-----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, TiwIZbudgi5JA6vVh0pr3qNbsMKteI3br8GCB25/iNYTrw59M4W6e53hl8cwaZT5 n15QB8uMA0bBtwzYB5doaQ== 0000050982-96-000002.txt : 19960417 0000050982-96-000002.hdr.sgml : 19960417 ACCESSION NUMBER: 0000050982-96-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960329 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERCONTINENTAL LIFE CORP CENTRAL INDEX KEY: 0000050982 STANDARD INDUSTRIAL CLASSIFICATION: 6311 IRS NUMBER: 221890938 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-07288 FILM NUMBER: 96541963 BUSINESS ADDRESS: STREET 1: THE AUSTIN CENTRE STREET 2: 701 BRAZOS 12TH FL CITY: AUSTIN STATE: TX ZIP: 78701 BUSINESS PHONE: 5124045050 MAIL ADDRESS: STREET 1: 701 BRAZOS STE 1400 STREET 2: ATTN KELLYE S SEEKATZ CITY: AUSTIN STATE: TX ZIP: 78701 FORMER COMPANY: FORMER CONFORMED NAME: INTERCONTINENTAL FINANCIAL CORP DATE OF NAME CHANGE: 19781019 FORMER COMPANY: FORMER CONFORMED NAME: INTERCONTINENTAL LIFE CO DATE OF NAME CHANGE: 19600201 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended December 31, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from to Commission File Number 0-7288 INTERCONTINENTAL LIFE CORPORATION (Exact name of registrant as specified in its charter) New Jersey 22-1890938 (State of Incorporation) (I.R.S. Employer identification number) 701 Brazos, Suite 1400, Austin, Texas 78701 (Address of Principal Executive Offices) (Zip Code) (512) 404-5050 (Registrant's Telephone Number) Securities Registered pursuant to Section 12(b) of the Act: None Securities Registered pursuant to Section 12(g) of the Act: Common Stock, $.22 par value (Title of Class) 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 The aggregate market value of the voting stock held by non- affiliates of the Registrant on March 20, 1996, based on the closing sales price in The Nasdaq Small-Cap Market ($13.38 per share), was $28,102,910. As of March 20, 1996, Registrant had 4,181,329 shares of its Common Stock outstanding (excluding shares held in Treasury and not entitled to vote). Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulations 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. [ ] PART I Item 1. Business General InterContinental Life Corporation ("ILCO", the "Company" or the "Registrant") was incorporated in 1969 under the laws of the State of New Jersey. Its executive offices are located at 701 Brazos, Suite 1400, Austin, Texas 78701. The Company is principally engaged, through its subsidiaries, in administering existing portfolios of individual and group life insurance, credit life and disability insurance policies and annuity products. The Company's insurance subsidiaries are also engaged in the business of marketing and underwriting individual life insurance, credit life and disability insurance and annuity products in 49 states and the District of Columbia. Such products are marketed through independent, non-exclusive general agents. It also administers an in-force book of health insurance business. The Company is controlled by Financial Industries Corporation ("FIC"), a life insurance holding company, through FIC's ownership of approximately 47% of the Company's outstanding Common Stock. FIC also holds options to acquire additional shares, which, if exercised, would result in FIC's owning approximately 62% of the Company's outstanding shares. FIC, ILCO and their insurance subsidiaries have substantially identical managements, and a majority of the directors of ILCO are also directors of FIC and ILCO's and FIC's insurance subsidiaries. No non-management director of the Company or FIC is a director of the other company. Officers allocate their time between ILCO and FIC in accordance with the comparative requirements of both companies and their subsidiaries. Roy F. Mitte, Chairman, President and Chief Executive Officer of FIC, the Company and their insurance subsidiaries, owns 34% of the outstanding shares of FIC's common stock. FIC owns Family Life Insurance Company, a marketer of mortgage protection life insurance based in Seattle, Washington. The Company was organized in 1969 to be the publicly owned holding company for InterContinental Life Insurance Company ("ILIC"). The Company acquired Standard Life Insurance Company ("Standard Life") in 1986, Investors Life Insurance Company of California ("Investors-CA") and Investors Life Insurance Company of North America ("Investors-NA") in 1988 and Meridian Life Insurance Company, now Investors Life Insurance Company of Indiana ("Investors-IN"), in February 1995. Acquisitions Strategy. The Company's strategy has been and continues to be to grow internally and through acquisitions, while maintaining an emphasis on cost controls. Management believes that, under appropriate circumstances, it is more advantageous to acquire companies with large books of in-force life insurance than to produce new business, because initial underwriting costs have already been incurred and mature business is generally less likely to terminate, making possible more predictable profit analysis. However, the Company's insurance subsidiaries do continue to market those products that are profitable, as well as develop new products and streamline distribution channels. See "Agency Operations". It is also management's belief that the continuing consolidation in the life insurance industry presents attractive opportunities for the Company to acquire life insurance companies that complement or fit within the Company's existing marketing structure and product lines. The Company's objective is to improve the profitability of acquired businesses by consolidating and streamlining the administrative functions of these businesses, eliminating unprofitable products and distribution channels, applying its marketing expertise to the acquired company's markets and agents, and benefitting from economies of scale. The Company's ability to make future acquisitions will be dependent on its being able to obtain the necessary financing. In addition, since FIC has the same acquisition strategy as ILCO, a conflict of interest could arise in the future between ILCO and FIC with respect to acquisition opportunities. Acquisition of Standard Life. In November 1986, the Company acquired Standard Life, headquartered in Jackson, Mississippi, for a gross purchase price of $54,500,000. A portion of the funds used by the new life insurance company formed by the Company to make the acquisition ("New Standard") was the proceeds of a loan extended to the Company by a national bank in the principal amount of $15,000,000 (the "Standard Term Loan"). This sum was, in turn, loaned by the Company to New Standard, and the loan was evidenced by a surplus debenture. New Standard was merged into Standard Life in June 1988. Acquisition of Investors-NA and Investors-CA. In December 1988, the Company, through Standard Life, purchased Investors-CA and Investors-NA from CIGNA Corporation for an adjusted purchase price of $136,000,000. The Company obtained the funds used for the acquisition from: (a) a senior loan in the amount of $125,000,000 provided by six financial institutions, (b) a $10,000,000 subordinated loan provided by two insurance and financial service organizations and (c) the sale of $5,000,000 of Class A Preferred Stock to CIGNA and $15,000,000 of Class B Preferred Stock to the subordinated lenders. Approximately $15,000,000 of these funds were used to discharge the Standard Term Loan. The balance of these funds were loaned by the Company to Standard Life. To evidence this indebtedness, Standard Life issued a $140,000,000 surplus debenture to the Company. In connection with the subordinated debt and preferred stock financing, the Company issued detachable warrants entitling the holders to purchase 1,107,480 shares of the Company's Common Stock at $3.33 per share. In May 1990, the holders of the Class A and Class B Preferred Stock exchanged that stock for subordinated loans of a like amount. The Company prepaid the subordinated debt and purchased the warrants in early 1993. See "Refinancing". Acquisition of Investors-IN. On February 14, 1995, ILCO, through Investors-NA, purchased from Meridian Mutual Insurance Company the stock of Meridian Life Insurance Company, an Indianapolis-based life insurer, for a cash purchase price of $17.1 million. After the acquisition, Meridian Life changed its name to Investors Life Insurance Company of Indiana ("Investors-IN"). Investors-IN is licensed in ten states and markets a variety of individual life and annuity products through independent agents. Merger of Insurance Subsidiaries. Investors-NA redomesticated from Pennsylvania to Washington in December of 1992. Investors-CA merged into Investors-NA on December 31, 1992, and Standard Life merged into Investors-NA on June 29, 1993. The mergers have achieved cost savings, such as reduced auditing expenses involved in auditing one combined company; the savings of expenses and time resulting from the combined company being examined by one state insurance department (Washington), rather than three (California, Pennsylvania and Mississippi); the reduction in the number of tax returns and other annual filings with 45 states; and smaller annual fees to do business and reduced retaliatory premium taxes in most states. Management believes that these reductions in expenses have further strengthened the financial condition of the combined company. Operations The Company has developed management techniques to reduce operating expenses by centralizing, standardizing and more efficiently performing many functions common to most life insurance companies, such as underwriting and policy administration, accounting and financial reporting, marketing, regulatory compliance, actuarial services and asset management. The Company has selectively recruited personnel in sales, marketing and various administrative departments. The Company's centralized management techniques resulted in significant employee reductions and expense savings in the three life insurance companies acquired by the Company in 1986 and 1988. During 1995, the general insurance expenses of the Company's insurance subsidiaries were $13,737,883, which represented an increase from 1994 primarily as the result of increased marketing expenses incurred by Investors-NA in 1995 and ILCO's acquisition of Investors-IN in early 1995. The general insurance expenses were $12,865,000 in 1994, $14,170,000 in 1993 and $18,182,000 in 1992 (including nonrecurring expenses of $2,423,200 incurred in connection with the relocation from Philadelphia to Austin). The attainment of this level of cost reduction has contributed significantly to the achievement of the current level of profitability. Management is committed to maintaining the general insurance expenses of the Company's insurance subsidiaries at a level which will generate an acceptable level of profitability while maintaining the competitive pricing of their insurance products. In June 1991, FIC acquired Family Life, which had 270 employees. Following the acquisition of Family Life by FIC, management integrated the sales, marketing, underwriting, accounting, contract and licensing, investments, personnel, data processing, home office support and other departments of Family Life and the life insurance subsidiaries of ILCO. Management believes this integration has resulted in cost savings for ILCO's insurance subsidiaries and Family Life. During 1992, the Company's insurance operations were centralized at the Company's headquarters in Austin, Texas, with the exception of certain services performed in Seattle, Washington (some of the premium accounting services were moved to Seattle in the first quarter of 1993). Management believes that relocating administrative functions to Austin has reduced costs and improved the efficiency of the insurance companies' operations. The number of employees within the Company and its subsidiaries (including employees who also perform administrative services for Family Life) was approximately 330 at December 31, 1995. Principal Products The Company's insurance subsidiaries are engaged primarily in administering existing portfolios of individual and group life insurance and accident and health insurance policies and annuity products. Approximately 73.9% of the total collected premiums for 1995 were derived primarily from renewal premiums on insurance policies and annuity products sold by the insurance subsidiaries prior to their acquisition by the Company. The Company's insurance subsidiaries are also engaged in marketing and underwriting individual life insurance and annuity products in 49 states and the District of Columbia. These products are marketed through independent, non-exclusive general agents. In 1992, Standard Life discontinued its group insurance marketing and transferred its in-force group insurance to an unrelated insurance company. The products currently being distributed include several versions of universal life insurance and interest-sensitive whole life insurance. Under a whole life insurance policy, the policyholder pays a level premium over his or her expected lifetime. The policy combines life insurance protection with a savings plan that gradually increases in amount over a period of several years. The universal and interest-sensitive whole life insurance policies of the Company's insurance subsidiaries provide permanent life insurance with adjustable rates of return based on current interest rates and mortality assumptions. The universal life insurance portfolio of the Company's insurance subsidiaries consists primarily of flexible premium universal life insurance policies. Under the flexible premium policies, policyholders may vary the amounts of their coverage (subject to minimum and maximum limits) as well as the date of payment and frequency of payments. Direct premiums received from all types of universal life products were $42.3 million in 1995, as compared to $42.1 million in 1994 and $46.8 million in 1993. In 1995, premium income from all life insurance products was derived from all states in which the Company's insurance subsidiaries are licensed, with significant amounts derived from Pennsylvania (14%), California (9%) New Jersey (8%). Until they discontinued sales of credit life and disability insurance in the fourth quarter of 1994, two of the Company's insurance subsidiaries generally sold that insurance to consumers through lending and credit organizations. Such insurance was generally written on an individual or group basis to (i) persons financing the purchase of new automobiles in the State of New Jersey and (ii) persons obtaining loans from banks and finance companies in southeastern states. Most policies of this type were issued for a term of 48 months or less. Direct premiums received from credit life and accident insurance, prior to reinsurance, were $4.2 million in 1994 and $6.5 million in 1993. Two of the Company's insurance subsidiaries receive premium income from health insurance policies. In 1995, premium income from all health insurance policies was $1.1 million, as compared to $1.4 million in 1994 and $1.9 million in 1993. Premium income from health insurance in 1995 was derived from all of the states in which those two insurance subsidiaries are licensed, with significant amounts derived from Pennsylvania (21%), New Jersey (21%), and California (9%). Investors-NA sponsors a variable annuity separate account, which offers single premium and flexible premium policies. The policies provide for the contract owner to allocate premium payments among four different portfolios of Putnam Capital Manager Trust ("PCM Fund"), a series fund which is managed by Putnam Investment Management, Inc. Prior to April, 1995, the underlying investment vehicle for the variable annuity contracts was the CIGNA Annuity Funds Group. A substitution of the PCM Fund for the CIGNA Funds was completed in April, 1995. The plan of substitution was approved by the Securities and Exchange Commission. Following such approval, the plan was submitted to policyholders for approval, which was obtained. During 1995, the premium income realized in connection with these variable annuity policies was $376,000, which was received from existing contract owners. Direct deposits from the sale of fixed annuity products were $1,359,000 in 1995, as compared to $1,296,000 in 1994 and $1,695,000 in 1993. The following table sets forth, for the three years ended December 31, 1995, the combined premium income and other considerations received by the Company's insurance subsidiaries from sales of their various lines of insurance. Year Ended December 31, Type of Insurance 1995 1994 1993 (in thousands) Individual: Life $16,426 $15,721 $16,196 Accident & Health 1,218 1,435 1,504 Total Individual Lines 17,644 17,156 17,700 Group: Life 2,594 2,226 3,195 Accident & Health 6 105 275 Total Group Lines 2,600 2,331 3,470 Credit: Life (222) 3,282 4,354 Accident & Health 240 2,296 2,468 Total Credit Lines 18 5,578 6,822 Total Premiums 20,262 25,065 27,992 Reinsurance premiums ceded (8,568) (10,748) (11,878) Total Net Premium 11,694 14,317 16,114 Amount Received on Investment Type Contracts 44,130 43,372 47,733 Total Premiums and Deposits Received $55,824 $57,689 $63,847 Investment of Assets The assets held by the Company's insurance subsidiaries must comply with applicable state insurance laws and regulations pertaining to life insurance companies. The investment portfolio of the Company's insurance subsidiaries is tailored to reflect the nature of the insurance obligations, business needs, regulatory requirements and tax considerations relating to the underlying insurance business with respect to such assets. This is particularly the case with respect to interest-sensitive life insurance and deferred annuity products, where the investment emphasis is to obtain a targeted margin of profit over the rate of interest credited to policyholders, while endeavoring to minimize the portfolio's exposure to changing interest rates. To reduce the exposure to such rate changes, portfolio investments are selected so that diversity, maturity and liquidity factors approximate the duration of associated policyholder liabilities. The investment objective of the Company's insurance subsidiaries emphasizes the selection of short to medium term high quality fixed income securities, rated Baa-3 (investment grade) or better by Moody's Investors Service, Inc. At December 31, 1995, only 5.1% of the Company's total assets were invested in mortgage loans or real estate. Non-affiliated corporate debt securities that were non-investment grade represented 1.1% of the Company's total assets at December 31, 1995. The Company had investments in debt securities of affiliated corporations aggregating approximately $61.2 million as of December 31, 1995. Investments in mortgage-backed securities included collateralized mortgage obligations ("CMOs") of $280,286,000 and mortgage-backed pass-through securities of $65,810,000 at December 31, 1995. Mortgage-backed pass-through securities, sequential CMOs, support bonds, and z-accrual bonds, which comprised approximately 57.1% of the book value of the Company's mortgage-backed securities at December 31, 1995, are sensitive to prepayment and extension risks. The Company has reduced the risk of prepayment associated with mortgage-backed securities by investing in planned amortization class ("PAC"), target amortization class ("TAC") instruments, accretion directed bonds and scheduled bonds. These investments are designed to amortize in a predictable manner by shifting the risk of prepayment of the underlying collateral to other investors in other tranches ("support classes") of the CMO. PAC and TAC instruments and accretion directed and scheduled bonds represented approximately 42.9% and sequential and support classes represented approximately 34.4% of the book value of the Company's mortgagebacked securities at December 31, 1995. In addition, the Company limits the risk of prepayment of CMOs by not paying a premium for any CMOs. The Company does not invest in mortgage-backed securities with increased prepayment risk, such as interest-only stripped pass-through securities and inverse floater bonds. The Company does invest in z-accrual bonds, but they constituted only 3.6% of the book value of the Company's mortgage-backed securities at December 31, 1995. The prepayment risk that certain mortgage-backed securities are subject to is prevalent in periods of declining interest rates, when mortgages may be repaid more rapidly than scheduled as individuals refinance higher rate mortgages to take advantage of the lower current rates. As a result, holders of mortgage-backed securities may receive large prepayments on their investments which cannot be reinvested at an interest rate comparable to the rate on the prepaying mortgages. The Company does not invest in non-agency mortgage-backed securities, which have a greater credit risk than that of agency mortgage-backed securities. The Company does not make new mortgage loans on commercial properties. Substantially all of the Company's mortgage loans were made by its subsidiaries prior to their acquisition by the Company. At December 31, 1995, 1.7% of the total book value of mortgage loans held by the Company had defaulted as to principal or interest for more than 90 days, and none of the Company's mortgage loans were in foreclosure. During 1995, none of the Company's mortgage loans were converted to foreclosed real estate or were restructured while the Company owned them. Another key element of the Company's investment strategy is to avoid large exposure in other investment categories which the Company believes carry higher credit or liquidity risks, including private placements, partnerships and bank participation. These categories accounted for approximately 2.2% of the Company's invested assets at December 31, 1995. The Company has established and staffed an investment department, which manages portfolio investments and investment accounting functions for ILCO's life insurance subsidiaries. Agency Operations ILCO's insurance subsidiaries collectively market through the "Investors" distribution system. Independent non-exclusive agents, general agents and brokers are recruited nation-wide to sell the products. Such agents and brokers also sell insurance products for companies in competition with ILCO's insurance subsidiaries. In order to attract agents and enhance the sale of its products, the Company's insurance subsidiaries pay competitive commission rates and provides other sales inducements. The Investors Sales distribution system is presently concentrating its efforts on the promotion and sale of universal life, interest-sensitive life and term products. A new interest- sensitive whole life product was introduced to complement the Company's life portfolio. In 1995, the Company continued recruitment of general agents and repositioned the VIP Gold recruiting program. Investors continued to pursue select risk marketing and expanded efforts to rebuild and increase production in traditional markets. Marketing and sales for all of the Company's insurance subsidiaries are directed by the Executive Vice President of Marketing and Sales. The Vice President for Investors Sales directs Regional Vice Presidents who are responsible for the recruitment and maintenance of the general agents and managing general agents for individual insurance sales. Data Processing Pursuant to a data processing agreement with a major service company, the data processing needs of ILCO's and FIC's insurance subsidiaries were provided at a central location until November 30, 1994. Effective December 1, 1994, all of those data processing needs have been provided to ILCO's and FIC's Austin, Texas and Seattle, Washington facilities by FIC Computer Services, Inc., a new subsidiary of FIC. See Item 13.