42 U.S.C. Section 7401 et seq.), the Toxic Substances Control Act (15 U.S.C. Section 2601 et seq.), the Safe Drinking Water Act (42 U.S.C. Section 300, et seq.), and the Occupational Safety and Health Act (29 U.S.C. Section 651 et seq.) ("OSHA"), as such laws have been amended or supplemented, and each similar federal, state and local statute, and each rule and regulation promulgated under such federal, state and local laws. "Event of Default" shall have the meaning specified in ARTICLE VIII hereof. "FAS 115" shall mean Statement of Financial Accounting Standards number 115 issued by the Financial Accounting Standards Board of the American Institute of Certified Public Accountants. "Facility Fee Rate" shall mean, at any time, the applicable per annum percentage as determined under the following table with reference to the Borrower's Senior Debt Rating Level as provided below:
============================================== Senior Debt Facility Rating Level Fee Rate ---------------------------------------------- I 0.080% ---------------------------------------------- II 0.100% ---------------------------------------------- III 0.125% ---------------------------------------------- IV 0.150% ==============================================
"Federal Funds Rate" shall mean, for any period, a fluctuating per annum interest rate (rounded upwards, if necessary, to the nearest 1/100 of one percentage point) equal for each day during such period to the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or if such -7- 14 rate is not so published for any day that is a Business Day, the average of the quotations for such day on such transactions received by the Agent from three federal funds brokers of recognized standing selected by the Agent. "Fee Letter" shall mean the letter from First Union to the Borrower, dated December 6, 1996, relating to the facility and administrative fees payable in respect of the transactions contemplated by this Agreement, as amended, modified or supplemented from time to time. "Financials" or "Financial Statements" shall mean the consolidated and consolidating balance sheet and statements of income and cash flow, to be delivered to the Lenders by the Borrower pursuant to SECTIONS 4.17, 4.18, 5.3(A) and 5.3(B) hereof, and all other Financial Statements of Borrower and its Subsidiaries that have previously been delivered by the Borrower to the Lenders, including without limitation any interim Financial Statements. "First Union" shall mean First Union National Bank of North Carolina, a national banking association with its principal offices in Charlotte, North Carolina. "Fiscal Quarter" shall mean any quarter of a Fiscal Year. "Fiscal Year" shall mean any period of twelve consecutive calendar months ending on the last day of December. "Generally Accepted Accounting Principles" or "GAAP" shall mean generally accepted accounting principles, as recognized by the American Institute of Certified Public Accountants, consistently applied and maintained on a consistent basis for a Person throughout the period indicated and consistent with the prior financial practice of such Person except for changes required due to changes in GAAP or changes consistent with GAAP with which the independent public accountants of Borrower concur, with the nature and effect of such changes being disclosed in the Financial Statements. "Governmental Authority" shall mean any nation or government, any state or other political subdivision thereof, and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, including, without limitation, the Department or any similar body or agency. "Hazardous Material" shall mean any substance or material meeting any one or more of the following criteria: (i) it is defined as a hazardous waste, hazardous substance, pollutant, contaminant or toxic substance under any Environmental Law; (ii) it is toxic, explosive, corrosive, ignitable, infectious, radioactive, mutagenic or otherwise hazardous, (iii) its presence requires investigation or remediation under an Environmental Law or common law; (iv) it constitutes a danger, nuisance, trespass or health or safety hazard to persons or property; (v) it is or was an underground or aboveground storage tank with a capacity of at least fifty-five gallons, whether empty, filled or partially filled with any substance; and/or (vi) it is or contains, without limiting the foregoing, asbestos, polychlorinated biphenyls, urea formaldehyde foam insulation, petroleum hydrocarbons, petroleum derived substances or waste, crude oil, nuclear fuel, natural gas or synthetic gas. "Highest Lawful Rate" shall mean, with respect to each Lender, the maximum nonusurious interest rate, if any, that at any time or from time to time may be contracted for, taken, reserved, charged or received on the Notes or other Obligations, as the case may be, under laws applicable to such Lender that are presently in effect or, to the extent allowed by law, under such applicable laws that may hereafter be -8- 15 in effect and that allow a higher maximum nonusurious interest rate than applicable laws now allow; provided, however, that this term shall apply only in the event that Texas law applies to such Lender with respect to interest or usury under this Credit Agreement and shall otherwise be null and void and of no effect. "Indebtedness" of a Person shall mean (without duplication): (i) all indebtedness of such Person for borrowed money including without limitation all obligations evidenced by bonds, debentures, notes or other similar instruments (including, with respect to the Borrower, all outstanding Obligations hereunder); (ii) indebtedness of such Person for the deferred purchase price of services or property; (iii) all obligations of such Person created or arising under any conditional sale or other title retention agreement with respect to property or assets acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property or assets); (iv) obligations of such Person under Capital Leases; (v) indebtedness of such Person arising under acceptance facilities; (vi) all obligations of such Person in respect of Rate Protection Agreements (it being understood that the amount of Indebtedness of such Person under any Rate Protection Agreement as of any date shall be deemed to equal the termination value payable by such Person if such Rate Protection Agreement were terminated on such date); (vii) indebtedness of such Person consisting of unpaid and overdue reimbursement obligations in respect of all obligations under letters of credit issued for the account of such Person; (viii) all unfunded pension fund obligations and liabilities; (ix) any Indebtedness of a partnership in which such Person is a general partner; (x) all obligations of such Person to purchase, redeem, retire, defease or otherwise make any payment in respect of any shares of capital stock of, or other ownership or profit interests in, such Person or in any other Person, or any warrants, rights or options to acquire such shares, valued, in the case of redeemable preferred stock, at the greater of its voluntary or involuntary liquidation preference plus accrued and unpaid dividends; (xi) all Indebtedness as stated in the definition of Net Investment Borrowings; (xii) all indebtedness of such Person arising out of such Person's agreement (i) to pay or purchase such indebtedness or to advance or supply funds for the payment or purchase of such indebtedness, excluding in the case of a Borrower Affiliate, liabilities assumed pursuant to its single premium immediate annuity program, (ii) to purchase, sell or lease (as lessee or lessor) property and assets, or to purchase or sell services, primarily for the purpose of enabling the debtor to make payment of such indebtedness or to assure the holder of such indebtedness against -9- 16 loss, (iii) to supply funds to or in any other manner to invest in the debtor (including, without limitation, any agreement to pay for the property and assets or services irrespective of whether such property and assets are received or such services are rendered) or (iv) otherwise to assure a creditor against loss; and (xiii) all Contingent Liabilities of such Person (including, without limitation, with respect to each of the foregoing clauses (i) through (xii), any such indebtedness or obligation that is non-recourse to the credit of such Person but is secured by assets of such Person, but in any such case only to the extent of the greater of the fair market value or the book value of such assets); PROVIDED, HOWEVER, that Indebtedness shall not include amounts payable in the ordinary course of business under the terms of insurance policies and annuities issued, assumed, or reinsured by an Insurance Subsidiary. "Insurance Code" shall mean, as to the Insurance Subsidiary, the Insurance Code of the state of domicile and any successor statute of similar import, together with the regulations thereunder, as amended or otherwise modified and in effect from time to time. References to sections of the Insurance Code shall be construed to also refer to successor sections. "Insurance Policies" shall mean policies purchased from insurance companies by either the Borrower or any Subsidiary for its own account to insure against its own liability and property loss (including, without limitation, casualty, liability and workers' compensation insurance), other than Reinsurance Agreements. "Insurance Subsidiary" shall mean Western National Life Insurance Company, and its respective successors and assigns, and any other Subsidiary of Borrower the ability of which to pay dividends is regulated by a Governmental Authority. "Interest Period" shall have the meaning given to such term in SECTION 2.11. "Internal Revenue Code" shall mean the Internal Revenue Code of 1986, and any successor statute of similar import, together with the regulations thereunder, as amended, reformed or otherwise modified and in effect from time to time. References to sections of the Internal Revenue Code shall be construed to also refer to successor sections. "Investment Grade Securities" shall mean non-equity securities that are rated "BBB-" or better by S&P, or "Baa3" by Moody's, "2" or better by the SVO, "BBB-" or better by Fitch Investors Service, Inc., or "BBB-" or better by Duff & Phelps Inc., or, in the case of securities not rated by one of the foregoing rating agencies, an equivalent rating by an equivalent rating agency selected by the Agent. "Invitation for Bids" shall have the meaning given to such term in SECTION 2.3(B). "Lenders" shall mean First Union and the other banking and financial institutions signatory hereto, and the other banking and financial institutions that may become a party to this Agreement pursuant to SECTION 10.1 hereof, and their successors or assigns. -10- 17 "Lending Office" shall mean, with respect to any Lender, the office of such Lender designated as its "Lending Office" on its signature page hereto or in an Assignment and Acceptance, or such other office as may be otherwise designated in writing from time to time by such Lender to the Borrower and the Agent. A Lender may designate separate Lending Offices as provided in the foregoing sentence for the purposes of making or maintaining different Types of Loans, and, with respect to LIBOR Loans, such office may be a domestic or foreign branch or Affiliate of such Lender. "LIBOR Auction" shall mean a solicitation of Bids setting forth LIBOR Bid Margins pursuant to SECTION 2.3. "LIBOR Bid Loan" shall mean, at any time, any Bid Loan that bears interest at such time at a rate equal to the LIBOR Rate as in effect at such time plus (or minus) a LIBOR Bid Margin established pursuant to a LIBOR Auction. "LIBOR Bid Margin" shall have the meaning given to such term in SECTION 2.3(C)(IV). "LIBOR Committed Loan" shall mean, at any time, any outstanding Committed Loan that bears interest at such time at the Adjusted LIBOR Rate as in effect at such time. "LIBOR Committed Margin" shall mean, at any time with respect to any Committed Loan, the applicable percentage as determined under the following table with reference to the Borrower's Senior Debt Rating Level:
============================================ Senior Debt LIBOR Rating Level Margin -------------------------------------------- I 0.170% -------------------------------------------- II 0.200% -------------------------------------------- III 0.275% -------------------------------------------- IV 0.350% ============================================
"Senior Debt Rating Level I" shall mean that neither rating assigned by Moody's or S&P to any class of long-term senior unsecured and unsupported debt issued by Borrower is lower than "A3" or "A-", respectively; "Senior Debt Rating Level II" shall mean that neither rating is lower than "Baa1" or "BBB+", respectively, but at least one such rating is not as high as its Senior Debt Rating Level I rating; "Senior Debt Rating Level III" shall mean that neither rating is lower than "Baa2" or "BBB", respectively, but at least one such rating is not as high as its Senior Debt Rating Level II rating; and "Senior Debt Rating Level IV" shall mean that either such rating is not as high as its Senior Debt Rating Level III rating. Each change in the LIBOR Committed Margin shall apply during the period commencing on the effective date of any change in the Senior Debt Rating Level and ending on the date immediately preceding the effective date of the next such change. If the ratings system of Moody's or S&P shall change, or if any such rating agency shall cease to be in the business of rating such debt, the Borrower and the Required Lenders shall negotiate in good faith to agree upon a substitute rating agency and to amend the references -11- 18 to specific ratings in this definition to reflect the ratings used by such substitute rating agency and, pending such agreement, the LIBOR Committed Margin shall be determined on the basis of the ratings provided by the other rating agency. "LIBOR Loan" shall mean any LIBOR Committed Loan or LIBOR Bid Loan. "LIBOR Rate" shall mean, for any Interest Period, an interest rate per annum obtained by dividing (i) (y) the rate of interest appearing on Telerate Page 3750 (or any successor page) or (z) if no such rate is available, or at the option of the Agent in any event, the rate of interest determined by the Agent to be the rate or the arithmetic mean of rates at which Dollar deposits in immediately available funds are offered by First Union to first-tier banks in the London interbank Eurodollar market, in each case under (y) and (z) above at approximately 11:00 a.m., London time, two (2) Business Days prior to the first day of such Interest Period for a period substantially equal to such Interest Period and in an amount substantially equal to the amount of First Union's Loan comprising part of such LIBOR Loan, by (ii) the amount equal to 1.00 minus the Reserve Requirement for such Interest Period. The LIBOR Rate shall be rounded to the next higher 1/100 of one percentage point; provided that, for purposes of this definition, with respect to LIBOR Bid Loans comprising a Bid Borrowing in which First Union is not participating, the LIBOR Rate shall be determined as if such LIBOR Bid Loans were LIBOR Committed Loans. "Licenses" is defined in SECTION 4.6. "Lien" shall mean any mortgage, pledge, hypothecation, assignment, security interest, lien (statutory or otherwise), preference, priority, charge or other encumbrance of any nature, whether voluntary or involuntary, including, without limitation, the interest of any vendor or lessor under any conditional sale agreement, title retention agreement, capital lease or any other lease or arrangement having substantially the same effect as any of the foregoing. "Loan" or "Loans" shall mean and collectively refer to the Committed Loans and the Bid Loans. "Loan Documents" shall mean and collectively refer to this Agreement, each of the Notes, all Supplemental Documentation, any Rate Protection Agreements between the Borrower and any Lender, and any and all amendments, modifications, replacements, substitutes and supplements to such documents, together with any other documents executed by or on behalf of the Borrower, its Insurance Subsidiary or other Affiliates in connection with any of the foregoing or that designate themselves Loan Documents under this Credit Agreement. "Loan Termination Date" shall mean the earliest of (i) the Maturity Date or such earlier date resulting from any mandatory or voluntary permanent reduction in the Total Commitment, (ii) the date of termination by the Required Lenders after the occurrence and during the continuance of an Event of Default, (iii) such date of termination as is mutually agreed upon by the Lenders and the Borrower, and (iv) the date after all Obligations have been paid in full and the Lenders are no longer obligated to make Loans hereunder. "Margin Stock" shall have the meaning provided in Regulation U. -12- 19 "Material Adverse Change" shall mean a material adverse change in the condition (financial or otherwise), operations, business, properties or financial prospects of the Borrower or the Borrower and its Subsidiaries, taken as a whole. "Material Adverse Effect" shall mean, relative to any occurrence of whatever nature (including any determination in litigation, arbitration or governmental proceeding or investigation), a materially adverse effect on: (a) the assets, business, financial condition, operations or prospects of a Person; or (b) the ability of any Person to perform any of its payment or other obligations under this Credit Agreement, any of the Notes, or any of the other Loan Documents. "Material Subsidiary" shall mean Western National Life, WNL Holding Corp., a Delaware corporation, any Subsidiary that owns, directly or indirectly, any Stock or Securities of Western National Life, and any other Subsidiary whose assets, liabilities, or revenues constitute five percent (5%) or greater of either the assets, liabilities, or revenues, respectively, of the Borrower on a consolidated basis as shown in the Financial Statements required under SECTION 5.3(A). "Maturity Date" shall mean the fifth (5th) anniversary of the Closing Date. "Moody's" shall mean Moody's Investors Service, Inc., its successors and assigns. "Multiemployer Plan" shall mean any "multiemployer plan" within the meaning of Section 4001(a)(3) of ERISA to which any Borrower Affiliate is required to make contributions. "NAIC" shall mean the National Association of Insurance Commissioners, or any successor thereto. "Net Investment Borrowings" shall mean (a) Indebtedness of the Borrower and its Subsidiaries incurred in connection with (i) mortgage-backed security transactions in which an investor sells mortgage collateral, such as securities issued by the Government National Mortgage Association and the Federal Home Loan Mortgage Corporation, for delivery in the current month while simultaneously contracting to repurchase "substantially the same" (as determined by the Public Securities Association and GAAP) collateral for a later settlement; (ii) transactions in which an investor lends cash to a primary dealer and the primary dealer collateralizes the borrowing of the cash with certain securities; (iii) transactions in which an investor lends securities to a primary dealer and the primary dealer collateralizes the borrowing of the securities with cash collateral; and (iv) transactions in which an investor makes loans of securities to a broker dealer under an agreement requiring such loans to be continuously secured by cash collateral or United States government securities, less, (b) the Short Term Investments of the Borrower and its Subsidiaries. "Notes" shall mean the Committed Loan Notes and the Bid Loan Notes. "Notice of Committed Borrowing" shall have the meaning given to such term in SECTION 2.2(A). -13- 20 "Notice of Conversion/Continuation" shall mean a notice in the form attached hereto as EXHIBIT B-2 to be delivered by the Borrower to the Agent pursuant to SECTION 2.12(B). "OECD" shall mean the Organization for Economic Cooperation and Development and any successor thereto. "Obligations" shall mean and include the Loans and all other loans, advances, indebtedness, liabilities, obligations, covenants and duties (including post-petition interest on the foregoing, to the extent lawful) owing, arising, due or payable jointly or severally, from the Borrower to any Lender, of any kind or nature, present or future, howsoever evidenced, created, incurred, acquired or owing, whether arising under this Credit Agreement, the Notes or the other Loan Documents, whether direct or indirect (including those acquired by assignment), absolute or contingent, primary or secondary, due or to become due, now existing or hereafter arising and however acquired. The term includes, without limitation, all interest, charges, expenses, fees, attorneys' fees and any other sums chargeable to the Borrower by any Lender under this Credit Agreement or any of the other Loan Documents. "Pension Benefit Guaranty Corporation" shall mean the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions. "Permitted Liens" is defined in SECTION 6.6. "Person" shall mean a corporation, an association, a joint venture, a partnership, an organization, a business, an individual, a trust or a government or political subdivision thereof or any government agency. "Prohibited Transaction" shall have the meaning given such term under ERISA or Section 4975 of the Internal Revenue Code. "Rate Protection Agreement" shall mean (a) any interest rate protection agreement, interest rate future agreement, interest rate option agreement, interest rate swap agreement, interest rate collar agreement, interest rate hedge agreement, basis swap agreement, forward rate agreement or other similar agreement or arrangement designed to protect any Person against fluctuations in interest rates (including any option to enter into any of the foregoing and any master agreement for any of the foregoing); (b) any foreign exchange contract, forward foreign exchange agreement, currency swap agreement, cross-currency rate swap agreement, currency option or other similar agreement or arrangement designed to protect any Person against fluctuations in currency values (including any option to enter into any of the foregoing and any master agreement for any of the foregoing); or (c) to the extent not covered by clauses (a) and (b) above, any derivative instrument, agreement or product used or entered into by any Person in the ordinary course of selling, issuing or underwriting insurance or reinsurance. "Regulation D" shall mean Regulation D of the Board of Governors of the Federal Reserve System, 12 C.F.R. Part 204, or any successor or other regulation relating to reserve requirements applicable to member banks of the Federal Reserve System. "Regulation G" shall mean Regulation G of the Board of Governors of the Federal Reserve System, 12 C.F.R. Part 207, or any successor or other regulation relating to reserve requirements applicable to member banks of the Federal Reserve System. -14- 21 "Regulation T" shall mean Regulation T promulgated by the Board of Governors of the Federal Reserve System, 12 C.F.R. Parts 220.3 and 220.4, or any successor or other regulation hereafter promulgated by said Board to replace the prior Regulation T and having substantially the same function. "Regulation U" shall mean Regulation U promulgated by the Board of Governors of the Federal Reserve System, 12 C.F.R. Part 221, or any successor or other regulation hereafter promulgated by said Board to replace the prior Regulation U and having substantially the same function. "Regulation X" shall mean Regulation X promulgated by the Board of Governors of the Federal Reserve System, 12 C.F.R. Part 224, or any successor or other regulation hereafter promulgated by said Board to replace the prior Regulation X and having substantially the same function. "Reinsurance Agreements" shall mean any agreement, contract, treaty, certificate or other arrangement (other than a Surplus Relief Reinsurance Agreement) whereby an Insurance Subsidiary agrees to transfer, cede or retrocede to another insurer or reinsurer all or part of the liability assumed by such an Insurance Subsidiary under a policy or policies of insurance issued by such an Insurance Subsidiary. "Reportable Event" shall have the meaning given such term in ERISA. "Required Lenders" shall mean (i) at any time prior to the Loan Termination Date, the Lenders having more than fifty percent (50%) of the aggregate Commitments at such time, and (ii) on and after the Termination Date, the Lenders having more than fifty percent (50%) of the aggregate principal amount of the Loans outstanding at such time (or, if at any time on or after the Loan Termination Date at which no Loans are outstanding, the Lenders having more than fifty percent (50%) of the aggregate Commitments immediately prior to the termination of the Commitments). "Requirement of Law" for any Person shall mean the articles of incorporation and bylaws or other organizational or governing documents of such Person, and any federal, state or local law (whether statutory, judicial or administrative), treaty, rule, ordinance or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject. "Reserve Requirement" shall, on any day, mean that percentage (expressed as a decimal) that is in effect on such day, as provided by the Board of Governors of the Federal Reserve System (or any successor governmental body) applied for determining the maximum reserve requirements (including without limitation, basic, supplemental, marginal and emergency reserves) under Regulation D with respect to "Eurocurrency liabilities" as currently defined in Regulation D, or under any similar or successor regulation with respect to Eurocurrency liabilities or Eurocurrency funding. Each determination by a Lender of the Reserve Requirement shall, in the absence of manifest error, be conclusive and binding. "S&P" shall mean Standard & Poor's Ratings Group, a division of McGraw-Hill, Inc., its successors and assigns. "Securities" shall mean common and preferred stock, partnership units and participations, certificates of equity contribution, notes, bonds, debentures, surplus debentures or notes, trust receipts and other obligations, instruments or evidences of indebtedness, including debt instruments of public and private issuers and tax-exempt securities (including, without limitation, warrants, rights, put and call -15- 22 options and other options relating thereto or any combination thereof), guarantees of indebtedness, choses in action, other property or interests commonly regarded as securities or any form of interest or participation therein (whether certificated or uncertificated) or any instruments convertible into any of the foregoing, other than insurance products issued in the ordinary course of business of an Insurance Subsidiary and any shares or interests issued pursuant to the Investment Company Act of 1940 in connection with such products. "Senior Debt Rating Level I [through] IV" shall have the meaning given such terms in the definition of "LIBOR Committed Margin." As of the Closing Date, Senior Debt Rating Level II shall be applicable to the Borrower. "Short Term Investments" shall mean Cash Equivalents and Investment Grade Securities (i) having maturities of less than one year or (ii) bearing interest at rates that are repriced to market rates at least annually. "Solvent" shall mean, with respect to any Person at any time, that such Person (i) has capital sufficient to carry on its business as presently conducted and as then proposed to be conducted, (ii) has assets sufficient to pay its debts and other liabilities (including contingent liabilities) as they become absolute and matured, and (iii) does not then intend to, and does not then believe that it will, incur debts or liabilities beyond its ability to pay such debts and liabilities as they mature, and, in the case of the Insurance Subsidiary, such term shall mean that such Subsidiary, at such time, satisfies the minimum capital requirements of the Department. "Statutory Accounting Principles" or "SAP" shall mean the statutory accounting practices prescribed or permitted by the insurance commissioner (or other similar authority) in the State of Texas for the preparation of Annual Statements and other financial reports by insurance corporations of the same type as the Insurance Subsidiary, as applied by the Insurance Subsidiary on a basis consistent with prior periods. "Statutory Financial Statements" is defined in SECTION 4.18(A). "Stock" shall mean all shares, options, interests or other equivalents (howsoever designated) of or in a corporation, whether voting or non-voting, including, without limitation, common stock, warrants, preferred stock, convertible debentures and all agreements, instruments and documents convertible, in whole or in part, into any one or more or all of the foregoing. "Subsidiary" shall mean a corporation of which the Borrower and its other Subsidiaries, individually or in the aggregate, own, directly or indirectly, such number of outstanding shares as have at the time of any determination hereunder more than 50% of the ordinary voting power for the election of directors (or their equivalent under the laws of the jurisdiction of organization of such corporation). "Supplemental Documentation" shall mean all agreements, instruments, documents, notices, schedules and other written matter necessary or requested by the Agent or the Lenders to consummate the transactions contemplated by this Credit Agreement and the Notes. "Surplus Relief Reinsurance Agreement" shall mean any transaction in which any Insurance Subsidiary cedes business under a reinsurance agreement that would be considered a "financing-type" -16- 23 reinsurance agreement as determined in accordance with principles set forth in the Statement of Financial Accounting Standards No. 113 or any successor thereto. "SVO" shall mean the Securities Valuation Office of the NAIC. "Taxes" is defined in SECTION 2.18(A). "Terminating Senior Indebtedness" shall mean the indebtedness and other monetary obligations of the Borrower under the Credit Agreement, dated as of June 8, 1995, among the Borrower, the lenders named therein, the Agent and the Co-Agent "Total Capitalization" shall mean, with respect to the Borrower, as of any date, the sum of (i) the amount of Consolidated Indebtedness as of such date and (ii) the amount of Consolidated Net Worth as of such date. "Total Adjusted Capital" shall mean, as to the Insurance Subsidiary, as of any date, the amount shown on line 27, column 1 of the schedule of Five Year Historical Data of the Annual Statement, or the amount determined in a consistent manner for any date other than one as of which an Annual Statement is prepared. "Total Commitment" shall mean, at any time, the sum of the commitments of each of the Lenders at such time, which shall not exceed $150,000,000, as reduced from time to time pursuant to ARTICLE II hereof. "Type" shall have the meaning given to such term in SECTION 2.1(C). "Utilization Fee Rate" shall mean a rate equal to 0.050% that shall be added to the Base Rate or Adjusted LIBOR Rate, as applicable, of Committed Loans as provided in SECTION 2.9 at any time that the Loans outstanding exceed 50% of the Total Commitment (it being understood that the Utilization Fee Rate shall not be added to the rate of interest otherwise applicable to Bid Loans. "Welfare Plan" shall mean any "employee welfare benefit plan" as such term is defined in ERISA, as to which the Borrower or its Subsidiaries has any liability. "Western National Life" shall mean Western National Life Insurance Company, a Texas stock insurance corporation. 