- Certain Relationships and Related Transactions with Management. Competition There are many life and health insurance companies in the United States. A significant number of casualty companies also market health insurance. Agents placing insurance business with ILCO's life insurance subsidiaries are compensated on a commission basis. However, some companies pay higher commissions and charge lower premium rates and many companies have more substantial resources. The principal cost and competitive factors that affect the Company's ability to sell its life and health insurance and annuity products on a profitable basis are: (1) the general level of premium rates for comparable products; (2) the extent of individual policy holder services required to service each product category; (3) general interest rate levels; (4) competitive commission rates and related marketing costs; (5) legislative and regulatory requirements and restrictions; (6) the impact of competing insurance and other financial products; and (7) the condition of the regional and national economies. Reinsurance and Reserves In accordance with general practices in the insurance industry, the Company's insurance subsidiaries limit the maximum net losses that may arise from large risks by reinsuring with other carriers. Such reinsurance provides for a portion of the mortality risk to be retained (the "Retention") with the excess being ceded to a reinsurer at a premium set forth in a schedule based upon the age and risk classification of the insured. The reinsurance treaties provide for allowances that help the Company's insurance subsidiaries offset the expense of writing new business. ILIC generally retains the first $70,000 of risk on the life of any individual. On group life insurance, the retention level is $50,000 per individual life. Investors-NA generally retains the first $100,000 of risk on the life of any individual. Investors-IN generally retains the first $50,000 of risk on the life of any individual. In 1988, Investors-NA entered into a bulk reinsurance treaty under which it reinsured all of its risks under accidental death benefit policies. ILIC had previously obtained similar bulk reinsurance for accidental death benefit policies. The treaty was renegotiated with another reinsurer, with a new effective date of January 1, 1996. In 1993 ILCO's life subsidiaries entered into a quota share reinsurance treaty under which all credit life and health business issued March 1, 1993 and later is 50% reinsured. In 1995, Investors-NA entered into a reinsurance agreement with Family Life pertaining to universal life insurance written by Family Life. The reinsurance agreement is on a co-insurance basis and applies to all covered business with effective dates on and after January 1, 1995. The agreement applies to only that portion of the face amount of the policy which is less than $200,000; face amounts of $200,000 or more are reinsured by Family Life with a third party reinsurer. The arrangement reflects management's plan to develop universal life business at Investors-NA, with Family Life concentrating on the writing of term life insurance products. Although reinsurance does not eliminate the exposure of the Company's insurance subsidiaries to losses from risks insured, the net liability of such subsidiaries will be limited to the portion of the risk retained, provided that the reinsurers meet their contractual obligations. The Company's insurance subsidiaries carry reserves on their books to meet future obligations under their outstanding insurance policies. Such reserves are believed to be sufficient to meet policy obligations as they mature and are calculated using assumptions for interest, mortality, expenses and withdrawals in effect at the time the policies were issued. FIC's Acquisition of Control of the Company In January 1985, FIC acquired 26.53% of ILCO's common stock. FIC and Family Life subsequently acquired additional shares of ILCO's common stock and as of March 20, 1996, FIC owned, directly and indirectly through Family Life, 47.03% of the outstanding shares of ILCO's common stock. FIC holds options to acquire up to 1,702,155 additional shares of ILCO Common Stock. Giving effect to the exercise of those options, FIC would own, directly and indirectly through Family Life, 62.35% of the outstanding shares of ILCO Common Stock. The exercise price of the options is equal to the average quoted market price of ILCO's common stock over the six month period immediately prior to exercise. In addition, in the event that any other party were to seek to acquire, without the prior approval of ILCO's Board of Directors, securities aggregating five percent or more of ILCO's outstanding common stock, FIC would have the right to acquire, under the same price formula, that number of shares of ILCO's common stock which, when added to the number of shares then owned by FIC, would amount to 51% of ILCO's outstanding common stock. The stock options were granted in 1986 to FIC by the Company principally in consideration for a $1,200,000 unsecured loan from FIC, FIC's agreement to guarantee up to $4,000,000 of Registrant's financial obligations and FIC's agreement to guarantee, upon demand, ILCO's performance under its lease on its headquarters building. In addition, FIC guaranteed a $15,000,000 term loan of ILCO. FIC's Acquisition of Family Life After FIC acquired control of ILCO, FIC's primary involvement in the insurance industry was its indirect investment, through ILCO, in ILCO's insurance subsidiaries. In June 1991, FIC acquired Family Life Insurance Company, ("Family Life"), based in Seattle, Washington, from Merrill Lynch Insurance Group, Inc. Family Life underwrites and sells mortgage protection life insurance to customers who are mortgage borrowers from financial institutions where Family Life has marketing relationships. Family Life distributes its insurance products primarily through a national career sales force in 49 states and the District of Columbia. The $114 million purchase price for Family Life and an additional $5 million for transaction costs, working capital and other related purposes were financed by: (a) a $50 million senior loan provided by a group of banks, (b) $44 million subordinated notes issued to the seller and its affiliates and (c) $25 million senior subordinated notes issued to Investors-CA and Investors-NA. In addition, FIC granted to Investors-CA and Investors-NA nontransferable options to purchase up to a total of 9.9% of FIC's common stock at a price of $10.50 per share, equivalent to the then current market price, subject to adjustment to prevent dilution. The options will expire on June 12, 1998 if not previously exercised. In July 1993 the subordinated notes held by the seller and its affiliates were prepaid. The primary source of the funds used to prepay the subordinated debt was a new subordinated loan of $34.5 million obtained from Investors-NA. See Item 13. Certain Relationships and Related Transactions with Management. Senior Loan, Subordinated Loans and Warrants The Company obtained the funds used for the acquisition of Investors-CA and Investors-NA from the following sources: (1) a credit facility in the amount of $135,000,000 composed of the following: (a) a senior loan in the amount of $125,000,000 (the "Senior Loan") provided by a nationally chartered banking institution (the "Senior Lender") as the lead bank in a lending syndicate consisting of six banks and/or other financial institutions; and (b) a $10,000,000 subordinated loan (the "Subordinated Loan") provided by two insurance and financial service organizations (the "Subordinated Lenders"); and (2) the sale of preferred stock as follows: (a) $5,000,000 of Class A Preferred stock issued at par to Insurance Company of North America, a CIGNA subsidiary; and (b) $15,000,000 of Class B Preferred Stock issued at par to the Subordinated Lenders. In May 1990, the holders of the Class A and Class B Preferred Stock exchanged such stock for subordinated loans of a like amount (see "Exchange of Preferred Stock"). Approximately $15,000,000 of these funds were used to discharge an existing term loan. The balance of these funds were loaned by ILCO to Standard to consummate the purchase under the Acquisition Agreement. To evidence this indebtedness, Standard issued a $140,000,000 surplus debenture to ILCO. The Company prepaid the Subordinated Loans and amended its Senior Loan in January 1993. See "The Refinancing." Senior Loan. The Senior Loan was a secured and guaranteed eight year term loan in the aggregate principal amount of $125,000,000. The Senior Loan had a maturity date of December 31, 1996. The principal was payable in twenty-seven quarterly installments of $4,000,000 each, commencing on July 1, 1989, followed by four quarterly installments of $4,250,000 each. The interest rate of the Senior Loan was subject to periodic change based upon stipulated percentages above a quoted bank base lending rate or Eurodollar rate as such are in effect from time to time. The obligations of the Registrant and its subsidiaries under the Senior Loan documents were secured by: (1) all of the issued and outstanding shares of stock of Standard and each other subsidiary now or hereafter directly owned by the Registrant, (2) an existing $15,000,000 surplus debenture assumed by Standard and payable to the Registrant, which had an outstanding principal balance of $6,956,224 as of December 31, 1995, and (3) a $140,000,000 surplus debenture issued by Standard to the Registrant in connection with the transaction, which had an outstanding principal balance of $62,340,000 as of December 31, 1995. The obligations of the Company under the Senior Loan documents were guaranteed by FIC. FIC owns approximately 47% of the Company's issued and outstanding common stock. The Senior Loan documents specified events of default, including, but not limited to, failure to pay amounts payable with respect to the Senior Loan documents when due, violation of covenants included in the Senior Loan documents (including covenants with respect to the maintenance of a minimum net worth), material misrepresentations, defaults under other indebtedness, the loss of any license of an insurance subsidiary of the Registrant which would have a material adverse effect on the Registrant, defaults under the FIC guaranty agreement, changes in ownership or control of FIC or the Company by its controlling person, Roy F. Mitte, or in the Company by FIC and the occurrence of certain events of bankruptcy. If Mr. Mitte had ceased to control the management of the Company solely by reason of (i) his death or (ii) his permanent inability to perform his usual and customary duties on a full-time basis on behalf of the Company and FIC as the result of physical or mental infirmity, a default would have occurred, and the banks holding in the aggregate at least 66 2/3% of the outstanding balance of the Senior Loan would have had the right, on or after 180 days after the date on which such default had occurred, to declare the Senior Loan immediately due and payable. The Senior Loan documents also contained various specified negative, affirmative and financial covenants to be performed or observed by the Registrant and its subsidiaries. In July 1990, the Company made an advance payment of the October 1990 and January 1991 installments of the principal payments under the Senior Loan. This advance payment was in the amount of $8 million and resulted in a savings in interest costs to the Company of approximately $334,250. In May 1991 the Company made another advance payment. This advance payment, in the amount of $12 million, prepaid the July 1991, October 1991 and January 1992 installments of principal and resulted in savings in interest costs to the Company of approximately $398,000. The Company made a payment of $21 million on April 1, 1992, which reduced the Senior Loan's outstanding principal balance to $60 million. Of that $21 million payment, $4,642,853 was required by the Senior Loan documents to be paid as a result of ILCO having Excess Cash Flow (as defined in the Senior Loan documents) in 1991, and $16 million prepaid the installments of principal through April 1, 1993. The Senior Loan was amended in January 1993. See "The Refinancing." Subordinated Loan. The original amount of the Subordinated Loan was $10,000,000, for a term of nine years (the "1997 Series Subordinate Notes"). As a result of the exchange of the Company's Class A Preferred Stock and Class B Preferred Stock (see "Preferred Stock"), the Subordinated Loan consisted of (i) the 1997 Series Subordinated Notes, in the principal amount of $10,000,000, (ii) the 1998 Series Subordinated Notes, in the principal amount of $5,000,000, plus a make-whole amount due at maturity equal to 13.25% of the then outstanding balance of the loan and (iii) the 1999 Series Subordinated Notes, in the principal amount of $15,000,000. The interest rate on the Subordinated Loan was 13.25% per annum payable quarterly. In the event of default, the interest rate would have increased to 15.25% per annum. Registrant was allowed to prepay the 1998 Series Subordinated Notes, in whole or in part, at any time, and the 1997 and 1999 Series Subordinated Notes, in whole or in part, after the third anniversary of the loan in 1991, subject to a make-whole premium payment intended to provide the Subordinated Lenders with an economic return on the Subordinated Loan approximately equal to that which they would have received if the loan was paid at maturity. The Subordinated Loan was subordinated to the $125,000,000 Senior Loan described above and constituted a second lien on all assets subject to the first lien of the Senior Loan. Repayment of the Subordinated Loan was also guaranteed by FIC. Pursuant to the terms of the Subordinated Loan, the holders of the 1997 Series Subordinated Notes and the 1999 Series Subordinated Notes were issued detachable warrants entitling the holders to purchase 19.95% of the Registrant's Common Stock on a fully diluted basis exercisable for a Warrant Exercise Price of $10.00 per share. As a result of the three-for-one stock split effective February 15, 1990, the Warrant Exercise Price was adjusted to $3.33 per share. The warrants provided for a put and call option under which the holder was entitled to put said warrants to the Registrant at a specified price during the sixth through eighth years (which was subject to being extended due to any postponement periods imposed by a Senior Debt default) of the Subordinated Loan and the Registrant had the right to call said warrants commencing at the beginning of the seventh year and continuing thereafter for a similar three year period. (see "Warrants"). The Subordinated Loan documents specified events of default, including, but not limited to, failure to pay principal, interest, commitment fees or other amounts payable with respect to the Subordinated Loan documents when due, violation of covenants included in the Subordinated Loan Documents (including covenants with respect to the maintenance of a minimum net worth of $22,500,000), material misrepresentations, defaults under other indebtedness, changes in ownership or control of FIC by its controlling person, Roy F. Mitte, or in the Registrant by FIC, and the occurrence of certain events of bankruptcy. The Subordinated Loan was prepaid in January 1993. See "The Refinancing." Preferred Stock. In 1988, the shareholders approved an amendment to the Company's Certificate of Incorporation to authorize the issuance of 5,000,000 shares of Class A Preferred Stock, $1.00 par value, 15,000,000 shares of Class B Preferred Stock, $1.00 par value and 10,000,000 shares of Class C Preferred Stock, $1.00 par value. In connection with the acquisition of the Investors Life Companies, the Registrant sold 5,000,000 shares of the Registrant's Class A Preferred Stock to Investors Life Insurance Company of North America for a total sales price of $5,000,000 and sold 15,000,000 shares of the Registrant's Class B Preferred Stock to the Subordinated Lenders and their affiliates for a total sales price of $15,000,000. Under the Senior Loan and the New Senior Loan (see "The Refinancing"), the Registrant is not permitted to issue the Class C Preferred Stock. Exchange of Preferred Stock. Effective as of May 1, 1990, the Company effected an exchange agreement with the holders of its Class A Preferred Stock (principal amount of $5 million; dividend rate of 13.25%) and its Class B Preferred Stock (principal amount of $15 million; dividend rate of 13.25%). Under the provisions of the exchange agreement, the holders of the Class A Preferred Stock received $5 million principal amount of a 13.25% 1998 Series Subordinate Notes, due November 1, 1998, together with a make whole amount equal to 13.25% of the then outstanding balance of the Note. The holders of the Class B Preferred Stock received $15 million principal amount of a 13.25% 1999 Series Subordinated Notes, due November 1, 1999. Each of the new Series of Subordinated Notes were included, by amendment, within the Subordinated Loan documents described in the preceding section (see "Subordinated Loan"). As a result of this transaction, the Company's interest expense increased by approximately $1.7 million in 1990 as compared to 1989 and increased by $ 2.7 million in 1991 as compared to 1989, and net income available to common shareholders in 1990 and 1991 increased by the tax effect of these increases in interest expense. Warrants. In connection with the Subordinated Loan and issuance of the Class B Preferred Stock the Registrant issued to the holders of the 1997 Series Subordinated Notes and the purchasers of the Class B Preferred Stock on December 28, 1988 detachable warrants entitling the warrant holders thereof to purchase a total of 1,107,480 shares of the Registrant's Common Stock, on a fully diluted basis, exercisable at $3.33 per share. The warrants carried a put and call option under which the holder was entitled to put said warrants to the Company at a price based on a specified formula during the period commencing at the beginning of the sixth year from the date of issuance and continuing for 1,095 days thereafter, except that to the extent that the Senior Loan would have prevented the exercise of such put, they could have been exercised for such additional period as would have given the warrant holders 1,095 days of exercise rights. The Company had the right to call said warrants for a like period commencing at the beginning of the seventh year from the date of issuance. The warrants were purchased and cancelled by the Company in January 1993. See "The Refinancing." The Refinancing. On January 29, 1993, the Company prepaid all of its subordinated indebtedness and purchased and cancelled all of the warrants held by certain of its subordinated noteholders. In addition to paying the $30 million aggregate principal amount of the subordinated notes due in 1997, 1998 and 1999 plus accrued interest, the Company paid approximately $7 million of prepayment penalty, the after-tax effect of which was a charge against earnings in 1993, and approximately $8 million for the warrants, which was a charge directly against retained earnings. The warrants had entitled the holders to purchase 1,107,480 shares of the Company's Common Stock (approximately 24% of the outstanding shares) at an exercise price of $3.33 per share. The currently estimated price that the warrant holders could have required the Company to pay for the warrants upon exercise of their put option was approximately $29.9 million. The earliest that the put option could have been exercised was December 1993, if such exercise would not have resulted in a default under the Senior Loan at that time. The purchase and cancellation of the warrants will reduce the number of the Company's outstanding shares of common stock and common stock equivalents used in the computation of its earnings per share from approximately 7,147,000 shares to approximately 6,040,000 shares. This adjustment in common stock equivalents has affected earnings per share for periods after January 29, 1993. The primary source of the funds used to prepay the subordinated debt and to purchase the warrants was an increase in the outstanding balance of the Senior Loan from $60 million to $110 million pursuant to an amended and restated credit agreement that the Company entered into on January 29, 1993 with certain banks, including the same agent bank as in the Company's original bank group in 1988. The Company's prepayment of subordinated debt, purchase of warrants and increase in senior bank indebtedness are referred to herein as the "Refinancing". The terms of the amended and restated credit facility ("New Senior Loan") are substantially the same as the Senior Loan. The interest rate on the $30 million subordinated debt that was replaced by the New Senior Loan was 13.25%. The average interest rate paid by the Company on its New Senior Loan was approximately 6.37% during 1993, 7.04% during 1994 and 8.63% during 1995. The maturity date, which had been December 31, 1996, was extended to July 1, 1998 for the New Senior Loan. On February 14, 1995, the Company borrowed an additional $15 million under the New Senior Loan to help finance the acquisition of Investors-IN, and the maturity date of the New Senior Loan was further extended to July 1, 1999. The New Senior Loan is a secured and guaranteed six and one-half year term loan. A required $26 million principal payment was made on April 1, 1993. Thereafter, the principal is payable in twenty two quarterly installments of $4.5 million each, commencing on April 1, 1994 and ending on July 1, 1999. The Company is required to make mandatory payments on the New Senior Loan equal to (a) 100% of the net proceeds from the issuance of the Company's capital stock or debt securities and (b) the applicable percentage of the Company's annual Excess Cash Flow: 100%, if the outstanding principal balance of the New Senior Loan exceeds $75 million; 75%, if the outstanding balance exceeds $50 million but is equal to or less than $75 million; or 50%, if the outstanding balance is equal to or less than $50 million. Excess Cash Flow is the excess of (i) the sum of the Company's cash and cash equivalents, principal and interest received by the Company from surplus debentures, cash dividends received by the Company and interest income on the Company's cash equivalents over (ii) the sum of principal and interest paid on the Company's indebtedness, operating expenses, taxes actually paid and $5 million. The New Senior Loan bears interest, at the option of the Company, at a rate per annum equal to (i) the Alternate Base Rate (as defined below) plus the Applicable Margin (as defined below), or (ii) LIBOR (adjusted for reserves) for interest periods of 1, 2, 3 or 6 months plus the Applicable Margin. LIBOR is London Inter-Bank Offered Rates. The Alternate Base Rate for any day is the higher of (a) the agent bank's corporate base rate as announced from time to time and (b) the federal funds rate as published by the Federal Reserve Bank of New York plus 0.5%. The Applicable Margin, depending on the outstanding principal balance of the New Senior Loan, ranges from 0.5% to 1.25% for loans that bear interest based upon the Alternate Base Rate and from 1.75% to 2.5% for loans that bear interest based upon LIBOR. The initial Applicable Margin for Alternate Base Rate loans is 1.25% and the initial Applicable Margin for LIBOR loans is 2.5%. The obligations of the Company under the New Senior Loan are secured by: (1) all of the outstanding shares of stock of Investors-NA, (2) a $15,000,000 surplus debenture of Investors-NA payable to the Company, which had an outstanding principal balance of $6,956,224 as of December 31, 1995 and (3) a $140,000,000 surplus debenture of Investors-NA payable to the Company, which had an outstanding principal balance of $62,340,000 as of December 31, 1995. The obligations of the Company under the New Senior Loan are guaranteed by FIC. The New Senior Loan prohibits the payment by the Company of cash dividends on the Common Stock and contains covenants, including restrictive covenants that impose limitations on the Company's and its subsidiaries' ability to, among other things: (i) make investments; (ii) create or incur additional debt; (iii) engage in businesses other than their present and related businesses; (iv) create or incur additional liens; (v) incur contingent obligations; (vi) dispose of assets, (vii) enter into transactions with affiliated companies; and (viii) make capital expenditures; and various financial covenants, including covenants requiring the maintenance of a minimum cash flow coverage ratio, minimum consolidated net worth and minimum statutory surplus of subsidiaries, and a minimum ratio (330%) of the sum of statutory capital and surplus, asset valuation reserve and interest maintenance reserve of each insurance company subsidiary to its respective Authorized Control Level RBC (see "Regulation"). The New Senior Loan specifies events of default, including, but not limited to, failure to pay amounts under the New Senior Loan documents when due; defaults or violation of covenants under other indebtedness; certain defaults or violation of certain covenants under the Family Life senior bank loan; defaults under the $34.5 million loan made by Investors-NA to subsidiaries of FIC in 1993; the loss of any license of an insurance subsidiary of the Company which would have a material adverse effect on the Company; defaults under the FIC guaranty agreement; changes in ownership or control of FIC or the Company by its controlling person, Roy F. Mitte, or in the Company by FIC; and the occurrence of certain events of bankruptcy. If Mr. Mitte ceases to control the management of the Company solely by reason of (i) his death or (ii) his permanent inability to perform his usual and customary duties on a full-time basis on behalf of the Company and FIC as the result of physical or mental infirmity, a default will occur, and the banks holding in the aggregate at least 66 2/3% of the outstanding balance of the New Senior Loan may, on or after 180 days after the date on which such default occurs, declare the New Senior Loan immediately due and payable. Mr. Mitte's ability to communicate and his mobility are impaired as a result of a stroke he suffered in May 1991. However, Mr. Mitte continues to control the management of the Company, and Mr. Mitte's impairments did not constitute a default under the Senior Loan, nor do they constitute a default under the New Senior Loan. See Item 10(b)-Executive Officers of the Registrant. The outstanding principal balance of the New Senior Loan was $- 59.4 million as of December 31, 1995. Regulation General. The Company's insurance subsidiaries are subject to regulation and supervision by the states in which they are licensed to do business. Such regulation is designed primarily to protect policy owners. Although the extent of regulation varies by state, the respective state insurance departments have broad administrative powers relating to the granting and revocation of licenses to transact business, licensing of agents, the regulation of trade practices and premium rates, the approval of form and content of financial statements and the type and character of investments. These laws and regulations require the Company's insurance subsidiaries to maintain certain minimum surplus levels and to file detailed periodic reports with the supervisory agencies in each of the states in which they do business and their business and accounts are subject to examination by such agencies at any time. The insurance laws and regulations of the domiciliary states of the Company's insurance subsidiaries require that such subsidiaries be examined at specified intervals. Investors-NA and ILIC are domiciled in the states of Washington and New Jersey, respectively. In December 