1.2 USE OF DEFINED TERMS. Unless otherwise defined or the context otherwise requires, terms for which meanings are provided in this Credit Agreement shall have such meanings when used in the schedules hereto, the Loan Documents, the exhibits and any other communications delivered from time to time in connection with this Credit Agreement. 1.3 CROSS REFERENCES; HEADINGS. The words "hereof," "herein" and "hereunder" and words of similar import when used in this Credit Agreement or in any of the Loan Documents shall refer to this Credit Agreement or such Loan Document as a whole and not to any particular provision of this Credit Agreement or such Loan Document. Section, schedule and exhibit references contained in this Credit Agreement are references to sections, schedules and exhibits in or to this Credit Agreement unless -17- 24 otherwise specified. Any reference in any section or definition to any clause is, unless otherwise specified, to such clause of such section or definition. The various headings in this Credit Agreement and the Loan Documents are inserted for convenience only and shall not affect the meaning or interpretation of this Credit Agreement or such Loan Document or any provision hereof or thereof. 1.4 ACCOUNTING TERMS. Any accounting terms used in this Credit Agreement that are not specifically defined shall have the meanings customarily given them in accordance with Statutory Accounting Principles or if any such term has no customary meaning under Statutory Accounting Principles, then such term shall have the meaning customarily given it in accordance with Generally Accepted Accounting Principles; provided, however, that, in the event that changes in Statutory Accounting Principles shall be mandated by applicable Governmental Authorities or the NAIC or changes in Generally Accepted Accounting Principles shall be mandated by the Financial Accounting Standards Board, or any similar accounting body of comparable standing, or any change in accounting practices shall be recommended, by the Borrower's independent certified public accountants, and to the extent that such changes would modify or could modify such accounting terms or the interpretation or computation thereof, such changes shall be followed in defining such accounting terms only from and after the date the Borrower, the Agent and the Lenders shall have amended this Credit Agreement to the extent necessary to reflect any such changes in the financial covenants and other terms and conditions of this Credit Agreement. References to amounts on particular exhibits, schedules, lines, pages and columns of the Annual Statement are based on the format promulgated by the NAIC for the 1994 Annual Statements. If such format is changed in future years so that different information is contained in such items or they no longer exist, it is understood that the reference is to information consistent with that reported in the referenced item in the Insurance Subsidiaries' 1994 Annual Statements. 1.5 OTHER DEFINITIONAL PROVISIONS. Unless the context otherwise requires, words in the singular include the plural and words in the plural include the singular. In addition, when used herein, the terms "best knowledge of" or "to the best knowledge of" any Person shall mean matters within the actual knowledge of such Person (or an executive officer or general partner of such Person) or which should have been known by such Person after reasonable inquiry. ARTICLE II REVOLVING CREDIT FACILITY 2.1 COMMITMENTS; LOANS. (a) Each Lender severally agrees, subject to and on the terms and conditions of this Agreement, to make loans (each, a "Committed Loan," and collectively, the "Committed Loans") to the Borrower, from time to time on any Business Day during the period from and including the Closing Date to but not including the Loan Termination Date, in an aggregate principal amount at any time outstanding not exceeding its Commitment at such time, provided that no Committed Borrowing shall be made if, immediately after giving effect thereto, the sum of the aggregate principal amount of Committed Loans outstanding at such time and the aggregate principal amount of Bid Loans outstanding at such time would exceed the aggregate Commitments at such time. Subject to and on the terms and conditions of this Agreement, the Borrower may borrow, repay and reborrow Committed Loans. (b) In addition to Committed Borrowings pursuant to subsection (a) above, each Lender severally agrees that the Borrower may, subject to and on the terms and conditions of this Agreement and -18- 25 as more particularly set forth in SECTION 2.3, request the Lenders to submit offers to make loans (each, a "Bid Loan," and collectively, the "Bid Loans") to the Borrower, from time to time on any Business Day during the period from and including the Closing Date to but not including the earlier of (i) the date that is one (1) Business Day prior to the seventh (7th) day prior to the Maturity Date or (ii) the Loan Termination Date; provided, however, that the Lenders may, but shall have no obligation to, submit such offers and the Borrower may, but shall have no obligation to, accept any such offers; and provided further that no Bid Borrowing shall be made if, immediately after giving effect thereto, the sum of the aggregate principal amount of Bid Loans outstanding at such time and the aggregate principal amount of Committed Loans outstanding at such time would exceed the Total Commitment at such time. (c) The Loans shall, at the option of the Borrower and subject to the terms and conditions of this Agreement, be (i) in the case of Committed Loans, either Base Rate Loans or LIBOR Committed Loans, or (ii) in the case of Bid Loans, either Absolute Rate Loans or LIBOR Bid Loans (Base Rate Loans, LIBOR Committed Loans, Absolute Rate Loans and LIBOR Bid Loans, each, a "Type" of Loan), provided that all Loans comprising the same Borrowing shall, unless otherwise specifically provided herein, be of the same Type. 2.2 COMMITTED BORROWINGS. (a) In order to make a Committed Borrowing (other than Committed Borrowings involving continuations or conversions of outstanding Committed Loans, which shall be requested pursuant to SECTION 2.12), the Borrower will give the Agent written notice not later than 12:00 noon, Charlotte time, three (3) Business Days prior to each Committed Borrowing to be comprised of LIBOR Committed Loans and one (1) Business Day prior to each Committed Borrowing to be comprised of Base Rate Loans; provided, however, that the Borrower may, on the proposed Borrowing Date for any Bid Borrowing of Absolute Rate Loans duly requested in accordance with SECTION 2.3, give a request in accordance with this subsection (a) not later than 12:00 noon, Charlotte time, for a Committed Borrowing on such date to be comprised of Base Rate Loans. Each such notice (each, a "Notice of Committed Borrowing") shall be irrevocable, shall be given in the form of EXHIBIT B-1 and shall specify (a) the aggregate principal amount and initial Type of the Committed Loans to be made pursuant to such Committed Borrowing, (b) in the case of a Committed Borrowing of LIBOR Committed Loans, the initial Interest Period to be applicable thereto, and (c) the requested Borrowing Date, which shall be a Business Day. Notwithstanding anything to the contrary contained herein: (i) the aggregate principal amount of each Committed Borrowing comprised of Base Rate Loans shall not be less than $3,000,000 or, if greater, an integral multiple of $1,000,000 in excess thereof (or, if less, in the amount of the Aggregate Unutilized Commitments), and the aggregate principal amount of each Committed Borrowing comprised of LIBOR Committed Loans shall not be less than $3,000,000 or, if greater, an integral multiple of $1,000,000 in excess thereof; (ii) if the Borrower shall have failed to designate the Type of Committed Loans comprising a Committed Borrowing, the Borrower shall be deemed to have requested a Committed Borrowing comprised of Base Rate Loans; and (iii) if the Borrower shall have failed to select the duration of the Interest Period to be applicable to any Committed Borrowing of LIBOR Committed Loans, then the Borrower shall be deemed to have selected an Interest Period with a duration of one month. -19- 26 (b) Upon its receipt of a Notice of Committed Borrowing, the Agent will promptly notify each Lender of the proposed Committed Borrowing. Not later than 2:00 p.m., Charlotte time, on the requested Borrowing Date, each Lender will make available to the Agent at its office referred to in SECTION 11.5 (or at such other location as the Agent may designate) an amount, in Dollars and in immediately available funds, equal to the amount of the Committed Loan to be made by such Lender. To the extent the Lenders have made such amounts available to the Agent as provided hereinabove, the Agent will make the aggregate of such amounts available to the Borrower by 3:30 p.m. Charlotte time in accordance with SECTION 2.4(A) and in like funds as received by the Agent. 2.3 BID BORROWINGS. (a) In order to request the Lenders to submit Bids to make Bid Loans hereunder, the Borrower will give the Agent written notice not later than 11:00 a.m., Charlotte time, (y) five (5) Business Days prior to the requested Bid Borrowing, in the case of a LIBOR Auction, or (z) two (2) Business Days prior to the requested Bid Borrowing, in the case of an Absolute Rate Auction. The Borrower may request offers to make Bid Loans for up to three (3) separate Interest Periods in a single notice, and each such request for offers for a separate Interest Period shall be deemed a request for a separate Bid Borrowing. Each such notice (each, a "Bid Request") shall be given in the form of EXHIBIT C-1 and shall specify, with respect to each requested Bid Borrowing for a particular Interest Period: (i) the Interest Period to be applicable to such Bid Borrowing; (ii) the aggregate amount of such requested Bid Borrowing, which shall not (with respect to any single Interest Period) be less than $10,000,000 or, if greater, an integral multiple of $5,000,000 in excess thereof, but shall not cause the limits specified in SECTION 2.1(B) to be exceeded; (iii) whether the Bid Borrowing requested for a particular Interest Period is to be comprised of LIBOR Bid Loans or Absolute Rate Loans; and (iv) the requested Borrowing Date, which shall be a Business Day; PROVIDED, HOWEVER, that (x) no Interest Period applicable to any Bid Borrowing shall expire on a date later than the first (1st) Business Day prior to the Maturity Date, (y) the Borrower may not submit a Bid Request within five (5) Business Days after the date of submission of any previous Bid Request, and (z) no Bid Borrowing shall be made if, immediately after giving effect thereto, there would be outstanding Bid Loans having more than four (4) separate Interest Periods or outstanding LIBOR Committed Loans and Bid Loans together having more than eight (8) separate Interest Periods (for which purpose Interest Periods applicable to LIBOR Committed Loans and Interest Periods applicable to Bid Loans shall be deemed to be separate Interest Periods even if they are coterminous). A Bid Request not given in the form of EXHIBIT C-1 or otherwise not given in compliance with the requirements of this subsection (a) may be rejected by the Agent in its sole discretion, and the Agent shall promptly notify the Borrower of any such rejection. (b) Upon receipt of a Bid Request that is not rejected as aforesaid, the Agent will promptly deliver to the Lenders a notice in substantially the form of EXHIBIT C-2 (each such notice, an "Invitation for Bids"), the delivery of which shall constitute an invitation by the Borrower to each Lender to submit Bids, on the terms and subject to the conditions of this Agreement, offering to make Bid Loans pursuant to such Bid Request. -20- 27 (c) Each Lender may, at its discretion, submit a Bid containing an offer or offers to make Bid Loans in response to any Invitation for Bids; provided that such Lender may submit a single Bid containing an offer or offers to make up to three separate Bid Loans for each Interest Period specified in the relevant Bid Request. Each Bid must comply with the requirements of this subsection (c) and must be submitted to the Agent in writing (by facsimile transmission or otherwise) not later than 10:30 a.m., Charlotte time, (y) three (3) Business Days prior to the requested Borrowing Date, in the case of a LIBOR Auction, or (z) on the requested Borrowing Date, in the case of an Absolute Rate Auction; provided, however, that Bids submitted by the Agent (or any Affiliate of the Agent) in its capacity as a Lender may be submitted only if the Agent or such Affiliate notifies the Borrower of the terms of the offer or offers contained therein not later than 10:15 a.m., Charlotte time, (y) three (3) Business Days prior to the requested Bid Borrowing, in the case of a LIBOR Auction, or (z) on the requested Borrowing Date, in the case of an Absolute Rate Auction. Each Bid by a Lender shall (subject to the conditions of ARTICLE III and SECTION 7.1) be irrevocable, shall be submitted in substantially the form of EXHIBIT C-3 and shall specify: (i) the identity of such Lender; (ii) the Interest Period with respect to each Bid Loan for which such Bid is being made; (iii) with respect to each such Interest Period, the principal amount of each Bid Loan for which such Bid is being made, which principal amounts shall, in the aggregate with respect to each such Interest Period, be not less than $10,000,000 or, if greater, in an integral multiple of $5,000,000 in excess thereof, provided that (y) the aggregate principal amount of all Bid Loans for which a Bid is submitted may be equal to, greater than or less than the Commitment of such Lender, and (z) the aggregate principal amount of all Bid Loans offered by such Lender for a single Interest Period shall not exceed the requested principal amount of the Bid Borrowing for such Interest Period; (iv) in the case of a LIBOR Auction, the margin above or below the applicable LIBOR Rate (the "LIBOR Bid Margin") offered for each such Bid Loan, expressed as a percentage (rounded to the nearest 1/1000 of 1%) to be added to or subtracted from the applicable LIBOR Rate; (v) in the case of an Absolute Rate Auction, the fixed rate of interest per annum (rounded to the nearest 1/1000th of 1%) offered for each such Bid Loan (the "Absolute Rate"); and (vi) the proposed Borrowing Date. A Bid shall be disregarded by the Agent if it (w) is not given substantially in the form of EXHIBIT C-3 or fails to specify all of the information required by this subsection (c), (x) contains qualifying, conditional or similar language, (y) proposes terms other than or in addition to those set forth in the applicable Invitation for Bids (other than setting forth separate offers for any Interest Period as contemplated by the preceding sentence), or (z) is submitted to the Agent after 10:30 a.m., Charlotte time, (i) three (3) Business Days prior to the requested Borrowing Date, in the case of a LIBOR Auction, or (ii) on the requested Borrowing Date, in the case of an Absolute Rate Auction. -21- 28 (d) Promptly upon receipt thereof and in any event not later than 11:00 a.m., Charlotte time, (y) three (3) Business Days prior to the requested Borrowing Date, in the case of a LIBOR Auction, or (z) on the requested Borrowing Date, in the case of an Absolute Rate Auction, the Agent will notify the Borrower of the terms (i) of each Bid, if any, submitted by a Lender in compliance with the provisions of subsection (c) above, and (ii) of each Bid, if any, submitted by a Lender that amends, modifies or is otherwise inconsistent with a previous Bid submitted by such Lender with respect to the same Bid Request. Any such subsequent Bid shall be disregarded by the Agent unless such subsequent Bid is submitted solely to correct a manifest error in such former Bid and is timely received as provided in subsection (c) above. The Agent's notice to the Borrower shall specify the aggregate principal amount of each Bid Borrowing in respect of which Bids were made for each Interest Period specified in the relevant Bid Request, the respective principal amounts and LIBOR Bid Margins or Absolute Rates, as the case may be, so offered, and the identity of the Lender that made each such Bid. (e) Not later than 11:30 a.m., Charlotte time, (y) three (3) Business Days prior to the requested Borrowing Date, in the case of a LIBOR Auction, or (z) on the requested Borrowing Date, in the case of an Absolute Rate Auction, the Borrower will notify the Agent of its acceptance or rejection of the offers referred to in subsection (d) above. The Borrower shall be under no obligation to accept any offer and may choose to reject all offers, provided that the failure by the Borrower to give such notice in a timely manner shall be deemed to constitute a rejection of all Bids. In the case of acceptance, such notice shall specify the aggregate principal amount of offers for each Interest Period that are accepted. The Borrower may accept any Bid in whole or in part, subject to the limitations on the aggregate outstanding principal amount of Bid Loans set forth in SECTION 2.1(B) and provided that: (i) the aggregate principal amount of each Bid Borrowing with regard to each Interest Period shall not exceed the applicable amount set forth in the related Bid Request; (ii) the aggregate principal amount of each Bid Borrowing shall not be less than $10,000,000 or, if greater, an integral multiple of $5,000,000 in excess thereof (subject to the provisions of clause (v) below); (iii) acceptance of Bids may be made only on the basis of ascending (i.e., from the lowest effective yield to the highest) LIBOR Bid Margins or Absolute Rates within each Interest Period, as the case may be; (iv) the Borrower may not accept any Bid that is required to be disregarded under the provisions of subsection (c) above or that otherwise fails to comply with the terms and conditions of this SECTION 2.3; and (v) if offers are made by two or more Lenders with the same LIBOR Bid Margins or Absolute Rates, as the case may be, for a greater aggregate principal amount than the amount in respect of which such offers are permitted to be accepted for the related Interest Period, then if the Borrower elects to accept any such offers, the aggregate principal amount of Bid Loans in respect of which such offers are accepted shall be allocated by the Borrower among such Lenders (after consultation with the Agent) as nearly as practicable (in such integral multiples of not less than $1,000,000 as the Borrower, after consultation with the Agent, may deem appropriate) in proportion to the respective aggregate principal amounts of such offers. Determinations by the Borrower and the Agent of the amounts of Bid Loans shall be conclusive absent manifest error. -22- 29 (f) The Agent will promptly notify each Lender having submitted a Bid whether its offer has been accepted or rejected (and if accepted, with regard to each applicable Interest Period, of the amount and Absolute Rate or LIBOR Bid Margin, as the case may be). Not later than 2:00 p.m., Charlotte time, on the requested Borrowing Date, each Lender that has received such notice will make available to the Agent at its office referred to in SECTION 11.5 (or at such other location as the Agent may designate) an amount, in Dollars and in immediately available funds, equal to the amount of the Bid Loan or Bid Loans required to be made by such Lender. To the extent the relevant Lenders have made such amounts available to the Agent as provided hereinabove, the Agent will make the aggregate of such amounts available to the Borrower by 3:30 p.m. Charlotte time in accordance with SECTION 2.4(A) and in like funds as received by the Agent. (g) In respect of each Bid Request received by the Agent hereunder (regardless of whether any Bid Loans shall be offered or made in response thereto), the Borrower will pay to the Agent, on the date of receipt by the Agent of such Bid Request, a fee in the amount set forth in paragraph (ii) of the Fee Letter. 2.4 DISBURSEMENTS; FUNDING RELIANCE; DOMICILE OF LOANS. (a) The Borrower hereby authorizes the Agent to disburse the proceeds of each Borrowing in accordance with the terms of any written instructions from any of the Authorized Officers, provided that the Agent shall not be obligated under any circumstances to forward amounts to any account not listed in an Account Designation Letter. The Borrower may at any time deliver to the Agent an Account Designation Letter listing any additional accounts or deleting any accounts listed in a previous Account Designation Letter. (b) Unless the Agent has received, prior to 2:00 p.m., Charlotte time, on the relevant Borrowing Date, written notice from a Lender that such Lender will not make available to the Agent such Lender's ratable portion, if any, of the relevant Borrowing, the Agent may assume that such Lender has made such portion available to the Agent in immediately available funds on such Borrowing Date in accordance with the relevant provisions of SECTION 2.2 or SECTION 2.3, as applicable, and the Agent may, in reliance upon such assumption, but shall not be obligated to, make a corresponding amount available to the Borrower on such Borrowing Date. If and to the extent that such Lender shall not have made such portion available to the Agent, and the Agent shall have made such corresponding amount available to the Borrower, such Lender, on the one hand, and the Borrower, on the other, severally agree to pay to the Agent forthwith on demand such corresponding amount, together with interest thereon for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Agent, (i) in the case of such Lender, at the Federal Funds Rate, and (ii) in the case of the Borrower, at the rate of interest applicable at such time to Loans comprising such Borrowing, as determined under the provisions of SECTION 2.9. If such Lender shall repay to the Agent such corresponding amount, such amount shall constitute such Lender's Loan as part of such Borrowing for purposes of this Agreement. The failure of any Lender to make any Loan required to be made by it as part of any Borrowing shall not relieve any other Lender of its obligation, if any, hereunder to make its Loan as part of such Borrowing, but no Lender shall be responsible for the failure of any other Lender to make the Loan to be made by such other Lender as part of any Borrowing. (c) Each Lender may, at its option, make and maintain any Loan at, to or for the account of any of its Lending Offices, PROVIDED that any exercise of such option shall not affect the obligation of the -23- 30 Borrower to repay such Loan to or for the account of such Lender in accordance with the terms of this Agreement. 2.5 NOTES. (a) The Loans made by each Lender shall be evidenced (i) in the case of Committed Loans, by a Committed Loan Note appropriately completed in substantially the form of EXHIBIT A-1, and (ii) in the case of Bid Loans, by a Bid Loan Note appropriately completed in substantially the form of EXHIBIT A-2. (b) Each Committed Loan Note issued to a Lender shall (i) be executed by the Borrower, (ii) be payable to the order of such Lender, (iii) be dated as of the Closing Date, (iv) be in a stated principal amount equal to such Lender's Commitment, (v) bear interest in accordance with the provisions of SECTION 2.9, as the same may be applicable to the Committed Loans made by such Lender from time to time, and (vi) be entitled to all of the benefits of this Agreement and the other Loan Documents and subject to the provisions hereof and thereof. (c) Each Bid Loan Note issued to a Lender shall (i) be executed by the Borrower, (ii) be payable to the order of such Lender, (iii) be dated as of the Closing Date, (iv) be in a stated principal amount equal to the Total Commitment, (v) bear interest in accordance with the provisions of SECTION 2.9, as the same may be applicable to the Bid Loans made by such Lender from time to time, and (vi) be entitled to all of the benefits of this Agreement and the other Loan Documents and subject to the provisions hereof and thereof. (d) Each Lender will record on its internal records the amount of each Loan made by it and each payment received by it in respect thereof and will, in the event of any transfer of any of its Notes, either endorse on the reverse side thereof or on a schedule attached thereto (or any continuation thereof) the outstanding principal amount of the Loans evidenced thereby as of the date of transfer or provide such information on a schedule to the Assignment and Acceptance relating to such transfer; provided, however, that the failure of any Lender to make any such recordation or provide any such information, or any error therein, shall not affect the Borrower's obligations under this Agreement or the Notes. 2.6 TERMINATION AND REDUCTION OF COMMITMENTS. (a) The Commitments shall be automatically and permanently terminated on the Maturity Date unless sooner terminated pursuant to subsection (b) below or SECTION 8.1. (b) At any time and from time to time after the date hereof, upon not less than five (5) Business Days' prior written notice to the Agent, the Borrower may terminate in whole or reduce in part the Aggregate Unutilized Commitments, provided that any such partial reduction shall be in an aggregate amount of not less than $10,000,000 or, if greater, an integral multiple thereof. Promptly upon receipt of such notice, the Agent shall provide the Lenders a copy thereof. The amount of any termination or reduction made under this subsection (b) may not thereafter be reinstated. Each reduction of the Commitments pursuant to this subsection (b) shall be applied ratably among the Lenders according to their respective Commitments. 2.7 MANDATORY PAYMENT AND PREPAYMENT. (a) Except to the extent due or made sooner pursuant to the provisions of this Agreement, (i) the Borrower will repay the aggregate outstanding principal amount of the Committed Loans in full on the Maturity Date, and (ii) the Borrower will repay each Bid Loan on the last day of the Interest Period applicable thereto. -24- 31 (b) In the event that, at any time, the sum of the aggregate principal amount of Committed Loans outstanding at such time and the aggregate principal amount of Bid Loans outstanding at such time shall exceed the aggregate Commitments at such time (after giving effect to any concurrent termination or reduction thereof), the Borrower will immediately prepay the outstanding principal amount of the Loans in the amount of such excess. Each such prepayment shall be applied (i) first, to the outstanding principal amount of the Committed Loans, and (ii) second, to the outstanding principal amount of the Bid Loans, ratably among the Lenders holding Bid Loans in proportion to the aggregate principal amount of Bid Loans held by each. (c) Each payment or prepayment of a LIBOR Committed Loan or a Bid Loan made pursuant to the provisions of this SECTION 2.7 on a day other than the last day of the Interest Period applicable thereto shall be made together with all amounts required under SECTION 2.19 to be paid as a consequence thereof. 2.8 VOLUNTARY PREPAYMENT. (a) At any time and from time to time, the Borrower shall have the right to prepay the Committed Loans, in whole or in part, without premium or penalty (except as provided in clause (iii) below), upon written notice to the Agent given not later than 11:00 a.m., Charlotte time, three (3) Business Days prior to each intended prepayment of LIBOR Committed Loans and one (1) Business Day prior to each intended prepayment of Base Rate Loans, PROVIDED that (i) each partial prepayment shall be in an aggregate principal amount of not less than $3,000,000 or, if greater, an integral multiple of $1,000,000 in excess thereof, (ii) no partial prepayment of LIBOR Committed Loans made pursuant to any single Committed Borrowing shall reduce the aggregate outstanding principal amount of the remaining LIBOR Committed Loans under such Committed Borrowing to less than $3,000,000 or to any greater amount not an integral multiple of $1,000,000 in excess thereof, and (iii) unless made together with all amounts required under SECTION 2.19 to be paid as a consequence of such prepayment, a prepayment of a LIBOR Committed Loan may be made only on the last day of the Interest Period applicable thereto. Each such notice shall specify the proposed date of such prepayment and the aggregate principal amount and the Types of the Committed Loans to be prepaid (and, in the case of LIBOR Committed Loans, the specific Committed Borrowing or Borrowings pursuant to which made) and shall be irrevocable and shall bind the Borrower to make such prepayment on the terms specified therein. Promptly upon receipt of such notice, the Agent shall provide the Lenders a copy thereof. Amounts prepaid pursuant to this subsection (a) may be reborrowed, subject to the terms and conditions of this Agreement. (b) The Borrower shall have the right to prepay the Bid Loans on a date other than the last day of the Interest Period applicable thereto, provided that any such prepayment shall be made together with all amounts required under SECTION 2.19 to be paid as a consequence thereof. 2.9 INTEREST. (a) The Borrower will pay interest in respect of the unpaid principal amount of each Loan, from the date of Borrowing thereof until such principal amount shall be paid in full: (i) in respect of each Committed Loan, (y) at the Base Rate, as in effect from time to time during such periods as such Committed Loan is a Base Rate Loan, and (z) at a rate per annum equal to the Adjusted LIBOR Rate, as in effect from time to time during such periods as such Committed Loan is a LIBOR Committed Loan, plus, in either case, the Utilization Fee Rate, if applicable; and -25- 32 (ii) in respect of each Bid Loan, (y) at the applicable Absolute Rate established in accordance with the provisions of SECTION 2.3, if such Loan is an Absolute Rate Loan, and (z) at a rate per annum equal to the LIBOR Rate, as in effect from time to time during the applicable Interest Period, plus (or minus) the applicable LIBOR Bid Margin, if such Loan is a LIBOR Bid Loan. (b) Any principal amounts of the Loans not paid when due and, to the greatest extent permitted by law, all interest accrued on the Loans and all other fees and amounts hereunder not paid when due (whether at maturity, pursuant to acceleration or otherwise), shall bear interest at a rate per annum equal to the interest rate applicable under subsection (a) above from time to time thereafter to such Loans plus 2% (or, in the case of fees and other amounts, at the Base Rate plus 2%), and, in each case, such default interest shall be payable on demand. To the greatest extent permitted by law, interest shall continue to accrue after the filing by or against the Borrower of any petition seeking any relief in bankruptcy or under any law pertaining to insolvency or debtor relief. (c) Accrued (and theretofore unpaid) interest shall be payable as follows: (i) in respect of each Base Rate Loan (including any Base Rate Loan or portion thereof paid or prepaid pursuant to the provisions of SECTION 2.7 or SECTION 2.8, except as provided hereinbelow), in arrears on the last Business Day of each calendar quarter; PROVIDED, that in the event the Committed Loans are repaid or prepaid in full and the Commitments have been terminated, then accrued interest in respect of all Base Rate Loans shall be payable together with such repayment or prepayment on the date thereof; (ii) in respect of each LIBOR Committed Loan (including any LIBOR Committed Loan or portion thereof paid or prepaid pursuant to the provisions of SECTION 2.7 or SECTION 2.8, except as provided hereinbelow), in arrears (y) on the last Business Day of the Interest Period applicable thereto (subject to the provisions of clause (iv) in SECTION 2.11) and (z) in the case of a LIBOR Committed Loan having an Interest Period of six months, on the date three months after the first day of such Interest Period; provided, that in the event all LIBOR Committed Loans made pursuant to a single Committed Borrowing are repaid or prepaid in full, then accrued interest in respect of such LIBOR Committed Loans shall be payable together with such repayment or prepayment on the date thereof; (iii) in respect of each Bid Loan, (1) in arrears on the last day of the Interest Period applicable thereto, and (2) on the date of any repayment or prepayment thereof in full; and (iv) in respect of any Loan, at maturity (whether pursuant to acceleration or otherwise) and, after maturity, on demand. (d) Nothing contained in this Agreement or in any other Loan Document shall be deemed to establish or require the payment of interest to any Lender at a rate in excess of the maximum rate permitted by applicable law. If the amount of interest payable for the account of any Lender on any interest payment date would exceed the maximum amount permitted by applicable law to be charged by such Lender, the amount of interest payable for its account on such interest payment date shall be automatically reduced to such maximum permissible amount. In the event of any such reduction affecting any Lender, if from time to time thereafter the amount of interest payable for the account of such Lender on any interest payment -26- 33 date would be less than the maximum amount permitted by applicable law to be charged by such Lender, then the amount of interest payable for its account on such subsequent interest payment date shall be automatically increased to such maximum permissible amount, provided that at no time shall the aggregate amount by which interest paid for the account of any Lender has been increased pursuant to this sentence exceed the aggregate amount by which interest paid for its account has theretofore been reduced pursuant to the previous sentence. (e) Although it is the express intention of this Agreement that the laws of the State of Texas shall not apply hereto, solely in the event that a court applies Texas law with respect to interest or usury, and notwithstanding anything to the contrary herein or in any other Loan Document, the following provisions shall apply: (i) the aggregate of all consideration which constitutes interest that is contracted for, taken, reserved, charged or received under the Loan Documents or otherwise in connection with the Obligations shall under no circumstances exceed the maximum amount allowed by such applicable law, (ii) in the event that the maturity of the Obligations is accelerated for any reason, or in the event of any required or permitted prepayment, then such consideration that constitutes interest may never include more than such maximum amount and (iii) excess interest, if any, provided for in this Agreement or otherwise shall be cancelled automatically and, if theretofore paid, shall be credited by the Lenders on the principal amount of the Obligations (or, to the extent that the principal amount of the Obligations shall have been or would thereby be paid in full, refunded by the Lenders to the Borrower). The right to accelerate the maturity of the Obligations does not include the right to accelerate any interest which has not otherwise accrued on the date of such acceleration, and the Lenders do not intend to collect any unearned interest in the event of acceleration. All sums paid or agreed to be paid to the Lenders for the use, forbearance or detention of sums included in the Obligations shall, to the extent permitted by applicable law, be amortized, prorated, allocated and spread throughout the full term of the Obligations until payment in full so that the rate or amount of interest on account of the Obligations does not exceed the applicable usury ceiling, if any. To the extent that Article 5069-1.04 of the Texas Revised Civil Statutes is relevant to the Lenders for the purpose of determining the highest lawful interest rate, the Lenders hereby elect to determine the applicable rate ceiling under such Article by the indicated (weekly) rate ceiling from time to time in effect, subject to the Lenders' right subsequently to change such methods in accordance with applicable law. In no event shall Article 5069, Chapter 15 of the Texas Revised Civil Statutes apply to the Notes or this Agreement. (f) The Agent shall promptly notify the Borrower and the Lenders upon determining the interest rate for each Committed Borrowing of LIBOR Committed Loans after its receipt of the relevant Notice of Committed Borrowing or Notice of Conversion/Continuation; PROVIDED, HOWEVER, that the failure of the Agent to provide the Borrower or the Lenders with any such notice shall neither affect any obligations of the Borrower or the Lenders hereunder nor result in any liability on the part of the Agent to the Borrower or any Lender. Each such determination (including each determination of the Reserve Requirement) shall, absent manifest error, be final and conclusive and binding on all parties hereto. 2.10 FEES. The Borrower agrees to pay: (a) To the Agent, for the account of each Lender, a facility fee for the period from the earlier of (i) the date of the initial Borrowing hereunder or (ii) February 27, 1997 to the Loan Termination Date, at the Facility Fee Rate on the average daily Commitment of such Lender (whether or not used), payable in arrears (y) on the last Business Day of each calendar quarter and (z) on the Loan Termination Date; and -27- 34 (b) To the Agent, for its own account, the annual administrative fee described in paragraph (ii) of the Fee Letter, on the terms, in the amount and at the times set forth therein. 2.11 INTEREST PERIODS. Concurrently with the giving of a Notice of Committed Borrowing or Notice of Conversion/Continuation in respect of any Committed Borrowing comprised of LIBOR Committed Loans, and concurrently with the giving of a Bid Request in respect of any requested Bid Loans, the Borrower shall have the right to elect, pursuant to such notice, the interest period (each, an "Interest Period") to be applicable to such LIBOR Committed Loans or Bid Loans, as the case may be, which Interest Period (x) in the case of any LIBOR Committed Loan and at the option of the Borrower, shall be a one, two, three or six-month period commencing on the date of the Borrowing of such LIBOR Committed Loan (including the date of any continuation of, or conversion into, such LIBOR Committed Loan) and (as to any successive Interest Period applicable to such LIBOR Committed Loan) on the day on which the next preceding Interest Period applicable thereto expires, (y) in the case of any LIBOR Bid Loan and as agreed to by the Borrower and the Lender making such LIBOR Bid Loan, shall be a one, two or three-month period commencing on the date of the Borrowing of such LIBOR Bid Loan, or (z) in the case of any Absolute Rate Loan and as agreed to by the Borrower and the Lender making such Absolute Rate Loan, shall be a period of not less than seven (7) nor more than ninety (90) days commencing on the date of the Borrowing of such Absolute Rate Loan; PROVIDED, HOWEVER, that: (i) all LIBOR Loans comprising a single Borrowing shall at all times have the same Interest Period; (ii) the Borrower may not select any Interest Period that expires after the Maturity Date; (iii) Bid Loans may not be outstanding under more than three (3) separate Interest Periods at any one time, and LIBOR Committed Loans and Bid Loans together may not be outstanding under more than seven (7) separate Interest Periods at any one time (for which purpose Interest Periods applicable to LIBOR Committed Loans and Interest Periods applicable to Bid Loans shall be deemed to be separate Interest Periods even if they are coterminous); (iv) if any Interest Period otherwise would expire on a day that is not a Business Day, such Interest Period shall expire on the next succeeding Business Day, PROVIDED that, in the case of an Interest Period applicable to LIBOR Loans, if such next succeeding Business Day falls in another calendar month, then such Interest Period shall expire on the next preceding Business Day; (v) if any Interest Period applicable to LIBOR Loans begins on a day for which there is no numerically corresponding day in the calendar month during which such Interest Period would otherwise expire, such Interest Period shall expire on the last Business Day of such calendar month; and (vi) if, upon the expiration of any Interest Period applicable to LIBOR Committed Loans, the Borrower shall have failed to elect a new Interest Period to be applicable to such LIBOR Committed Loans, then the Borrower shall be deemed to have elected to convert such LIBOR Committed Loans into Base Rate Loans as of the expiration of the then current Interest Period applicable thereto. -28- 35 2.12 CONVERSIONS AND CONTINUATIONS. (a) The Borrower shall have the right on any Business Day to elect (i) to convert all or a portion of the outstanding principal amount of any Base Rate Loans into LIBOR Committed Loans, or to convert any LIBOR Committed Loans the Interest Periods for which end on the same day into Base Rate Loans, or (ii) to continue all or a portion of the outstanding principal amount of any LIBOR Committed Loans the Interest Periods for which end on the same day for an additional Interest Period, PROVIDED that (x) any such conversion or continuation shall involve an aggregate principal amount of not less than $3,000,000 or, if greater, an integral multiple of $1,000,000 in excess thereof, and no partial conversion of LIBOR Committed Loans made pursuant to a single Borrowing shall reduce the outstanding principal amount of such LIBOR Committed Loans to less than $3,000,000 or to any greater amount not an integral multiple of $1,000,000 in excess thereof, (y) except as otherwise provided in SECTION 2.17(D), LIBOR Committed Loans may be converted into Base Rate Loans only on the last day of the Interest Period applicable thereto (and, in any event, if a LIBOR Committed Loan is converted into a Base Rate Loan on any day other than the last day of the Interest Period applicable thereto, the Borrower will pay, upon such conversion, all amounts required under SECTION 2.19 to be paid as a consequence thereof) and (z) no conversion of Base Rate Loans into LIBOR Committed Loans or continuation of LIBOR Committed Loans shall be permitted during the continuance of a Default or Event of Default. (b) The Borrower shall make each such election by giving the Agent written notice not later than 12:00 noon, Charlotte time, three (3) Business Days prior to the effective date of any conversion of Base Rate Loans into, or continuation of, LIBOR Committed Loans and one (1) Business Day prior to the effective date of any conversion of LIBOR Committed Loans into Base Rate Loans. Each such notice (each, a "Notice of Conversion/Continuation") shall be irrevocable, shall be given in the form of EXHIBIT B-2 and shall specify (x) the date of such conversion or continuation (which shall be a Business Day), (y) in the case of a conversion into, or a continuation of, LIBOR Committed Loans, the Interest Period to be applicable thereto, and (z) the aggregate amount and Type of the Loans being converted or continued. Upon the receipt of a Notice of Conversion/Continuation, the Agent will promptly notify each Lender of the proposed conversion or continuation. In the event that the Borrower shall fail to deliver a Notice of Conversion/Continuation as provided herein with respect to any outstanding LIBOR Committed Loans, such LIBOR Committed Loans shall automatically be converted to Base Rate Loans upon the expiration of the then current Interest Period applicable thereto (unless repaid pursuant to the terms hereof). 2.13 METHOD OF PAYMENTS; COMPUTATIONS. (a) All payments by the Borrower hereunder shall be made without setoff, counterclaim or other defense, in Dollars and in immediately available funds to the Agent, for the account of the Lenders (except as otherwise expressly provided herein as to payments required to be made directly to the Lenders) at its office referred to in SECTION 11.5, prior to 12:00 noon, Charlotte time, on the date payment is due. Any payment made as required hereinabove, but after 12:00 noon, Charlotte time, shall be deemed to have been made on the next succeeding Business Day. If any payment falls due on a day that is not a Business Day, then such due date shall be extended to the next succeeding Business Day (except that in the case of LIBOR Loans to which the proviso of clause (iv) in SECTION 2.11 is applicable, such due date shall be the next preceding Business Day), and such extension of time shall then be included in the computation of payment of interest, fees or other applicable amounts. (b) The Agent will distribute to the Lenders like amounts relating to payments made to the Agent for the account of the Lenders as follows: (i) if the payment is received by 12:00 noon, Charlotte time, in immediately available funds, the Agent will make available to each relevant Lender on the same date, by wire transfer of immediately available funds, such Lender's ratable share of such payment (based -29- 36 on the percentage that the amount of the relevant payment owing to such Lender bears to the total amount of such payment owing to all of the relevant Lenders), and (ii) if such payment is received after 12:00 noon, Charlotte time, or in other than immediately available funds, the Agent will make available to each such Lender its ratable share of such payment by wire transfer of immediately available funds on the next succeeding Business Day (or in the case of uncollected funds, as soon as practicable after collected). If the Agent shall not have made a required distribution to the appropriate Lenders as required hereinabove after receiving a payment for the account of such Lenders, the Agent will pay to each such Lender, on demand, its ratable share of such payment with interest thereon at the Federal Funds Rate for each day from the date such amount was required to be disbursed by the Agent until the date repaid to such Lender. (c) Unless the Agent shall have received written notice from the Borrower prior to the date on which any payment is due to any Lender hereunder that such payment will not be made in full, the Agent may assume that the Borrower has made such payment in full to the Agent on such date, and the Agent may, in reliance on such assumption, but shall not be obligated to, cause to be distributed to such Lender on such due date an amount equal to the amount then due to such Lender. If and to the extent the Borrower shall not have so made such payment in full to the Agent, and without limiting the obligation of the Borrower to make such payment in accordance with the terms hereof, such Lender shall repay to the Agent forthwith on demand such amount so distributed to such Lender, together with interest thereon for each day from the date such amount is so distributed to such Lender until the date repaid to the Agent, at the Federal Funds Rate. (d) Each Lender for whose account any payment is to be made hereunder may, but shall not be obligated to, debit the amount of any such payment not made as and when required hereunder to any ordinary deposit account of the Borrower with such Lender (with prompt notice to the Agent and the Borrower); PROVIDED, HOWEVER, that the failure to give such notice shall not affect the validity of such debit by such Lender. (e) With respect to each payment hereunder, except as specifically provided otherwise herein or in any of the other Loan Documents, the Borrower may designate by written notice to the Agent prior to or concurrently with such payment the specific Loans or other Obligations that are to be paid, repaid or prepaid, PROVIDED that (i) unless made together with all amounts required under SECTION 2.19 to be paid as a consequence thereof, a prepayment of a LIBOR Committed Loan or a Bid Loan may be made only on the last day of the Interest Period applicable thereto, and (ii) each payment on account of any Obligations to or for the account of any one or more Lenders shall be apportioned ratably among such Lenders in proportion to the amounts of such Obligations owed to them respectively. In the absence of any such designation by the Borrower, or if an Event of Default has occurred and is continuing, the Agent shall make such designation in its sole discretion or as the Required Lenders may direct, subject to the foregoing and to the other provisions of this Agreement. (f) All computations of interest and fees hereunder (including computations of the Reserve Requirement) shall be made on the basis of a year consisting of 365 days and the actual number of days (including the first day, but excluding the last day) elapsed; PROVIDED that interest on LIBOR Loans shall be computed on the basis of a 360-day year and the actual days elapsed. 2.14 RECOVERY OF PAYMENTS. (a) The Borrower agrees that to the extent the Borrower makes a payment or payments to or for the account of the Agent or any Lender, which payment or payments or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside or required -30- 37 to be repaid to a trustee, receiver or any other party under any bankruptcy, insolvency or similar state or federal law, common law or equitable cause, then, to the extent of such payment or repayment, the Obligation intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been received. (b) If any amounts distributed by the Agent to any Lender are subsequently returned or repaid by the Agent to the Borrower or its representative or successor in interest, whether by court order or by settlement approved by the Lender in question, such Lender will, promptly upon receipt of notice thereof from the Agent, pay the Agent such amount. If any such amounts are recovered by the Agent from the Borrower or its representative or successor in interest, the Agent will redistribute such amounts to the Lenders on the same basis as such amounts were originally distributed. 2.15 USE OF PROCEEDS. The proceeds of the Loans shall be used solely (i) to repay in full the Terminating Senior Indebtedness, (ii) to pay or reimburse reasonable fees and expenses in connection with the consummation of the transactions contemplated hereby, and (iii) for working capital and general corporate purposes. 2.16 PRO RATA TREATMENT; SHARING OF PAYMENTS. (a) All fundings, continuations and conversions of Committed Loans shall be made by the Lenders pro rata on the basis of their respective Commitments (in the case of the initial funding of Committed Loans pursuant to SECTION 2.2) or Committed Loans (in the case of continuations and conversions of outstanding Committed Loans pursuant to SECTION 2.12), as applicable from time to time. (b) Each Lender agrees that if it shall receive any amount hereunder (whether by voluntary payment, realization upon security, exercise of the right of setoff or banker's lien, counterclaim or cross action, or otherwise, other than pursuant to SECTIONS 10.1 or 10.2) applicable to the payment of any of the Obligations that exceeds its ratable share (according to the proportion of (i) the amount of such Obligations due and payable to such Lender at such time to (ii) the aggregate amount of such Obligations due and payable to all Lenders at such time) of payments on account of such Obligations then or therewith obtained by all the Lenders to which such payments are required to have been made, such Lender shall forthwith purchase from the other Lenders such participations in such Obligations as shall be necessary to cause such purchasing Lender to share the excess payment or other recovery ratably with each of them; PROVIDED, HOWEVER, that if all or any portion of such excess payment is thereafter recovered from such purchasing Lender, such purchase from each such other Lender shall be rescinded and each such other Lender shall repay to the purchasing Lender the purchase price to the extent of such recovery, together with an amount equal to such other Lender's ratable share (according to the proportion of (i) the amount of such other Lender's required repayment to (ii) the total amount so recovered from the purchasing Lender) of any interest or other amount paid or payable by the purchasing Lender in respect of the total amount so recovered. The Borrower agrees that any Lender so purchasing a participation from another Lender pursuant to the provisions of this subsection may, to the fullest extent permitted by law, exercise any and all rights of payment (including, without limitation, setoff, banker's lien or counterclaim) with respect to such participation as fully as if such participant were a direct creditor of the Borrower in the amount of such participation. If under any applicable bankruptcy, insolvency or similar law, any Lender receives a secured claim in lieu of a setoff to which this subsection applies, such Lender shall, to the extent practicable, exercise its rights in respect of such secured claim in a manner consistent with the rights of the Lenders entitled under this subsection to share in the benefits of any recovery on such secured claim. If at any time any Lender having outstanding both Committed Loans and Bid Loans exercises a right of -31- 38 setoff, such Lender shall apply the proceeds of such setoff first to its Committed Loans until reduced to zero, and thereafter to its Bid Loans. 