1992, Investors-NA redomesticated from Pennsylvania to Washington, and Investors-CA merged into Investors-NA. In June, 1993 Standard Life merged into Investors-NA. Investors-IN is domiciled in the State of Indiana. A number of states regulate the manner and extent to which insurance companies may test for acquired immune deficiency syndrome (AIDS) antibodies in connection with the underwriting of life insurance policies. To the extent permitted by law, the Company's insurance subsidiaries consider AIDS information in underwriting coverage and establishing premium rates. An evaluation of the financial impact of future AIDS claims is extremely difficult, due in part to insufficient and conflicting data regarding the incidence of the disease in the general population and the prognosis for the probable future course of the disease. Risk-Based Capital Requirements. Effective for the 1993 calendar year, the National Association of Insurance Commissioners ("NAIC") has adopted Risk-Based Capital ("RBC") requirements 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; (ii) asset and liability matching; and (iv) other business factors. The states will use the RBC formula as an early warning tool to discover potential weakly capitalized companies for the purpose of initiating regulatory action. The RBC requirements are not intended to be a basis for ranking the relative financial strength of insurance companies. In addition, the formula defines a new minimum capital standard which will supplement the 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 in those states that adopt the NAIC regulations, depending on the ratio of the company's Total Adjusted Capital (which generally consist of its statutory capital, surplus and asset valuation reserve) to its Authorized Control Level RBC. A "Company Action Level Event" is triggered if a company's Total Adjusted Capital is less than 200% but greater than or equal to 150% of its Authorized Control Level RBC, or if a negative trend has occurred (as defined by the regulations) and Total Adjusted Capital is less than 250% but more than 200% of its Authorized Control Level RBC. When a Company Action Level Event occurs, the company must submit a comprehensive plan to the regulatory authority which discusses proposed corrective actions to improve its capital position. A "Regulatory Action Level Event" is triggered if a company's Total Adjusted Capital is less than 150% but greater than or equal to 100% of its Authorized Control Level RBC. When a Regulatory Action Level Event occurs, the regulatory authority will perform a special examination of the company and issue an order specifying corrective actions that must be followed. An "Authorized Control Level Event" is triggered if a company's Total Adjusted Capital is less than 100% but greater than or equal to 70% of its Authorized Control Level RBC, and the regulatory authority may take any action it deems necessary, including placing the company under regulatory control. A "Mandatory Control Level Event" is triggered if a company's total adjusted capital is less than 70% of its Authorized Control Level RBC, and the regulatory authority is mandated to place the company under its control. Calculations using the NAIC formula and the statutory financial statements of the Company's insurance subsidiaries as of December 31, 1995 indicate that the Total Adjusted Capital of each of the Company's insurance subsidiaries is above 500% of its respective Authorized Control level RBC. Solvency Laws Assessments. The solvency or guaranty laws of most states in which the Company's insurance subsidiaries do business may require the Company's insurance subsidiaries to pay assessments (up to certain prescribed limits) to fund policyholder losses or liabilities of insurance companies that become insolvent. Recent insolvencies of insurance companies increase the possibility that such assessments may be required. These assessments may be deferred or forgiven under most guaranty laws if they would threaten an insurer's financial strength and, in certain instances, may be offset against future premium taxes. The insurance companies record the expense for guaranty fund assessments in the period assessed. The occurrence and amount of such assessments have increased in recent years. The net amount of such assessment for the Company's insurance subsidiaries was approximately $241,692 in the year ended December 31, 1995. That amount is net of the amounts that can be offset against future premium taxes. The likelihood and amount of any other future assessments cannot be estimated and are beyond the control of the Company. Surplus Debentures and Dividends. The principal sources of cash for the Company to make payments of principal and interest on the Senior Loan are payments under the surplus debentures of Investors-NA (a Washington-domiciled corporation) and dividends paid by Investors-NA, ILIC (a New Jersey-domiciled company) and Investors-IN (an Indiana-domiciled company). Under current Washington and New Jersey law, any proposed payment of a dividend or distribution which, together with dividends or distributions paid during the preceding twelve months, exceeds the greater of (i) 10% of statutory surplus as of the preceding December 31 or (ii) statutory net gain from operations for the preceding calendar year is called an "extraordinary dividend" and may not be paid until either it has been approved, or a waiting period shall have passed during which it has not been disapproved, by the insurance commissioner. Effective July 25, 1993, Washington amended its insurance code to retain the "greater of" standard but enacted requirements that prior notification of a proposed dividend be given to the Washington Insurance Commissioner and that dividends may be paid only from earned surplus. Investors-NA does not presently have earned surplus as defined by the regulations adopted by the Washington Insurance Commissioner and, therefore, is not presently permitted to pay cash dividends. However, since the new law applies only to dividend payments, the ability of Investors-NA to make principal and interest payments under the surplus debentures is not affected. Under the Indiana insurance code, a domestic insurer may make dividend distributions upon proper notice to the Department of Insurance, as long as the distribution is reasonable in relation to adequate levels of policyholder surplus and quality of earnings. Under Indiana law the dividend must be paid from earned surplus. Extraordinary dividend approval would be required where a dividend exceeds the greater of 10% of surplus or the net gain from operations for the prior fiscal year. Investors-IN had earned surplus of $11,014,294 at December 31, 1995. The surplus debentures were originally issued by Standard Life. Upon the merger of Standard Life into Investors-NA, the obligations of the surplus debentures were assumed by Investors-NA. Since Investors-NA is domiciled in the State of Washington, the provisions of Washington insurance law apply to the surplus debentures. Under the provisions of the surplus debentures and current law, Investors-NA can pay interest and principal on the surplus debentures without having to obtain the prior approval of the Washington Insurance Commissioner; provided that, after giving effect to such payments, the statutory surplus of Investors-NA is in excess of $10 million. As of December 31, 1995, the statutory surplus of Investors-NA was $59,496,193. Investors-NA does give five-days prior notification to the Washington Insurance Department of each proposed payment on the surplus debentures in accordance with an agreement between Investors-NA and the Department. ILCO does not anticipate that Investors-NA will have any difficulty in making principal and interest payments on the surplus debentures in the amounts necessary to enable ILCO to service the Senior Loan for the foreseeable future. Pursuant to the surplus debentures, Standard Life, which merged into Investors-NA on June 29, 1993, had paid to the Company principal and interest totalling $17,755,412 and $14,970,460 in 1992 and 1993, respectively. After the merger, Investors-NA paid to the Company principal and interest on the surplus debentures of $8,573,320 during the balance of 1993, $26,224,640 in 1994 and $22,749,576 in 1995. Valuation Reserves. Commencing in 1992, the Mandatory Securities Valuation Reserve ("MSVR") required by the NAIC for life insurance companies was replaced by a mandatory Asset Valuation Reserve ("AVR") which is expanded to cover mortgage loans, real estate and other investments. A new mandatory Interest Maintenance Reserve ("IMR"), designed to defer realized capital gains and losses due to interest rate changes on fixed income investments and to amortize those gains and losses into future income, is also effective for 1992. Previously, realized capital gains attributable to interest rate changes were credited to the MSVR and had the effect of reducing the required MSVR contributions of ILCO's insurance subsidiaries. Effective in 1992, such realized capital gains are credited to the IMR. As a result of these changes, management believes that the Company's insurance subsidiaries are required to accrue greater aggregate asset valuation reserves. The combination of the AVR and IMR will affect statutory capital and surplus and may reduce the ability of the Company's insurance subsidiaries to pay dividends and make payments on the surplus debentures. Insurance Holding Company Regulation. Investors-NA, ILIC and Investors-IN are subject to regulation under the insurance and insurance holding company statutes of Washington, New Jersey and Indiana. The insurance holding company laws and regulations vary from jurisdiction to jurisdiction, but generally require insurance and reinsurance subsidiaries of insurance holding companies to register with the applicable state regulatory authorities and to file with those authorities certain reports describing, among other information, their capital structure, ownership, financial condition, certain intercompany transactions and general business operations. The insurance holding company statutes also require prior regulatory agency approval or, in certain circumstances, prior notice of certain material intercompany transfers of assets as well as certain transactions between insurance companies, their parent companies and affiliates. Under the Washington, New Jersey and Indiana insurance holding company laws, unless (i) certain filings are made with the respective department of insurance, (ii) certain requirements are met, including a public hearing and (iii) approval or exemption is granted by the respective insurance commissioner, no person may acquire any voting security or security convertible into a voting security of an insurance holding company, such as the Company, which controls an insurance company domiciled in that state, or merge with such a holding company, if as a result of such transaction such person would "control" the insurance holding company. "Control" is presumed to exist if a person directly or indirectly owns or controls 10% or more or the voting securities of another person. Potential Federal Regulation. Although the federal government generally does not directly regulate the insurance industry, federal initiatives often have an impact on the business. Congress and certain federal agencies are investigating the current condition of the insurance industry (encompassing both life and health and property and casualty insurance) in the United States in order to decide whether some form of federal role in the regulation of insurance companies would be appropriate. Congress is currently conducting a variety of hearings relating in general to the solvency of insurers. It is not possible to predict the outcome of any such congressional activity nor the potential effects thereof on the Company's insurance subsidiaries. Congressional initiatives directed at repeal of the McCarran- Ferguson Act (which exempts the "business of insurance" from most federal laws, including the antitrust laws, to the extent it is subject to state regulation) and judicial decisions narrowing the definition of "business of insurance" for McCarran-Ferguson Act purposes may limit the ability of insurance companies in general to share information with respect to rate-setting, underwriting and claims management practices. Current and proposed federal measures which may also significantly affect the insurance industry include minimum solvency requirements and removal of barriers preventing banks from engaging in the insurance business. Federal Income Taxation The Revenue Reconciliation Act of 1990 amended the Internal Revenue Code of 1986 to require a portion of the expenses incurred in selling insurance products to be deducted over a period of years, as opposed to an immediate deduction in the year incurred. Since this change only affects the timing of the deductions, it does not affect tax expense as shown on the Company's financial statements prepared in accordance with GAAP. However, the change will increase the tax for statutory accounting purposes in the first few years, which will reduce statutory surplus and, accordingly, may decrease the amount of cash dividends that Investors Life-NA can pay to the Company. For the years ended December 31, 1993, 1994 and 1995, the increases (decreases) in the current income tax provisions of the Company's insurance subsidiaries due to this change were $429,325, $88,505 and ($118,480), respectively. The change has a negative tax effect for statutory accounting purposes when the premium income of the Company's insurance subsidiaries increases, but has a positive tax effect when their premium income decreases. Segment Information The principal operations of the Company's insurance subsidiaries are the underwriting of life insurance and annuities. Accordingly, no separate segment information is required to be provided by the Registrant for the three-year period ending December 31, 1995. Item 2. Properties The Registrant's headquarters are located at Austin Centre, 701 Brazos, Suite 1400, Austin, Texas. Investors-NA purchased Austin Centre, an office-hotel property in downtown Austin in August 1991 for a purchase price of $31,275,000 from an unrelated seller that had previously acquired the property through foreclosure. Austin Centre covers a full city block and is a sixteen story mixed use development consisting of 343,664 square feet of office/retail space (predominately office space), a 314 room hotel and 61 luxury apartments, all united by a 200 foot high glass atrium. The project was completed in October 1986. At December 31, 1995, the office tower was approximately 85% occupied, and during 1995 the hotel averaged about 80% occupancy. In September 1995, Investors-NA entered into a contract to sell Austin Centre to an Austin-based real estate investment firm for a purchase price of $62.675 million, less $1 million to be paid to a capital reserve account for the purchaser. The contract provides that the sale will be consummated by March 29, 1996. ILCO anticipates that the sale proceeds equal to the amount that Investors-NA presently has invested in Austin Centre will be retained and reinvested by Investors-NA and that most of the balance of the net proceeds of the sale will be used to reduce ILCO's bank indebtedness by approximately $15 million. On January 31, 1995, ILCO, through Investors-NA, purchased, as an investment property, an office building project known as Bridgepoint Office Square in Austin, Texas for a cash purchase price of $9.75 million. The property consists of 20 acres of land with four office building sites and two parking structure sites. The first phase of development of the property was completed in 1986 and consists of a five-story office building with 83,474 square feet of rentable space and a 550-car parking garage. In the fourth quarter of 1995, construction began on the second office building, containing approximately 109,000 rentable square feet, and the other parking garage. This second phase of the project is projected to be completed in the summer of 1996. In March 1996, Investors-NA agreed to lease approximately 152,000 square feet at Bridgepoint Office Square to Motorola, Inc. for use by the Power PC Alliance, composed of engineers from Motorola, IBM Corp. and Apple Computer Inc. The Alliance will occupy 100% of the second office building and approximately 43,000 square feet of the third office building, which Investors- NA began constructing in March 1996. The third building will contain approximately 81,000 rentable square feet and is projected to be finished in late 1996. ILCO leases a building located at 40 Parker Road, Elizabeth, New Jersey. This building, which was formerly the Company's headquarters building, contains approximately 41,000 square feet of office space. The remaining term of the lease is 11 years, and the lease calls for a minimum base rental of $450,000 per annum. The lease provides that all costs including, but not limited to, those for maintenance, repairs, insurance and taxes be borne by ILCO. The Registrant and ILIC currently occupy a nominal portion of the space in the 40 Parker Road property and have sub-leased the remaining portion. ILIC owns three buildings which are adjacent to the 40 Parker Road building. One building, which leased to third parties, contains approximately 3,500 square feet of space. The second building contains approximately 2,500 square feet of space and is leased to persons who perform maintenance services for ILIC's and ILCO's properties in Elizabeth, New Jersey. The third building, purchased during 1985, contains approximately 3,500 square feet of space, and is partially leased to third parties and the remainder is used to provide accommodations for employees working at the New Jersey office. Investors-NA owns an office building, located at 206 West Pearl Street, Jackson, Mississippi. This building is 66 years old and contains approximately 85,000 square feet of office space. Investors-NA currently occupies a nominal portion of the space in this property and leases space to various commercial tenants. The Company believes that its properties and leased space are adequate to meet its foreseeable requirements. Item 3. Legal Proceedings The Company and its subsidiaries are defendants in certain legal actions related to the normal business operations of the Company. Management believes that the resolution of such legal actions will not have a material impact on the financial statements. Item 4. Submission of Matters to a Vote of Security Holders No matter was submitted during the fourth quarter of the fiscal year ended December 31, 1995 to a vote of security holders. PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters A. Market Information The following table sets forth the quarterly high and low sales prices for the Company's Common Stock in The Nasdaq Small-Cap Market for 1995 and 1994. Prices High Low 1995: 1st Quarter. . . . . . . $13.50 $10.00 2nd Quarter. . . . . . . 13.00 10.75 3rd Quarter. . . . . . . 12.00 10.25 4th Quarter. . . . . . . 13.25 10.25 1994: 1st Quarter. . . . . . . $13.50 $12.00 2nd Quarter. . . . . . . 12.50 10.00 3rd Quarter. . . . . . . 12.50 10.50 4th Quarter. . . . . . . 12.00 9.25 The Common Stock of the Company is traded in The Nasdaq Small-Cap Market (NASDAQ Symbol: ILC0). Quotations are furnished by the National Association of Securities Dealers Automated Quotation System (NASDAQ). B. Holders The approximate number of record holders of the Common Stock of the Registrant as of March 20, 1996 was 1,600. C. Dividends No dividend was declared or paid by the Company during 1993, 1994 or 1995. Under the terms of the Senior Loan and the New Senior Loan, the Registrant was not, and is not, permitted to declare or pay any dividends on its Common Stock during the loan term. A more detailed discussion of the Senior Loan and the New Senior Loan is set forth in Item 1 hereof. The ability of an insurance holding company, such as ILCO, to pay dividends to its shareholders may be limited by the company's ability to obtain revenue, in the form of dividends and other payments, from its operating insurance subsidiaries. The right of such subsidiaries to pay dividends is generally restricted by the insurance laws of their domiciliary states. See Item 1. Business Regulation - Surplus Debentures and Dividends. Item 6. Selected Financial Data (in thousands, except per share data; certain restatements and adjustments are explained following this table.) Years Ended December 31, 1995 1994 1993 1992 1991 Revenues $ 122,390 $ 114,842 $ 117,843 $ 139,009 $ 152,936 Benefits & Expenses 105,907 99,142 100,525 117,568 133,397 Income from operations 16,483 15,700 17,318 21,441 19,539 Provision for federal income taxes 5,769 5,783 5,118 7,540 6,776 Net Income before extra- ordinary item and cumulative effect of change in accounting principle $ 10,714 $ 9,917 $ 12,200 $ 13,901 $ 12,763 Extraordinary Item -0- -0- (6,253) -0- -0- Net Income before cumulative effect of change in accounting principle 10,714 9,917 5,947 13,901 12,763 Cumulative effect of change in accounting principle -0- -0- (2,600) -0- -0- Net Income $ 10,714 $ 9,917 $ 3,347 $ 13,901 $ 12,763 Common Stock and Common Stock Equivalents 5,389 5,378 5,858 7,052 7,149 Net Income per share before extraordinary item and cumulative effect of change in accounting principle $ 2.11 $ 1.93 $ 2.20 $ 2.06 $ 1.89 Extraordinary Item -0- -0- (1.07) -0- -0- Net income per share before cumulative effect of change in accounting principle 2.11 1.93 1.13 2.06 1.89 Cumulative effect of change in accounting principle -0- -0- (.44) -0- -0- Net income per share $ 2.11 $ 1.93 $ .69 $ 2.06 $ 1.89 Cash Dividend -0- -0- -0- -0- -0- Long Term Debt$ 59,385 $ 66,585 $ 84,000 $ 90,325 $ 111,300 Total Assets $1,315,293 $1,148,994 $1,266,941 $1,286,733 $1,312,141 1 Net income per share for the years ended December 31, 1995, 1994, 1993, 1992 and 1991 included the dilutive effect resulting from the increase in the market price of the Company's common stock. Such increase requires that outstanding common share equivalents be taken into account in determining net income per share. See "Notes to Consolidated Financial Statements" for a description of the manner of calculation of common share equivalents. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations For the year ended December 31, 1995, ILCO's net income from operations was $10,714,000 ($2.11 per common share), as compared to $9,917,000 ($1.93 per common share) in 1994 and $12,200,000 ($2.20 per common share), before extraordinary item and change in accounting principle, in 1993. Net income for the years 1995 and 1994 was not affected by extraordinary items. For the year ended December 31, 1993, after giving effect to the cost of early extinguishment of debt (net of tax) and the effect of a change in accounting principle, net income for the period was $3,347,000, or $.69 per common share. The net income of ILCO for the year 1993 was affected by (i) the costs associated with the prepayment in January of 1993 of its Subordinated Loans; the prepayment premium resulted in a one time charge to earnings in the amount of $6,253,000, net of tax, and (ii) the one time charge to earnings, in the amount of $2,600,000, which was incurred in connection with the initial adoption of Financial Accounting Standard No. 109 ("Accounting for Income Taxes"). The effect of each of these items was within the range previously disclosed by management in the Company's Form 10-K for the year ended December 31, 1992. The results for 1995 include the operations of Investors Life Insurance Company of Indiana (formerly known as Meridian Life Insurance Company) for the period from February 14, 1995 to December 31, 1995. Investors Life Insurance Company of Indiana ("Investors-IN") was purchased by ILCO and Investors Life Insurance Company of North America ("Investors-NA") for an adjusted purchase price of $17.1 million; the transaction was completed on February 14, 1995. The name change was completed in May, 1995. The statutory earnings of the Company's insurance subsidiaries, as required to be reported to insurance regulatory authorities, before interest expense, capital gains and losses, and federal income taxes were $24,511,342 at December 31, 1995, as compared to $21,119,689 at December 31, 1994 and $20,325,814 at December 31, 1993. These statutory earnings are the source to provide for the repayment of ILCO's indebtedness. The operating strategy of the Company's management emphasizes several key objectives: expense management; marketing of competitively priced insurance products which are designed to generate an acceptable level of profitability; maintenance of a high quality portfolio of investment grade securities; and the provision of quality customer service. Premium income, net of reinsurance, for the year 1995 was $11.7 million, as compared to $14.3 million in 1994 and $16.1 million in 1993. The decline is primarily attributable to the decision to discontinue the writing of credit life and credit accident and health insurance, as well as the reduction in premiums received for traditional (non-universal) life insurance and accident and health insurance policies. This decline was partially offset by the premium income resulting from the inclusion of Investors-IN. For the year 1995, reinsurance premiums ceded were $8.9 million, as compared to $10.9 million in 1994 and $11.9 million in 1993. During the first half of 1994, management completed its review of the credit life and credit disability business of the Company. As a result of this review, management determined that these product lines were not producing desired profitability objectives. Accordingly, management announced that the Company's subsidiaries which underwrote credit insurance would discontinue the writing of new credit life and credit disability insurance. For the full year of 1995, this action had a negative effect on premium income in the amount of $5.6 million. Earned insurance charges for the year ended December 31, 1995 were $42.3 million, as compared to $39.4 million for 1994 and $38.6 million in 1993. This source of revenues is related to the universal life insurance and annuity book of business of Investors-NA. The increase in the level of earned insurance charges for the 1995 year is primarily attributable to the addition of Investors-IN. In 1995, Investors-NA entered into a reinsurance agreement with Family Life Insurance Company (an insurance company subsidiary of Financial Industries Corporation and an affiliated company of Investors-NA), pertaining to universal life insurance written by Family Life. The reinsurance agreement is on a co-insurance basis and applies to all covered business with effective dates on and after January 1, 1995. The agreement applies to only that portion of the face amount of the policy which is less than $200,000; face amounts of $200,000 or more are reinsured by Family Life with a third party reinsurer. The arrangement reflects management's plan to develop universal life business at Investors-NA, with Family Life concentrating on the writing of term life insurance products. Interest expense was $5.7 million for the year ended December 31, 1995, as compared to $5.2 million for the year 1994 and $5.7 million in 1993. The increase in 1995, as compared to 1994, is attributable to an increase in the average rate of interest paid on the senior loan - 8.63% in 1995 as compared to 7.04% for 1994, the effect of which was partially offset by a decrease in the average amount of the senior loan ($64.3 million in 1995 as compared to $69.4 million in 1994). The decrease in interest expense in 1994, as compared to 1993, was attributable to the lower average amount of the senior loan ($69.4 million for 1994 and compared to $88.9 million in 1993), offset partially by a slight increase in the average rate of interest paid on the senior loan (7.04% in 1994, as compared to 6.37% in 1993). The decline in long-term interest rates during 1995, which was related to general economic conditions, had a positive effect upon the market value of the fixed maturities available for sale segment of the portfolio. As of December 31, 1995, the market value of the fixed maturities available for sale segment was $483.6 million as compared to a carrying value of $463.7 million, or an unrealized gain $19.9 million. There is no assurance that this unrealized gain willbe realized in the future. The investment income earned on the Company's portfolio affects the level of interest rates which the Company credits to its universal life insurance, whole life insurance and annuity products. The objective of the Company is to maintain an appropriate margin between the rate of interest which it earns on its investments and the rate which it credits to policyholders. Total assets as of December 31, 1995 ($1.32 billion) increased from the level as of December 31, 1994 ($1.15 billion). The increase in total assets is primarily attributable to (a) the inclusion of Investors-IN and (ii) an increase in the amount of separate account assets. On January 31, 1995, ILCO, through Investors-NA, purchased, as an investment property, an office building project known as One Bridgepoint Office Square in Austin, Texas for a cash purchase price of $9.75 million. The property consists of 20 acres of land, with four office building sites and two sites for parking garages. At the time of the purchase, the first stage of the development had already been completed, consisting of a five- story office building with 83,474 square feet of rentable space and a 550-car parking garage. That stage of the development was completed in 1986. In the fourth quarter of 1995, construction commenced on a second building on the site, with 110,000 square feet of rentable space, and the second parking garage. The second phase of the project is expected to be completed in the summer of 1996. In March 1996, Investors-NA agreed to lease approximately 152,000 square feet at Bridgepoint Office Square to Motorola, Inc. for use by the Power PC Alliance, composed of engineers from Motorola, IBM Corp. and Apple Computer Inc. The Alliance will occupy 100% of the second office building and approximately 43,000 square feet of the third office building, which Investors- NA began constructing in March 1996. The third building will contain approximately 81,000 rentable square feet and is projected to be finished in late 1996. In January 1996, the Company announced that Investors-NA had entered into an agreement to sell the Austin Centre, an office- hotel complex in Austin, Texas. The selling price is $62.675 million, less $1 million to be paid to a capital reserve account for the purchaser. The property, which consists of 343,664 square feet of office/retail space, a 314 room hotel and 61 rental apartments, was purchased in 1991 for $31.275 million. Since 1992, the Company has rented space on three floors of the office tower as its headquarters. The Company anticipates that a portion of the sale proceeds, approximately the amount that Investors-NA has invested in the property, will be retained and reinvested. The balance of the net proceeds of the sale will be used to reduce the Company's senior loan obligations by approximately $15 million. The sale contract provides that the sale will be consummated by March 29, 1996. Results of Operations For the year ended December 31, 1995, the Company's income from operations before Federal income taxes was $16,483,000 on revenues of $122,390,000, as compared to $15,700,000 on revenues of $114,842,000 in 1994. For the year 1993, income from operations before Federal income taxes, extraordinary item and cumulative effect of change in accounting principle was $17,318,000 (on revenues of $117,843,000). The Company's net income, net of federal income taxes, was $10,714,000, or $ 2.11 per common share for the year 1995, as compared to $9,917,000, or $1.93 per common share for the year 1994 For the year 1993, net income, net of federal income taxes, extraordinary items and cumulative effect of change in accounting principle, was $3,347,000, or $.69 per common share. Net income per common share in 1995 was affected by a slight increase in the number of common stock and common stock equivalents which were required to be taken into account in determining net income per share. For the year ended December 31, 1995, the amount of common stock and common stock equivalents was 5,389,000, as compared to 5,378,000 in 1994 and 5,858,000 in 1993. For the year ended December 31, 1995, annualized first-year premiums and deposits on deposit type contracts of Investors-NA declined by approximately 19% as compared to 1994. The corresponding decline from 1993 to 1994 was 7%. During 1995, the lapse rate with respect to universal life insurance policies increased slightly from the lapse rate experienced in 1994. The rate in 1995 was 8.8%, as compared to 8.2% in 1994. The lapse rate with respect to traditional (non- universal) life insurance policies decreased from the levels experienced in 1994. The rate in 1995 was 8.8%, as compared to 9.8% in 1994. The lapse rates experienced during the 1995 period were within the ranges anticipated by management. As of December 31, 1995, the number of employees within the Company was approximately 338. This level of staffing includes employees who provide administrative services to Family Life Insurance Company, in connection with which Investors-NA receives an expense reimbursement. Liquidity and Capital Resources: ILCO is a holding company whose principal assets consist of the common stock of Investors Life Insurance Company of North America and its subsidiaries - Investors Life Insurance Company of Indiana (formerly known as Meridian Life Insurance Company) and InterContinental Life Insurance Company ("ILIC"). ILCO's primary source of funds consists of payments under two Surplus Debentures from Investors-NA. As of December 31, 1994, the outstanding principal balance of the ILCO's senior loan obligations was $66.6 million. On January 2, 1995, the Company made a scheduled payment of $4.5 million under its Senior Loan. In connection with the acquisition of Investors-IN in February, 1995, ILCO borrowed an additional $15 million under its Senior Loan to help finance the purchase. On April 3, 1995, a principal payment in the amount of $13.2 million was made, which prepaid the Senior Loan until October 1, 1995. The Senior Loan had a principal balance at December 31, 1995 of $59.4 million. In January, 1996, the Company made a scheduled principal payment, in the amount of $4.5 million. As of March 15, 1996, the principal balance of the Senior Loan was $54.9 million. ILCO's principal source of liquidity consists of the periodic payment of principal and interest by Investors-NA, pursuant to the terms of the Surplus Debentures. The Surplus Debentures were originally issued by Standard Life Insurance Company and their terms were previously approved by the Mississippi Insurance Commissioner. Upon the merger of Standard Life into Investors- NA, the obligations of the Surplus Debentures were assumed by Investors-NA. As of December 31, 1995, the outstanding principal balance of the Surplus Debentures was $7.0 million and $62.3 million, respectively. Since Investors-NA is domiciled in the State of Washington, the provisions of Washington insurance law apply to the Surplus Debentures. Under the provisions of the Surplus Debentures and current law, no prior approval of the Washington Insurance Commissioner is required for Investors-NA to pay interest or principal on the Surplus Debentures; provided that, after giving effect to such payments, the statutory surplus of Investors-NA is in excess of $10 million (the "surplus floor"). However, Investors-NA has voluntarily agreed with the Washington Insurance Commissioner that it will provide at least five days advance notice of payments which it will make under the surplus debenture. As of December 31, 1995, the statutory capital and surplus of Investors-NA was $61.9 million, an amount substantially in excess of the surplus floor. The funds required by Investors-NA to meet its obligations to the Company under the terms of the Surplus Debentures are generated from operating income generated from insurance and investment operations. In addition to the payments under the terms of the Surplus Debentures, ILCO has received dividends from Standard Life (now, from Investors-NA). Effective July 25, 1993, Washington amended its insurance code to retain the "greater of" standard for payment of dividends to shareholders, but enacted requirements that prior notification of a proposed dividend be given to the Washington Insurance Commissioner and that cash dividends may be paid only from earned surplus. Investors-NA does not presently have earned surplus as defined by the regulations adopted by the Washington Insurance Commissioner and, therefore, is not permitted to pay a cash dividend. However, since the new law applies only to dividend payments, the ability of Investors-NA to make principal and interest payments under the Surplus Debentures is not affected. ILCO does not anticipate that Investors-NA will have any difficulty in making principal and interest payments on the Surplus Debentures in the amounts necessary to enable ILCO to service the Senior Loan for the foreseeable future. Investors-IN is domiciled in the State of Indiana. Under the Indiana insurance code, a domestic insurer may make dividend distributions upon proper notice to the Department of Insurance, as long as the distribution is reasonable in relation to adequate levels of policyholder surplus and quality of earnings. Under Indiana law the dividend must be paid from earned surplus. Extraordinary dividend approval would be required where a dividend exceeds the greater of 10% of surplus or the net gain from operations for the prior fiscal year. Investors-IN currently has earned surplus. ILCO's net cash flow provided by (used in) operating activities was $10.3 million for the year ended December 31, 1995, as compared to ($15.3) million for the same period in 1994. This change is primarily due to fluctuations in the amount of deferred federal income taxes, related to the market value of the portion of investments assets that are fixed maturities available for sale. Management believes that its cash, cash equivalents and short term investments are sufficient to meet the needs of its business and to satisfy debt service. Investments As of December 31, 1995, the book value of the Company's investment assets totaled $669.5 million, as compared to $547.7 million as of December 31, 1994. Total assets as of December 31, 1995 ($1.32 billion) increased from the level as of December 31, 1994 ($1.15 billion). The increase in total assets is primarily attributable to the inclusion of Investors-IN and an increase in the amount of separate account assets and the unrealized gain in the market value of fixed maturities available for sale. The level of short-term investments at the end of 1995 was $86.0 million, as compared to $94.9 million at the end of 1994. The decline in the level of short-term investments reflects the actions of management to diversify the investment portfolio of the Company and the investment in the development of Bridgepoint. The fixed maturities available for sale portion of invested assets at December 31, 1995 was $483.6 million. The amortized cost of the fixed maturities available for sale segment as of December 31, 1995 was $463.7 million, representing a net unrealized gain of $19.9 million. This unrealized gain principally reflects changes in interest rates from the date the respective investments were purchased. To reduce the exposure to interest rate changes, portfolio investments are selected so that diversity, maturity and liquidity factors approximate the duration of associated policyholder liabilities. The assets held by ILCO's life insurance subsidiaries must comply with applicable state insurance laws and regulations. In selecting investments for the portfolios of its life insurance subsidiaries, the Company's emphasis is to obtain targeted profit margins, while minimizing the exposure to changing interest rates. Thisobjective is implemented byselecting primarily short- to medium-term, investment grade fixed income securities. In making such portfolio selections, the Company generally does not select new investments which are commonly referred to as "high yield" or "non-investment grade." The Company's fixed maturities portfolio (including short-term investments), as of December 31, 1995, included a non-material amount (1.1% of total fixed maturities and short-term investments) of debt securities which, in the annual statements of the companies as filed with state insurance departments, were designated under the National Association of Insurance Commissioners ("NAIC") rating system as "3" (medium quality) or below. For the year ended December 31, 1994, the comparable percentage was 1.1%. The majority of these non-investment grade investments are concentrated in the medium quality (or "3") category, with only 0.2% receiving an NAIC rating of "4" (low quality) or below as of December 31, 1995, as compared to 0.5% as of December 31, 1994. The consolidated balance sheets of the Company as of December 31, 1995 include $61.2 million of "Notes receivable from affiliates", represented by (i) a loan of $22.5 million from Investors-NA to Family Life Corporation and a $2.5 million loan from Investors-CA to Financial Industries Corporation (which is now owned by Investors-NA as a result of the merger of Investors-CA into Investors-NA) and $1.7 million of additions to the $2.5 million note made in accordance with the terms of such note; these loans were granted in connection with the 1991 acquisition of Family Life Insurance Company by a wholly-owned subsidiary of FIC (ii) a loan of $30 million by Investors-NA to Family Life Corporation made in July, 1993, in connection with the prepayment by the FIC subsidiaries of indebtedness which had been previously issued to Merrill Lynch as part of the 1991 acquisition and (iv) a loan of $4.5 million by Investors-NA to Family Life Insurance Investment Company made in July, 1993, in connection with the same transaction described above. The NAIC has assigned a rating of "3" to the notes described above. These loans have not been included in the preceding description of NAIC rating percentages. Management believes that the absence of any material amounts of "high-yield" or "non-investment grade" investments (as defined above) in the portfolios of its life insurance subsidiaries enhances the ability of the Company to service its debt, provide security to its policyholders and to credit relatively consistent rates of return to its policyholders. Accounting Development Stock-Based Compensation: In October, 1995, the Financial Accounting standards Board issued Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation." This Statement encourages companies to adopt a fair value based method of accounting for employee stock options and other equity instruments awarded as compensation. Under this method, compensation expense equal to the fair value of the security at the award grant date is recognized as compensation expense over the vesting period of the awarded security. However, the Statement also allows companies to continue to account for stock-based compensation under the intrinsic value based method, as prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Under the intrinsic value based method, the compensation cost is computed as the excess, if any, of the quoted market price of the equity security at the measurement date over the amount an employee must pay to acquire the security. If a company continues to account for stock-based compensation under the intrinsic value based method, it must make certain pro-forma disclosures in the footnotes to the financial statements for the difference in the fair value based method and the intrinsic value based method. This Statement is effective for stock-based compensation transactions entered into in fiscal years that begin after December 15, 1995. Management intends to continue to account for stock-based compensation under the intrinsic value based method as prescribed by APB No. 25, and allowed under SFAS No. 123. The company will make the appropriate pro-forma disclosures required by SFAS in 1996. Item 8. Financial Statements and Supplementary Data The following Financial Statements of ILCO and its consolidated subsidiaries have been filed as part of this report: 1. Report of Price Waterhouse LLP, Independent Accountants, dated March 27, 1996. 2. Consolidated Balance Sheets, as of December 31, 1995 and December 31, 1994. 3. Consolidated Statements of Income for the years ended December 31 1995, 1994 and 1993. 4. Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1995, 1994 and 1993. 5. Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993. 6. Notes to Consolidated Financial Statements. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure No independent accountant who audited the Registrant's financial statements has resigned or been dismissed during the two most recent fiscal years. PART III Item 10. Directors and Executive Officers of Registrant (a) Directors of the Registrant The names and ages of the current directors of the Registrant, their principal occupations or employment during the past five years and other data regarding them are set forth below. All of the directors, other than Mr. Hamm, were elected at the 1995 annual shareholders meeting. Mr. Hamm was appointed a director by the Board of Directors on September 22, 1995. The data supplied below is based on information provided by the directors, except to the extent that such data is known to the Registrant. Principal Occupations Director Name and Other Information Since Age W. Lewis Gilcrease Dentist practicing in San 1988 63 Marcos, Texas. Director of Financial Industries Corporation from 1979 to July 6, 1991. James M. Grace Vice President and Treasurer 1984 52 of the Company since January, 1985. Executive Vice President, Treasurer and Director of InterContinental Life Insurance Company since 1989. Vice President, Treasurer and Director of Financial Industries Corporation since July, 1976. Executive Vice President and Treasurer of Investors Life Insurance Company of North America since 1989; Executive Vice President, Treasurer and Director of Family Life Insurance Company (a subsidiary of Financial Industries Corporation) since June 1991. Director, Executive Vice President and Treasurer of Investors Life Insurance Company of Indiana since February 1995. Richard A. Kosson Certified Public Accountant 1981 63 and a partner in the firm of Manheim, Kosson & Novick in Millburn, New Jersey. Roy F. Mitte Chairman of the Board and 1984 64 Chief Executive Officer of the Company and InterContinental Life Insurance Company since January, 1985. President of the Company since April, 1985. Chairman of the Board, President and Chief Executive Officer of Financial Industries Corporation since 1976. Chairman of the Board, President and Chief Executive Officer of Investors Life Insurance Company of North America since December, 1988. Chairman of the Board, President and Chief Executive Officer of Family Life Insurance Company since June 1991. Chairman of the Board, President and Chief Executive Officer of Investors Life Insurance Company of Indiana since February 1995. Chairman, ILG Securities Corporation since December 1988. Donald Shuman Real estate specialist, 1980 71 engaged in sales and management of real estate for his own company, Don Shuman Associates, a real estate brokerage and management firm. Eugene E. Payne Vice President of the Company 1989 53 since December 1988 and Director since May 1989. Vice President and Director of Financial Industries Corporation since February 1992. Executive Vice President, Secretary and Director of Investors Life Insurance Company of North America since December 1988. Executive Vice President since December 1988 and Director since May 1989 of InterContinental Life Insurance Company. Executive Vice President, Secretary and Director of Family Life Insurance Company since June 1991. Director, Executive Vice President and Secretary of Investors Life Insurance Company of Indiana since February 1995. Theodore A. Fleron Vice President of the Company 1991 56 since May, 1992. Assistant Secretary since June, 1990. Senior Vice President, General Counsel, Assistant Secretary and Director of Investors Life Insurance Company of North America and InterContinental Life Insurance Company since July, 1992. General Counsel, Assistant Secretary and Director of Investors Life Insurance Company of North America and InterContinental Life Insurance Company from January, 1989 to July, 1992. Senior Vice President, General Counsel and Assistant Secretary of Investors Life Insurance Company of Indiana since June, 1995. Joseph F. Crowe Vice President and Director of 1991 57 the Company since May 1991. Vice President and Director of Financial Industries Corporation since February 1992. Executive Vice President and Director of Investors Life Insurance Company of North America and InterContinental Life Insurance Company since June 1991. Executive Vice President and Director of Family Life Insurance Company since June 1991. Director and Executive Vice President of Investors Life Insurance Company of Indiana since February 1995. From December 1986 to March 1991, Executive Vice President of Personal Financial Security Division of Aetna Life & Casualty Company. Thomas C. Richmond Director from March 1989 to 1994 54 February 1990, Senior Vice President since January, 1993 and Vice President from March 1989 to January, 1993 of Investors Life Insurance Company of North America and InterContinental Life Insurance Company. Senior Vice President of Family Life Insurance Company since June 1991. Senior Vice President of Investors Life Insurance Company of Indiana since June 1995. Steven P. Schmitt Senior Vice President since 1994 49 April 1992 and Director, Vice President and Assistant Secretary since August 1989 of Investors Life Insurance Company of North America and InterContinental Life Insurance Company. Senior Vice President since April 1992 and Director and Vice President since June 1991 of Family Life Insurance Company. Director, Senior Vice President and Assistant Secretary of Investors Life Insurance Company of Indiana since June 1995. Roger H. Hamm Executive Vice President and 1995 51 Director of Investors Life Insurance Company of Indiana, Investors Life Insurance Company of North America and Family Life Insurance Company since August 1995. Vice President and Director of Financial Industries Corporation and the Company since September 1995. Executive Vice President of InterContinental Life Insurance Company since August 1995. Vice President of Aetna Life & Casualty Company from 1972 to 1995. Mr. Shuman was the general partner of Shuman-Carlisle Mall Associates, a partnership that owned a 400,000 square foot shopping mall located in Carlisle, Pennsylvania. In January 1993, the partnership filed a petition pursuant to Chapter 11 of the Federal Bankruptcy Code, and that bankruptcy proceeding was concluded in early 1995. The incumbent directors have been nominated for submission to vote of the shareholders for reelection at the 1996 annual shareholders' meeting. (b) Executive Officers of the Registrant The following table sets forth the names and ages of the persons who have served as Registrant's Executive Officers during 1995 together with all positions and offices held by them with the Registrant. Officers are elected to serve at the will of the Board