2.17 INCREASED COSTS; CHANGE IN CIRCUMSTANCES; Illegality; etc. (a) If, at any time after the Closing Date and from time to time, the introduction of or any change in any applicable law, rule or regulation or in the interpretation or administration thereof by any Governmental Authority charged with the interpretation or administration thereof, or compliance by any Lender with any guideline or request from any such Governmental Authority (whether or not having the force of law), shall (i) subject such Lender to any tax or other charge, or change the basis of taxation of payments to such Lender, in respect of any of its LIBOR Committed Loans or Bid Loans or any other amounts payable hereunder or its obligation to make, fund or maintain any LIBOR Committed Loans or Bid Loans (other than any change in the rate or basis of tax on the overall net income of such Lender or its applicable Lending Office), (ii) impose, modify or deem applicable any reserve, special deposit or similar requirement (other than as a result of any change in the Reserve Requirement) against assets of, deposits with or for the account of, or credit extended by, such Lender or its applicable Lending Office, or (iii) impose on such Lender or its applicable Lending Office any other condition affecting its LIBOR Committed Loans or Bid Loans, and the result of any of the foregoing shall be to increase the cost to such Lender of making or maintaining any LIBOR Committed Loans or Bid Loans or to reduce the amount of any sum received or receivable by such Lender hereunder, the Borrower will, within fifteen (15) days after delivery to the Borrower by such Lender of written demand therefor (which shall set forth the basis for such demand in reasonable detail), pay to such Lender such additional amounts as shall compensate such Lender for such increase in costs or reduction in return. (b) If, at any time after the Closing Date and from time to time, any Lender shall have reasonably determined that the introduction of or any change in any applicable law, rule or regulation regarding capital adequacy or in the interpretation or administration thereof by any Governmental Authority charged with the interpretation or administration thereof, or compliance by such Lender with any guideline or request from any such Governmental Authority (whether or not having the force of law), has or would have the effect, as a consequence of such Lender's Commitment or Loans hereunder, of reducing the rate of return on the capital of such Lender or any Person controlling such Lender to a level below that which such Lender or controlling Person could have achieved but for such introduction, change or compliance (taking into account such Lender's or controlling Person's policies with respect to capital adequacy), the Borrower will, within fifteen (15) days after delivery to the Borrower by such Lender of written demand therefor (which shall set forth the basis for such demand in reasonable detail), pay to such Lender such additional amounts as will compensate such Lender or controlling Person for such reduction in return. (c) If, on or prior to the first day of any Interest Period, (y) the Agent shall have determined that adequate and reasonable means do not exist for ascertaining the applicable LIBOR Rate for such Interest Period or (z) the Agent shall have received written notice from the Required Lenders of their determination that the rate of interest referred to in the definition of "LIBOR Rate" upon the basis of which the applicable interest rate for LIBOR Loans for such Interest Period is to be determined will not adequately and fairly reflect the cost to such Lenders of making or maintaining LIBOR Loans during such Interest Period, the Agent will forthwith so notify the Borrower and the Lenders. Upon such notice, (i) all then outstanding LIBOR Committed Loans shall automatically, on the expiration date of the respective Interest Periods applicable thereto (unless then repaid in full), be converted into Base Rate Loans, (ii) the obligation of the Lenders to make LIBOR Bid Loans or to make, to convert Base Rate Loans into, or to continue, LIBOR Committed Loans shall be suspended (including pursuant to the Borrowing to which such -32- 39 Interest Period applies), and (iii) any Notice of Committed Borrowing, Bid Request or Notice of Conversion/Continuation given at any time thereafter with respect to LIBOR Loans shall be deemed to be a request for Base Rate Loans (or, in the case of a Bid Borrowing, Absolute Rate Loans), in each case until the Agent or the Required Lenders, as the case may be, shall have determined that the circumstances giving rise to such suspension no longer exist (and the Required Lenders, if making such determination, shall have so notified the Agent), and the Agent shall have so notified the Borrower and the Lenders. Notwithstanding the foregoing, the Agent and each Lender will take any reasonable actions available to it (including designation of a different Lending Office), consistent with legal and regulatory restrictions, that will avoid the need to take the steps described in this subsection (c) and that will not, in the reasonable judgment of the Agent or such Lender, be materially disadvantageous to it. (d) Notwithstanding any other provision in this Agreement, if, at any time after the Closing Date and from time to time, any Lender shall have determined in good faith that the introduction of or any change in any applicable law, rule or regulation or in the interpretation or administration thereof by any Governmental Authority charged with the interpretation or administration thereof, or compliance with any guideline or request from any such Governmental Authority (whether or not having the force of law), has or would have the effect of making it unlawful for such Lender to make or to continue to make or maintain LIBOR Loans, such Lender will forthwith so notify the Agent and the Borrower. Upon such notice, (i) each of such Lender's then outstanding LIBOR Committed Loans shall automatically, on the expiration date of the respective Interest Period applicable thereto (or, to the extent any such LIBOR Committed Loan may not lawfully be maintained as a LIBOR Committed Loan until such expiration date, upon such notice), be converted into a Base Rate Loan, (ii) the obligation of such Lender to make LIBOR Bid Loans or to make, to convert Base Rate Loans into, or to continue, LIBOR Committed Loans shall be suspended (including pursuant to any Borrowing for which the Agent has received a Notice of Committed Borrowing or Bid Request but for which the Borrowing Date has not arrived), and (iii) any Notice of Committed Borrowing, Bid Request or Notice of Conversion/Continuation given at any time thereafter with respect to LIBOR Loans shall, as to such Lender, be deemed to be a request for a Base Rate Loan (or, in the case of a Bid Borrowing, an Absolute Rate Loan), in each case until such Lender shall have determined that the circumstances giving rise to such suspension no longer exist and shall have so notified the Agent, and the Agent shall have so notified the Borrower. Notwithstanding the foregoing, the Agent and each Lender will take any reasonable actions available to it (including designation of a different Lending Office), consistent with legal and regulatory restrictions, that will avoid the need to take the steps described in this subsection (d) and that will not, in the reasonable judgment of the Agent or such Lender, be materially disadvantageous to it. (e) Determinations by the Agent or any Lender for purposes of this SECTION 2.17 of any increased costs, reduction in return, market contingencies, illegality or any other matter shall, absent manifest error, be conclusive, PROVIDED that such determinations are made in good faith. Nothing in this SECTION 2.17 shall require or be construed to require the Borrower to pay any interest, fees, costs or other amounts in excess of that permitted by applicable law. 2.18 TAXES. (a) Any and all payments by the Borrower hereunder or under any Note shall be made, in accordance with the terms hereof and thereof, free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, other than net income and franchise taxes imposed on the Agent or any Lender by the United States or by the jurisdiction under the laws of which the Agent or such Lender, as the case may be, is organized or in which its principal office or (in the case of a Lender) its applicable Lending Office is -33- 40 located, or any political subdivision or taxing authority thereof (all such nonexcluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes"). If the Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder or under any Note to the Agent or any Lender, (i) the sum payable shall be increased as may be necessary so that after making all required deductions (including deductions applicable to additional sums payable under this SECTION 2.18), the Agent or such Lender, as the case may be, receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower will make such deductions, (iii) the Borrower will pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law and (iv) the Borrower will deliver to the Agent or such Lender, as the case may be, evidence of such payment. (b) The Borrower will indemnify the Agent and each Lender for the full amount of Taxes (including, without limitation, any Taxes imposed by any jurisdiction on amounts payable under this SECTION 2.18) paid by the Agent or such Lender, as the case may be, and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto, whether or not such Taxes were correctly or legally asserted. This indemnification shall be made within 30 days from the date the Agent or such Lender, as the case may be, makes written demand therefor. (c) Each of the Agent and the Lenders agrees that if it subsequently recovers, or receives a permanent net tax benefit with respect to, any amount of Taxes (i) previously paid by it and as to which it has been indemnified by or on behalf of the Borrower or (ii) previously deducted by the Borrower (including, without limitation, any Taxes deducted from any additional sums payable under clause (i) of subsection (a) above), the Agent or such Lender, as the case may be, shall reimburse the Borrower to the extent of the amount of any such recovery or permanent net tax benefit (but only to the extent of indemnity payments made, or additional amounts paid, by or on behalf of the Borrower under this SECTION 2.18 with respect to the Taxes giving rise to such recovery or tax benefit); PROVIDED, HOWEVER, that the Borrower, upon the request of the Agent or such Lender, agrees to repay to the Agent or such Lender, as the case may be, the amount paid over to the Borrower (together with any penalties, interest or other charges), in the event the Agent or such Lender is required to repay such amount to the relevant taxing authority or other Governmental Authority. The determination by the Agent or any Lender of the amount of any such recovery or permanent net tax benefit shall, in the absence of manifest error, be conclusive and binding. (d) If any Lender is a "foreign corporation, partnership or trust" within the meaning of the Internal Revenue Code, and such Lender claims exemption from United States withholding tax under Section 1441 or 1442 of the Internal Revenue Code, such Lender will deliver to each of the Agent and the Borrower, on or prior to the date of any payment by the Borrower to such Lender under this Agreement or the Notes, a properly completed Internal Revenue Service Form 4224 or 1001, as applicable (or successor forms), certifying that such Lender is entitled to an exemption from or a reduction of withholding or deduction for or on account of United States federal income taxes in connection with payments under this Agreement or any of the Notes, together with a properly completed Internal Revenue Service Form W-8 or W-9, as applicable (or successor forms). Each such Lender further agrees to deliver to each of the Agent and the Borrower an additional copy of each such relevant form on or before the date that such form expires (currently, three successive calendar years for Form 1001 and one calendar year for Form 4224) or becomes obsolete or after the occurrence of any event requiring a change in the most recent forms so delivered by it, in each case certifying that such Lender is entitled to an exemption from or a reduction of withholding or deduction for or on account of United States federal income taxes in connection with payments under this Agreement or any of the Notes, unless an event (including, without limitation, any -34- 41 change in treaty, law or regulation) has occurred prior to the date on which any such delivery would otherwise be required, which event renders all such forms inapplicable or the exemption to which such forms relate unavailable and such Lender notifies the Agent and the Borrower that it is not entitled to receive payments without deduction or withholding of United States federal income taxes. Each such Lender will promptly notify the Agent and the Borrower of any changes in circumstances that would modify or render invalid any claimed exemption or reduction. (e) Any Lender claiming any additional amounts payable pursuant to this Section shall use reasonable efforts (consistent with legal and regulatory restrictions) to file any certificate or document requested by the Borrower or the Agent or to change the jurisdiction of its applicable Lending Office or to contest any tax imposed if the making of such a filing or change or contesting such tax would avoid the need for or reduce the amount of any such additional amounts that may thereafter accrue and would not, in the sole determination of such Lender, be otherwise disadvantageous to such Lender. (f) If any Lender is entitled to a reduction in (and not a complete exemption from) the applicable withholding tax, the Borrower and the Agent may withhold from any interest payment to such Lender an amount equivalent to the applicable withholding tax after taking into account such reduction. If any of the forms or other documentation required under subsection (d) above are not delivered to the Agent as therein required, then the Borrower and the Agent may withhold from any interest payment to such Lender not providing such forms or other documentation an amount equivalent to the applicable withholding tax. 2.19 COMPENSATION. The Borrower will compensate each Lender, upon its written request through the Agent (which request shall be accompanied by a statement setting forth the basis for requesting such compensation in reasonable detail and using the methodology set forth in EXHIBIT F), for all losses, expenses and liabilities (including, without limitation, any loss, expense or liability incurred by reason of the liquidation or reemployment of deposits or other funds required by such Lender to fund or maintain LIBOR Loans) that such Lender may incur or sustain (i) if for any reason (other than a default by such Lender) a borrowing or continuation of, or conversion into, a LIBOR Committed Loan, or a borrowing of a Bid Loan, does not occur on a date specified therefor in a Notice of Committed Borrowing, Notice of Conversion/Continuation or Bid Request, (ii) if any repayment, prepayment or conversion of any LIBOR Committed Loan, or repayment of any Bid Loan, occurs on a date other than the last day of an Interest Period applicable thereto (including as a consequence of acceleration of the maturity of the Loans pursuant to SECTION 8.1), (iii) if any prepayment of any LIBOR Committed Loan or Bid Loan is not made on any date specified in a notice of prepayment given by the Borrower or (iv) as a consequence of any other failure by the Borrower to make any payments with respect to any LIBOR Committed Loan or Bid Loan when due hereunder. Calculation of all amounts payable to a Lender under this SECTION 2.19 in respect of LIBOR Loans shall be made as though such Lender had actually funded its relevant LIBOR Loan through the purchase of a Eurodollar deposit bearing interest at the LIBOR Rate in an amount equal to the amount of such LIBOR Loan, having a maturity comparable to the relevant Interest Period; PROVIDED, HOWEVER, that each Lender may fund its LIBOR Loans in any manner it sees fit and the foregoing assumption shall be utilized only for the calculation of amounts payable under this SECTION 2.19. Determinations by any Lender for purposes of this SECTION 2.19 of any such losses, expenses or liabilities shall, absent manifest error, be conclusive, PROVIDED that such determinations are made in good faith and in accordance with the methodology set forth in EXHIBIT F. -35- 42 ARTICLE III CONDITIONS OF CLOSING AND BORROWING 3.1 CONDITIONS OF CLOSING AND INITIAL BORROWING. The obligation of each Lender to make Loans in connection with the initial Borrowing hereunder is subject to the satisfaction of the following conditions precedent: (a) The Agent shall have received Commitments from the Lenders (in addition to the Commitment of First Union) to provide funds to the Borrower in the amount of the Total Commitment and on the terms and conditions set forth in the Loan Documents. (b) The Agent shall have received the following, each dated as of the Closing Date (unless otherwise specified) and, except for the Notes, in sufficient copies for each Lender: (i) a Committed Loan Note for each Lender that is a party hereto as of the Closing Date in the amount of such Lender's Commitment and duly completed and executed by the Borrower; (ii) a Bid Loan Note for each Lender that is a party hereto as of the Closing Date in the amount of the Total Commitment and duly completed and executed by the Borrower; (iii) a certificate, signed by the chief executive officer, chief financial officer or a vice chairman of the Borrower, in form and substance satisfactory to the Agent, certifying that, as of the Closing Date and both immediately before and after the initial Borrowing of Loans hereunder and the application of the proceeds thereof, (A) all representations and warranties of the Borrower contained in this Agreement and the other Loan Documents are true and correct (B) no Default or Event of Default has occurred and is continuing, (C) there are no insurance regulatory proceedings pending or, to such individual's knowledge, threatened against the Insurance Subsidiary in any jurisdiction that, if adversely determined, would be reasonably likely to have a Material Adverse Effect, and (D) no Material Adverse Change has occurred since December 31, 1995 (except as may be disclosed in the Forms 10-K and 10-Q filed by the Borrower for the periods ending December 31, 1995 through September 30, 1996), and there exists no event, condition or state of facts that could reasonably be expected to result in a Material Adverse Change; (iv) a certificate of the secretary or an assistant secretary of the Borrower, in form and substance satisfactory to the Agent, certifying (A) that attached thereto is a true and complete copy of the certificate of incorporation and all amendments thereto of the Borrower, certified as of a recent date by the Secretary of State of the State of Delaware, and that the same has not been amended since the date of such certification, (B) that attached thereto is a true and complete copy of the bylaws of the Borrower, as then in effect and as in effect at all times from the date on which the resolutions referred to in clause (C) below were adopted to and including the date of such certificate and (C) that attached thereto is a true and complete copy of the resolutions adopted by the board of directors of the Borrower authorizing the execution, delivery and performance by the Borrower of the Loan Documents to which it is a party, and as to the incumbency and genuineness of the signature of each officer of the Borrower executing any of such Loan Documents, and attaching all such copies of the documents described above; and -36- 43 (v) a certificate of the secretary or an assistant secretary of the Insurance Subsidiary, in form and substance satisfactory to the Agent, certifying (A) that attached thereto is a true and complete copy of the certificate of incorporation and all amendments thereto of the Insurance Subsidiary, certified as of a recent date by the Commissioner of the Texas Department of Insurance, and that the same has not been amended since the date of such certification and (B) that attached thereto is a true and complete copy of the bylaws of the Insurance Subsidiary, as then in effect, and attaching all such copies of the documents described above; and (vi) favorable opinions of Richard W. Scott, Vice Chairman and General Counsel of the Borrower, and Vinson & Elkins L.L.P., special counsel to the Borrower, addressed to the Agent and the Lenders, in substantially the form of EXHIBIT G and addressing such other matters as the Agent or any Lender may reasonably request. (c) The Agent shall have received (i) a certificate as of a recent date of the good standing of each of the Borrower Affiliates under the laws of the jurisdictions of organization, from the Secretary of State (or comparable Governmental Authority) of such jurisdiction, and (ii) as to each Insurance Subsidiary, a certificate of compliance as of a recent date, issued by the Insurance Regulatory Authority of its jurisdiction of domicile. (d) All approvals, permits and consents of any Governmental Authorities (including, without limitation, all relevant Insurance Regulatory Authorities) or other Persons required in connection with the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby shall have been obtained (without the imposition of conditions that are not reasonably acceptable to the Agent), and all related filings, if any, shall have been made, and all such approvals, permits, consents and filings shall be in full force and effect and the Agent shall have received such copies thereof as it shall have requested; all applicable waiting periods shall have expired without any adverse action being taken by any Governmental Authority having jurisdiction; and no action, proceeding, investigation, regulation or legislation shall have been instituted, threatened or proposed before, and no order, injunction or decree shall have been entered by, any court or other Governmental Authority, in each case to enjoin, restrain or prohibit, to obtain substantial damages in respect of, or that is otherwise related to or arises out of, this Agreement or the consummation of the transactions contemplated hereby, or that, in the opinion of the Agent, would otherwise be reasonably likely to have a Material Adverse Effect. (e) Since December 31, 1995, both immediately before and after giving effect to the consummation of the transactions contemplated by this Agreement, there shall not have occurred any Material Adverse Change or any event, condition or state of facts that could reasonably be expected to result in a Material Adverse Change (except as may be disclosed in the Forms 10-K and 10-Q filed by the Borrower for the periods ending December 31, 1995 through September 30, 1996). (f) The Borrower shall have paid (i) to the Agent, the initial payment of the annual administrative fee described in paragraph (ii) of the Fee Letter, and (ii) all other fees and expenses of the Agent and the Lenders required under this Agreement or under any other Loan Document to be paid on or prior to the Closing Date (including fees and expenses of counsel) in connection with this Agreement and the transactions contemplated thereby. -37- 44 (g) The Agent shall have received evidence satisfactory to it that, concurrently with the making of the initial Loans hereunder, all principal, interest and other amounts outstanding with respect to the Terminating Senior Indebtedness shall be repaid and satisfied in full. (h) The results of a search of all filings made against the Borrower Affiliates under the Uniform Commercial Code as in effect in any state in which any assets of the Borrower Affiliates are located which results shall be satisfactory to the Lenders. (i) There shall not have occurred and been continuing any event or condition in the United States financial and capital markets that could reasonably be expected to have a material adverse effect on the primary syndication of the revolving credit facility provided for hereunder. (j) The Agent shall have received an Account Designation Letter, together with written instructions from an Authorized Officer of the Borrower, including wire transfer information, directing the payment of the proceeds of the initial Loans. (k) The Agent and each Lender shall have received such other documents, certificates, opinions and instruments as it shall have reasonably requested. 3.2 CONDITIONS TO ALL LOANS. The obligation of each Lender to make any Loans hereunder is subject to the satisfaction of the following conditions precedent on the relevant Borrowing Date: (a) The Agent shall have received a Notice of Committed Borrowing in accordance with SECTION 2.2(A) or a Bid Request in accordance with SECTION 2.3(A), as applicable; (b) Each of the representations and warranties contained in ARTICLE IV and in the other Loan Documents shall be true and correct on and as of the relevant Borrowing Date with the same effect as if made on and as of such date, both immediately before and after giving effect to the Loans to be made on such date (except to the extent any such representation or warranty is expressly stated to have been made as of a specific date, in which case such representation or warranty shall be true and correct as of such date); and (c) No Default or Event of Default shall have occurred and be continuing on such date, both immediately before and after giving effect to the Loans to be made on such date. Each giving of a Notice of Committed Borrowing or a Bid Request, and the consummation of each Borrowing, shall be deemed to constitute a representation by the Borrower that the statements contained in subsections (b) and (c) above are true, both as of the date of such notice or request and as of the relevant Borrowing Date. 3.3 WAIVER OF CONDITIONS PRECEDENT. If any Lender makes any Loan hereunder prior to the fulfillment of any of the conditions precedent set forth in this ARTICLE III, the making of such Loan shall constitute only an extension of time for the fulfillment of such condition and not a waiver thereof, and unless the Required Lenders indicate otherwise in writing, the Borrower shall thereafter use its best efforts to fulfill each such condition promptly. No failure by the Borrower to fulfill any such condition precedent shall constitute a Default or an Event of Default hereunder, except to the extent any such failure is -38- 45 continuing after the expiration of any period within which such condition is specifically required to be fulfilled. ARTICLE IV REPRESENTATIONS AND WARRANTIES To induce the Lenders to enter into this Credit Agreement and to make the Loans, the Borrower makes the following warranties and representations to the Agent and the Lenders, all of which shall be true and correct as of the date hereof, the Closing Date and any other date on which any Loans are made hereunder: 4.1 CORPORATE ORGANIZATION AND POWER. Each Borrower Affiliate (i) is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation, (ii) is duly qualified to do business and in good standing in each jurisdiction where, because of the nature of its activities or properties, such qualification is required, except where any failure to comply herewith would not reasonably be expected to have a Material Adverse Effect on such Borrower Affiliate, (iii) has the requisite corporate power and authority and the right to own and operate its properties, to lease the property it operates under lease, and to conduct its business as now and proposed to be conducted and (iv) has obtained all material licenses, permits, consents or approvals from or by, and has made all filings with, and given all notices to, all Governmental Authorities having jurisdiction, to the extent required for such ownership, operation and conduct (including, without limitation, the consummation of the transactions contemplated by this Credit Agreement and the other Loan Documents) as to each of the foregoing, except where any failure to comply herewith would not reasonably be expected to have a Material Adverse Effect on such Borrower Affiliate. The execution, delivery and performance by the Borrower of each Loan Document and the consummation of the transactions contemplated hereby and thereby are within its corporate powers and have been duly authorized by all necessary corporate action (including, without limitation, shareholder approval, if required). Each Borrower Affiliate has received all material governmental and other consents and approvals (if any shall be required) necessary for such execution, delivery and performance of this Credit Agreement and the other Loan Documents, and such execution, delivery and performance do not and will not contravene or conflict with, or create a lien or right of termination or acceleration under, any Requirement of Law or Contractual Obligation binding upon any Borrower Affiliate. This Credit Agreement and each of the Loan Documents is (or when executed and delivered will be) the legal, valid, and binding obligation of the Borrower, enforceable against the Borrower in accordance with its respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally or by general equitable principles. 4.2 CERTAIN AGREEMENTS. There have been delivered to the Agent, on behalf of each Lender, true, correct and complete copies of each of the Credit Agreement, such Lender's Note, and each of the other Loan Documents and any other material documents required to be delivered in connection therewith, as amended to the date hereof, and all exhibits and schedules delivered in connection therewith. Each of the Loan Documents existing as of the Closing Date is in full force and effect, and the Borrower has performed all of its material obligations thereunder required to be performed on or prior to the date hereof. -39- 46 4.3 LITIGATION; GOVERNMENT REGULATION. No claim, litigation (including, without limitation, derivative actions), arbitration, or governmental investigation, proceeding or inquiry is pending or threatened against the Borrower or any Subsidiary (i) that is reasonably expected to have a Material Adverse Effect on any Borrower Affiliate or (ii) that relates to any of the transactions contemplated hereby, and there is no basis known to the Borrower for any of the foregoing. SCHEDULE 4.3 sets forth all material claims, litigation, arbitration, and governmental investigations, proceedings or inquiries pending or threatened against any Borrower Affiliate, and none of such actions, individually or in the aggregate is reasonably expected to have a Material Adverse Effect on such Borrower Affiliate. No Borrower Affiliate has any material contingent liabilities not provided for or referred to in the Financial Statements and Statutory Financial Statements delivered pursuant to SECTIONS 4.17, 4.18 and 5.3. 4.4 TAXES. No Borrower Affiliate is delinquent in the payment of any taxes that have been levied or assessed by any Governmental Authority against it or its assets. Each Borrower Affiliate has timely filed all tax returns that are required by law to be filed, and has paid all taxes shown on said returns and all other assessments or fees levied upon such Borrower Affiliate, or upon its respective properties to the extent that such taxes, assessments or fees have become due and if not due, such taxes have been adequately provided for, except for matters contested in good faith in appropriate proceedings. No material controversy in respect of income taxes is pending or, to the Borrowers's knowledge, threatened, against any Borrower Affiliate. As used in this SECTION 4.4, the term "taxes" includes all taxes of any nature whatsoever and however denominated, including, without limitation, income, sales, use, and excise taxes, import and governmental fees, duties and all other charges, as well as additions to tax, penalties and interest thereon, imposed by any government or instrumentality. 4.5 CONFLICTS WITH OTHER INSTRUMENTS, LAWS. Neither the execution, delivery or performance of the Loan Documents by the Borrower or any Subsidiary nor its compliance therewith: (a) conflicts or will conflict with or results or will result in any breach of, or constitutes or will constitute, with the passage of time or the giving of notice or both, a default under, or requires the consent or approval of any Person with respect to, (i) the articles of incorporation or bylaws of any Borrower Affiliate, (ii) any law, rule, statute or regulation or any order, writ, injunction or decree of any court or governmental authority or (iii) any agreement or instrument to which any Borrower Affiliate is a party or by which such Borrower Affiliate, or its respective properties, is bound or (b) results or will result in the creation or imposition of any lien, charge or encumbrance upon its properties pursuant to any such agreement or instrument. 4.6 GOVERNMENTAL COMPLIANCE; INSURANCE LICENSES. (a) Except as disclosed on SCHEDULE 4.6, each Borrower Affiliate has been and is in good standing with respect to all material governmental approvals, licenses, permits, certificates, inspections, consents and franchises necessary to continue to conduct its business as heretofore conducted and to own or lease and operate its properties as now owned or leased by them. None of such approvals, licenses, permits, certificates, consents or franchises contains any term, provision, condition or limitation more burdensome than such as are generally applicable to Persons engaged in the same or similar business as either such Borrower Affiliate. (b) SCHEDULE 4.6 lists all of the jurisdictions in which the Insurance Subsidiary holds licenses (including, without limitation, licenses or certificates of authority from applicable insurance departments), permits or authorizations to transact insurance and reinsurance business (collectively, the "Licenses"). Except as set forth on SCHEDULE 4.6, no such License is the subject of a proceeding for suspension, revocation or limitation or any similar proceedings, there is no sustainable basis for such a suspension, revocation or limitation, and no such suspension, revocation or limitation is threatened by any state -40- 47 insurance department. SCHEDULE 4.6 indicates the line or lines of insurance in which the Insurance Subsidiary is permitted to be engaged with respect to each License therein listed. The Insurance Subsidiary does not transact any insurance business, directly or indirectly, in any state other than those enumerated on SCHEDULE 4.6 hereto, where such business requires any license, permit, governmental approval, consent or other authorization. 4.7 DEFAULT. No event has occurred and is continuing that constitutes a Default or an Event of Default. 4.8 MARGIN SECURITIES. Neither the making of any Loan hereunder, nor the use of the proceeds thereof, will violate or be inconsistent with the provisions of Regulation G, T, U or X of the Board of Governors of the Federal Reserve System, and no part of the proceeds of any Loans will be used to purchase or carry any Margin Stock in violation of Regulation U or to extend credit for the purpose of purchasing or carrying any Margin Stock in violation of Regulation U. 4.9 USE OF PROCEEDS. The Borrower's use of the proceeds of any Loans are and will be for legal and proper corporate uses, duly authorized by its Board of Directors, and such uses are and will comply with SECTION 2.15 and be consistent in all material respects with all applicable laws and statutes, as in effect from time to time. 4.10 INSURANCE. Each Borrower Affiliate is adequately insured for its benefit under policies issued by insurers of recognized responsibility, with coverage of types and in amounts as are customary in the Borrower Affiliates' respective industries. No notice of any pending or threatened cancellation or material premium increase has been received by a Borrower Affiliate with respect to any such insurance policies. Each Borrower Affiliate is in substantial compliance with all material conditions contained in such insurance policies. 4.11 OWNERSHIP OF PROPERTIES, SUBSIDIARY. On the date of any Loan, each Borrower Affiliate will have good title, subject to any Permitted Liens, to all of its properties and assets, real and personal, of any nature whatsoever reflected in the Financial Statements and Statutory Financial Statements. Borrower owns 100% of the outstanding Stock and Securities of WNL Holding Corp., and WNL Holding Corp. owns 100% of the outstanding Stock and Securities of Western National Life, in each case free and clear of all liens, encumbrances and charges whatsoever. 4.12 BUSINESS LOCATIONS. SCHEDULE 4.12 lists each of the locations where each of the Borrower Affiliates maintains an office, a place of business or any records. 4.13 ACCURACY OF INFORMATION. All factual written information furnished heretofore or contemporaneously herewith by any Borrower Affiliate or known by any Borrower Affiliate to have been furnished on its behalf to the Agent or the Lenders for purposes of or in connection with this Credit Agreement or any of the transactions contemplated hereby, as supplemented to the date hereof, is, and all other such factual written information hereafter furnished by or on behalf of any Borrower Affiliate to the Agent or the Lenders will be, true and accurate in every material respect on the date as of which such information is dated or certified and not incomplete by omitting to state any material fact necessary to make such information, in light of the circumstances under which it is provided, not misleading, and the Borrower has notified the Lenders of all events that have occurred since such date that would render such information incomplete or misleading in any material respect. -41- 48 4.14 SUBSIDIARIES; AFFILIATES. As of the date hereof, other than as set forth on SCHEDULE 4.14, the Borrower has and, to its knowledge, has had no Subsidiaries or Affiliates other than the Insurance Subsidiary, and the Insurance Subsidiary has and, to the knowledge of Borrower, has had no Subsidiaries. In addition, SCHEDULE 4.14 sets forth the ownership by any Person of five percent (5%) or more of any class of capital stock in the Borrower Affiliates. 4.15 INVESTMENT COMPANY ACT; PUBLIC UTILITY HOLDING COMPANY ACT. No Borrower Affiliate is an "investment company" or a company "controlled by an investment company," within the meaning of the Investment Company Act of 1940, as amended, provided, however, that the WNL Series Trust is an "investment company" operating a mutual fund as part of the Insurance Subsidiary's variable annuity program and may in the future become a Borrower Affiliate, and, at all times, shall be in material compliance with the Investment Company Act of 1940. No Borrower Affiliate is a "holding company," or a "subsidiary company" of a "holding company," or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company," within the meaning of the Public Utility Holding Company Act of 1935, as amended. 4.16 EMPLOYEE PLANS; ERISA. (a) All Multiemployer Plans, all Welfare Plans and all other Employee Plans that each Borrower Affiliate has adopted with respect to its employees are in compliance with ERISA and the Internal Revenue Code. (b) Except as set forth in SCHEDULE 4.16, no accumulated funding deficiency (as defined in Section 302 of ERISA and Section 412 of the Internal Revenue Code), whether or not waived, has occurred with respect to any Employee Plan, and no ERISA Event has occurred or is reasonably expected to occur with respect to any Employee Plan. Except as set forth in SCHEDULE 4.16, the present value of all accrued benefits under each Employee Plan (based on those assumptions used to fund such Employee Plan) did not, as of the most recent valuation date, exceed the then current value of the assets of such Employee Plan allocable to such benefits. Except as set forth in SCHEDULE 4.16, full payment has been made on or before the due date thereof of all amounts that any Borrower Affiliate is required under the terms of each such Employee Plan to have paid as contributions to such plan. (c) Except as set forth in SCHEDULE 4.16, no Borrower Affiliate has incurred any withdrawal liability under Section 4201 of ERISA. (d) No Borrower Affiliate has participated in any Prohibited Transaction that has subjected, or may subject, it to any material civil penalty or tax imposed by Section 502(i) of ERISA or Section 4975 of the Internal Revenue Code, respectively. Except as set forth in SCHEDULE 4.16, no Borrower Affiliate has incurred, or is reasonably expected to incur, any liability to the Pension Benefit Guaranty Corporation (other than for insurance premiums, which have been paid when due). (e) The present value (determined using actuarial and other assumptions that are reasonable in respect of the benefits provided and the employees participating) of the liability of any Borrower Affiliate for post-retirement benefits to be provided to their current and former employees under all Welfare Plans does not, in the aggregate, exceed the assets under all such plans allocable to such benefits by an amount that would materially and adversely affect the financial condition of such Borrower Affiliate or the Borrower's ability to perform its obligations hereunder. -42- 49 (f) The execution and delivery of this Credit Agreement will not involve any transaction that is subject to the prohibitions of Section 406 of ERISA or in connection with which a tax could be imposed pursuant to Section 4975 of the Internal Revenue Code. (g) No Borrower Affiliate is making or has ever made or been required to make any contributions to a Multiemployer Plan. 4.17 FINANCIAL STATEMENTS OF THE BORROWER AND ITS INSURANCE SUBSIDIARY. The Borrower has previously delivered to the Agent the Financial Statements consisting of the audited consolidated balance sheets of the Borrower and its Insurance Subsidiary as of December 31, 1995, December 31, 1994 and December 31, 1993 and the related statements of income and cash flows for the Fiscal Years then ended, and the unaudited consolidated balance sheets of the Borrower and its Insurance Subsidiary as of September 30, 1996 and the related statements of income and cash flows for the three- month period then ended have been prepared by the Borrower in accordance with Generally Accepted Accounting Principles, and they contain no material misstatement or omission and fairly present the financial position, assets and liabilities of the Borrower and its Insurance Subsidiary, on a consolidated basis, as of the respective dates thereof and the results of operations of the Borrower and its Insurance Subsidiary, on a consolidated basis, for the respective periods then ended. Since December 31, 1995, there has been no Material Adverse Change in the assets, liabilities or financial position of any Borrower Affiliate or in the results of any such Borrower Affiliate's operations (except as may be disclosed in the Forms 10-K and 10-Q filed by the Borrower for the periods ending December 31, 1995 through September 30, 1996), and no Borrower Affiliate has incurred any obligation or liability that could materially and adversely affect its financial condition or business operations. 4.18 SAP FINANCIAL STATEMENTS. (a) The Annual Statements of the Insurance Subsidiary including, without limitation, the provisions made therein for investments and the valuation thereof, losses (reserves), and Statutory Liabilities, as filed with the Department and delivered to Agent prior to the execution and delivery of this Agreement, as of the end of, and for, the 1993, 1994 and 1995 Fiscal Years (collectively, the "Statutory Financial Statements"), have been prepared in accordance with SAP. Each such Statutory Financial Statement was in compliance with applicable law when filed. The Statutory Financial Statements fairly present the financial position, the results of operations, changes in equity and changes in financial position of the Insurance Subsidiary as of and for the respective dates and periods indicated therein in accordance with SAP, except as set forth in the notes thereto. Except for liabilities and obligations disclosed or provided for in the Statutory Financial Statements, including, without limitation, losses (reserves) and Statutory Liabilities (all of which have been computed in accordance with SAP), the Insurance Subsidiary did not have, as of the respective dates of each of such Statutory Financial Statements, any material liabilities or obligations (whether absolute or contingent and whether due or to become due) that in conformity with SAP would have been required to be or should be disclosed or provided for in such Statutory Financial Statements. All books of account of the Insurance Subsidiary fully and fairly disclose all of the transactions, properties, assets, investments, liabilities and obligations of the Insurance Subsidiary and all of such books of account are in the possession of the Insurance Subsidiary and are true, correct and complete in all material respects. (b) The investments of the Insurance Subsidiary reflected in the 1995 Annual Statements comply in all material respects with all applicable requirements of the Department as well as those of any -43- 50 other Governmental Authority with jurisdiction over the investment of the Insurance Subsidiary's funds. (c) The amounts shown in the 1995 Annual Statement for the Insurance Subsidiary for (i) aggregate reserve for life policies and contracts and for accident and health policies (set forth in lines 1 and 2, column 1, of page 3 thereof), and (ii) Statutory Liabilities were computed in accordance with commonly accepted actuarial standards consistently applied and were fairly stated in accordance with sound actuarial principles, were based on actuarial assumptions that were in accordance with or more stringent than those called for in the insurance policies and contracts and in the related reinsurance, co-insurance or similar contracts of the Insurance Subsidiary, were computed on the basis of assumptions consistent with those of the preceding Fiscal Year or Quarter, as the case may be, and met the requirements of the Department, as applicable, as well as those of any other applicable Governmental Authority. Such reserves established by the Insurance Subsidiary were, in the judgment of Borrower and such Insurance Subsidiary, adequate as of such date for the payment by the Insurance Subsidiary of all insurance benefits, losses, claims and investigative expenses of the Insurance Subsidiary. (d) Marketable securities and short term investments reflected in the Insurance Subsidiary's 1995 Annual Statement are valued at cost, amortized cost or market value, as required by applicable law or regulation. 4.19 SOLVENCY. The Borrower is Solvent, and will not, as a result of the transactions contemplated hereby become not Solvent or be left with unreasonably small capital. 4.20 ENVIRONMENTAL MATTERS. (a) Except as reflected in SCHEDULE 4.20, (i) to the best knowledge of Borrower, no Hazardous Material is or has been generated, used, released, treated, disposed of or stored, or otherwise located, in, on or under any Realty (or any portion thereof) in violation of any Environmental Law, and no part of the Realty or other property owned, leased or operated by the Borrower or any Subsidiary (now or in the past), including without limitation the soil and groundwater located thereon and thereunder, has been contaminated by any Hazardous Material; (ii) no improvements on the Realty contain any asbestos or substances containing asbestos; (iii) none of the Realty has been the subject of an environmental audit or assessment, or remedial action; and (iv) to the best of the Borrower's knowledge, the foregoing statements are true and correct with respect to all of the real property adjoining any of the Realty. (b) To the best of the Borrower's knowledge, no portion of the Realty has been used as or for a mine, a landfill, a dump or other disposal facility, a gasoline service station, or a petroleum products storage facility, and none of the Realty or other property owned, leased or operated by the Borrower or any Subsidiary (now or in the past) has, pursuant to any Environmental Law, been placed on the "National Priorities List" or "CERCLIS List" (or any similar federal, state or local list) of sites subject to possible environmental problems. (c) Except as set forth in SCHEDULE 4.20, there are no underground storage tanks situated on the Realty and, to the best of the knowledge of the Borrower, no underground storage tanks have ever been situated on the Realty. (d) Except as set forth in SCHEDULE 4.20, to the best knowledge of Borrower, all activities and operations of the Borrower and Subsidiaries meet the requirements of all applicable Environmental Laws, -44- 51 neither the Borrower nor any Subsidiary has violated any Environmental Law in the past, and the Realty has never been the site of a violation of any Environmental Law. (e) Except as set forth on SCHEDULE 4.20, to the best knowledge of Borrower, neither the Borrower nor any Subsidiary has ever sent a Hazardous Material to a site which, pursuant to any Environmental Law, (1) has been placed on the "National Priorities List" or "CERCLIS List" (or any similar federal, state or local list) of sites subject to possible environmental problems, or (2) which is subject to a claim, an administrative order or other request to take "response," "removal," "corrective" or "remedial" action, as defined in any Environmental Law, or to pay for or contribute to the costs of cleaning up the site. (f) Neither the Borrower nor any Subsidiary is involved in any suit or proceeding or has received any notice from any Governmental Authority or other third party with respect to a release or threat of release of any Hazardous Material, or violation or alleged violation of any Environmental Law, or has received notice of any claim from any person or entity relating to property damage or to personal injuries from exposure to any Hazardous Material. (g) To the Borrower's knowledge, the Borrower and each Subsidiary has timely filed all reports required to be filed, has acquired all necessary certificates, approvals and permits, and has generated and maintained in all material respects all required data, documentation and records required under all Environmental Laws. 4.21 ASSETS FOR CONDUCT OF BUSINESS. Each of the Borrower Affiliates possesses adequate assets, contract rights, patents, patent applications, copyrights, trademarks, servicemarks and trade names, or licenses thereto, to continue to conduct its business as heretofore conducted, without any material conflict with the rights of others. 4.22 TRADE RELATIONS. There exists no actual or, to the best of the Borrower's knowledge following due inquiry, threatened termination, cancellation or limitation of, or any modification or change in (other than fluctuation in sales by individual insurance agents or agencies or distributors that occur in the ordinary course of business), the business relationship of any Borrower Affiliate with any customer or any group of customers that Borrower anticipates will have a Material Adverse Effect on the business of such Borrower Affiliate, or with any agent, distributor (including a bank), or insurance agency or group of agents, distributors, or insurance agencies, that Borrower anticipates will have a Material Adverse Effect on the business of such Borrower Affiliate, and there exists no present condition or state of facts or circumstances that would have a Material Adverse Effect on any Borrower Affiliate or prevent such Borrower Affiliate from conducting its business after the consummation of the transactions contemplated by this Credit Agreement in substantially the same manner in which it has heretofore been conducted. 4.23 SECURITIES LAWS. Neither the Borrower nor any Subsidiary, nor anyone acting on behalf of any such Person, has directly or indirectly offered any interest in any Note or any other Obligation for sale to, or solicited any offer to acquire any such interest from, or has sold any such interest to, any Person that would subject the issuance or sale of such Note or any other liability to registration under the Securities Act of 1933, as amended. 4.24 COMPLIANCE WITH LAWS. Neither the Borrower nor any Subsidiary is in violation of any law, ordinance, rule, regulation, order, policy, guideline or other requirement of any Governmental -45- 52 Authority, if the effect of such violation, or cumulative effect of such violations, could reasonably be expected to have a Material Adverse Effect on any Borrower Affiliate and, to the best of the Borrower's knowledge, no such violation has been alleged, and the Borrower and each Subsidiary (i) has filed in a timely manner all reports, documents and other materials required to be filed by it with any Governmental Authority, if such failure to so file could reasonably be expected to have a Material Adverse Effect on any Borrower Affiliate, and the information contained in each of such filings is true, correct and complete in all material respects, and (ii) has retained all records and documents required to be retained by it pursuant to any law, ordinance, rule, regulation, order, policy, guideline or other requirement of any Governmental Authority, if the failure to so retain such records and documents could reasonably be expected to have a Material Adverse Effect on any Borrower Affiliate. 4.25 EMPLOYEES AND LABOR. There is no unfair labor practice complaint against any Borrower Affiliate pending before the National Labor Relations Board or any state or local agency and there is not a labor strike or other labor dispute pending or, to the best of the Borrower's knowledge, threatened, affecting any of the foregoing that if adversely resolved would have a Material Adverse Effect on such Borrower Affiliate and, to the best of the Borrower's knowledge, there are no organizational attempts affecting any of the employees of any Borrower Affiliate that could have a Material Adverse Effect on any Borrower Affiliate; there is no grievance, labor dispute or work stoppage involving or affecting any Borrower Affiliate pending or, to the best of the Borrower's knowledge, threatened that could have a Material Adverse Effect on any Borrower Affiliate. 4.26 REINSURANCE. The Insurance Subsidiary is not a party to any existing Surplus Relief Reinsurance Agreement. SCHEDULE 4.26 lists all existing Reinsurance Agreements of the Insurance Subsidiary. Except as set forth on SCHEDULE 4.26, (i) as of the date hereof all such Reinsurance Agreements are in full force and effect and are with reinsurers rated "A" or better by A.M. Best & Company and (ii) no party to any such agreements is in default in any material respect as to any provision thereof, and no such agreement contains any provision providing that the other party thereto may terminate such agreement by reason of the transactions contemplated by the Credit Agreement. To the best knowledge of the Borrower, there is no reason to believe that the financial condition of any other party to any such Reinsurance Agreement is impaired with the result that a default thereunder may reasonably be anticipated. 4.27 POLICIES OF INSURANCE. Except with respect to terms specifically negotiated with policyholders, if any, and subject to such exceptions, if any, as are not material to Borrower or Western National Life all policies of insurance issued by the Insurance Subsidiary as now in force are, to the extent required under applicable law, on forms approved by the appropriate Governmental Authorities in the jurisdictions where issued or have been filed with and not objected to by such Governmental Authorities within the period provided for objection. None of the terms embraced by the exception contained in the preceding sentence adversely affects, or could reasonably be expected to adversely affect, the enforceability of any such policies or jeopardizes, or could reasonably be expected to jeopardize, the License of the Insurance Subsidiary in any jurisdiction. -46- 53 ARTICLE V AFFIRMATIVE COVENANTS Until payment in full of all Obligations of the Borrower to each of the Lenders and termination of the Commitments, the Borrower covenants and agrees that, unless the Required Lenders consent otherwise in writing, the Borrower shall: 5.1 REPAYMENT OF OBLIGATIONS. Promptly repay the Obligations when due, including without limitation the amounts due under the Notes, according to the terms of this Credit Agreement and the other Loan Documents. 5.2 PERFORMANCE UNDER LOAN DOCUMENTS. Perform, and cause its Subsidiaries to perform, all obligations required to be performed by the Borrower and each such Subsidiary, as applicable, under the terms of this Credit Agreement and the other Loan Documents and any other agreements now or hereafter existing or entered into between any Borrower Affiliate and the Lenders, subject to notice and cure provisions contained therein. 5.3 REPORTS, CERTIFICATES AND OTHER INFORMATION. Furnish or cause to be furnished to the Agent and the Lenders: (a) GAAP Financial Statements. (i) Within 45 days after the end of each of the first three Fiscal Quarters of each Fiscal Year of the Borrower, (A) a copy of the unaudited consolidated and consolidating balance sheet of the Borrower and its Insurance Subsidiary, as of the close of such Fiscal Quarter, and (B) a copy of the unaudited consolidated and consolidating statements of income of the Borrower and its Insurance Subsidiary for such Fiscal Quarter and for the elapsed portion of the Fiscal Year, and (C) the consolidated and consolidating statements of cash flows of the Borrower and its Insurance Subsidiary, for such Fiscal Quarter and for the elapsed portion of the Fiscal Year, all prepared in accordance with Generally Accepted Accounting Principles (subject to normal year-end adjustments and except that footnote and schedule disclosure may be abbreviated) and accompanied by the certification of the chief executive officer or chief financial officer of the Borrower that all such Financial Statements are complete and correct and present fairly in accordance with Generally Accepted Accounting Principles (subject to normal year-end adjustments) the financial position and results of operations of the Borrower and its Insurance Subsidiary as at the end of such Fiscal Quarter, and for such Fiscal Quarter and for the elapsed portion of the Fiscal Year. (ii) Within 90 days after the close of each Fiscal Year, a copy of the annual audited consolidated Financial Statements of the Borrower, consisting of the consolidated and consolidating balance sheets and statements of income, retained earnings and cash flows, setting forth in comparative form in each case the consolidated figures for the previous Fiscal Year, which Financial Statements shall be prepared in accordance with Generally Accepted Accounting Principles, certified without qualification by the independent certified public accountants regularly retained by the Borrower, or any other firm of independent certified public accountants of recognized national standing selected by the Borrower and reasonably acceptable to the Required Lenders that all such Financial Statements are complete and correct and present fairly in -47- 54 accordance with Generally Accepted Accounting Principles the consolidated financial position and the consolidated results of operations and cash flows of the Borrower and its Insurance Subsidiary as at the end of such Fiscal Year and for such Fiscal Year. (b) SAP Financial Statements. (i) As soon as possible, but in any event within 60 days after the end of each Fiscal Year of the Insurance Subsidiary, a copy of the Annual Statement for such Fiscal Year prepared in accordance with SAP and accompanied by the certification of the chief financial officer or chief executive officer of the Insurance Subsidiary that such financial statement is complete and correct and presents fairly in accordance with SAP the financial position of the Insurance Subsidiary for such Fiscal Year. (ii) As soon as possible, but in any event within 60 days after the end of each Fiscal Year of the Insurance Subsidiary, the certification of the chief valuation actuary of the Insurance Subsidiary as to the adequacy of the Insurance Subsidiary's reserves set forth in the applicable Annual Statement. Such opinion shall be in the format, if any, prescribed by the applicable Insurance Code. (iii) Within 90 days after the end of each Fiscal Year, a copy of the Insurance Subsidiary's Annual Statement prepared in accordance with SAP, certified without qualification by the independent certified public accountants regularly retained by the Insurance Subsidiary, or any other firm of independent certified public accountants of recognized national standing selected by the Borrower and reasonably acceptable to the Required Lenders that such Annual Statement is complete and correct and presents fairly in accordance with SAP the Insurance Subsidiary's financial position for such Fiscal Year and continuing consolidated and consolidating financial statements. (iv) As soon as possible, but in any event within 45 days after the end of each of the first three Fiscal Quarters of each Fiscal Year of the Insurance Subsidiary, a copy of the Insurance Subsidiary's quarterly statement for such Fiscal Quarter, all prepared in accordance with SAP and accompanied by the certification of the Insurance Subsidiary's chief financial officer or chief executive officer that all such financial statements are complete and correct and present fairly in accordance with SAP the Insurance Subsidiary's financial position for the periods then ended. (v) Upon filing with the Department, the Insurance Subsidiary's management discussion and analysis. (c) Notice of Default. As soon as practicable, but in any event within three (3) Business Days after the Borrower becomes aware of the existence of any Default or Event of Default, or any development that would have a Material Adverse Effect on any Borrower Affiliate, telephonic, facsimile, telegraphic notice specifying the nature of such Default, Event of Default or development, including the anticipated effect thereof, which notice shall be promptly confirmed in writing within two (2) Business Days, other than developments that affect the economy of the United States generally or the insurance industry generally. -48- 55 (d) Additional Information. The following certificates and other information: (i) As soon as received, but not later than ten (10) Business Days after receipt thereof, a copy of any reports on examination or similar reports, financial examination reports or market conduct examination reports by a Governmental Authority with respect to the Insurance Subsidiary's insurance business. (ii) Copies of all material filings with Governmental Authorities by any Borrower Affiliate not later than five (5) Business Days after such filings are made, including, without limitation, filings that seek approval of Governmental Authorities with respect to material transactions between any Borrower Affiliate and any Affiliates thereof. (iii) Within three (3) Business Days of such notice, notice of actual suspension, termination, limitation or revocation of any material license of any Borrower Affiliate (including any License of the Insurance Subsidiary) by any Governmental Authority or of receipt of notice from any Governmental Authority notifying the Insurance Subsidiary of a hearing relating to such a suspension, termination, limitation or revocation, including any request by a Governmental Authority that commits any Borrower Affiliate to take, or refrain from taking, any action that otherwise materially and adversely affects the authority of such Borrower Affiliate to conduct its business. (iv) Within three (3) Business Days of such notice, notice of any material pending or threatened inquiry, investigation or