of Directors or until their successors have been elected and qualified. Name Age Positions and Offices Roy F. Mitte 64 Chairman of the Board, President and Chief Executive Officer James M. Grace 52 Vice President and Treasurer Eugene E. Payne 53 Vice President and Secretary Joseph F. Crowe 57 Vice President Roger H. Hamm 51 Vice President In May 1991, Roy F. Mitte suffered a stroke, resulting in partial paralysis affecting his speech and mobility. Mr. Mitte continues to make the requisite decisions in his capacity as Chief Executive Officer, although his ability to communicate and his mobility are impaired. (c) Identification of certain significant employees Not Applicable. (d) Family relationships Not Applicable. (e) Business experience All of the executive officers of the Company are members of the Board of Directors and their business experience has been outlined in Item 10(a). (f) Compliance with Section 16(a) of the Securities Exchange Act of 1934 Section 16(a) of the Securities Exchange Act of 1934 requires the Company's officers and directors, and persons who own more than ten percent of a registered class of the Company's equity securities, to file reports of beneficial ownership on Form 3 and changes in beneficial ownership on Forms 4 and 5 with the Securities and Exchange Commission. Officers, directors and greater than ten-percent shareholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file. Based solely on review of the copies of such forms furnished to the Company, or written representations that no Forms 5 were required, the Company believes that during the period from January 1, 1995 through December 31, 1995, all Section 16(a) filing requirements applicable to its officers, directors and greater than ten-percent beneficial owners were complied with. Item 11. Executive Compensation Summary Compensation Table The following table sets forth information concerning the compensation of the Company's Chief Executive Officer and each of the four other persons who were serving as executive officers of the Company at the end of 1995 and received cash compensation exceeding $100,000 during 1995. Annual Compensation Long Term Compensa- tion Awards Name and Stock Principal Options All Other Position Year Salary(1) Bonus(1) Other(2) (Shares) Compensation Roy F. Mitte, Chairman, President and Chief 1995 $286,643 -0- -0- -0- $713,513(4) Executive 1994 251,750 576,159(3) -0- -0- 1,376,663(5) Officer 1993 251,750 -0- -0- -0- 3,237,120(6) James M. Grace, Vice President 1995 195,000 10,000 -0-(7) -0- -0- and 1994 195,000 2,500 -0- -0- -0- Treasurer 1993 195,000 5,000 -0- -0- -0- Eugene E. Payne, Vice President 1995 195,000 10,000 -0-(8) -0- -0- and 1994 195,000 5,000 -0- -0- -0- Secretary 1993 195,000 -0- -0- -0- -0- Joseph F. Crowe, Vice 1995 195,000 10,000 -0- -0- -0- Presi- 1994 195,000 5,500 -0- -0- -0- dent 1993 195,000 3,000 -0- -0- -0- Roger H. Hamm, Vice Presi- dent(9) 1995 67,308 -0- 175,371(10) -0- -0- (1) The executive officers of the Company have also been executive officers of the Company's insurance subsidiaries and FIC and FIC's insurance subsidiary, Family Life. The only executive officer who has been paid compensation by Family Life is Mr. Mitte, who received $216,857 in salary in 1995, $251,750 in salary and $538,080 in bonus in 1994 and $251,700 in salary in 1993 from Family Life, which amounts are not included in the table above. Family Life reimbursed the Company (or, in the case of Mr. Mitte paid Mr. Mitte directly) the following amounts as Family Life's share of these executive officers' cash compensation for 1993, 1994 and 1995: $251,700, $789,830 and $216,857, respectively, for Mr. Mitte; $55,750, $70,590 and $88,293, respectively, for Mr. Grace; $91,650, $126,750 and $79,875, respectively, for Dr. Payne; $55,350, $68,250 and $88,293, respectively, for Mr. Crowe; and $109,205 (1995 only) for Mr. Hamm. (2) Does not include the value of perquisites and other personal benefits because the aggregate amount of any such compensation does not exceed the lesser of $50,000 or 10 percent of the total amount of annual salary and bonus for any named individual. (3) The Company's Compensation Committee made a recommendation to the Board of Directors, which the Board adopted, that a bonus be paid to Mr. Mitte to enable him to pay off the $650,000 loan that the Company had made to Mr. Mitte in 1989 and to reimburse him for the amount of federal income tax payable on the bonus. Since the Company and FIC have usually each paid one-half of Mr. Mitte's cash compensation, FIC's Board of Directors, acting on the recommendation of its Compensation Committee, subsequently authorized FIC to pay $500,000 of that bonus to Mr. Mitte. Therefore, the Company paid $576,159, and FIC paid $500,000, of the bonus. (4) In 1989, the Board of Directors granted Mr. Mitte options to purchase 600,000 shares (as adjusted for the three-for-one stock split effective February 15, 1990) of the Common Stock of the Company in equal annual installments of 150,000 shares each. Each installment was subject to the approval of the Board of Directors and is exercisable for a period of ten years from the date the options become exercisable at a price of $1.00 per share (as adjusted). The Board of Directors voted to award installments of 150,000 shares in each of 1989, 1990, 1991 and 1992. In October 1992, Mr. Mitte surrendered to the Company for cancellation options to purchase 120,000 shares. The Company and Mr. Mitte entered into a contract in 1993 providing for the cancellation in 1993 of 240,000 options for an aggregate amount of $3,237,120 and the cancellation in subsequent years of the remaining options for an aggregate amount of $3,610,240. In addition, the Company agreed to pay Mr. Mitte the amount necessary to ensure that Mr. Mitte will receive the same amount, after federal income tax, that he would have received if the options had been cancelled in 1992. During 1995, Mr. Mitte was paid $836,582 for the cancellation in 1995 of options to purchase 50,000 shares of ILCO's Common Stock, $156,323 for the federal income tax reimbursement relating to the cancellation in 1994 of options to purchase 68,500 shares and $127,608 as the final payment relating to the cancellation in 1993 of options to purchase 240,000 shares. These option cancellation payments were made pursuant to the contract referred to above. FIC's Compensation Committee made a recommendation to FIC's Board of Directors, which it adopted, that, in lieu of paying Mr. Mitte a bonus as it has in the past, FIC paid $407,000 of these option cancellation payments to Mr. Mitte, with the balance of $713, 513 being paid by ILCO. (5) During 1994, the Company paid Mr. Mitte $997,520 for the cancellation in 1994 of options to purchase 68,500 shares of the Company's Common Stock and $379,143 for the federal income tax reimbursement relating to the cancellation in 1993 of options to purchase 240,000 shares. Both of these payments were made pursuant to the contract referred to in footnote (4). (6) The Company paid this amount in 1993 to Mr. Mitte for the cancellation of options to purchase 240,000 shares of the Company's Common Stock pursuant to the contract referred to in footnote (4). (7) Mr. Grace exercised stock options in 1995 to purchase 12,000 shares of the Company's Common Stock. See "Aggregated Option Exercises in 1995" below. (8) Dr. Payne exercised stock options in 1995 to purchase 16,000 shares of the Company's Common Stock. See "Aggregated Option Exercises in 1995" below. (9) Mr. Hamm became an executive officer of the Company in August 1995. (10) This amount was paid as relocation assistance by the Company to Mr. Hamm in connection with his relocation from Connecticut to Austin, Texas. Option Grants in 1995 The only executive officer of the Company who was granted stock options during 1995 was Roger H. Hamm, who was granted non- qualified stock options on August 14, 1995 to purchase 60,000 shares of the Company's Common Stock at $11.12 per share, which was the market price on the date of grant. No other options were granted in 1995. Mr. Hamm's options become exercisable in the following non-cumulative installments of shares: 20% of the shares covered by the option on the sixth anniversary of the date of grant and an additional 20% of the shares on each of the seventh, eighth, ninth and tenth anniversaries of the date of grant. The period of exercisability for each 20% installment is one year from the anniversary date on which such installment becomes exercisable. To the extent the optionee does not exercise that 20% portion during the one-year period, it terminates. The last 20% installment of Mr. Hamm's options expires on August 14, 2006. The rules of the Securities and Exchange Commission ("SEC") require the Company to indicate the value of Mr. Hamm's options at the end of the option terms if the stock price were to appreciate annually by 5% and 10%, respectively. Since Mr. Hamm's options become exercisable in non-cumulative one-year installments of 20% each, the potential realizable value at the assumed annual rates of 5% and 10% of stock price appreciation are set forth in the following table at the end of each of those five one-year periods: 5% 10% August 14, 2002 $ 54,360 $126,597 August 14, 2003 63,750 152,600 August 14, 2004 73,609 181,204 August 14, 2005 83,962 212,668 August 14, 2006 94,832 247,279 Total $370,513 $920,348 Therefore, if the price of the Company's Common Stock increased 5% annually during the eleven-year term of Mr. Hamm's option and if Mr. Hamm exercised all of his options at the end of each of the five year periods that they are exercisable, the total potential realizable value of his stock options would be $370,513. If the annual rate of appreciation were 10% under those same assumptions, the total potential realizable value would be $920,348. These potential realizable values are presented in an effort to comply with the SEC's rules and are not intended to forecast future appreciation, if any, in the Company's Common Stock. Aggregated Option Exercises in 1995 The following table sets forth information concerning each exercise of stock options during 1995 by each of the executive officers of the Company. Shares Acquired Value Name On Exercise (#) Realized ($) James M. Grace 12,000 $ 90,540 Eugene E. Payne 16,000 134,220 Aggregated Stock Option Values The following table sets forth information with respect to the unexercised options held by the executive officers of the Company. Value of Number of Unexercised Unexercised Options In-the-Money Held at Options at December 31, 1995 December 31, 1995 Name Exercisable Unexercisable Exercisable Unexercisable Roy F. 121,500 -0- $1,862,000(1) -0- Mitte James M. 42,000 36,000 389,340(2) 339,120(2) Grace Eugene E. 26,000 18,000 244,920(2) 169,560(2) Payne Joseph F. 30,000 30,000 120,000(2) 120,000(2) Crowe Roger H. Hamm -0- 60,000 -0- 97,800(2) (1) Represents the amount that the Company has agreed to pay for the cancellation of Mr. Mitte's options after 1995. (2) Based on the closing price of the Company's Common Stock on NASDAQ on December 29, 1995 ($12.75). Members of Compensation Committee W. Lewis Gilcrease, Donald Shuman and Richard A. Kosson are the members of the Company's Compensation Committee, which makes recommendations to the Board of Directors with respect to the Chief Executive Officer's compensation. Compensation Committee Interlocks and Insider Participation Roy F. Mitte determines the compensation of all executive officers of the Company, other than the Chief Executive Officer. Mr. Mitte is the Chairman of the Board, President and Chief Executive Officer of the Company and FIC. He also determines the compensation of all executive officers of FIC, other than the Chief Executive Officer. Pension Plan Table The following table sets forth estimated annual pension benefits payable upon retirement at age of 65 under the Company's noncontributory defined benefit plan ("Pension Plan") to an employee in the final pay and years of service classifications indicated, assuming a straight life annuity form of benefit. The amounts shown in the table do not reflect the reduction related to Social Security benefits referred to below. Years of Service 30 or Remuneration 15 20 25 more $125,000 $31,250 $41,667 $52,083 $62,500 150,000 37,500 50,000 62,498 75,000 175,000 43,750 58,333 72,914 87,500 200,000 50,000 66,667 83,330 100,000 The normal retirement benefit provided under the Pension Plan is equal to 1-2/3% of final average eligible earnings less 3/4% of the participant's Social Security covered compensation multiplied by the number of years of credited service (up to 30 years). The compensation used in determining benefits under the Pension Plan is the highest average earnings received in any five consecutive full-calendar years during the last ten full-calendar years before the participant's retirement date. The maximum amount of annual salary and bonus that can be used in determining benefits under the Pension Plan is $200,000 for any year prior to 1994 and is $150,000 for 1994 and each subsequent year. The annual eligible earnings, for 1995 only, covered by the Pension Plan (salary and bonus up to $150,000) with respect to the individuals reported in the Summary Compensation Table were as follows, with their respective years of credited service under the Pension Plan at December 31, 1995 being shown in parentheses: Mr. Mitte, $150,000 (8 years), Mr. Grace, $150,000 (8 years), Dr. Payne, $150,000 (7 years) and Mr. Crowe, $150,000 (5 years). Compensation of Directors Directors who are not officers or employees of the Company are paid a $5,000 annual fee, and are compensated $1,000 for each regular or special meeting of the Board of Directors which they attend in person. In the case of telephonic meetings of the Board, non-employee directors who participate in such telephonic meetings are compensated $500 for such meeting. Directors who participate via telephone in a regular or special meeting which is held by other than conference telephone are not entitled to a fee for such a meeting. Non-employee directors serving on committees of the Board are compensated in the amount of $500 for each committee meeting they attend whether such participation is in person or by telephone, provided that the committee meeting is held on a day other than that on which the Board meets. Employment Agreements and Change In Control Arrangements The terms and conditions of employment agreements that the Company would enter into upon the occurrence of certain events that result in the agreements taking effect were approved by the Board of Directors with respect to Messrs. Grace, Payne and Crowe in 1991 and Mr. Hamm in 1995. Each agreement would include two independent provisions with respect to the effective date and the term of each agreement. First, the term of the agreement would begin on the earlier of (i) the date of retirement (early, normal or deferred) of Roy F. Mitte from his position as Chairman, President and Chief Executive Officer of the Company or (ii) the date of death or disability of Mr. Mitte, and would terminate on the last day of the twelfth month next following the commencement date of the term of the agreement, unless extended upon mutually acceptable terms. Independently, the term of the agreement would commence upon the date that any person who is not currently a control person with respect to the Company acquires, or enters into an agreement to acquire, control of the Company, directly or indirectly, and would end on the last day of the twelfth month next following the date on which the employee receives notice of the termination of his employment with the Company or the life insurance subsidiaries of the Company. During the term of the agreement, the employee would be entitled to perform all of the duties of the position or positions held by the employee with the Company and all subsidiaries of the Company on the date immediately preceding the commencement date of the agreement. During the term of the agreement, the employee would be entitled to an annual rate of compensation which is not less than the annual rate of compensation in effect as of the date immediately preceding the commencement date of the agreement. During the term of the agreement, the employee would be entitled to participate in and benefit from all employee benefit plans and other fringe benefits on the same basis as such plans and benefits are made available to other executive personnel of the Company. The agreement may be terminated by the Company only in the event that the employee is guilty of theft of property of the Company or commits a wrongful act which has a material adverse effect upon the business of the Company and with respect to which the employee would not be entitled to indemnification under the provisions of the Bylaws of the Company in effect as of the commencement date of the agreement. The employee may terminate the agreement uponthirty daysadvance written noticeto theCompany. Item 12. Security Ownership of Certain Beneficial Owners and Management The following table presents information as of March 20, 1996 as to all persons who, to the knowledge of the Company, were beneficial owners of five (5%) percent or more of the Common Stock of the Company. Amount and Nature of Percent of Name and Address Beneficial Ownership Class Financial Industries Corp. 701 Brazos, Suite 1400 1 6 Austin, TX 78701..................3,668,501 62.35% Roy F. Mitte 701 Brazos, Suite 1400 2,3 6 Austin, TX 78701..................3,894,214 64.85% Investors Life Insurance Company of North America 701 Brazos, Suite 1400 4 6 Austin, TX 78701..................... 334,960 8.01% InterContinental Life Insurance Company 701 Brazos, Suite 1400 5 6 Austin, TX 78701...................... 281,560 6.73% 1 Includes 1,966,346 shares of the Company's stock presently owned and an option to purchase up to 1,702,155 shares of the Company's authorized but unissued Common Stock which is the balance of the option granted to Financial Industries Corporation ("FIC") by the Company in December, 1985. This option may be exercised by FIC at any time at an exercise price equal to the average bid prices of the Company's Common Stock over the six-month period immediately preceding such exercise. 2 As of March 20, 1996 Mr. Mitte owned directly 25,000 shares of the Company's stock and had an option to purchase 121,500 shares at an exercise price of $1 per share. Mr. Mitte is also a Trustee of the Company's Employee Stock Ownership Plan, of which 65,805 un-allocated shares are voted jointly by him and Mr. Grace (see Note (2), below). Mr. Mitte, jointly with his wife Joann, also owns 373,304 common shares of Financial Industries Corporation ("FIC") which constitutes 34.39 percent of the outstanding common stock of that company, and holds the position of Chairman, President and Chief Executive Officer of FIC. Since FIC holds a controlling interest in the Company, Mr. Mitte's personal holdings in the Company have been combined with the holdings of FIC in determining the amount and percentage of Mr. Mitte's beneficial ownership of the Company. 3 Includes 13,408 shares allocated to Mr. Mitte's account under the Employee Stock Ownership Plan. 4 Represents 281,560 shares owned by ILIC and 53,400 shares owned directly by Investors-NA. ILIC is a life insurance company subsidiary of Investors-NA. All of these shares are treated as treasury shares. 5 All are directly owned by ILIC and are treated as treasury shares. 6 Assumes that outstanding stock options or warrants available to other persons have not been exercised. The following table contains information as of March 15, 1995 as to the Common Stock of the Company beneficially owned by each director, nominee and executive officer and by all executive officers and directors of the Company as a group. The information contained in the table has been obtained by the Company from each director and executive officer except for information known to the Company. Except as indicated in the notes to the table, each beneficial owner has sole voting power and sole investment power as to the shares listed opposite his name. Amount and Nature of Percent of Name Beneficial Ownership Class W. Lewis Gilcrease 4,040 * James M. Grace(1) 124,459(2)(3)(4) 2.95% Richard A. Kosson 200 * Roy F. Mitte(1) 3,894,214(2)(4) 64.85% Donald Shuman 450 * Eugene E. Payne(1) 51,796(3)(4) 1.23% Joseph F. Crowe(1) 37,541(3)(4) * Theodore A. Fleron 13,162(4)(5) * Thomas C. Richmond 14,528(4)(5) * Steven P. Schmitt 11,837(4)(5) * Roger H. Hamm -0- * All Executive Officers and Directors as a group, all of whom are listed above 4,086,422(1)(2)(3)(4)(5) 66.22% * Less than 1% (1) Is an executive officer and/or director of FIC which as of March 20, 1996 beneficially owned 3,668,501 shares of the Company's Common Stock (including option rights to purchase 1,702,155 shares of the Company). In addition to the shareholdings of Mr. Mitte in FIC (see Note 2, above), Mr. Grace owns 1,120 shares of FIC Common Stock. (2) 379,738 shares of the Company's Common Stock are held by the Trustees of the Company's Employee Stock Ownership Plan ("ESOP") of which 65,805 shares are unallocated to any participant's account. Messrs. Grace and Mitte are the trustees of the ESOP and are entitled to vote such un- allocated shares. The ESOP participants have the right to direct the voting of shares allocated to their respective accounts. Beneficial ownership of these unallocated shares is disclaimed by Messrs. Grace and Mitte. The same 65,805 shares are included in the above table for each of Messrs. Grace and Mitte as required for technical compliance with the definition of beneficial ownership promulgated by the Securities and Exchange Commission, and are counted once for purposes of executive officers and directors as a group. (3) Includes 30,000 shares issuable upon exercise of options granted under the Incentive Stock Option Plan during 1987 to Mr. Grace at a price of $3.54 (as adjusted) per share and 12,000 shares issuable upon exercise of options granted under the Non-Qualified Stock Option Plan during 1988 to Mr. Grace at a price of $3.33 (as adjusted) per share, all of which are currently available for exercise. Includes 20,000 shares issuable upon exercise of options granted under the Incentive Stock Option Plan and 6,000 shares issuable upon exercise of options granted under the Non-Qualified Stock Option Plan during 1988 to Dr. Payne at a price of $3.33 (as adjusted) per share, all of which are currently available for exercise. Includes 30,000 shares issuable upon exercise of options granted under the Incentive Stock Option Plan to Mr. Crowe during 1991 at a price of $8.75 per share, which are currently available for exercise. (4) Includes shares beneficially acquired through participation in the Company's ESOP and/or the Employee Stock Purchase Plan, which are group plans for eligible employees. (5) Includes 6,000 shares issuable upon exercise of options granted under the Non-Qualified Stock Option Plan during 1988 to each of Messrs. Fleron, Richmond and Schmitt at a price of $3.33 (as adjusted) per share, which are currently exercisable. Item 13. Certain Relationships and Related Transactions with Management The obligations of the Company under the New Senior Loan are guaranteed by FIC. FIC presently owns 1,966,346 shares of the company's Common Stock, constituting 47.03% of such shares outstanding, and holds options to acquire an additional 1,702,155 shares at the average bid price of such shares during the six- month period preceding the date of any such purchase. In the event that such options were to be fully exercised, the total number of the Company's shares owned by FIC would constitute 62.35% of the outstanding shares of the Company's Common Stock. In May 1989, the Board of Directors of ILCO granted Roy F. Mitte the right to borrow up to $650,000 from ILCO to be used solely for the purchase of FIC common stock pursuant to Mr. Mitte's then existing options. A principal purpose of said loan was to enable Mr. Mitte to maintain his equity position in FIC, as required under the terms of the lending agreements entered into in connection with the purchase of the Investors Life Companies (see "Acquisition of Investors Life Companies"). Said loan, which was exercised on June 1, 1989, carried no interest and was payable in five years. The loan was paid in full in 1994. See Item 11. Executive Compensation. When it acquired Austin Centre, Investors-NA leased the hotel to FIC Realty Services, Inc. ("FIC Realty"), a subsidiary of FIC, pursuant to which FIC Realty pays monthly rent to Investors-NA in an amount equal to 95% of the net operating profits of the hotel for the preceding month (excess of all hotel revenues over all hotel expenses, including insurance, utilities and property taxes). Any net operating loss for a month is carried forward and deducted from the net operating profit for the next month that has such a profit. During 1995 FIC Realty paid $1,991,356 of rent to Investors-NA pursuant to this lease. FIC Realty has delegated the management of the hotel to an unrelated third party pursuant to a management agreement, but FIC Realty bears most of the economic risks in operating the hotel. As an inducement to FIC Realty's agreeing to bear those risks, Investors-NA has agreed to provide funds to pay expenses in operating the hotel to the extent that the cash flow from such operations is not sufficient to do so. Alcoholic beverages had been sold at the hotel by an unrelated third party pursuant to a lease it had with FIC Realty until September 30, 1994. Commencing October 1, 1994, all alcoholic beverages sales have been conducted by Atrium Beverage Corporation ("Atrium Beverage"), a new subsidiary of FIC Realty. Atrium Beverage subleases from FIC Realty space in the hotel for the storage, service and sale of alcoholic beverages pursuant to