regulatory proceeding (other than routine periodic inquiries, investigations or reviews) by any Governmental Authority concerning the business, practices or operations of any Borrower Affiliate, including any agent or managing general agent thereof. (v) Promptly, notice of any actual or, to the best of the Borrower's knowledge, proposed material changes (other than proposed changes existing as of the date of this Credit Agreement) in the Insurance Code governing the investment or dividend practices of Texas domiciled insurance companies. (vi) (A) Promptly, notice of any change or modification to any Reinsurance Agreement whether entered into before or after the Closing Date, which change or modification could reasonably be expected to have a Material Adverse Effect on any Borrower Affiliate; (B) promptly, notice of any written notice received by any Borrower Affiliate of denial of coverage, litigation, claim or arbitration arising out of any Reinsurance Agreement to which such entity is a party; and (C) promptly, such other financial, actuarial and other information with respect to Reinsurance Agreements as the Agent may reasonably request. (e) Compliance Certificates. Concurrently with each delivery of the financial statements described in SECTIONS 5.3(A) AND (B), and at any other time no later than thirty (30) Business Days following a written request of the Agent, a duly completed Compliance Certificate, signed by the chief financial officer of the Borrower, containing, among other things, a computation of, and showing compliance with, each of the applicable financial ratios and financial restrictions contained in ARTICLE VI and to the effect that, to the best of such officer's knowledge, as of such date no Default or Event of Default has occurred and is continuing. -49- 56 (f) Auditors' Reports. Promptly upon receipt thereof, copies of all material detailed financial and management reports regarding any Borrower Affiliate submitted to any such entity by independent public accountants in connection with each annual or interim audit report made by such accountants of the books of such entity. (g) Reports to Shareholders and SEC. Promptly upon (and in any event within three (3) Business Days after) the sending or filing thereof, copies of (i) all financial statements, reports, notices and proxy statements that the Borrower shall send or make available generally to its public shareholders or file with the Securities and Exchange Commission, (ii) all regular, periodic and special reports, registration statements and prospectuses, including all amendments thereto, that the Borrower or any of its Subsidiaries shall render to or file with the Securities and Exchange Commission, the NASD or any national securities exchange (excluding filings related to variable annuity products and related operations), and (iii) all press releases and other statements that the Borrower or any of its Subsidiaries shall make available generally to the public concerning developments in the business of the Borrower or any of its Subsidiaries, other than press releases or statements issued in the ordinary course of business. (h) Notice of Litigation and ERISA Matters. Upon learning of the occurrence of any of the following, written notice thereof, describing the same and the steps being taken by the Borrower or Subsidiary with respect thereto: (i) the institution of, or any adverse determination in, any litigation, arbitration proceeding or governmental proceeding (including any Internal Revenue Service or Department of Labor proceeding with respect to any Employee Plan or Welfare Plan) that could, if adversely determined, be reasonably expected to have a Material Adverse Effect on any Borrower Affiliate, (ii) the failure of any Borrower Affiliate timely to make a required contribution to any Employee Plan if such failure is sufficient to give rise to a lien under section 302(f)(1) of ERISA, (iii) the institution of any steps by any Borrower Affiliate to withdraw from, or the institution of any steps by any Borrower Affiliate to terminate under a distress termination, any Employee Plan or the taking of any action with respect to an Employee Plan that could result in the requirement that the Borrower Affiliate furnish a bond or other security to such Employee Plan, or the occurrence of any event with respect to any Employee Plan that could result in the incurrence by any Borrower Affiliate of any material liability (other than a liability for contributions or premiums), fine or penalty, or (iv) the commencement of any dispute that might lead to the modification, transfer, revocation, suspension or termination of this Credit Agreement or any Loan Document. (i) Insurance Reports. Within five (5) Business Days of receipt of such notice by any Borrower Affiliate, written notice of any cancellation or Material Adverse Change in any material Insurance Policy carried by such Borrower Affiliate. (j) Bonding of Fiduciaries. Upon request of the Agent, evidence that every fiduciary and every Person who handles funds of an Employee Plan or Welfare Plan is bonded in accordance with section 412 of ERISA. (k) Change of Name, Places of Business. As soon as reasonably practicable but in any event within 30 days after such event, written notice to the Agent of any change in the name or principal place of business of any Borrower Affiliate. -50- 57 (l) Subsidiaries. Borrower shall deliver with its Financial Statements notice of (i) any newly created or acquired Material Subsidiary and (ii) any Subsidiary that has become a Borrower Affiliate since the most recent delivery of Financial Statements. (m) Other Information. From time to time such other information under Borrower's possession or control concerning any Borrower Affiliate as the Agent may reasonably request. 5.4 CORPORATE EXISTENCE; FOREIGN QUALIFICATION. Do and cause to be done at all times all things necessary to (i) maintain and preserve the corporate existence of each Borrower Affiliate, (ii) be, and ensure that each Borrower Affiliate is, duly qualified to do business and be in good standing as a foreign corporation in each jurisdiction where the nature of its business makes such qualification necessary, (iii) comply, and cause each other Borrower Affiliate to comply, in all material respects with all Contractual Obligations and Requirements of Law binding upon such entity, and (iv) do or cause to be done all things necessary to preserve and keep in full force and effect the Insurance Subsidiary's corporate existence and all Licenses required by the Insurance Subsidiary to engage in the insurance business in all jurisdictions in which the Insurance Subsidiary is so engaged; provided, however, with respect to (i) above, Borrower Affiliates may merge with other Borrower Affiliates (so long as the Borrower is the survivor in any merger to which it is a party) and, provided, further, with respect to (iv) above and subject to the other provisions of this Credit Agreement, the Insurance Subsidiary need not maintain Licenses in jurisdictions in which it ceases to do business). 5.5 BOOKS, RECORDS AND INSPECTIONS. (i) Maintain, and cause its Subsidiaries to maintain, materially complete and accurate books and records, (ii) permit, and cause each Subsidiary to permit access at reasonable times by the Agent to its books and records, (iii) permit, and cause each Subsidiary to permit, the Agent to inspect at reasonable times its properties and operations, and (iv) permit, and cause each Subsidiary to permit, the Agent to discuss its business, operations and financial condition with such entities' officers. 5.6 INSURANCE. Maintain, and cause each Subsidiary to maintain, such insurance policies to such extent and against such hazards and liabilities as is customarily maintained by prudent companies similarly situated or as may be required by law. 5.7 TAXES AND LIABILITIES. Pay, and cause each Subsidiary to pay, when due, all material taxes, assessments and other material liabilities except as contested in good faith and by appropriate proceedings, with respect to which reserves have been established, and are being maintained, in accordance with Generally Accepted Accounting Principles, if and so long as such contest could not reasonably be expected to have a Material Adverse Effect on any Borrower Affiliate. 5.8 EMPLOYEE BENEFIT PLANS. Maintain, and cause each Subsidiary to maintain, each Employee Plan, Multiemployer Plan and Welfare Plan in compliance in all material respects with all applicable Requirements of Law. 5.9 COBRA. Operate, and cause each Subsidiary to operate, each Employee Plan in such a manner that such Borrower Affiliate or Subsidiary will not incur any material tax liability under Section 4980B of the Internal Revenue Code or any material liability to any qualified beneficiary as defined in such Section 4980B. -51- 58 5.10 COMPLIANCE WITH LAWS. Comply, and cause each Subsidiary to comply, in all material respects with all federal, state and local laws, rules and regulations related to its businesses (including, without limitation, the establishment of all insurance reserves required to be established under SAP and applicable laws restricting the Insurance Subsidiary's investments). 5.11 MAINTENANCE OF PERMITS. Maintain, and cause each Subsidiary to maintain, all material permits, licenses and consents as may be required for the conduct of its business by any state, federal or local government agency or instrumentality. 5.12 INVESTMENTS. Cause the assets of the Insurance Subsidiary to be invested at all times so as to be in material compliance, at the time of making each investment, with the investment policies adopted by the Board of Directors of the Insurance Subsidiary, as amended by such Board from time to time. 5.13 INTEREST RATE PROTECTION. Subject to maintaining the required ratio of SECTION 6.3 hereof, the Borrower may enter into Rate Protection Agreements and shall promptly furnish to Lenders copies thereof. ARTICLE VI NEGATIVE COVENANTS Until payment in full of all Obligations of the Borrower to each of the Lenders and termination of the Commitments, the Borrower covenants and agrees that, unless the Required Lenders consent in writing, the Borrower shall not, and shall not permit any Borrower Affiliate, to: 6.1 CONSOLIDATED NET WORTH. Permit Consolidated Net Worth of the Borrower to be less than $675,000,000. 6.2 ADJUSTED STATUTORY CAPITAL AND SURPLUS. Permit Adjusted Statutory Capital and Surplus of Western National Life to be less than $550,000,000. 6.3 RATIO OF CONSOLIDATED INDEBTEDNESS TO TOTAL CAPITALIZATION. Permit the ratio of (i) Consolidated Indebtedness at any time to (ii) the Total Capitalization of the Borrower at such time to be more than 0.375 to 1.0. 6.4 RISK BASED CAPITAL. Permit the Total Adjusted Capital of Western National Life to be less than 150% of the Company Action Level RBC. 6.5 BEST RATING. Permit the Insurance Subsidiary to have an A.M. Best Rating of less than "A-." 6.6 LIMITATION ON LIENS. Except as provided below, incur, issue, assume or guarantee any Indebtedness secured by a Lien on any property or assets of the Borrower or the Insurance Subsidiary, or any shares of capital stock of any Subsidiary, without effectively providing that the Obligations (together with, if the Borrower shall so determine, any other Indebtedness which is not subordinated to the Obligations) shall be secured equally and ratably with (or prior to) such Indebtedness, so long as such -52- 59 Indebtedness shall be so secured; provided, however, that this covenant shall not apply to Indebtedness secured by (a) Liens existing on the date of this Agreement listed on SCHEDULE 6.6; (b) Liens on property of, or on any shares of stock of, any corporation existing at the time such corporation becomes a Subsidiary or merges into or consolidates with the Borrower or a Subsidiary; (c) Liens on property or shares of stock existing at the time of acquisition thereof by the Borrower or any Subsidiary; (d) Liens to secure (i) the financing of the acquisition, construction or improvement of real property, or (ii) the acquisition of shares of stock by the Borrower or any Subsidiary to the extent the Liens cover only the shares of stock being acquired; provided, that such Liens are created not later than one year after such acquisition or, in the case of real property, not later than one year after completion of construction or commencement of commercial operation, whichever is later; (e) Liens in favor of the Borrower; (f) Liens in favor of, or required by, governmental authorities; (g) liens arising in the ordinary and customary course of the Insurance Subsidiary's investment activities so long as such activities are otherwise in compliance with this Agreement; (h) statutory liens for the payment of goods and services that individually and in the aggregate are not expected to have a Material Adverse Effect on any Borrower Affiliate; and (i) any extension, renewal or replacement as a whole or in part, of any Lien referred to in the foregoing clauses (a) to (d) inclusive; provided, however, that (A) such extension, renewal or replacement Lien shall be limited to all or a part of the same property or shares of stock that secured the Lien extended, renewed or replaced and (b) the Indebtedness secured by such Lien at such time is not so increased. The foregoing are hereinafter referred to as "Permitted Liens." 6.7 REINSURANCE AGREEMENTS. (a) Enter into any Reinsurance Agreement with any reinsurer that is not rated "A" or better by A.M. Best & Company, Inc. (b) Enter into any Surplus Relief Reinsurance Agreement. 6.8 LIMITATION ON LINES OF BUSINESS. Permit the Insurance Subsidiary to engage in any line of business other than the lines of business described in detail on SCHEDULE 6.8, without the approval of the Required Lenders. 6.9 MERGERS, CONSOLIDATIONS AND SALES. (a) Enter into any merger, consolidation or other transaction to which Borrower is a party and is not the surviving entity, or permit any Borrower Affiliate to enter into a merger, consolidation or purchase or other acquisition of assets or stock of any other Person if such transaction has or is expected to have a negative effect on Borrower's Senior Debt Rating Level. (b) Sell, transfer, convey or lease, or permit any Subsidiary to sell, transfer, convey or lease, to any Person other than a Borrower Affiliate, (i) any asset or line of business of any Borrower Affiliate material to the operations or financial condition of such Borrower Affiliate, including, but not limited to, as to the Insurance Subsidiary, any asset or group of assets constituting, (x) in any single transaction, ten percent (10%) of such Subsidiary's Admitted Assets as of the most recent financial statement provided pursuant to SECTION 5.3(B) or, (y) during the term of this Agreement, thirty percent (30%) of such Subsidiary's Admitted Assets as of December 31, 1996 and (ii) the Stock or other Securities (other than insurance products issued in the ordinary course of business) of the Insurance Subsidiary; provided, -53- 60 however, that clause (i) above shall not limit the sale of Securities in the ordinary course of managing any Borrower Affiliate's investment portfolio. 6.10 CHANGE IN OWNERSHIP; ISSUANCE OF STOCK. (a) Permit a Change in Ownership to occur without the prior written consent of the Required Lenders, which may withhold their consent in their absolute discretion; or (b) Issue any Stock, or permit any Subsidiary to issue any Stock, options or warrant or other rights to purchase such Stock, to any Person without the prior written consent of the Required Lenders, which may withhold consent in their absolute discretion; provided, however, that (i) Borrower shall be permitted to issue its Stock, or options or warrants to purchase its Stock, to any Person and (ii) Borrower may alter the capital structure of any Subsidiary so long as Borrower continues to own, directly or indirectly, 100% of the outstanding Stock and Securities (other than insurance products issued in the ordinary course of business) of such Subsidiary, free and clear of all liens, encumbrances and charges whatsoever. 6.11 SUBSIDIARIES. Create or permit to exist any Subsidiary (other than WNL Holding Corp.) or other Person that owns or would own any Stock or Security of Western National Life or WNL Holding Corp. 6.12 BUSINESS ACTIVITIES. (a) Engage, or permit any Borrower Affiliate to engage, in any type of business except the business in which it is engaged as of the date hereof, the business activities described in detail in SCHEDULE 6.12, lines of business customarily associated with the life insurance business, and, in the case of the Insurance Subsidiary, the business allowed under SECTION 6.8. For purposes of this SECTION 6.12(A), the business of the Borrower shall include the holding of stock in Subsidiaries engaged in any line of business, provided that any Material Subsidiaries otherwise comply with this SECTION 6.12. (b) Engage in the business of issuing insurance policies other than through an Insurance Subsidiary. (c) Change, or permit the Insurance Subsidiary to change, the location of its principal executive office to a jurisdiction other than the State of Texas without the approval of the Required Lenders. 6.13 TRANSACTIONS WITH AFFILIATES. Enter into, or cause, suffer or permit to exist, except as set forth in the Borrower's proxy statement relating to its 1996 annual meeting or Form 10-Q for the quarter ending September 30, 1996, directly or indirectly, any arrangement, transaction or contract (other than ordinary compensation and benefits arrangements) with any officer, director or holder of 10% or more of Borrower's shares (other than a shareholder who is the Borrower or a Subsidiary) of a Borrower Affiliate unless such arrangement, transaction or contract is in the ordinary course of business and on terms and conditions reasonably believed to be at least as favorable to such Borrower Affiliate as the terms and conditions that would apply in a similar arrangement, transaction or contract with an unrelated Person. 6.14 RESTRICTED PAYMENTS. If an Event of Default shall have occurred and be continuing, purchase or redeem, or permit any Borrower Affiliate to purchase or redeem, any shares of its Stock or -54- 61 declare or pay any dividends or make any distribution to stockholders or set aside any funds for any such purpose (except, with respect to any Subsidiary, dividends paid to the Borrower for the sole purpose of enabling the Borrower to make any payments of principal or interest to the Lenders or to other creditors of Borrower ranking pari passu with the Lenders as required hereunder). 6.15 STOCK OF SUBSIDIARIES. Transfer or dispose of, or permit any Borrower Affiliate to transfer or dispose of, any Stock of any Borrower Affiliate to any Person; or, pledge or otherwise encumber, or permit any Subsidiary to pledge or otherwise encumber, any Stock of any Subsidiary except as permitted under SECTION 6.6. 6.16 NEGATIVE PLEDGE AGREEMENTS. Create, incur, assume or suffer to exist any agreement, other than this Credit Agreement, the Loan Documents, the agreements set forth on SCHEDULE 6.16, and agreements hereafter entered into by the Borrower which shall not be any more restrictive than this Credit Agreement, that places any restrictions (i) upon the right of a Borrower Affiliate to sell, pledge or otherwise dispose of any material portion of its properties now owned or hereafter acquired other than as permitted herein, except for such restrictions imposed (x) by federal or state securities laws, (y) under the terms of agreements relating to Permitted Liens, and (z) on assets held in favor of policy holders in the ordinary course of business for variable products or other separate account activities, (ii) upon the right of a Borrower Affiliate to sell, pledge or otherwise dispose of Securities owned by it, except customary restrictions incurred in the ordinary course of such Borrower Affiliate's investment activities, or (iii) upon the right or ability of any Insurance Subsidiary to pay dividends or make any other distributions on its Stock held by the Borrower, respectively, or to pay any obligation owed to the Borrower, except as may be required by any Governmental Authority. 6.17 FISCAL YEAR. Change its fiscal year from a fiscal year ending on December 31. 6.18 CERTAIN INVESTMENTS. Permit the assets of the Insurance Subsidiary to be invested at any time in violation in any material respect of the Insurance Code as applicable to the Insurance Subsidiary as well as the applicable insurance laws and regulations of any other applicable jurisdiction relating to investments by the Insurance Subsidiary. 6.19 HAZARDOUS MATERIALS. Violate any Environmental Law or permit any Hazardous Material to be brought onto any of the Realty or any other property owned, leased or operated by any Borrower or Subsidiary, except as permitted by applicable law. If any Hazardous Material is brought or found thereon or therein, except as may be permitted above (and then only in strict compliance with all applicable Environmental Laws), Borrower, without cost or expense to the Agent or any Lender, shall perform or cause to be performed all required environmental response, removal, disposal, corrective and remedial actions in a diligent manner and in accordance with all Environmental Laws. The Borrower shall promptly, after any officer of the Borrower learns or obtains knowledge of the occurrence thereof, give written notice to the Agent of receipt of any written notice of violation or noncompliance, order or request for information from any Governmental Authority with respect to any Environmental Law, and shall promptly remedy any breach of any Environmental Law by Borrower. Agent shall have the right to enter upon the Realty or other property owned, leased or operated by the Borrower or any Subsidiary, or any part thereof (through its employees and/or agents), to verify compliance by Borrower with the terms of this Agreement and to conduct such environmental assessments and audits as Agent shall deem advisable to facilitate such verification; provided, however, BORROWER HEREBY ACKNOWLEDGES THAT ALL HAZARDOUS MATERIAL HANDLING PRACTICES AND ENVIRONMENTAL PRACTICES AND -55- 62 PROCEDURES OF THE BORROWER AND ITS SUBSIDIARIES ARE THE SOLE RESPONSIBILITY OF THE BORROWER AND ITS SUBSIDIARIES, AND THE BORROWER HAS FULL DECISION-MAKING POWER WITH RESPECT THERETO. BORROWER FURTHER ACKNOWLEDGES THAT NEITHER THE AGENT NOR ANY LENDER IS AN ENVIRONMENTAL CONSULTANT, ENGINEER, INVESTIGATOR OR INSPECTOR OF ANY TYPE WHATSOEVER. NO ACT (OR DECISION NOT TO ACT) OF THE AGENT OR ANY LENDER RELATED TO THIS AGREEMENT OR ANY LOAN DOCUMENT SHALL GIVE RISE TO ANY OBLIGATION OR LIABILITY ON THE PART OF THE AGENT OR ANY LENDER WITH RESPECT TO ENVIRONMENTAL MATTERS. IN NO EVENT SHALL ANY INFORMATION OBTAINED FROM THE AGENT OR ANY LENDER OR THEIR RESPECTIVE AGENTS PURSUANT TO THIS AGREEMENT OR ANY LOAN DOCUMENT CONCERNING THE ENVIRONMENTAL CONDITION OF THE REALTY OR OTHER PROPERTY BE CONSIDERED BY THE BORROWER OR ANY SUBSIDIARY (OR ANY OTHER RECIPIENT OF SAID INFORMATION) AS CONSTITUTING LEGAL OR ENVIRONMENTAL CONSULTING, ENGINEERING, INVESTIGATING OR INSPECTING ADVICE, AND NEITHER THE BORROWER NOR ANY OF ITS SUBSIDIARIES (NOR ANY OTHER RECIPIENT OF SAID INFORMATION) SHALL RELY ON SAID INFORMATION. THE RESPONSIBILITY OF THE BORROWER AND ITS SUBSIDIARIES FOR COMPLIANCE WITH ENVIRONMENTAL LAWS RESTS SOLELY WITH THE BORROWER AND ITS SUBSIDIARIES. ARTICLE VII EVENTS OF DEFAULT 7.1 EVENTS OF DEFAULT. The occurrence of any one or more of the following events shall constitute an "Event of Default" under this Credit Agreement, the Note and the other Loan Documents: (a) The Borrower shall fail to pay any principal on the Loans when due, or shall fail to pay any interest, fees or any other Obligations when due or within three Business Days thereafter; (b) The Borrower or any Subsidiary shall fail or neglect to observe, perform or comply with any term, provision, condition or covenant contained in SECTIONS 5.3(C) or 5.4(I) or in ARTICLE VI of this Credit Agreement; (c) The Borrower shall fail or neglect to observe, perform or comply with any other term, provision, condition or covenant contained in this Credit Agreement, except those enumerated in SECTIONS 7.1(A) and 7.1(B) above, and the same is not cured within thirty (30) days after the Borrower acquires knowledge thereof; (d) Any representation or warranty made in writing by or on behalf of the Borrower or any Subsidiary in this Credit Agreement or the other Loan Documents or in any certificate, instrument or document delivered in connection herewith or therewith, or in connection with the transactions contemplated hereby or thereby, shall prove to have been false or incorrect in any material respect at the time as of which such representation or warranty was made; -56- 63 (e) The Borrower or any Subsidiary shall fail to observe, perform or comply with any term, condition or covenant contained in any of the Loan Documents other than this Agreement, and such failure shall continue unremedied for any grace period specifically applicable thereto or, if no specific grace period is applicable, for a period of thirty (30) days after Borrower acquires knowledge thereof; (f) Any Borrower Affiliate shall fail to pay when due, whether by scheduled maturity, acceleration or otherwise (taking into account any applicable grace period), any principal of, interest on or other amount payable in respect of any Indebtedness (other than the Indebtedness incurred pursuant to this Agreement) having an aggregate principal amount of at least $10,000,000; any other default or event of default shall occur under the terms of any agreement or instrument pursuant to which a Borrower Affiliate has incurred any such Indebtedness, the effect of which default or event of default is to accelerate, or permit acceleration of (after any applicable grace period, notice or lapse of time), the maturity of at least $10,000,000 in principal amount of such Indebtedness; or any such Indebtedness of a Borrower Affiliate shall be declared to be due and payable or required to be prepaid or redeemed (other than pursuant to a regular schedule therefor), purchased or defeased, or an offer to prepay, redeem, purchase or defease shall be required to be made, in each case prior to the stated maturity thereof; (g) The institution of an action or proceeding by any Governmental Authority seeking to place the Insurance Subsidiary under supervision, conservation or rehabilitation, or the appointment of a receiver of any such entity; (h) Any Borrower Affiliate shall (i) file a voluntary petition or commence a voluntary case seeking liquidation, reorganization, dissolution, arrangement, readjustment of debts or any other relief under the Bankruptcy Code or under any other applicable bankruptcy, insolvency or similar law now or hereafter in effect, (ii) consent to the appointment of or taking possession by a custodian, trustee, receiver or similar official for or of all or a substantial part of its properties, (iii) fail generally to pay its debts as they become due or admit in writing its inability to pay its debts generally as they become due, (iv) make a general assignment for the benefit of creditors or (v) take any corporate action to authorize or approve any of the actions described above; (i) Any involuntary petition or case shall be filed or commenced against a Borrower Affiliate seeking liquidation, reorganization, dissolution, arrangement, readjustment of debts, the appointment of a custodian, trustee, receiver or similar official for it or all or a substantial part of its properties or any other relief under the Bankruptcy Code or under any other applicable bankruptcy, insolvency or similar law now or hereafter in effect, which petition or case is not dismissed, bonded or discharged within sixty (60) days of the date of filing; or an order for relief (including, without limitation, the appointment of a custodian, trustee, receiver or similar official) shall be entered in any such proceeding, which order is not immediately stayed or made subject to other similar relief; (j) Any Borrower Affiliate shall (i) cease to be Solvent, or (ii) be enjoined, restrained or in any way prevented by order of court or any other Governmental Authority from conducting all or any material part of its business affairs; -57- 64 (k) Any one or more judgments, writs or warrants of attachment, executions or similar processes involving an aggregate amount in excess of $10,000,000 shall be entered or filed against any Borrower Affiliate or any of its respective properties, and all such judgments and processes shall not be dismissed, vacated, stayed, discharged or bonded for a period of thirty (30) days or in any event later than five (5) days prior to the date of any proposed sale thereunder, and, if bonded, such bond (or a replacement bond) shall not continue in effect at all times until such judgment is dismissed or discharged; (l) Any lien, levy or assessment, or notice thereof, shall be filed of record with respect to all or any portion of the assets of any Borrower Affiliate by the United States, or any department, agency or instrumentality thereof, or by any other Governmental Authority, including, without limitation, the Pension Benefit Guaranty Corporation; such lien, levy or assessment, taken together with all other Liens, levies or assessments then of record with respect to the assets of the Borrower Affiliates, taken as a whole, exceeds $10,000,000; and such lien, levy or assessment shall be executed upon or shall not be paid, dismissed, vacated, stayed, released, bonded or discharged within thirty (30) days after the same becomes a lien or, in the case of a lien involving ad valorem taxes, prior to the last day when payment may be made without penalty; (m) Any one or more licenses, permits or authorizations now or hereafter held by any Insurance Subsidiary shall be terminated, suspended or revoked or shall not be renewed, which terminations, suspensions, revocations or failures to renew would, individually or in the aggregate, be likely, in the reasonable judgement of the Required Lenders, to have a Material Adverse Effect; (n) Any Loan Document, at any time after execution and delivery thereof, shall for any reason cease, in any material respect, to be a legal, valid and binding obligation of the Borrower (and any party that becomes a party thereto after the Closing Date), enforceable against such party, or to give the Agent the rights, powers and remedies purported to be created thereby, in each case unless any such cessation is due to any act or failure to act on the part of the Agent or any Lender; (o) The occurrence of any of the following events: (i) the happening of a Reportable Event (which is not waived by the Pension Benefit Guaranty Corporation) with respect to any Employee Plan; (ii) the termination of any Employee Plan in a "distress termination" under the provisions of section 4041 of ERISA; (iii) the appointment of a trustee by an appropriate United States District Court to administer any Employee Plan; (iv) the institution of any proceedings by the Pension Benefit Guaranty Corporation to terminate any Employee Plan or to appoint a trustee to administer any such plan; and (v) the failure of the Borrower to notify the Agent promptly upon receipt by a Borrower Affiliate of any notice of the institution of any proceeding or any other actions that may result in the termination of any such plan; (p) Any change is made in the Insurance Code that affects the dividend practices of the Insurance Subsidiary and that could reasonably be expected to have a Material Adverse Effect on such entity or the Borrower or the ability of the Borrower to perform its Obligations under the Loan Documents; (q) Any event or events occur that individually or in the aggregate has had or could be expected, in the reasonable judgement of the Required Lenders, to have a Material Adverse -58- 65 Effect on the Borrower or the Insurance Subsidiary and that is not capable of being rectified (as reasonably determined by the Required Lenders) to prevent such Material Adverse Effect, or, if capable of being so rectified (as so determined), is not rectified within sixty (60) days after such event occurs; or (r) A Change in Ownership occurs. ARTICLE VIII RIGHTS AND REMEDIES AFTER EVENT OF DEFAULT; INTERCREDITOR PROVISIONS 8.1 RIGHTS AND REMEDIES. Upon and at any time after the occurrence and during the continuance of any Event of Default, unless such Event of Default shall have been waived in accordance with SECTION 11.9, the Agent may, with the consent of the Required Lenders, or shall, upon request of the Required Lenders, by notice to the Borrower, take any or all of the following actions, without prejudice to the rights of any Lender to enforce its claims against the Borrower, except as otherwise specifically provided for in this Credit Agreement: (i) declare the Total Commitment terminated, whereupon the Commitment of each Lender shall forthwith terminate immediately and any fees payable in respect thereof shall forthwith become due and payable without any other notice of any kind; (ii) declare all or any part of the Obligations owing hereunder immediately due and payable, whereupon such Obligations shall become immediately due and payable without presentment, demand, protest, notice or legal process of any kind, all of which are hereby expressly waived by the Borrower and/or (iii) exercise all of the rights and remedies of the Lenders under this Credit Agreement, the other Loan Documents and applicable law (including, without limitation, the Lenders' rights under SECTION 8.2 hereof), in order to satisfy all of the Borrower's Obligations; provided, however, that all obligations shall automatically become due and payable upon the occurrence of an Event of Default pursuant to SECTIONS 7.1(G), (H) or (I) hereof. 8.2 SET-OFF. The Borrower agrees that, in addition to any rights now or hereafter granted under applicable law or otherwise, the Agent and each of the Lenders shall have, and are hereby granted by the Borrower and authorized to exercise, all rights of set-off provided by applicable law (to the fullest extent thereof) and, in addition thereto, the Borrower agrees that at any time (a) any payment or amount owing by the Borrower under or in connection with this Credit Agreement or the Loan Documents is then due or (b) any Event of Default exists, each Lender or the Agent, without advance notice to the Borrower of any kind (any such notice being expressly waived by the Borrower), may set-off and apply to the payment of such payment or other amount any and all balances, credits, deposits, accounts or moneys (general or special, time or demand, provisional or final) at any time held and any other Indebtedness at any time owing by the Agent or any Lender to or for the credit or the account of the Borrower against any or all of the Obligations of the Borrower to the Agent or any Lender under this Credit Agreement or any other Loan Document, now or hereafter existing, whether or not such Obligations have matured. The Agent and each Lender agree promptly to notify the Borrower after any such set-off or application by it, provided that the failure to give such notice shall not affect the validity of such set-off or application. 8.3 INTERCREDITOR PROVISIONS. (a) Upon the occurrence and during the continuance of an Event of Default, the proceeds of any collection actions or claims payable to the Agent, for the benefit of -59- 66 the Lenders, and all payments made to the Agent, for the benefit of the Lenders, under this Agreement, the Notes and any of the other Loan Documents, shall be applied by the Agent in the following order: (i) First, to the payment in full of all reasonable costs and expenses incurred by the Agent, on behalf of the Lenders, in connection with the collection of the Obligations, including, without limitation, out-of-pocket costs, court costs, attorneys' fees and all liabilities and advances incurred by the Agent in connection therewith, and all other fees, expenses and amounts due to the Agent hereunder and under the other Loan Documents (it is intended that expenses shared by the Lenders, including the Agent, be reimbursed on a pro rata basis pursuant to this clause (i); (ii) Second, to the payment in full of all reasonable costs and expenses incurred by the Lenders in connection with the collection of the Obligations, including, without limitation, out-of-pocket costs, court costs attorneys' fees and all liabilities and advances incurred by the Lenders in connection therewith, but only to the extent that such costs and expenses are required to be paid hereunder and under the other Loan Documents; (iii) Third, to the payment in full of all interest with respect to the Obligations accrued and unpaid as of the date of the Agent's receipt of such proceeds, pro rata to each Lender based on the percentage that the amount of such interest owed to such Lender bears to the aggregate amount of such interest owed to all Lenders; (iv) Fourth, to the payment in full of all remaining Obligations (including, without limitation, principal on the Loans) outstanding and unpaid as of the date of the Agent's receipt of such proceeds, pro rata to each Lender based on the percentage that the amount of such Obligations owed to such Lender bears to the aggregate amount of such Obligations owed to all Lenders; and (v) The balance, to the Borrower or to such other Persons as may be required by law. (b) Each Lender agrees that it shall not, unless specifically requested to do so by the Agent, commence or cause to be commenced against the Borrower any enforcement proceeding with respect to a Note or this Credit Agreement. 8.4 RIGHTS AND REMEDIES CUMULATIVE; NON-WAIVER; ETC. The enumeration of the Lenders' rights and remedies set forth in this Credit Agreement is not intended to be exhaustive and the exercise by any Lender of any right or remedy shall not preclude the exercise of any other rights or remedies, all of which shall be cumulative, and shall be in addition to any other right or remedy given hereunder, under the Loan Documents or under any other agreement between any of the Borrower Affiliates and any of the Lenders or which may now or hereafter exist in law or in equity or by suit or otherwise. No delay or failure to take action on the part of the Agent or any Lender in exercising any right, power or privilege shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or privilege preclude other or further exercise thereof or the exercise of any other right, power or privilege or shall be construed to be a waiver of any Event of Default. No course of dealing between the Borrower and the Agent or any Lender or the agents or employees of either of them shall be effective to change, -60- 67 modify or discharge any provision of this Agreement or to constitute a waiver of any Default or Event of Default. ARTICLE IX THE AGENT 9.1 APPOINTMENT. Each Lender hereby irrevocably appoints and authorizes First Union to act as Agent hereunder and under the other Loan Documents and to take such actions as agent on its behalf hereunder and under the other Loan Documents, and to exercise such powers and to perform such duties, as are specifically delegated to the Agent by the terms hereof or thereof, together with such other powers and duties as are reasonably incidental thereto. 9.2 NATURE OF DUTIES. The Agent shall have no duties or responsibilities other than those expressly set forth in this Agreement and the other Loan Documents. The Agent shall not have, by reason of this Agreement or any other Loan Document, a fiduciary relationship in respect of any Lender; and nothing in this Agreement or any other Loan Document, express or implied, is intended to or shall be so construed as to impose upon the Agent any obligations or liabilities in respect of this Agreement or any other Loan Document except as expressly set forth herein or therein. The Agent may execute any of its duties under this Agreement or any other Loan Document by or through agents or attorneys-in-fact and shall not be responsible for the negligence or misconduct of any agents or attorneys-in-fact that it selects with reasonable care. The Agent shall be entitled to consult with legal counsel, independent public accountants and other experts selected by it with respect to all matters pertaining to this Agreement and the other Loan Documents and its duties hereunder and thereunder and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts. The Lenders hereby acknowledge that the Agent shall not be under any duty to take any discretionary action permitted to be taken by it pursuant to the provisions of this Agreement or any other Loan Document unless it shall be requested in writing to do so by the Required Lenders (or, where a higher percentage of the Lenders is expressly required hereunder, such Lenders). 9.3 EXCULPATORY PROVISIONS. Neither the Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or Affiliates shall be (i) liable for any action taken or omitted to be taken by it or such Person under or in connection with the Loan Documents, except for its or such Person's own gross negligence or willful misconduct, (ii) responsible in any manner to any Lender for any recitals, statements, information, representations or warranties herein or in any other Loan Document or in any document, instrument, certificate, report or other writing delivered in connection herewith or therewith, for the execution, effectiveness, genuineness, validity, enforceability or sufficiency of this Agreement or any other Loan Document, or for the financial condition of the Borrower, its Subsidiaries or any other Person, or (iii) required to ascertain or make any inquiry concerning the performance or observance of any of the terms, provisions or conditions of this Agreement or any other Loan Document or the existence or possible existence of any Default or Event of Default, or to inspect the properties, books or records of the Borrower or any of its Subsidiaries. 9.4 RELIANCE BY AGENT. The Agent shall be entitled to rely, and shall be fully protected in relying, upon any notice, statement, consent or other communication (including, without limitation, any thereof by telephone, telecopy, telex, telegram or cable) believed by it in good faith to be genuine and -61- 68 correct and to have been signed, sent or made by the proper Person or Persons. The Agent may deem and treat each Lender as the owner of its interest hereunder for all purposes hereof unless and until a written notice of the assignment, negotiation or transfer thereof shall have been given to the Agent in accordance with the provisions of this Agreement. The Agent shall be entitled to refrain from taking or omitting to take any action in connection with this Agreement or any other Loan Document (i) if such action or omission would, in the reasonable opinion of the Agent, violate any applicable law or any provision of this Agreement or any other Loan Document or (ii) unless and until it shall have received such advice or concurrence of the Required Lenders (or, where a higher percentage of the Lenders is expressly required hereunder, such Lenders) as it deems appropriate or it shall first have been indemnified to its satisfaction by the Lenders against any and all liability and expense (other than liability and expense arising from its own gross negligence or willful misconduct) that may be incurred by it by reason of taking, continuing to take or omitting to take any such action. Without limiting the foregoing, no Lender shall have any right of action whatsoever against the Agent as a result of the Agent's acting or refraining from acting hereunder or under any other Loan Document in accordance with the instructions of the Required Lenders (or, where a higher percentage of the Lenders is expressly required hereunder, such Lenders), and such instructions and any action taken or failure to act pursuant thereto shall be binding upon all of the Lenders (including all subsequent Lenders). 9.5 NON-RELIANCE ON AGENT AND OTHER LENDERS. Each Lender expressly acknowledges that neither the Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or Affiliates has made any representation or warranty to it and that no act by the Agent or any such Person hereafter taken, including any review of the affairs of the Borrower and its Subsidiaries, shall be deemed to constitute any representation or warranty by the Agent to any Lender. Each Lender represents to the Agent that (i) it has, independently and without reliance upon the Agent or any other Lender and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, prospects, operations, properties, financial and other condition and creditworthiness of the Borrower and its Subsidiaries and made its own decision to enter into this Agreement and extend credit to the Borrower hereunder, and (ii) 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 analysis, appraisals and decisions in taking or not taking action hereunder and under the other Loan Documents and to make such investigation as it deems necessary to inform itself as to the business, prospects, operations, properties, financial and other condition and creditworthiness of the Borrower and its Subsidiaries. Except as expressly provided in this Agreement and the other Loan Documents, the Agent shall have no duty or responsibility, either initially or on a continuing basis, to provide any Lender with any credit or other information concerning the business, prospects, operations, properties, financial or other condition or creditworthiness of the Borrower, its Subsidiaries or any other Person that may at any time come into the possession of the Agent or any of its officers, directors, employees, agents, attorneys-in-fact or Affiliates. 9.6 NOTICE OF DEFAULT. The Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default unless the Agent shall have received written notice from the Borrower or a Lender referring to this Agreement, describing such Default or Event of Default and stating that such notice is a "notice of default." In the event that the Agent receives such a notice, the Agent will give notice thereof to the Lenders as soon as reasonably practicable; PROVIDED, HOWEVER, that if any such notice has also been furnished to the Lenders, the Agent shall have no obligation to notify the Lenders with respect thereto. The Agent shall (subject to SECTIONS 9.4 and 11.9) take such action with respect to such Default or Event of Default as shall reasonably be directed by the Required Lenders; PROVIDED that, unless -62- 69 and until the Agent shall have received such directions, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable in the best interests of the Lenders. 9.7 INDEMNIFICATION. To the extent the Agent is not reimbursed by or on behalf of the Borrower, and without limiting the obligation of the Borrower to do so, the Lenders agree (i) to indemnify the Agent and its officers, directors, employees, agents, attorneys-in-fact and Affiliates, ratably in proportion to their respective percentages as used in determining the Required Lenders as of the date of determination, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses (including, without limitation, attorneys' fees and expenses) or disbursements of any kind or nature whatsoever that may at any time (including, without limitation, at any time following the repayment in full of the Loans and the termination of the Commitments) be imposed on, incurred by or asserted against the Agent in any way relating to or arising out of this Agreement or any other Loan Document or any documents contemplated by or referred to herein or the transactions contemplated hereby or thereby or any action taken or omitted by the Agent under or in connection with any of the foregoing, and (ii) to reimburse the Agent upon demand, ratably in proportion to their respective percentages as used in determining the Required Lenders as of the date of determination, for any expenses incurred by the Agent in connection with the preparation, negotiation, execution, delivery, administration, amendment, modification, waiver or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement or any of the other Loan Documents (including, without limitation, reasonable attorneys' fees and expenses and compensation of agents and employees paid for services rendered on behalf of the Lenders); PROVIDED, HOWEVER, that no Lender shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements to the extent resulting from the gross negligence or willful misconduct of the party to be indemnified. 9.8 THE AGENT IN ITS INDIVIDUAL CAPACITY. With respect to its Commitment, the Loans made by it, the Letters of Credit issued or participated in by it and the Note or Notes issued to it, the Agent in its individual capacity and not as Agent shall have the same rights and powers under the Loan Documents as any other Lender and may exercise the same as though it were not performing the agency duties specified herein; and the terms "Lenders," "Required Lenders," "holders of Notes" and any similar terms shall, unless the context clearly otherwise indicates, include the Agent in its individual capacity. The Agent and its Affiliates may accept deposits from, lend money to, make investments in, and generally engage in any kind of banking, trust, financial advisory or other business with the Borrower, any of its Subsidiaries or any of their respective Affiliates as if the Agent were not performing the agency duties specified herein, and may accept fees and other consideration from any of them for services in connection with this Agreement and otherwise without having to account for the same to the Lenders. 9.9 SUCCESSOR AGENT. The Agent may resign at any time by giving ten (10) days' prior written notice to the Borrower and the Lenders. Upon any such notice of resignation, the Required Lenders will, with the prior written consent of the Borrower (which consent shall not be unreasonably withheld), appoint from among the Lenders a successor to the Agent (PROVIDED that the Borrower's consent shall not be required in the event a Default or Event of Default shall have occurred and be continuing). If no successor to the Agent shall have been so appointed by the Required Lenders and shall have accepted such appointment within such ten-day period, then the retiring Agent may, on behalf of the Lenders and after consulting with the Lenders and the Borrower, appoint a successor Agent from among the Lenders. Upon the acceptance of any appointment as Agent by a successor Agent, such successor Agent shall -63- 70 thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations hereunder and under the other Loan Documents. After any retiring Agent's resignation as Agent, the provisions of this Article shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent. If no successor to the Agent has accepted appointment as Agent by the thirtieth (30th) day following a retiring Agent's notice of resignation, the retiring Agent's resignation shall nevertheless thereupon become effective, and the Lenders shall thereafter perform all of the duties of the Agent hereunder and under the other Loan Documents until such time, if any, as the Required Lenders appoint a successor Agent as provided for hereinabove. 9.10 CO-AGENT. Notwithstanding any other provision of this Agreement or any of the other Loan Documents, the Co-Agent is named as such for recognition purposes only, and in its capacity as such shall have no powers, rights, duties, responsibilities or liabilities with respect to this Agreement and the other Loan Documents and the transactions contemplated hereby and thereby. ARTICLE X ASSIGNMENTS AND PARTICIPATIONS 10.1 ASSIGNMENTS. (a) Each Lender may assign to one or more other Eligible Assignees (each, an "Assignee") all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitment, the outstanding Loans made by it and the Note or Notes held by it); PROVIDED, HOWEVER, that (i) any such assignment (other than an assignment to a Lender or an Affiliate of a Lender) shall not be made without the prior written consent of the Agent and the Borrower (to be evidenced by their counterexecution of the relevant Assignment and Acceptance), which consent shall not be unreasonably withheld, (ii) except in the case of an assignment to a Lender or an Affiliate of a Lender, the amount of the Commitment of the assigning Lender being assigned pursuant to each such assignment (determined as of the date of the Assignment and Acceptance with respect to each such assignment) shall in no event be less than the lesser of (y) the entire Commitment of such Lender immediately prior to such assignment or (z) $5,000,000, and (iii) the parties to each such assignment will execute and deliver to the Agent, for its acceptance and recording in the Register, an Assignment and Acceptance, together with any Note or Notes subject to such assignment, and will pay a nonrefundable processing fee of $2,500 to the Agent for its own account. Upon such execution, delivery, acceptance and recording of the Assignment and Acceptance, from and after the effective date specified therein, which effective date shall be at least five Business Days after the execution thereof (unless the Agent shall otherwise agree), (A) the Assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, shall have the rights and obligations of the assigning Lender hereunder with respect thereto and (B) the assigning Lender shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights (other than rights under the provisions of this Agreement and the other Loan Documents relating to indemnification or payment of fees, costs and expenses, to the extent such rights relate to the time prior to the effective date of such Assignment and Acceptance) and be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of such assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto). The terms and provisions of each Assignment and Acceptance shall, upon the effectiveness thereof, be incorporated into and made a part of this -64- 71 Agreement, and the covenants, agreements and obligations of each Lender set forth therein shall be deemed made to and for the benefit of the Agent and the other parties hereto as if set forth at length herein. (b) The Agent will maintain at its address for notices referred to herein a copy of each Assignment and Acceptance delivered to and accepted by it and a register for the recordation of the names and addresses of the Lenders and the Commitments of, and principal amount of the Loans owing to, each Lender from time to time (the "Register"). The entries in the Register shall be conclusive and binding for all purposes, absent manifest error, and the Borrower, the Agent and the Lenders may treat each Person whose name is recorded in the Register as a Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Borrower and each Lender at any reasonable time and from time to time upon reasonable prior notice. (c) Upon its receipt of a duly completed Assignment and Acceptance executed by an assigning Lender and an Assignee and counterexecuted by the Borrower (if required), together with the Notes subject to such assignment and the processing fee referred to in subsection (a) above, the Agent will (i) accept such Assignment and Acceptance, (ii) on the effective date thereof, record the information contained therein in the Register and (iii) give notice thereof to the Borrower and the Lenders. Within five (5) Business Days after its receipt of such notice, the Borrower, at its own expense, will execute and deliver to the Agent in exchange for the surrendered Notes (y) a new Committed Loan Note to the order of such Assignee in a principal amount equal to the principal amount of the Commitment (or, if the Commitments have been terminated, the principal amount of the Committed Loans) assumed by it pursuant to such Assignment and Acceptance and, to the extent the assigning Lender has retained its Committed Loans and/or Commitment hereunder, a new Committed Loan Note to the order of the assigning Lender in an amount equal to the principal amount of the Commitment (or, if the Commitments have been terminated, the principal amount of the Committed Loans) retained by it hereunder, and (z) a new Bid Loan Note to the order of such Assignee in a principal amount equal to the Total Commitment. Such new Notes shall be dated the date of the replaced Notes and shall otherwise be in substantially the forms of EXHIBITS A-1 and A-2, as applicable. The Agent will return cancelled Notes to the Borrower. 10.2 PARTICIPATIONS. Each Lender may, without the consent of the Borrower, the Agent or any other Lender, sell to one or more other Persons (each, a "Participant") participations in any portion comprising less than all of its rights and obligations under this Agreement (including, without limitation, a portion of its Commitment, the outstanding Loans made by it and the Note or Notes held by it); PROVIDED, HOWEVER, that (i) such Lender's obligations under this Agreement shall remain unchanged and such Lender shall remain solely responsible for the performance of such obligations, (ii) the principal amount of the participation shall not be less than $3,000,000 and no Lender shall sell any participation that, when taken together with all other participations, if any, sold by such Lender, covers all of such Lender's rights and obligations under this Agreement, (iii) the Borrower, the Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement, and no Lender shall permit any Participant to have any voting rights or any right to control the vote of such Lender with respect to any amendment, modification, waiver, consent or other action hereunder or under any other Loan Document (except as to actions that would (x) reduce or forgive the principal amount of, or rate of interest on, any Loan, or reduce or forgive any fees or other Obligations, (y) extend any date (including the Maturity Date) fixed for the payment of any principal of or interest on any Loan, any fees or any other Obligations, or (z) increase any Commitment of any Lender), and (iv) no Participant shall have any rights under this Agreement or any of the other Loan Documents, each Participant's rights against the granting Lender in respect of any participation to be those set forth in the -65- 72 participation agreement, and all amounts payable by the Borrower hereunder shall be determined as if such Lender had not granted such participation. Notwithstanding the foregoing, each Participant shall have the rights of a Lender for purposes of SECTIONS 2.17(A), 2.17(B), 2.18, 2.19 and 8.2, and shall be entitled to the benefits thereto, to the extent that the Lender granting such participation would be entitled to such benefits if the participation had not been made, provided that no Participant shall be entitled to receive any greater amount pursuant to any of such Sections than the Lender granting such participation would have been entitled to receive in respect of the amount of the participation made by such Lender to such Participant had such participation not been made. 10.3 MISCELLANEOUS. (a) The Agent and each Lender may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section, disclose to the assignee or participant, or proposed assignee or participant, any information relating to the Borrower and its Subsidiaries furnished to it by or on behalf of any other party hereto. (b) Nothing herein shall prohibit the pledging by any Lender of any Note to any Federal Reserve Bank in accordance with applicable law. ARTICLE XI MISCELLANEOUS 11.1 FEES AND EXPENSES. Whether or not the transactions contemplated by this Agreement shall be consummated, the Borrower shall be obligated: (a) to pay or reimburse the Agent upon demand and after notice in accordance with SECTION 11.5 for all reasonable expenses (including, without limitation, attorneys' fees, but excluding salaries of the Agent's regularly employed personnel and overhead) incurred or paid by the Agent in connection with: (i) the preparation, execution, delivery, interpretation, modification, amendment or termination of this Agreement or the other Loan Documents or any consent or waiver requested by the Borrower hereunder or thereunder; (ii) charges for appraisers, examiners, environmental consultants, auditors or similar Persons whom the Agent may engage with respect to rendering opinions concerning the financial condition of the Borrower and its Subsidiaries; and (iii) any commercially reasonable attempt to inspect, verify, protect, preserve, collect, sell, liquidate or otherwise dispose of assets of the Borrower or any Subsidiary; (b) to pay or reimburse the Agent and each Lender upon demand and after notice in accordance with SECTION 11.5 for all reasonable expenses (including, without limitation, attorneys' fees, but excluding salaries of the Agent's or such Lender's regularly employed personnel and overhead) incurred or paid by the Agent or such Lender in connection with: (i) any litigation, contest, dispute, suit or proceeding or action (whether instituted by the Agent, the Lenders, or any of them, the Borrower or any other Person) in any way relating to this Agreement or the other Loan Documents or to the Borrower's or any Subsidiary's affairs (other than a dispute solely between or among the Lenders); (ii) any attempt by the Agent or such Lender to enforce any of its rights against the Borrower or any other Person that may be obligated to the Agent or such Lender by virtue of this Agreement or the other Loan Documents; and (iii) any refinancing or restructuring of the credit arrangement provided under this Agreement in the nature of a "work-out" or in any insolvency or bankruptcy proceeding; -66- 73 (c) to pay and hold the Agent and each Lender harmless from and against any and all liability and loss with respect to or resulting from the nonpayment or delayed payment of any and all intangibles, documentary stamp and other similar taxes, fees and excises, if any, including any interest and penalties, that may be, or be determined to be, payable in connection with the transactions contemplated by this Agreement and the other Loan Documents or in any modification hereof or thereof; and (d) to pay and hold the Agent and each Lender harmless from and against any and all finder's or brokerage fees and commissions that may be payable in connection with the transactions contemplated by this Agreement and the other Loan Documents, other than any fees or commissions of finders or brokers engaged by the Agent or any Lender. 