which Atrium Beverage pays monthly rent to FIC Realty of $12,500. The sublease provides that the rent paid during each calendar year will be reduced to the extent necessary to insure that Atrium Beverage's net operating profit from alcoholic beverage sales is not less than 5% of its gross receipts from such sales. Atrium Beverage and FIC Realty are also parties to a management agreement whereby FIC Realty manages Atrium Beverage's alcoholic beverage operations at the hotel for a monthly fee equal to 28% of the gross receipts from alcoholic beverages sales. During 1995, Atrium Beverage paid FIC Realty rent and management fees totalling $319,815. All of that amount was included in the hotel revenues of FIC Realty for purposes of determining its net operating profits under the hotel lease agreement with Investors- NA. Investors-NA entered into a management agreement in September 1991 with FIC Property Management, Inc. ("FIC Management"), a subsidiary of FIC, whereby it appointed FIC Management to manage, lease and operate the office tower, retail areas, underground parking garage and common areas of Austin Centre. FIC Management is paid fees in an amount equal to 5% of the net operating profit that Investors-NA receives from the properties managed and leased by FIC Management. During 1995, Investors-NA paid $130,760 of fees to FIC Management under this agreement. As part of the financing arrangement for the acquisition of Family Life Insurance Company, Family Life Corporation ("FLC"), a subsidiary of FIC, entered into a senior loan agreement under which $50 million was provided by a group of banks. The balance of the financing consisted of a $30 million subordinated note issued by FLC to Merrill Lynch Insurance Group, Ins. ("Merrill Lynch") and $14 million borrowed by another subsidiary of FIC from an affiliate of Merrill Lynch and evidenced by a senior subordinated note in the principal amount of $12 million and a junior subordinated note in the principal amount of $2 million and $25 million lent by two insurance company subsidiaries of ILCO. The latter amount was represented by a $22.5 million loan from Investors-NA to FLC and a $2.5 million loan provided directly to FIC by Investors-CA. In addition to the interest provided under those loans, Investors-NA and Investors-CA were granted by FIC non-transferable options to purchase, in the amounts proportionate to their respective loans, up to a total of 9.9 percent of shares of FIC's common stock at a price of $10.50 per share, equivalent to the then current market price, subject to adjustment to prevent dilution. The options will expire on June 12, 1998 if not previously exercised. On July 30, 1993, the subordinated indebtedness owed to Merrill Lynch and its affiliate was prepaid. $38 million plus accrued interest was paid to retire the indebtedness, which had a principal balance of approximately $50 million on July 30, 1993. The primary source of the funds used to prepay the subordinated debt was new subordinated loans totalling $34.5 million that FLC and another subsidiary of FIC obtained from Investors-NA. The principal amount of the new subordinated debt is payable in four equal annual installments in 2000, 2001, 2002 and 2003 and bears interest at an annual rate of 9%. The other terms of the new debt are substantially the same as those of the $22.5 million subordinated loans that Investors-NA had previously made to FLC and that continue to be outstanding. The Company believes that this restructuring of subordinated debt should enhance the value of the loans that Investors-NA has made to FIC's subsidiaries and the options it holds to purchase FIC's stock. The Company reimbursed FIC for rental expenses and certain other operating expenses incurred during 1995 on behalf of the Company. The amount of such reimbursement was approximately $830,000. Pursuant to a data processing agreement with a major service company, the data processing needs of ILCO's and FIC's insurance subsidiaries were provided at a central location until November 30, 1994. Commencing December 1, 1994, all of those data processing needs are provided to ILCO's and FIC's Austin, Texas and Seattle, Washington facilities by FIC Computer Services, Inc. ("FIC Computer"), a new subsidiary of FIC. Each of FIC's and ILCO's insurance subsidiaries has entered into a data processing agreement with FIC Computer whereby FIC Computer provides data processing services to each subsidiary for fees equal to such subsidiary's proportionate share of FIC Computer's actual costs of providing those services to all of the subsidiaries. The Company's insurance subsidiaries paid $1,655,486 and Family Life paid $779,052 to FIC Computer for data processing services provided during December 1995. In 1995, Investors-NA entered into a reinsurance agreement with Family Life pertaining to universal life insurance written by Family Life. The reinsurance agreement is on a co-insurance basis and applies to all covered business with effective dates on and after January 1, 1995. The agreement applies to only that portion of the face amount of the policy which is less than $200,000; face amounts of $200,000 or more are reinsured by Family Life with a third party reinsurer. Roy F. Mitte serves as Chairman, President and Chief Executive Officer of both FIC and ILCO. James M. Grace serves as Vice President, Treasurer and Director of both companies and Secretary of FIC, and Messrs. Payne and Crowe serve as Vice Presidents and Directors of both companies. Mr. Roy Mitte holds beneficial ownership of 34.39% of the outstanding shares of FIC (see "Security Ownership of Certain Beneficial Owners and Management"). Part IV Item 14. Exhibits, Financial Statements, Schedules, and Reports on Form 8-K (a) The following documents have been filed as part of this Report. 1. Financial Statements as identified in Item 8 above. 2. Financial Statement Schedules Required to be filed by Item 8. a. Schedule I-Summary of Investments other than Investments in Related Parties. b. Schedule II-Amounts Receivable from Related Parties, Underwriters, Promoters and Employees other than Related Parties. c. Schedule III-Condensed Financial Statements of Registrant. d. Schedule VI-Reinsurance Ceded and Assumed. 3. Exhibits filed with this report or incorporated herein by reference are as listed in the Index to Exhibits on page E-1. (b) Reports on Form 8-K: No reports on Form 8-K were filed during the last quarter of the fiscal year ended December 31, 1995. SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. InterContinental Life Corporation (Registrant) By: /s/ Roy F. Mitte By:/s/ James M. Grace Roy F. Mitte, Chairman of James M. Grace, Treasurer, the Board, President and Principal Accounting Chief Executive Officer and Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 27, 1996. /s/ Roy F. Mitte Roy F. Mitte, Director /s/ James M. Grace James M. Grace, Director /s/ Eugene E. Payne Eugene E. Payne, Director /s/ Joseph F. Crowe Joseph F. Crowe, Director /s/ Theodore A. Fleron Theodore A. Fleron, Director /s/ Roger H. Hamm Roger H. Hamm, Director /s/ Thomas C. Richmond Thomas C. Richmond, Director /s/ Steven P. Schmitt Steven P. Schmitt, Director /s/ W. Lewis Gilcrease W. Lewis Gilcrease, Director /s/ Richard A. Kosson Richard A. Kosson, Director /s/ Donald Shuman Donald Shuman, Director INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES FORM 10-K--ITEM 14 (a)(1) and (2) LIST OF FINANCIAL STATEMENTS TABLE OF CONTENTS The following consolidated financial statements of InterContinental Life Corporation and Subsidiaries are included in Item 8: Report of Independent Accountants.............................F-2 Consolidated Balance Sheets, December 31, 1995 and 1994.......F-3 Consolidated Statements of Income, for the years ended December 31, 1995, 1994 and 1993.............................F-5 Consolidated Statements of Changes in Shareholders' Equity, for the years ended December 31, 1995, 1994 and 1993.........F-7 Consolidated Statements of Cash Flows, for the years ended December 31, 1995, 1994 and 1993............................F-10 Notes to Consolidated Financial Statements...................................................F-13 The following consolidated financial statement schedules of InterContinental Life Corporation and Subsidiaries are included: Schedule I - Summary of Investments Other Than Investments in Related Parties.............................................F-43 Schedule II - Amounts Receivable From Related Parties and Underwriters, Promoters, and Employees Other Than Related Parties......................................................F-44 Schedule III - Condensed Financial Statements of Registrant...................................................F-46 Schedule VI - Reinsurance Ceded and Assumed.................F-50 All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are not applicable, and therefore have been omitted. REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of InterContinental Life Corporation In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a)(1) and (2) on page F-1 present fairly, in all material respects, the financial position of InterContinental Life Corporation and its subsidiaries (the Company) at December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Note 1, the Company adopted the provisions of Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" as of January 1, 1993. /s/Price Waterhouse Price Waterhouse LLP Dallas, Texas March 27, 1996 INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands of dollars) December 31, ASSETS 1995 1994 Investments: Fixed maturities, at amortized cost (market value approximates $14,277 and $24,175) $ 14,420 $ 23,776 Fixed maturities available for sale, at market value (amortized cost $463,701 and $388,263) 483,606 357,084 Equity securities, at market value (cost approximates $368 and $414) 1,559 1,243 Policy loans 53,656 48,096 Mortgage loans 14,836 17,055 Invested real estate and other invested assets 15,467 5,580 Short-term investments 85,994 94,841 Total investments 669,538 547,675 Cash and cash equivalents 6,537 5,563 Notes receivable from affiliates 61,224 60,759 Accrued investment income 8,190 8,495 Agent advances and other receivables 16,591 19,778 Reinsurance receivables 14,474 14,066 Property and equipment, net 4,460 4,418 Real estate occupied by the Company, net 36,169 34,418 Deferred policy acquisition costs 24,926 25,282 Present value of future profits of acquired businesses 48,606 46,153 Deferred financing costs 1,597 2,462 Other assets 6,859 6,506 Separate account assets 416,122 373,419 Total Assets $1,315,293 $1,148,994 The accompanying notes are an integral part of the consolidated financial statements. INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS, Continued (in thousands of dollars) December 31, LIABILITIES AND SHAREHOLDERS' EQUITY 1995 1994 Liabilities: Policy liabilities and contractholder deposit funds: Future policy benefits $ 128,265 $ 117,761 Contractholder deposit funds 544,621 490,232 Unearned premiums 10,669 12,203 Other policy claims and benefits payable 6,125 8,621 689,680 628,817 Other policyholders' funds 2,700 2,669 Senior loans 59,385 66,585 Deferred federal income taxes 25,462 2,662 Other liabilities 27,105 24,781 Separate account liabilities 413,876 371,173 Total Liabilities 1,218,208 1,096,687 Commitments and Contingencies (Note 13) Redeemable preferred stock: Class A Preferred, $1 par value, 5,000,000 shares authorized, issued 5,000 5,000 Class B Preferred, $1 par value, 15,000,000 shares authorized, issued 15,000 15,000 Redeemable Preferred Stock held 20,000 20,000 in treasury (20,000) (20,000) -0- -0- Shareholders' equity: Common stock, $.22 par value, 10,000,000 shares authorized; 5,166,239 and 5,107,239 shares issued, 4,175,329 and 4,116,329 shares out- standing in 1995 and 1994, respectively 1,137 1,124 Additional paid-in capital 3,521 2,854 Net unrealized appreciation of equity securities 748 568 Net unrealized gain (loss) on investments in fixed maturities available for sale 12,938 (20,266) Retained earnings 81,759 71,045 Common treasury stock, at cost, 100,103 55,325 990,910 shares (3,018) (3,018) Total shareholders' equity 97,085 52,307 Total Liabilities and Shareholders' Equity $1,315,293 $1,148,994 The accompanying notes are an integral part of the consolidated financial statements. INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (in thousands of dollars) (except for per share data) Year Ended December 31, 1995 1994 1993 Revenues: Premiums $ 11,694 $ 14,317 $ 16,114 Net investment income 64,781 57,553 57,548 Earned insurance charges 42,324 39,370 38,554 Other 3,591 3,602 5,627 122,390 114,842 117,843 Benefits and expenses: Policyholder benefits and expenses 42,639 41,243 30,639 Interest expense on contractholder deposit funds 32,375 29,592 34,010 Amortization of present value of future profits of acquired businesses 6,211 5,393 6,455 Amortization of deferred policy acquisition costs 3,929 4,116 2,889 Operating expenses 15,016 13,574 20,793 Interest expense 5,737 5,224 5,739 105,907 99,142 100,525 Income from operations 16,483 15,700 17,318 Provision for federal income taxes: Current 945 (465) 2,818 Deferred 4,824 6,248 2,300 5,769 5,783 5,118 Net income before extraordinary item and cumulative effect of change in accounting principle 10,714 9,917 12,200 Extraordinary Item: Cost of early extinguishment of debt, net of tax -0- -0- (6,253) Net income before cumulative effect of change in accounting principle 10,714 9,917 5,947 Cumulative effect of change in accounting principle -0- -0- (2,600) Net Income $ 10,714 $ 9,917 $ 3,347 The accompanying notes are an integral part of the consolidated financial statements. INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (in thousands of dollars) (except for per share data) Year Ended December 31, 1995 1994 1993 Net income per share (Note 15): Common stock and common stock equivalents 5,389 5,378 5,858 Net income per share available to common shareholders before extraordinary item and cumulative effect of change in accounting principle $ 2.11 $ 1.93 $ 2.20 Extraordinary Item: Cost of early extinguishment of debt, net of tax -0- -0- (1.07) Net income per share before cumulative effect of change in accounting principle 2.11 1.93 1.13 Cumulative effect of change in accounting principle -0- -0- (.44) Net income per share of common stock $ 2.11 $ 1.93 $ .69 The accompanying notes are an integral part of the consolidated financial statements. INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (in thousands of dollars) Additional Common Stock Paid-in Shares Amount Capital Balance at December 31, 1992 5,100 $1,122 $2,761 Net income Change in net unrealized appreciation of equity securities Change in net unrealized loss on investments in fixed maturities available for sale Cost of options acquired Options exercised 2 1 25 Balance at December 31, 1993 5,102 1,123 2,786 Net Income Change in net unrealized appreciation of equity securities Change in net unrealized loss on investments in fixed maturities available for sale Options exercised 5 1 68 Balance at December 31, 1994 5,107 1,124 2,854 Net Income Change in net unrealized appreciation of equity securities Change in net unrealized gain on investments in fixed maturities available for sale Options exercised 59 13 667 Balance at December 31, 1995 5,166 $1,137 $3,521 The accompanying notes are an integral part of these consolidated financial statements. INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (in thousands) Net Un- realized Gain (Loss) on Invest- Net Un- ments in realized Fixed Appreciation Maturities of Equity Available Retained Balance at December 31, Securities For Sale Earnings 1992 $ 1,156 $ 12,122 $ 65,793 Net income 3,347 Change in net unrealized appreciation of equity securities (211) Change in net unrealized loss on investments in fixed maturities available for sale (5,799) Cost of options acquired (8,012) Options exercised Balance at December 31, 1993 945 6,323 61,128 Net Income 9,917 Change in net unrealized appreciation of equity securities (377) Change in net unrealized loss on investments in fixed maturities available for sale (26,589) Options exercised Balance at December 31, 1994 568 (20,266) 71,045 Net Income 10,714 Change in net unrealized appreciation of equity securities 180 Change in net unrealized gain on investments in fixed maturities available for sale 33,204 Options exercised Balance at December 31, 1995 $ 748 $ 12,938 $ 81,759 The accompanying notes are an integral part of the consolidated financial statements. INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (in thousands) Common Total Treasury Shareholders Stock Equity Balance at December 31, 1992 $ (3,018) $ 79,936 Net income 3,347 Change in net unrealized appreciation of equity securities (211) Change in net unrealized loss on investments in fixed maturities available for sale (5,799) Cost of options acquired (8,012) Options exercised 26 Balance at December 31, 1993 (3,018) 69,287 Net Income 9,917 Change in net unrealized appreciation of equity securities (377) Change in net unrealized loss on investments in fixed maturities available for sale (26,589) Options exercised 69 Balance at December 31, 1994 (3,018) 52,307 Net Income 10,714 Change in net unrealized appreciation of equity securities 180 Change in net unrealized gain on investments in fixed maturities available for sale 33,204 Options exercised 680 Balance at December 31, 1995 $ (3,018) $ 97,085 The accompanying notes are an integral part of the consolidated financial statements. INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands of dollars) Year Ended December 31, CASH FLOWS FROM OPERATING 1995 1994 1993 ACTIVITIES Net Income $ 10,714 $ 9,917 $ 3,347 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Cost of early extinguishment of debt -0- -0- 7,136 Amortization of present value of future profits of acquired businesses 6,211 5,393 6,455 Amortization of deferred policy acquisition costs 3,929 4,116 2,889 Depreciation 2,610 268 1,938 Net gain on sales of investments (418) (695) (8,490) Financing costs amortized(deferred) 865 1,411 4,176 Amortization of deferred gain on sale of real estate (110) (151) (153) Changes in assets and liabilities: (Increase) Decrease in accrued investment income 1,759 (698) 91 Decrease (Increase) in agent advances and other receivables 4,656 (2,467) (7,566) Policy acquisition costs deferred (3,573) (3,597) (4,211) Decrease in policy liabilities and contractholder deposit funds (27,753) (17,685) (863) Increase (Decrease) in other policy holders' funds (349) 78 (241) Increase (Decrease) in other liabilities 911 (707) (3,459) Increase (Decrease) in deferred federal income taxes 4,696 (8,124) 3,548 Decrease (Increase) in other assets 7,527 (1,037) (1,030) Other, net (1,388) (1,371) (3,298) Net cash provided by (used in) operating activities 10,287 (15,349) 269 The accompanying notes are an integral part of the consolidated financial statements. INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands of dollars) Year Ended December 31, CASH FLOWS FROM INVESTING 1995 1994 1993 ACTIVITIES Purchase of insurance subsidary (17,492) -0- -0- Investments purchased (38,781) (130,710) (190,958) Proceeds from sales and maturities of investments 50,181 97,019 256,327 Net change in short-term investments 8,847 68,505 (2,706) Purchases & retirements of equipment (4,403) (655) (420) Notes receivable from affiliates (465) (413) (34,848) Net cash (used in) provided by investing activities (2,113) 33,746 27,395 CASH FLOWS FROM FINANCING ACTIVITIES Issuance of senior loan 15,000 -0- 110,000 Repayment of debt (22,200) (17,415) (116,325) Cost of early extinguishment of debt -0- -0- (7,136) Deferred financing cost from issuance of senior loan -0- -0- (5,717) Cost of repurchase of warrants -0- -0- (8,012) Net cash used in financing activities (7,200) (17,415) (27,190) Net increase in cash and cash equivalents 974 982 474 Cash and cash equivalents, beginning of year 5,563 4,581 4,107 Cash and cash equivalents, end of year $ 6,537 $ 5,563 $ 4,581 The accompanying notes are an integral part of the consolidated financial statements. INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands of dollars) Supplemental Cash Flow Disclosures: Year Ended December 31, 1995 1994 1993 Income taxes paid $ 560 $ 2,675 $ 4,955 Interest paid $ 5,905 $ 4,733 $ 6,303 Supplemental Schedule of Non-Cash Investing Activities: The Company purchased the outstanding capital stock of a life insurer in the first quarter of 1995 for a cash purchase price of $17.1 million net of post closing adjustments. This purchase resulted in the Company receiving tangible assets and assuming liabilities as follows: Assets $99,642,000 Liabilities $90,816,000 The accompanying notes are an integral part of the consolidated financial statements. INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization and Summary of Significant Accounting Policies Organization InterContinental Life Corporation (ILCO or the "Company") is principally engaged, through its subsidiaries, in administering existing portfolios of individual and group life insurance, credit life and disability insurance policies and annuity products. The Company's insurance subsidiaries are also engaged in the business of marketing and underwriting individual life insurance, credit life and disability insurance and annuity products in 49 sates and the District of Columbia. Such products are marketed through independent, non-exclusive general agents. The Company also administers an in-force book of health insurance business. Principles of Consolidation The consolidated financial statements include the accounts of InterContinental Life Corporation and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. Basis of Presentation The financial statements have been prepared in conformity with generally accepted accounting principles which differ from statutory accounting principles required by regulatory authorities for the Company's insurance subsidiaries. Significant accounting policies followed by the Company are: Investments The Company's general investment philosophy is to hold fixed maturity securities until maturity. However, fixed maturities may be sold prior to the maturity dates in response to changing market conditions, duration of liabilities, liquidity factors, interest rate movements and other investment factors. Accordingly, consistent with the requirements of Statement of Financial Accounting Standards No.115 "Accounting for Certain Investments in Debt and Equity Securities" ("FAS 115") which is effective for fiscal years beginning after December 15, 1993, most fixed maturity investments are classified as available for sale and are carried at market value. All other fixed maturities are carried at the lower of amortized cost or net realizable value as management has the positive intent and the Company has the ability to hold such investments to maturity. Unrealized gains and losses on securities available for sale are not recognized in earnings but are reported as a separate component of equity, net of the income tax effect. Premiums and discounts on collateralized mortgage obligations (CMOs) are amortized over the estimated redemption period as opposed to the stated maturities. An adjustment to the investment and investment income is booked on a retrospective basis to reflect the amounts that would have existed had the new effective yield been applied since the acquisition of the CMOs. Equity securities are carried at market value. Unrealized gains and losses on equity securities, net of deferred income taxes, if applicable, are reflected directly in shareholders' equity. Mortgage loans and policy loans are recorded at unpaid balances. Real estate is carried at cost less accumulated depreciation, which is generally calculated using the straight-line method over 20 to 40 years. Accumulated depreciation on investments in real estate is $5,021,082 and $4,463,255 at December 31, 1995 and 1994, respectively. Short-term investments are carried at cost, which approximates market value, and generally consist of those fixed maturities and other investments that are intended to be held less than one year from the date of purchase. Realized gains and losses on disposal of investments are included in net income. The cost of investments sold is determined on the specific identification basis, except for equity securities, for which the first-in, first-out method is employed. When an impairment of the value of an investment is considered other than temporary, the decrease in value is reported in net income as a realized investment loss and a new cost basis is established. Cash and Cash Equivalents Short-term investments with maturities of three months or less at the time of purchase are reported as cash equivalents. Property and Equipment and Home Office Real Estate Property and equipment and home office real estate is stated at cost less accumulated depreciation. Depreciation is calculated using straight-line and accelerated methods over estimated useful lives of 10 to 33 years for buildings and improvements and 10 years for furniture and equipment. Maintenance and repairs are charged to expense when incurred. Accumulated depreciation for property and equipment and home office real estate was $8,984,287 and $6,931,956 at December 31, 1995 and 1994, respectively. Deferred Acquisition Costs The cost of acquiring new and renewal business, principally first year commissions and certain expenses of the policy issuance and underwriting departments, which vary with and are primarily related to the production of new and renewal business, have been deferred to the extent recoverable. Acquisition costs related to universal life products are deferred and amortized in proportion to the ratio of estimated annual gross profits to total estimated gross profits over the expected lives of the contracts. Acquisition costs related to traditional life insurance business are deferred and amortized over the premium paying period of the related policies. Present Value of Future Profits The present value of future profits of acquired businesses is amortized over the premium paying period of the related policies in proportion to the ratio of the annual premium revenue to total anticipated premium revenue applicable to such policies. Interest on the unamortized balance is accreted at rates from 8.5% to 9%. For interest-sensitive products, these costs are amortized in relation to the present value, using the current credited interest rate, of expected gross profits of the policies over the anticipated coverage period. Retrospective adjustments of these amounts are made periodically upon the revision of estimates of current or future gross profits on universal life-type products to be realized from a group of policies. Recoverability of present value of future profits is evaluated periodically by comparing the current estimate of future profits to the unamortized asset balances. Anticipated investment returns, including realized gains and losses, from the investment of policyholder balances are considered in determining the amortization of present value of future profits acquired. Deferred Financing Costs Financing costs associated with the Company's Senior Loan have been deferred and are being amortized over the borrowing periods using the interest method. Separate Accounts Separate account assets, carried at market value, and liabilities represent policyholder funds maintained in accounts having specific investment objectives. The net investment income, gains and losses of these accounts, less applicable contract charges, generally accrue directly to the policyholders and are not included in the Company's statement of income. Solvency Laws Assessments The solvency or guaranty laws of most states in which the Company's insurance subsidiaries do business may require the Company's insurance subsidiaries to pay assessments (up to certain prescribed limits) to fund polichyholder losses or liabilities of insurance companies that become insolvent. These assessments may be deferred or forgiven under most guaranty laws if they would threaten an insurer's financial strength and, in certain instances, may be offset against future premium taxes. The Company's insurance subsidiaries record the expense for guaranty fund assessment from states which do not allow premium tax offsets in the period assessed. The Company's insurance subsidiaries expensed approximately $241,692, $192,371 and $206,965 in the years ended December 31, 1995, 1994 and 1993, respectively, as a result of such assessments. Policy Liabilities and Contractholder Deposit Funds Liabilities for future policy benefits related to traditional life products are computed using the net level premium method or an equivalent actuarial method. Assumptions for future investment yields are incorporated in these liabilities (principally 8% for guaranteed premium products). Assumptions for mortality and withdrawal, based on industry and Company experience for all products, include provisions for possible unfavorable deviations. The liability for future policy benefits for traditional life policies is graded to reserves stipulated by regulatory authorities over a 30-year period or the end of the premium paying period, if less. Contractholder deposit funds are liabilities for universal life and annuity products. These liabilities consist of deposits received from customers and accumulated net investment income on their fund balances, less administrative charges. Universal life fund balances are also assessed mortality charges. The cash value benefit for these products is based on actual crediting rates, which are lower than assumed investment yields. Liabilities for future policy benefits related to non-cancelable and guaranteed renewable accident and health contracts are computed based on industry and Company experience and estimated future investment yields ranging from 4 1/2% to 6%. Unearned premium reserves for credit life and accident and health contracts are computed on either the sum-of-the-year's digits or pro rata methods depending upon the type of coverage. Other policy claims and benefits payable The liability for other policy claims and benefits payable represents management's estimate of ultimate unpaid losses on claims and other miscellaneous liabilities to policyholders reduced by amounts anticipated to be recovered from reinsurance. Estimated unpaid losses on claims are comprised of losses on claims that have been reported but not yet paid, including estimates of additional development of initial claims estimates, and claims that have been incurred but not yet reported (IBNR) to the Company. The liability for other policy claims and benefits payable is subject to the impact of changes in claim severity, frequency and other factors. Although there is considerable variability inherent in such estimates, management believes that the liability recorded is adequate. Revenue Recognition Premiums on traditional life and health products are recognized as revenue over the premium paying period when due. Credit life and health insurance premiums are recognized over the contract period on a pro rata basis, or the sum of years digits basis. Benefits and expenses are associated with earned premiums, so as to result in recognition of profits over the lives of the contracts. Proceeds from investment-related products and universal life products are recorded as liabilities when received. Revenues for investment-related products consist of contract charges assessed against the deposit fund values and net investment income. Related benefit expenses primarily consist of interest credited to the fund values after deductions for investment and policy charges. Revenues for universal life products consist of net investment income, mortality and administration charges against deposits and fund values and surrender charges assessed against the fund values. Related benefit expenses include universal life benefit claims in excess of fund values and interest credited to universal life fund values. Net Income Per Share Net income per share is based on the weighted average number of shares of common stock and common stock equivalents outstanding during each year and net income increased by the reduction in interest expense caused by the assumed conversion of common stock equivalents. There are no significant differences between primary and fully diluted income per share amounts. Federal Income Taxes In February 1992, the Financial Accounting Standards Board (FSAB) issued Statement of Financial Accounting Standards (FAS) No. 109, "Accounting for Income Taxes" ("FAS 109"). The Company adopted FAS 109 on a prospective basis effective January 1, 1993. FAS 109 mandates the asset and liability method for computing deferred income taxes. Under this method, balance sheet amounts for deferred income taxes are computed based on the tax effect of the temporary differences between the financial reporting and federal income tax basis of assets and liabilities using the tax rates which are expected to be in effect when these temporary differences are anticipated to reverse. Under FAS 109, assets acquired and liabilities assumed in purchase business combinations are assigned their fair values assuming equal tax basis and deferred taxes are provided for lower or higher tax basis. Under APB 11 (the previous accounting standard used by the Company to account for income taxes), values assigned to assets acquired and liabilities assumed were net-of- tax. In adopting FAS 109, the Company adjusted the carrying amounts of Investors-NA which was acquired in 1988. Pre-tax income from operations for the calendar year ended December 31, 1993 was not impacted. Under FAS 109, as under APB 11, the Company will disclose in its financial statements a reconciliation between the effective tax rate and the amount derived by multiplying pre-tax accounting income by the currently enacted federal income tax rate. As a result of adopting FAS 109, a charge of $2,600,000 was recorded in 1993 relating to the cumulative effect of a change in accounting principle. Use 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 and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. New Accounting Pronouncements: In May 1993, the FASB issued FAS No. 114, "Accounting by Creditors for Impairment of a Loan", effective for fiscal years beginning after December 15, 1994. This statement requires that impaired loans be valued at the present value of the expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. It further amends FAS No. 5, "Accounting for Contingencies," to require that all contractual principal and interest payments be considered in determining the impairment of a loan. The adoption of FAS No. 114 in January 1995 did not have a material impact on the Company's financial statements. In March 1995, the FASB issued FAS No. 121, "Accounting For the Impairmant of Long-Lived Assets and For Long-lived Assets to be Disposed of." This Statement requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In addition, the Statement requires that long-lived assets and certain identifiable intangibles to be disposed of be reported at the lower of carrying amount or fair value less cash to sell. FAS No. 121 is effective for fiscal years beginning after 1995. The Company plans to adopt FAS No. 121 effective January 1, 1996. Management does not anticipate that adoption of this Statement will have a material impact on the Company's financial statements. During 1995, the FASB issued FAS No. 123 "Accounting for Stock- Based Compensation," which encourages companies to adopt the fair value based method of accounting for stock-based compensation. This method requires the recognition of compensation expense equal to the fair value of such equity securities at the date of the grant. This statement also allows companies to continue to account for stock-based compensation under the intrinsic value based method, as prescribed by Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees," with footnote disclosure of the pro forma effects of the fair value based method. FAS No. 123 is effective for transactions entered into in years that begin after December 15, 1995. The Company plans to adopt FAS No. 123 during 1996 by continuing to account for stock-based compensation under the intrinsic value method and disclosing the pro forma effects of the fair value method in the footnotes to the financial statements. 2. Investments Fixed Maturities The amortized cost, gross unrealized gains and losses and market values of fixed maturities available for sale and fixed maturities held to maturity at December 31, 1995 and 1994, respectively were as follows (in thousands): Gross Gross Amort- Unreal- Unreal- ized ized ized Market Cost Gains Losses Value Fixed Maturities Available For Sale as of December 31, 1995: U.S. Treasury securities and obligations of U.S. government agencies and corporations $ 15,826 $ 1,494 $ 5 $ 17,315 Obligation of states and political subdivisions 4,686 266 -0- 4,952 Foreign government debt securities 15 -0- 1 14 Corporate securities 98,822 5,092 1,048 102,866 Mortgage-backed securities 344,352 14,600 493 358,459 Total Fixed Maturities Available For Sale 463,701 21,452 1,547 483,606 Fixed maturities held to Maturity: Private Placements-Corporate 14,420 370 513 14,277 Total Fixed Maturities $478,121 $ 21,822 $ 2,060 $497,883 Fixed Maturities Available For Sale as of December 31, 1994: U.S. Treasury securities and obligations of U.S. government agencies and corporations $ 14,388 $ 127 $ 508 $ 14,007 Obligations of states and political subdivisions 2,182 48 180 2,050 Foreign government debt securities 16 -0- 2 14 Corporate securities 76,815 260 8,742 68,333 Mortgage-backed securities 294,862 1,798 23,980 272,680 Total Fixed Maturities Available For Sale 388,263 2,233 33,412 357,084 Fixed Maturities held to Maturity: Private Plavements-Corporate 23,776 888 489 24,175 Total Fixed Maturities $412,039 $ 3,121 $ 33,901 $381,259 The amortized cost and market value of fixed maturities carried at amortized cost at December 31, 1995 is shown below by contractual maturity. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Fixed Maturities Available for Sale Amortized Market Cost (in thousands) Value Due in one year or less......$ 4,370 $ 4,370 Due after one through five years................. 15,407 16,043 Due after five through ten years...................... 22,005 23,973 Due after ten years.......... 77,567 80,761 Mortgage backed securities... 344,352 358,459 Total Fixed Maturities Available for Sale $ 463,701 $ 483,606 Fixed Maturities Held to Maturity Amortized Market Cost (in thousands) Value Due in one year or less.....$ 372 $ 361 Due after one through five years................ 6,107 6,167 Due after five through ten years..................... 7,164 7,007 Due after ten years......... 777 742 Mortgage backed securities.. 0 0 Total Fixed Maturities Held to Maturity $ 14,420 $ 14,277 Proceeds from sales and maturities of investments in fixed maturities during 1995, 1994 and 1993 were approximately $47,316,000, $59,247,000 and $ 243,999,000. Gross gains of approximately $578,000, $824,000 and $5,888,000 and gross losses of approximately $22,000, $193,000 and $65,000 were realized on those sales and maturities in 1995, 1994 and 1993, respectively. Equity Securities The change in net unrealized appreciation for equity securities was $ 277,000 and ($579,000) for the years ended December 31, 1995 and 1994, respectively. Amounts as of December 31 were as follows: 1995 1994 (in thousands) Unrealized appreciation $ 1,172 $ 887 Unrealized depreciation (21) (13) Net unrealized appreciation $ 1,151 $ 874 Net Investment Income The components of net investment income are summarized as follows: Year Ended December 31, (in thousands) 1995 1994 1993 Fixed maturities $49,329 $40,938 $46,287 Equity securities 65 12 6 Other, including policy loans, real estate and mortgage loans 19,392 19,650 15,839 68,786 60,600 62,132 Investment expenses (4,005) (3,047) (4,584) Net investment income $64,781 $57,553 $57,548 Realized Gains and Losses Net realized gains (losses) included in net investment income are summarized below: Year Ended December 31, (in thousands) 1995 1994 1993 Fixed maturities available for sale $ 556 $ 78 $ 5,822 Equity securities (26) 324 3 Other investments (97) 293 2,664 433 695 8,489 Income taxes 152 243 2,971 Net realized gains $ 281 $ 452 $ 5,518 Non-income producing investments The carrying value of non-income producing investments were as follows as of December 31: 1995 1994 (in thousands) Fixed maturities $ 48 $ 106 Mortgage loans 400 305 Total $ 448 $ 411 Mortgage loans and invested real estate The Company's mortgage loans and invested real estate are diversified by property type, location and issuer. Mortgage loans are collaterized by the related properties and such loans generally range from 15% to 80% of the property's value at the time the loan is made. No new mortgage loans were made during the three year period ended December 31, 1995. Financial Industries Corporation Equity securities includes a $1,404,150 investment, ($318,390 at cost), in 37,950 shares of common stock of Financial Industries Corporation (FIC) (See Note 8). This represents 3.5% of FIC's outstanding common stock at December 31, 1995. 3. Disclosures about Fair Value of Financial Instruments The estimated fair values of the Company's financial instruments at December 31, 1995 are as follows: Carrying Fair Amount Value (in thousands) Financial assets: Fixed maturities $478,121 $497,883 Policy loans 53,656 53,656 Mortgage loans 14,836 16,187 Short-term investments 85,994 85,994 Cash and cash equivalents 6,537 6,537 Notes receivable from affiliates 61,224 61,224 Carrying Fair Amount Value (in thousands) Financial liabilities: Deferred annuities $124,208 $123,567 Supplemental contracts 12,066 11,597 Senior loans 59,385 59,385 The following methods and assumptions were used to estimate the fair value of each class of financial instrument: Fixed maturities Fair values are based on quoted market prices or dealer quotes. Policy loans Policy loans are, generally, issued with coupon rates below market rates and are considered early payment of the life benefit. As such, the carrying amount of these financial instruments is a reasonable estimate of their fair value. Mortgage loans The fair value of mortgage loans is estimated using a discounted cash flow analysis using rates for BBB- rated bonds with similar coupon rates and maturities. Cash and cash equivalents and short-term investments The carrying amount of these instruments approximates market value. Notes receivable from affiliates The fair value is estimated based on a discounted cash flow analysis using current rates offered to the Company for debt of the same remaining maturities. Senior loans The fair value has been set at the price to call the debt. Deferred annuities and supplemental contracts The fair value of deferred annuities is estimated using cash surrender values. Fair values for supplemental contracts is estimated using a discounted cash flow analysis, based on interest rates currently offered on similar products. 4. Present value of future profits of acquired business An analysis of the present value of future profits of acquired businesses is as follows: 1995 1994 Beginning balance $ 46,153 $ 51,546 Acquisition of insurance subsidiary 8,664 -0- Accretion of interest 4,437 4,588 Amortization (10,648) (9,981) Ending balance $ 48,606 $ 46,153 Amortization of the present value of future profits included in the consolidated statements of income is net of the accretion of interest. The estimated amount of present value of future profits to be amortized net of interest accretion during each of the next five years is as follows: 1996 $ 5,642 1997 $ 5,337 1998 $ 4,994 1999 $ 3,162 2000 $ 2,485 5. Acquisition of Business On February 14, 1995, the Company and Investors-NA completed the purchase of Meridian Life Insurance Company (MLIC), a life insurer domiciled in Indiana, from Meridian Mutual Insurance Company. Under the terms of the agreement, the Company acquired approximately 82% of the outstanding common stock of MLIC for $14 million. Investors-NA acquired the remaining 18% for $3 million. Immediately after finalizing the transaction, ILCO contributed its acquired shares to unassigned surplus of Investors-NA, resulting in MLIC being a wholly owned subsidiary of Investors- NA. ILCO's senior loan was increased by $15 million (through an amendment to the loan agreement) to fund its portion of the purchase price. Subsequent to the purchase, MLIC's name was officially changed to Investors' Life Insurance Company of Indiana (INVIND). The transaction was accounted for as a purchase business combination. Accordingly, the results of INVIND's operations are included in income from the date of the acquisition to December 31, 1995. The purchase price has been allocated to the fair values of the assets and liabilities acquired, including the present value of future profits disclosed in Note 4. The pro forma unaudited results of operations for the years ended December 31, 1995 and 1994, assuming the acquisition of MLIC had been consummated as of the beginning of 1994, are as follows: Unaudited 1995 1994 (in thousands, except per share data) Total revenues $123,905 $134,431 Net income $ 10,391 $ 9,889 Net income per share available to common shareholders $ 2.05 $ 1.92 6. Senior Loans On January 29, 1993, the Company prepaid all of the Subordinated Notes Payable and purchased and canceled all of the detachable warrants (See Note 9). The Company paid approximately $7 million of prepayment penalty, the after-tax effect of which was charged against earnings in the first quarter of 1993. The primary source of funds for this debt prepayment and warrant cancellation was an increase in the outstanding balance of the Senior Loan from $60 million to $110 million pursuant to an amended and restated credit agreement that was entered into on January 29, 1993 (the "New Senior Loan"). The terms of the New Senior Loan, which then matured on July 1, 1998, are substantially the same as the Senior Loan. Following is a summary of outstanding debt at December 31, 1995 and 1994: 1995 1994 (in thousands) A series of separate notes, each of which is payable to a member bank of a lending syndicate with principal payments beginning April 1, 1993 and a final payment on or before July 1, 1999. Interest payable at the Company's option based on (1) the managing bank's corporate base rate plus 1.25% declining to .5% as principal declines, or (2) LIBOR plus 2.5% declining to 1.75%. The rate in effect at December 31, 1995 and 1994 was 8.18% and 8.00%. $ 59,385 $ 66,585 The obligations of the Company under the New Senior Loan are secured by: (1) all of the outstanding shares of stock of Investors-NA, (2) a $15,000,000 surplus debenture of Investors-NA payable to the Company, which had an outstanding principal balance of $6,956,224 as of December 31, 1995 and (3) a $140,000,000 surplus debenture of Investors-NA payable to the Company, which had an outstanding principal balance of $62,340,000 as of December 31, 1995. The obligations of the Company under the New Senior Loan are guaranteed by FIC. The New Senior Loan documents also require the Company to make additional mandatory principal payments which reduce the quarterly principal payments in the inverse order of their due dates. The payments are equal to (a) 100% of the net proceeds from the issuance of the Company's capital stock or debt securities and (b) the applicable percentage of the Company's annual Excess Cash Flow (as defined). Additional mandatory principal payments during 1995, 1994 and 1993 were $4,200,000, $3,915,000 and $-0-, respectively. The Senior Loan may be prepaid, in whole or in part, without penalty or premium. In connection with the acquisition of Meridian Life Insurance Company in February, 1995 (See Note 5), the Company borrowed an additional $15 million under the New Senior Loan to help finance the purchase. In addition, the maturity schedule was extended one year to July 1, 1999. Maturities of the New Senior Loan over the next four years, are as follows: (in thousands) 1996 $ 18,941 1997 18,000 1998 18,000 1999 4,444 $ 59,385 7. Federal Income Taxes The Company files consolidated federal income tax returns with its non-life subsidiaries. The Company's life insurance subsidiaries file consolidated federal income tax returns. In accordance with the Company's tax allocation agreement, federal income tax expense or benefit is allocated to each member of the consolidated group as if each member were filing a separate return. The Omnibus Budget Reconciliation Act of 1993 passed by Congress in August 1993 ("the enactment date") increased the federal corporate income tax rate to 35%, retroactive to January 1, 1993. In accordance with SFAS No. 109, the effect of the rate change was reflected in the third quarter 1993 financial statements. The rate change increased the provision for income taxes by an adjustment to the January 1, 1993 deferred tax liability of approximately $287,000. The U.S. federal income tax provision (benefit) charged to continuing operations for the years ended December 31, was as follows: 1995 1994 1993 (amounts in thousands) Current tax provision $ 945 $ (465) $2,818 Deferred tax provision 4,824 6,248 2,300 Total provision for income taxes $5,769 $ 5,783 $5,118 Provision has not been made for state and foreign income tax expense since expense is minimal. The provision for income taxes is less than the amount of income tax determined by applying the U.S. statutory federal income tax rate (35% in 1995, 1994 and 1993) to pre-tax income from continuing operations before extraordinary item as a result of the following differences: 1995 1994 1993 Income taxes at the statutory rate $ 5,769 $ 5,495 $ 6,061 Increase (decrease) in taxes resulting from: Deferred compensation arrangement -0- 375 (961) Effect of tax rate change -0- -0- 287 Other items, net -0- (87) (269) Total provision for income taxes $ 5,769 $ 5,783 $ 5,118 Deferred taxes are recorded for temporary differences between the financial reporting bases and the federal income tax bases of the Company's assets and liabilities. The sources of these differences and the estimated tax effect of each are as follows: Dec. 31, Dec. 31, 1995 1994 Deferred Tax Liability: Deferred policy acquisition costs $ 4,058 $ 4,215 Present value of future profits 10,201 8,639 Invested assets 998 721 Net unrealized appreciation on marketable equity securities 7,369 -0- Acquisition discounts on mortgages/policy loans 2,404 2,846 Other taxable temporary differences 3,135 2,326 Total deferred tax liability $ 28,165 $18,747 Dec. 31, Dec. 31, 1995 1994 Deferred Tax Asset: Policy Reserves $ 804 $ 3,832 Net unrealized depreciation of marketable equity securities -0- 10,607 Deferred gains on real estate 527 580 Depreciable Property -0- -0- Other deferred tax assets 1,109 311 Deferred Compensation 263 755 Less: Valuation allowance -0- -0- Total deferred tax asset $ 2,703 $16,085 Net deferred tax liability $25,462 $ 2,662 Deferred federal income tax expense (benefit) of $17,976,000 and ($14,372,000) for 1995 and 1994, respectively, have been provided on the unrealized appreciation (depreciation) of marketable securities and included in the deferred tax liability. This increase in deferred tax liability has been recorded as a reduction to the equity adjustment due to the net change in unrealized appreciation or depreciation and has not been reflected in the deferred income tax expense. Under the provisions of pre-1984 life insurance company income tax regulations, a portion of "gain from operations" of ILIC and Investors-NA was not subject to current taxation but was accumulated, for tax purposes, in special tax memorandum accounts designated as "policyholders' surplus accounts". Subject to certain limitations,"policyholders' surplus" is not taxed until distributed or the insurance company no longer qualifies to be taxed as a life insurance company. The accumulation in these accounts for Investors-NA and ILIC at December 31, 1995 was $8,225,000 and $4,357,000, respectively. Federal income tax of $2,879,000 and $1,525,000 would be due if the entire balance is distributed at a tax rate of 35%. The Company does not anticipate any transactions that would cause any part of the policyholders' surplus accounts to become taxable and, accordingly, deferred taxes have not been provided on such amounts. At December 31, 1995, Investors-NA and ILIC have approximately $90,000,000 and $6,000,000, respectively, in the aggregate in their shareholders' surplus accounts from which distributions could be made without incurring any federal tax liability. At December 31, 1995, the Company and its non-life wholly-owned subsidiaries have net operating loss carryforwards of approximately $2.4 million. At December 31, 1995, there were no IRS examinations in progress for the Company or its subsidiaries. 