11.2 SURVIVAL OF AGREEMENTS. All agreements, representations and warranties contained herein or made in writing by or on behalf of the Borrower in connection with the transactions contemplated hereby shall survive the execution and delivery of this Credit Agreement and the other Loan Documents. No termination or cancellation (regardless of cause or procedure) of this Credit Agreement shall in any way affect or impair the powers, obligations, duties, rights and liabilities of the parties hereto in any way with respect to (a) any transaction or event occurring prior to such termination or cancellation, or (b) any of the Borrower's undertakings, agreements, covenants, warranties and representations contained in this Credit Agreement and the other Loan Documents and all such undertakings, agreements, covenants, warranties and representations shall survive such termination or cancellation until payment in full of the Obligations. The Borrower further agrees that to the extent the Borrower makes a payment or payments to the Lenders, which payment or payments or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside and/or required to be repaid to a trustee, receiver or any other party under any bankruptcy, insolvency or similar state or federal law, common law or equitable cause, then, to the extent of such payment or repayment, the Obligation or part thereof intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been received by the Lenders. 11.3 GOVERNING LAW; CONSENT TO JURISDICTION. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS HAVE BEEN EXECUTED, DELIVERED AND ACCEPTED IN, AND SHALL BE DEEMED TO HAVE BEEN MADE IN, NORTH CAROLINA AND SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NORTH CAROLINA (WITHOUT REGARD TO THE CONFLICTS OF LAW PROVISIONS THEREOF). THE BORROWER HEREBY CONSENTS TO THE NONEXCLUSIVE JURISDICTION OF ANY STATE COURT WITHIN MECKLENBURG COUNTY, NORTH CAROLINA OR ANY FEDERAL COURT LOCATED WITHIN THE WESTERN DISTRICT OF THE STATE OF NORTH CAROLINA FOR ANY PROCEEDING INSTITUTED HEREUNDER OR UNDER ANY OF THE OTHER LOAN DOCUMENTS, OR ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS, OR ANY PROCEEDING TO WHICH THE AGENT OR ANY LENDER OR THE BORROWER IS A PARTY, INCLUDING ANY ACTIONS BASED UPON, ARISING OUT OF, OR IN CONNECTION WITH, ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENT (WHETHER ORAL OR WRITTEN) OR ACTIONS OF THE AGENT OR ANY LENDER OR THE BORROWER. THE BORROWER IRREVOCABLY AGREES TO BE BOUND (SUBJECT TO ANY AVAILABLE RIGHT OF APPEAL) BY ANY JUDGMENT RENDERED OR RELIEF GRANTED THEREBY AND FURTHER WAIVES ANY OBJECTION THAT IT MAY HAVE BASED ON LACK OF JURISDICTION OR IMPROPER VENUE OR FORUM NON CONVENIENS TO THE CONDUCT OF ANY SUCH PROCEEDING. THE BORROWER CONSENTS THAT ALL SERVICE OF -67- 74 PROCESS BE MADE BY REGISTERED OR CERTIFIED MAIL DIRECTED TO IT AT ITS ADDRESS SET FORTH HEREINBELOW, AND SERVICE SO MADE SHALL BE DEEMED TO BE COMPLETED UPON THE EARLIER OF ACTUAL RECEIPT THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN THE UNITED STATES MAILS, PROPER POSTAGE PREPAID AND PROPERLY ADDRESSED. NOTHING IN THIS SECTION SHALL AFFECT THE RIGHT TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR AFFECT THE RIGHT OF ANY PARTY TO BRING ANY ACTION OR PROCEEDING AGAINST ANY OTHER PARTY IN THE COURTS OF ANY OTHER JURISDICTION. 11.4 ARBITRATION; PRESERVATION AND LIMITATION OF REMEDIES. (a) Upon demand of any party hereto, whether made before or after institution of any judicial proceeding, any dispute, claim or controversy arising out of, connected with or relating to this Agreement or any other Loan Document ("Disputes") between or among the Borrower, the Agent and the Lenders, or any of them, shall be resolved by binding arbitration as provided herein. Institution of a judicial proceeding by a party does not waive the right of that party to demand arbitration hereunder. Disputes may include, without limitation, tort claims, counterclaims, claims brought as class actions, claims arising from documents executed in the future, or claims arising out of or connected with the transactions contemplated by this Agreement and the other Loan Documents. Arbitration shall be conducted under and governed by the Commercial Financial Disputes Arbitration Rules (the "Arbitration Rules") of the American Arbitration Association (the "AAA"), as in effect from time to time, and Title 9 of the U.S. Code, as amended. All arbitration hearings shall be conducted in the city in which the principal office of the Agent is located. The expedited procedures set forth in Rule 51 et seq. of the Arbitration Rules shall be applicable to claims of less than $1,000,000. All applicable statutes of limitation shall apply to any Dispute. A judgment upon the award may be entered in any court having jurisdiction. The panel from which all arbitrators are selected shall be comprised of licensed attorneys. The single arbitrator selected for expedited procedure shall be a retired judge from the highest court of general jurisdiction, state or federal, of the state where the hearing will be conducted. Notwithstanding the foregoing, this arbitration provision does not apply to Disputes under or related to Rate Protection Agreements. (b) Notwithstanding the preceding binding arbitration provisions, the parties hereto agree to preserve, without diminution, certain remedies that any party hereto may employ or exercise freely, either alone, in conjunction with or during a Dispute. Any party hereto shall have the right to proceed in any court of proper jurisdiction or by self-help to exercise or prosecute the following remedies, as applicable: (i) all rights to foreclose against any Collateral by exercising a power of sale granted pursuant to any of the Loan Documents or under applicable law or by judicial foreclosure and sale, including a proceeding to confirm the sale; (ii) all rights of self-help, including peaceful occupation of real property and collection of rents, set-off, and peaceful possession of personal property; (iii) obtaining provisional or ancillary remedies, including injunctive relief, sequestration, garnishment, attachment, appointment of a receiver and filing an involuntary bankruptcy proceeding; and (iv) when applicable, a judgment by confession of judgment. Preservation of these remedies does not limit the power of an arbitrator to grant similar remedies that may be requested by a party in a Dispute. The parties hereto agree that no party shall have a remedy of punitive or exemplary damages against any other party in any Dispute, and each party hereby waives any right or claim to punitive or exemplary damages that it has now or that may arise in the future in connection with any Dispute, whether such Dispute is resolved by arbitration or judicially. -68- 75 11.5 NOTICE. All notices and other communications hereunder shall be in writing and shall be deemed to have been validly served, given or delivered five (5) days after deposit in the United States mails with postage prepaid, and addressed to the party to be notified as follows: If to the Borrower: Western National Corporation 5555 San Felipe Avenue Houston, Texas 77056 Attn: Mr. Arthur R. McGimsey Facsimile Number: 713-888-7893 If to the Agent at: First Union National Bank of North Carolina One First Union Center, TW-10 301 South College Street Charlotte, North Carolina 28288-0608 Attn: Syndication Agency Services Facsimile Number: 704-383-0288 and, if to any Lender, to it at the address for notices set forth on its signature page hereto (or if to any Lender not a party hereto as of the date hereof, at the address for notices set forth in its Assignment and Acceptance); or in each case, to such other address as any party may designate for itself by like notice to all other parties hereto. All such notices and communications shall be deemed to have been given (i) if mailed as provided above by any method other than overnight delivery service, on the third Business Day after deposit in the mails, (ii) if mailed by overnight delivery service, telegraphed, telexed, telecopied or cabled, when delivered for overnight delivery, delivered to the telegraph company, confirmed by telex answerback, transmitted by telecopier or delivered to the cable company, respectively, or (iii) if delivered by hand, upon delivery; provided that notices and communications to the Agent shall not be effective until received by the Agent. 11.6 INDEMNIFICATION OF THE AGENT AND THE LENDERS. From and at all times after the date of this Agreement, and in addition to all of the Agent's and the Lenders' other rights and remedies against the Borrower, the Borrower agrees to indemnify and hold harmless the Agent and each Lender and each director, officer, employee, agent and Affiliate of the Agent and each Lender against any and all claims, losses, damages, liabilities, costs and expenses of any kind or nature whatsoever (including without limitation reasonable attorneys' fees, costs and expenses) incurred by or asserted against the Agent or such Lender or any such director, officer, employee, agent or Affiliate, from and after the date hereof, whether direct, indirect or consequential, as a result of or arising from or in any way relating to any suit, action or proceeding (including any inquiry or investigation) by any Person other than the Borrower, whether threatened or initiated, asserting a claim for any legal or equitable remedy against any Person under any statute or regulation, including, but not limited to, any federal or state securities laws, or under any common law or equitable cause or otherwise, arising from or in connection with the negotiation, preparation, execution or performance of this Credit Agreement or the other Loan Documents or any transactions contemplated herein or therein, including without limitation the actual or alleged generation, presence or release of any Hazardous Material on or from, or the transportation of Hazardous Material to or from, any real property owned or leased by the Borrower or any Subsidiary or any other violation of Environmental Laws, whether or not the Agent or the Lender or any such director, officer, employee, agent or Affiliate is a party to any such action, proceeding, suit or the target of any such inquiry or -69- 76 investigation; provided, however, that no indemnified party shall have the right to be indemnified hereunder for any liability resulting from the gross negligence or wilful misconduct of such indemnified party as finally determined by a court of competent jurisdiction and not subject to appeal, or pursuant to arbitration as set forth in SECTION 11.4. All of the foregoing losses, damages, costs and expenses of the Agent or any Lender shall be payable by the Borrower upon demand by the Agent or the Lender and shall be additional Obligations hereunder. The Borrower's obligations under this SECTION 11.6 shall survive any termination of this Credit Agreement or any other Loan Document. 11.7 WAIVERS BY THE BORROWER. Except as otherwise provided for in this Credit Agreement, the Borrower waives, to the extent permitted by applicable law, (a) presentment, demand and protest and notice of presentment, protest, default, nonpayment, maturity and all other notices; (b) any bond or security that might be required by any court prior to allowing the Agent or any Lender to exercise any of the Lenders' remedies under this Credit Agreement or the other Loan Documents; and (c) the benefit of all valuation, appraisement and exemption laws. 11.8 ASSIGNMENT AND SALE. The Borrower may not sell, assign or transfer this Credit Agreement, or the other Loan Documents or any portion thereof, including without limitation, the Borrower's rights, title, interests, remedies, powers, and duties hereunder or thereunder. 11.9 AMENDMENT OR WAIVER. Except as may be otherwise specifically set forth in this Agreement or the other Loan Documents, neither this Agreement nor any other Loan Document nor any provision hereof or thereof may be amended, modified, waived, discharged or terminated, and no consent to any departure by the Borrower from any provision hereof or thereof may be given, except in a writing signed by the Required Lenders; provided, however, that: (a) no such amendment, modification, waiver, discharge, termination or consent shall, without the consent of each Lender holding Obligations directly affected thereby, (i) reduce the principal amount of, or rate of interest on, any Loan, or reduce any fees or other Obligations (other than fees payable to the Agent for its own account) or any obligations of any Person now or hereafter primarily or contingently liable with respect to the Obligations or (ii) postpone any date fixed for any payment of principal, interest (other than additional interest payable hereunder during the continuance of an Event of Default), fees (other than fees payable to the Agent for its own account) or any other Obligations; (b) no such amendment, modification, waiver, discharge, termination or consent shall, without the consent of all Lenders, (i) increase the Commitments of any Lender (it being understood that a waiver of any Default or Event of Default or of any mandatory reduction in the Total Commitment shall not constitute such an increase), (ii) change the definition of "Required Lenders" or otherwise change the number or percentage of Lenders that shall be required for the Lenders or any of them to take or approve, or direct the Agent to take, any action hereunder, (iii) amend, modify or waive any of the provisions for extending, or take action to extend, the Loan Termination Date, (iv) amend any provision of this Section or of SECTIONS 2.17, 2.18, 2.19 or 11.6, or (v) consent to the assignment or transfer by the Borrower, or by any other Person now or hereafter primarily or contingently liable with respect to the Obligations, of any of its rights and obligations under this Agreement or any of the other Loan Documents; (c) no provision relating to the rights or obligations of the Agent under this Agreement or any of the other Loan Documents may be amended, modified or waived without the consent of the Agent. -70- 77 11.10 SEVERABILITY. To the extent any provision of this Agreement is prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Credit Agreement. 11.11 ENTIRE AGREEMENT. This Credit Agreement and the other documents, certificates and instruments referred to herein constitute the entire agreement between the parties and supersede and rescind any prior agreements relating to the subject matter hereof. THIS WRITTEN AGREEMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN OR ORAL AGREEMENTS BETWEEN THE PARTIES. 11.12 BINDING EFFECT. All of the terms of this Credit Agreement and the other Loan Documents, as the same may from time to time be amended, shall be binding upon, inure to the benefit of and be enforceable by the respective successors and assigns of the Borrower, the Agent and the Lenders. This provision, however, shall not be deemed to modify SECTION 11.8. 11.13 EXECUTION IN COUNTERPARTS. This Credit Agreement may be executed in two or more counterparts, which when assembled shall constitute one and the same agreement. 11.14 CONFLICT OF TERMS. The provisions of the exhibits hereto and the other Loan Documents and any schedule or annex hereto are incorporated in this Credit Agreement by this reference thereto. Except as otherwise provided in this Credit Agreement and except as otherwise provided in the other Loan Documents, if any provision contained in this Credit Agreement is in conflict with, or inconsistent with, any provision of the other Loan Documents, the provision contained in this Credit Agreement shall control. 11.15 INJUNCTIVE RELIEF. The Borrower recognizes that in the event the Borrower fails to perform, observe or discharge any of its obligations or liabilities under this Credit Agreement, any remedy of law may prove to be inadequate relief to the Lenders. The Borrower therefore agrees that the Lenders, if the Lenders so request, shall be entitled to temporary and permanent injunctive relief in any such case without the necessity of proving actual damages. 11.16 SYNDICATION. The Borrower will, and will cause each of its Subsidiaries to, use its best efforts to assist the Agent in the syndication of the Loans and the resulting addition of Lenders after the date hereof and after the Closing Date. -71- 78 IN WITNESS WHEREOF, the parties hereto have caused this Credit Agreement to be executed in their corporate names by their duly authorized corporate officers as of the date first above written. WESTERN NATIONAL CORPORATION By:/s/ Richard W. Scott ------------------------------------ Richard W. Scott, Vice Chairman, General Counsel and Chief Investment Officer -72- 79 FIRST UNION NATIONAL BANK OF NORTH CAROLINA, as Agent and as a Lender Commitment: $32,000,000 By:/s/ Gail M. Golightly ------------------------------------ Gail M. Golightly, Senior Vice President Instructions for wire transfers to the Agent: First Union National Bank of North Carolina ABA Routing No. 053 000 219 Charlotte, North Carolina General Ledger No. 465906, RC No. 5007 Attention: Syndication Agency Services Re: Western National Corporation Address for notices (as a Lender): First Union National Bank of North Carolina One First Union Center, 5th Floor 301 South College Street Charlotte, North Carolina 28288-0735 Attention: Jay S. Bullock Telephone: (704) 383-3789 Telecopy: (704) 383-7611 Lending Office: First Union National Bank of North Carolina One First Union Center, 5th Floor 301 South College Street Charlotte, North Carolina 28288-0735 Attention: Jay S. Bullock Telephone: (704) 383-3789 Telecopy: (704) 383-7611 -73- 80 TEXAS COMMERCE BANK, N.A., as Co-Agent and as a Lender Commitment: $27,000,000 By: /s/ Susan Garner ------------------------------------------------ Susan Garner Vice President Instructions for wire transfers to the Co-Agent: Texas Commerce Bank National Association ABA Routing No. 113 000 609 Houston, Texas General Ledger No. 13681-7800 Re: Western National Corporation 0040078923 Address for notices (as a Lender): Texas Commerce Bank N.A. 712 Main, 5-TCB-E Houston, TX 77002 Attention: Susan Garner Telephone: 713/216-2446 Telecopy: 713/216-7500 Lending Office: Texas Commerce Bank N.A. 712 Main, 5-TCBE-78 Houston, TX 77002 Attention: Susan Garner Telephone: 713/216-2446 Telecopy: 713/216-7500 -74- 81 THE FUJI BANK, LIMITED, as a Lender Commitment: $21,000,000 By: /s/ David Kelley ----------------------------------- David Kelley Senior Vice President Instructions for wire transfers to the Lender: Texas Commerce Bank ABA Routing No. 113 000 609 Houston, TX Account No. 0010-197-3098 Attention: Loan Administration Re: Western National Corporation Address for notices: The Fuji Bank, Limited 1221 McKinney, Suite 4100 Houston, TX 77010 Attention: Mr. Jay Fort Telephone: 713/650-7855 Telecopy: 713/759-0048 Lending Office: The Fuji Bank, Limited 1221 McKinney, Suite 4100 Houston, TX 77010 Attention: Jenny Lin Telephone: 713/650-7821 Telecopy: 713/951-0590 -75- 82 BANK OF TOKYO-MITSUBISHI TRUST COMPANY, as a Lender Commitment: $21,000,000 By: /s/ Hiroaki Fuchida ---------------------------------------- Hiroaki Fuchida Senior Vice President & Manager Instructions for wire transfers to the Lender: Bank of Tokyo-Mitsubishi Trust Company ABA Routing No. 0260-0968-7 City: New York Short Name: BK TOKYO TR NYC CIF# 97770477 Attention: Loan Administration Dept. Re: Western National Corporation Address for notices: Bank of Tokyo-Mitsubishi Trust Company 1251 Avenue of the Americas, 12th Floor New York, NY 10020-1104 Attention: Mr. Eric Oppenheimer Telephone: 212/782-4340 Telecopy: 212/782-4935 Lending Office: Bank of Tokyo-Mitsubishi Trust Company 1251 Avenue of the Americas, 12th Floor New York, NY 10020-1104 Attention: Mr. Rolando Uy Telephone: 201/413-8570 Telecopy: 201/766-3127 -76- 83 BANQUE NATIONALE DE PARIS, HOUSTON AGENCY, as a Lender Commitment: $21,000,000 By: /s/ Mike Shryock ---------------------------------------- Mike Shryock Vice President Instructions for wire transfers to the Lender: BNP New York ABA Routing No. 026 007 689 New York Name of Acct.: BNP Houston Agency A/C#: 141011-001-69 Re: Western National Corporation Address for notices: Banque Nationale de Paris, Houston Agency 333 Clay, Suite 3400 Houston, TX 77002 Attention: Mr. Mike Shryock Telephone: 713/951-1224 Telecopy: 713/659-1414 Lending Office: Banque Nationale de Paris, Houston Agency 333 Clay, Suite 3400 Houston, TX 77002 Attention: Ms. Donna Rose Telephone: 713/951-1240 Telecopy: 713/659-1414 -77- 84 THE BANK OF NOVA SCOTIA, as a Lender Commitment: $18,000,000 By: /s/ F.C.H. Ashby ------------------------------------ F.C.H. Ashby Senior Manager Loan Operations Instructions for wire transfers to the Lender: The Bank of Nova Scotia New York Agency ABA Routing No. 026 002 532 For Further Credit to Atlanta Agency Account No.: 0606634 Attention: Cleve Bushey Re: Western National Corporation Address for notices: The Bank of Nova Scotia 600 Peachtree Street N.E. Suite 2700 Atlanta, GA 30308 Attention: F.S.C. Ashby Telephone: 404/877-1500 Telecopy: 404/888-8998 With a Copy To: The Bank of Nova Scotia Houston Representative Office 1100 Louisiana, Suite 3000 Houston, TX 77002 Attention: Rosine Matthews Telephone: 713/759-3432 Telecopy: 713/752-2425 Lending Office: The Bank of Nova Scotia Atlanta 600 Peachtree Street N.E., Suite 2700 Atlanta, GA 30308 Attention: F.S.C. Ashby Telephone: 404/877-1500 -78- 85 Telecopy: 404/888-8998 CREDIT LYONNAIS NEW YORK BRANCH, as a Lender Commitment: $10,000,000 By: /s/ Renaud d'Herbes ------------------------------------ Renaud d'Herbes Senior Vice President Instructions for wire transfers to the Lender: Federal Reserve Bank of New York ABA Routing No. 026-008-073 New York Further Credit: 01-88179214000 Attention: Loan Servicing/K.Macksey Re: Western National Corporation Address for notices: Credit Lyonnais New York Branch 1301 6th Avenue New York, NY 10019 Attention: Mr. Donald Schipf Telephone: 212/261-7409 Telecopy: 212/261-3401 Lending Office: Credit Lyonnais New York Branch 1301 6th Avenue New York, NY 10019 Attention: Lucy Mercado Telephone: 212/261-7271 Telecopy: 212/261-3401 -79- EX-11.1 6 COMPUTATION OF PER SHARE EARNINGS 1 EXHIBIT 11.1 WESTERN NATIONAL CORPORATION COMPUTATION OF EARNINGS PER SHARE (DOLLARS IN MILLIONS -- EXCEPT PER SHARE DATA) PRIMARY:
DECEMBER 31, --------------------- 1996 1995 1994 ----- ----- ----- Weighted average shares outstanding......................... 62.3 62.3 62.0 Common equivalent shares related to: Series A Preferred Stock.................................. 2.1 -- -- Stock options at average market price (as determined by application of the treasury stock method).............. 0.5 0.2 0.1 ----- ----- ----- Weighted average shares and common stock equivalents........ 64.9 62.5 62.1 ===== ===== ===== Net income........................................ $99.4 $ 7.3 $73.3 ===== ===== ===== Net income per share.............................. $1.53 $0.12 $1.18 ===== ===== =====
FULLY DILUTED:
DECEMBER 31, --------------------- 1996 1995 1994 ----- ----- ----- Weighted average shares outstanding......................... 62.3 62.3 62.0 Common equivalent shares related to: Series A Preferred Stock.................................. 2.1 -- -- Stock options at end of period price (as determined by application of the treasury stock method).............. 0.5 0.2 0.2 ----- ----- ----- Weighted average shares and common stock equivalents........ 64.9 62.5 62.2 ===== ===== ===== Net income........................................ $99.4 $ 7.3 $73.3 ===== ===== ===== Net income per share.............................. $1.53 $0.12 $1.18 ===== ===== =====
EX-12.1 7 COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES 1 EXHIBIT 12.1 WESTERN NATIONAL CORPORATION COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (DOLLARS IN MILLIONS)
1996 1994 1995 ------ ------ ------ Income before income taxes.................................. $152.9 $ 8.8 $114.1 Add fixed charges: Interest expense on annuities and financial products...... 381.7 364.9 344.2 Interest expense on investment borrowings................. 11.1 9.2 7.3 Interest expense on notes payable......................... 10.7 10.7 9.6 ------ ------ ------ Fixed charges.......................................... 403.5 384.8 361.1 ------ ------ ------ Adjusted earnings...................................... $556.4 $393.6 $475.2 ====== ====== ====== Ratio of earnings to fixed charges(1).................. 1.38x 1.02x 1.32x ====== ====== ====== Ratio of earnings to fixed charges, excluding interest expense on annuities and financial products(2)........ 8.01x 1.44x 7.75x ====== ====== ======
- --------------- (1) For purposes of this ratio, "fixed charges" consist of interest expense on annuities, financial products, investment borrowings and notes payable, and "earnings" consist of income before income taxes plus the fixed charges, as defined. (2) For purposes of this ratio, "fixed charges" consist of interest expense on investment borrowings and notes payable, and "earnings" consist of income before income taxes plus the fixed charges, as defined. EX-21.1 8 WESTERN NATIONAL CORPORATION SUBSIDIARIES 1 EXHIBIT 21.1 WESTERN NATIONAL CORPORATION SUBSIDIARIES
NAME STATE OF INCORPORATION ---- ---------------------- WNL Holding Corp............................................ Delaware Western National Life Insurance Company................... Texas Conseco Annuity Guarantee Company......................... Texas WNL Insurance Services, Inc............................... Delaware WNL Investment Advisory Services, Inc..................... Delaware WNL Brokerage Services, Inc............................... Delaware Independent Advantage Financial and Insurance Services, Inc.................................................... California
The ownership of the above listed subsidiaries is 100%. WNL Series Trust (all of the shares of which are held in the separate account of Western National Life Insurance Company for the benefit of the Western National Life Insurance Company variable annuity policyholders). EX-23.1 9 CONSENT OF INDEPENDENT ACCOUNTANTS 1 EXHIBIT 23.1 WESTERN NATIONAL CORPORATION AND SUBSIDIARIES CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements on each Form S-8 (Reg. No. 33-77050 and 33-77052) of Western National Corporation of our reports dated February 5, 1997 on our audits of the consolidated financial statements and financial statement schedules of Western National Corporation and its subsidiaries as of December 31, 1996 and 1995, and for each of the three years in the period ended December 31, 1996, which reports are included in this annual report on Form 10-K. COOPERS & LYBRAND L.L.P. Houston, Texas March 13, 1997 EX-27 10 FINANIAL DATA SCHEDULE
7 12-MOS DEC-31-1996 DEC-31-1996 8,843 0 0 0 123 0 9,376 110 98 380 10,096 8,678 0 2 0 148 0 0 0 915 10,096 93 710 (2) 0 567 42 18 153 54 99 0 0 0 99 1.53 1.53 0 0 0 0 0 0 0
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