8. Reinsurance The Company reinsures portions of certain policies thereby providing greater diversification of risk and minimizing exposure on larger policies. The Company's retention on any one individual ranges from $60,000 to $250,000 depending on the company and the risk. The Company remains liable to the extent the reinsurance companies are unable to meet their obligations under the reinsurance agreements. The amounts reported in the consolidated financial statements for reinsurance ceded are as follows: December 31, 1995 1994 (in thousands) Future policy benefits $ 7,964 $ 8,479 Unearned premiums 2,634 2,265 Other policy claims and benefits payable 155 271 Amounts recoverable on paid claims 3,721 3,051 Reinsurance receivables $ 14,474 $ 14,066 Years ended December 31, 1995 1994 1993 (in thousands) Premiums $ 8,898 $ 10,907 $ 11,878 Policyholder benefits and expenses $ 14,404 $ 14,176 $ 14,472 9. Shareholders' Equity The Company is controlled by FIC, a life insurance holding company, through FIC's ownership of approximately 47% of the Company's outstanding common stock. FIC also holds options to purchase up to an additional 1,702,155 shares of the Company's authorized but unissued common stock at a price equal to the average market value during the six months preceding the exercise date. If all of these options were exercised at December 31, 1995, FIC would own approximately 62.42% of the issued and outstanding shares of the Company's common stock, assuming no other options or warrants held by other parties were exercised. In the event that any other party seeks to acquire the Company's outstanding shares, FIC has the right to acquire, without prior approval and under the same pricing formula, the number of shares of common stock which when added to the number of shares then owned by FIC, amount to 51% of the outstanding shares of the Company. These options will remain in effect as long as any indebtedness guaranteed by FIC remains outstanding (See Note 6). The Company's ability to pay dividends to its shareholders is affected, in part, by the receipt of dividends from Investors-NA, which is organized under the laws of the state of Washington. Under current Washington law, any proposed payment of a dividend or distribution which, together with dividends or distributions paid during the preceding twelve months, exceeds the greater of (i) 10% of statutory surplus as of the preceding December 31 or (ii) statutory net gain from operations for the preceding calendar year is called an "extraordinary dividend" and may not be paid until either it has been approved, or a waiting period shall have passed during which it has not been disapproved, by the insurance commissioner. In addition, Washington Laws require that prior notification of a proposed dividend be given to the Washington Insurance Commissioner and that dividends may be paid only from earned surplus. Investors-NA does not presently have earned surplus as defined by the regulations adopted by the Washington Insurance Commissioner and, therefore, is not presently permitted to pay cash dividends. The New Senior Loan described in Note 6 restricts the Company from paying any dividends on its common stock during its term. Net income (before surplus debenture interest expense) and capital and surplus of Investors-NA as reported to insurance regulators and as determined in accordance with statutory accounting practices are as follows: Year Ended December 31 (in thousands) 1995 1994 1993 Net Income $ 23,810 $ 21,706 $ 21,767 Capital and Surplus $ 61,896 $ 53,841 $ 60,957 In December 1994, the AICPA approved Statement of Position 94-5, "Disclosures of Certain Matters in the Financial Statements of Insurance Enterprises." This statement requires insurance enterprises to make disclosures in their financial statements regarding the accounting methods used in their statutory financial statements that are permitted by state insurance departments rather than prescribed statutory accounting practices. Prescribed statutory accounting practices include a variety of publications of the NAIC as well as state laws, regulations and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed. The insurance regulations of the state of Washington limit the amount an insurer may invest in the obligations of any one corporation to four percent of the insurer's statutory admitted assets. Investors-NA held $52,500,000 in subordinated notes issued by Family Life Corporation, a wholly-owned subsidiary of FIC, at December 31, 1995 and 1994. This investment exceeds the limit on investments prescribed by the state of Washington by $9,282,287 and $10,784,423 at December 31, 1995 and 1994, respectively. Prior to the acquisition of these notes, Investors-NA received written approval from the Washington State Insurance Department for the inclusion of the full amount of these notes in its statutory admitted assets. At December 31, 1995 and 1994, this permitted practice increased statutory surplus by $9,282,287 and $10,784,423 over what it would have been under prescribed statutory accounting practices. In 1988, the Company authorized the issuance of 10 million shares of Class C Preferred Stock, $1.00 par value. The Company is not permitted, under the provisions of the Senior Loan Agreement (See Note 6), to issue any preferred stock except Class A and Class B issued in connection with the acquisition of the Investors Life Companies. The Company has reacquired the Class A and Class B Preferred Stock and holds the shares in treasury. 10. Detachable Warrants The Company issued on December 28, 1988, a total of 1,107,480 detachable warrants entitling the warrant holders to purchase 19.95% of the Company's common stock, on a fully diluted basis, at an exercise price of $3.33 per share. On January 29, 1993, the Company purchased and canceled all of the detachable warrants for approximately $8 million (See Note 6). 11. Retirement Plans and Employee Stock Plans Retirement Plan The Company maintains a retirement plan, ("ILCO Pension Plan"), covering substantially all employees of the Company. The plan is a non-contributory, defined benefit pension plan, which covers each eligible employee who has attained 21 years of age and has completed one year or more of service. Each participating company contributes an amount necessary (as actuarially determined) to fund the benefits provided for its participating employees. The normal retirement benefit provided under the plan is equal to 1-2/3% of final average eligible earnings less 3/4% of the participant's Social Security Covered Compensation multiplied by the number of years of credited service (up to 30 years). The compensation used in determining benefits under the plan is the highest average earnings received in any five consecutive full-calendar years during the last ten full-calendar years before the participant's retirement date. The plan provides for reduced early retirement benefits at age 60, with at least 5 completed years of service. In connection with the acquisition of the Investors Companies, the Company adopted a non-contributory defined benefit pension plan, ("The IIP Pension Plan") that provided benefits substantially similar to the benefits provided under the CIGNA Corporation pension plan, for all employees of the Investors Companies who had been eligible to participate in the CIGNA Pension Plan. As of January 1, 1990, the IIP Pension Plan was merged into the ILCO Pension Plan. Accrued benefits under the IIP Pension Plan were frozen as of December 31, 1989. Accordingly, accrued benefits under the ILCO Pension Plan applicable to former participants in the IIP Pension Plan consist of two components: (a) an accrued benefit determined in accordance with the provisions of the IIP Pension Plan, frozen as of December 31, 1989 and (b) an accrued benefit determined on the benefit formula described above, based on credited service earned after January 1, 1990. The pension costs for all plans include the following components: 1995 1994 (in thousands) Service cost-benefits earned during the period $ 313 $ 316 Interest cost on projected benefit obligation 571 509 Return on plan assets (1,081) (1,027) Amortization (269) (268) Pension benefit $ (466) $ (470) The following summarizes the funded status of the plans at December 31: 1995 1994 (in thousands) Actuarial present value of: Vested benefit obligation $ (7,495) $ (5,858) Accumulated benefit obligation $ (7,870) $ (6,026) Projected benefit obligation $ (9,155) $ (6,701) Plan assets at market value 14,316 13,665 Plan assets in excess of projected benefit obligations $ 5,161 $ 6,964 Unrecognized prior service cost $ (1,888) $ (2,156) Unrecognized net loss (gain) $ 700 $ (1,301) Prepaid pension expense $ 3,973 $ 3,507 The significant assumptions for the plans are as follows: The discount rate for projected benefit obligations was 7.00% and 8.00% in 1995 and 1994, respectively. The assumed long-term rate of compensation increases was 6.5% for 1995 and 1994. The long-term rate of return on plan assets was 8.0% for 1995 and 1994. Savings and Investment Plan The Company adopted a Savings and Investment (401(k)) Plan that allows eligible employees who have met a one-year service requirement to make contributions to the Plan on a tax-deferred basis. A Plan participant may elect to contribute up to 16% of eligible earnings on a tax deferred basis, subject to certain limitations applicable to "highly compensated employees" as defined in the Internal Revenue Code. Plan participants may allocate contributions, and earnings thereon, between a Guaranteed Fund and a Variable Fund. Effective January 1, 1994, the Plan was amended to include four additional investment options which may be selected by participants. The Account Balance of each Participant is 100% vested at all times. Prior to January 1, 1990, the Company made matching contributions of up to 50% of the first 6% of eligible compensation contributed by the plan participants. Vesting of such company contributions is based on number of years of service. The employer contributions were discontinued effective January 1, 1990. During 1995, the Plan was ammended to allow for the addition of Family Life Insurance Company (FLIC), a wholly-owned subsidiary of FIC, as a participating employer, thus allowing FLIC employees to participate in the Plan. The amendment did not affect the Plan's tax-qualified status. Employee Stock Ownership Plan During 1979, the Company established an Employee Stock Ownership Plan and a related trust for the benefit of its employees. The Plan generally covers employees who have attained the age of 21 and have completed one year of service. Vesting of benefits to employees is based on number of years of service. No contributions were made to the Plan in 1995, 1994 or 1993. At December 31, 1995, the Plan had a total of 313,932 shares which are allocated to participants and 65,805 which remain unallocated. During 1995, the Plan was amended to allow for the addition of FLIC as a participating employer, thus allowing FLIC employees to participate in the Plan. The amendment did not affect the Plan's tax-qualified status. Stock Option Plans Under the Company's Incentive Stock Option Plan, options to purchase shares of the Company's common stock, at 100% of fair market value on the date of grant, have been granted to key employees. A total of 315,000 shares of the Company's common stock are currently reserved for issuance under this plan. As of December 31, 1995, options to purchase 327,850 shares have been granted since the plans inception. As of December 31, 1995, 208,250 options have been exercised and 86,100 options have been terminated. At December 31, 1995 33,500 options to purchase shares of the Company's common stock at prices ranging from $3.33 to $9.25 remain outstanding. The number of options exercised in 1995, 1994 and 1993 were 59,000, 5,500 and 2,000, respectively. Under the Non-Qualified Stock Option Plan for certain officers, directors, agents and others, the Board of Directors is authorized to issue options to purchase up to 600,000 shares of the Company's common stock at 100% of the fair market value on the date of grant but in no case less than $3.33 per share. In 1988, options to purchase 330,000 shares were granted at a price of $3.33 per share. In 1991, options to purchase 50,000 shares were granted at prices ranging from $8.75 to $9.25. In 1992 and and 1990 options to purchase 60,000 and 30,000 shares respectively, expired. In 1995, options to purchase 60,000 shares were granted at a price of $11.12 per share. In 1989 options to purchase 600,000 shares of the Company's common stock at $1.00 per share were granted by the Board of Directors to the Company's Chairman of the Board. These options became exercisable upon approval of the Board of Directors in annual installments of 150,000 shares each. The last installment was granted in 1992. In 1992, the chairman surrendered for cancellation 120,000 of these options. In October of 1993, the Company entered into an agreement with the Chairman, whereby the Chairman agreed to surrender all of his remaining common stock options between 1993 and 1996. Pursuant to this agreement, 358,500 options were surrendered through December 31, 1995, with 121,500 options remaining to be surrendered during 1996 (see Note 13). 12. Leases The Company and its subsidiaries occupy office facilities under lease agreements which expire at various dates through 2005. Certain office space leases may be renewed at the option of the Company. Rent expense in 1995, 1994, and 1993 was $2,531,085, $1,424,946, and $2,091,220, respectively, under these lease agreements. Minimum annual future rentals are as follows: (in thousands) 1996 1,274 1997 1,115 1998 637 1999 637 2000 637 Thereafter 3,183 $ 7,483 13. Related Party Transactions On June 12, 1991, FIC (which owns approximately 47% of the outstanding common stock of the Registrant) completed the purchase of all the outstanding shares of Family Life Insurance Company, a Washington domiciled life insurance company, from Merrill Lynch Insurance Group, Inc. The transaction was financed, in part, by a senior subordinated loan of $22.5 million by Investors - NA to Family Life Corporation (FLC), an indirect, wholly-owned subsidiary of FIC, and a senior loan of $2.5 million by Investors - NA to FIC. In addition to the interest provided under the terms of said loans, Investors - NA was granted non- transferrable options to purchase up to a total of 9.9 percent of the common shares of FIC. The option price is $10.50 per share, equivalent to the then current market price, subject to adjustment to prevent the effect of dilution. The options provide for their expiration at the time of final repayment of each of the respective loans. On July 30, 1993, FLC prepaid its Merrill Lynch subordinated loans. The transaction was financed, in part, by a subordinated loan of $30 million by Investors - NA to FLC and by a subordinated loan of $4.5 million by Investors - NA to Family Life Insurance Investment Company, (FLIIC), a wholly-owned subsidiary of FIC and parent of FLC. Notes receivable from affiliates of $61,224,000 include $52,500,000 senior subordinated loans by Investors - NA to FLC, a subordinated loan of $4,500,000 to FLIIC, and a senior loan of $4,224,000 to FIC. Interest earned by ILCO on the aforementioned loans totaled $6,044,322, $5,993,512, and $4,104,661 in 1995, 1994 and 1993, respectively. At December 31, 1995 and December 31, 1994 accrued interest was $1,459,408 and $1,933,169, respectively. In May, 1989, the Board of Directors of the Company granted the Chairman of the Board the right to borrow up to $650,000 from the Company to be used solely for the purchase of FIC common stock pursuant to his then existing options. This loan, which was issued on June 1, 1989, carries no interest and is repayable in five years unless forgiven at the discretion of the Board of Directors or upon the occurrence of certain designated events. This loan was repaid in full in 1994. Rent and certain other operating expenses aggregating approximately $830,000, $585,000, and $860,000, were incurred by FIC in 1995, 1994 and 1993, respectively, on behalf of the Company. The Company reimbursed FIC for these costs. ILCO received $15 million, $13 million, and $13 million from Family Life Insurance Company for direct costs incurred by ILCO on behalf of Family Life Insurance Company's operations in 1995, 1994 and 1993, respectively. Under an agreement between ILCO and Family Life all direct costs incurred on behalf of the other are to be reimbursed. In connection with the purchase of the Austin Centre, an office-hotel property in Austin, Texas, Investors-NA entered into an agreement with FIC Realty Services, Inc.("FIC Realty") , a subsidiary of FIC, to furnish real estate brokerage services. In connection with the agreement, FIC Realty received commissions from Investors-NA of $159,500. In addition, Investors-NA leased a portion of the Austin Centre to FIC Realty pursuant to a lease agreement in which FIC Realty pays monthly rent to Investors-NA in an amount equal to 95% of the net operating profits of the hotel. Total rent payable to Investors-NA under the terms of the lease agreement is $1,991,356, $1,346,160, and $745,665 in 1995, 1994 and 1993, respectively. Alcoholic beverages had been sold at the hotel by an unrelated third party pursuant to a lease it had with FIC Realty until September 30, 1994. Commencing October 1, 1994, all alcoholic beverages sales have been conducted by Atrium Beverage Corporation ("Atrium Beverage"), a new subsidiary of FIC Realty. Atrium Beverage subleases from FIC Realty space in the hotel for the storage, service and sale of alcoholic beverages pursuant to which Atrium Beverage pays monthly rent to FIC Realty of $12,500. The sublease provides that the rent paid during each calendar year will be reduced to the extent necessary to insure that Atrium Beverage's net operating profit from alcoholic beverages sales is not less than 5% of its gross receipts from such sales. Atrium Beverage and FIC Realty are also parties to a management agreement whereby FIC Realty manages Atrium Beverage's alcoholic beverage operations at the hotel for a monthly fee equal to 28% of the gross receipts from alcoholic beverages sales. During 1995 and 1994, Atrium Beverage paid FIC Realty rent and management fees totalling $319,815 and $81,233, respectively. All of that amount was included in the hotel revenues of FIC Realty for purposes of determining its net operating profits under the hotel lease agreement with Investors-NA. Investors-NA entered into a management agreement in September 1991 with FIC Property Management, Inc. ("FIC Management"), a subsidiary of FIC, whereby it appointed FIC Management to manage, lease and operate the office tower, retail areas, underground parking garage and common areas of Austin Centre. FIC Management is paid fees in an amount equal to 5% of the net operating profit that Investors-NA receives from the properties managed and leased by FIC Management. During 1995, Investors-NA paid fees of $130,760 to FIC Management under this agreement as compared to $106,460 and $77,115 in 1994 and 1993, respectively. In October of 1993, the Company entered into an agreement with the Chairman, whereby the Chairman agreed to surrender all of his remaining common stock options for consideration of $6,847,000 (see Note 11). Prior to entering into this agreement, the Company had accrued compensation expense related to these options of $4,225,000. Upon entering into the agreement, additional compensation was recorded totaling $2,622,000 for the year ended December 31, 1993 to increase total compensation to the surrender price. Accordingly, a liability was recorded for the unpaid portion of the agreement. Pursuant to this agreement, during 1993 the Chairman was paid $3,237,120 for cancellation of 240,000 of these options and during 1994 he was paid $997,520 for cancellation of 68,500 options and $379,143 for federal income tax reimbursement relating to the cancellation of options in 1993. During 1995, the Chairman was paid $836,582 for the cancellation in 1995 of options to purchase 50,000 shares of ILCO's Common Stock, $156,323 for the federal income tax reimbursement relating to the cancellation in 1994 of options to purchase 68,500 shares and $127,608 as the final payment relating to the cancellation in 1993 of options to purchase 240,000 shares. The federal income tax reimbursements are expensed in the period when they are incurred. Pursuant to a data processing agreement with a major service company, the data processing needs of ILCO's and FIC's insurance subsidiaries were provided by an offsite third party until November 30, 1994. Commencing December 1, 1994, all of those data processing needs are provided to ILCO's and FIC's Austin, Texas and Seattle, Washington facilities by FIC Computer Services, Inc. ("FIC Computer"), a new subsidiary of FIC. Each of FIC's and ILCO's insurance subsidiaries has entered into a data processing agreement with FIC Computer whereby FIC Computer provides data processing services to each subsidiary for fees equal to such subsidiary's proportionate share of FIC Computer's actual costs of providing those services to all of the subsidiaries. Family Life paid $151,977 and $779,052 and Investors-NA, Investors-IN and ILIC paid $181,971 and $1,655,486 to FIC Computer for data processing services provided during December 1994 and 1995, respectively. 14. Commitments and Contingencies The Company and its subsidiaries are defendants in certain legal actions related to the normal business operations of the Company. Management believes that the resolution of such matters will not have a material impact on the financial statements. 15. Net Income Per Share Net income per share was determined by dividing net income available to common shareholders by the weighted average number of shares of common stock and common stock equivalents outstanding during each year. For the years ended December 31, 1995, 1994 and 1993, net income available to common shareholders is calculated as follows: 1995 1994 1993 Income before extraordinary (in thousands) item and cumulative effect of change in accounting principle $10,714 $ 9,917 $12,200 Interest expense reduction, net of income tax effect 671 472 660 Income before extraordinary item and cumulative effect of change in accounting principle available to common shareholders 11,385 10,389 12,860 Cost of early extinguishment of debt, net of tax -0- -0- (6,253) Income before cumulative effect of change in accounting principle available to common shareholders 11,385 $10,389 6,607 Cumulative effect of change in accounting principle -0- -0- (2,600) Net income available to common shareholders $11,385 $10,389 $ 4,007 Changes in the market price of the Company's common stock also impacts the number of common stock options and warrants which are considered dilutive under the treasury stock method of calculating the weighted average common stock and common stock equivalents. For the years ended December 31, 1995, 1994 and 1993, weighted average common stock and common stock equivalents is calculated as follows: 1995 1994 1993 (In thousands) Weighted average common shares outstanding 4,139 4,116 4,109 Common stock equivalents: Common stock options 2,085 2,084 2,480 Common stock warrants 91 Less assumed repurchase of shares using the treasury stock method (835) (822) (822) Common stock and common stock equivalents 5,389 5,378 5,858 16. Quarterly Financial Data (unaudited) (in thousands, except per share amounts) Three Months Three Months Ended Ended March 31, June 30, 1995 1994 1995 1994 Net Operating Revenue $29,105 $29,325 $31,017 $29,437 Net Income $ 2,589 $ 2,892 $ 2,601 $ 2,031 Net income per share available to common shareholders $ 0.51 $ 0.56 $ 0.52 $ 0.40 Three Months Three Months Ended Ended September 30, December 31, 1995 1994 1995 1994 Net Operating Revenue $30,453 $27,595 $31,815 $28,651 Net Income $ 2,498 $ 2,099 $ 3,026 $ 2,895 Net income per share available to common shareholders $ 0.50 $ 0.42 $ 0.58 $ 0.57 INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES SCHEDULE I - SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES December 31, 1995 (in thousands of dollars) Column A Column B Column C Column D Amount at Which Shown in the Balance Type of Investment Costs Value Sheet Fixed maturities available for sale: United States Government and government agencies and authorities $ 15,826 $ 17,315 $ 17,315 States, municipalities and political subdivisions 4,686 4,952 4,952 Foreign governments 15 14 14 Corporate securities 98,822 102,866 102,866 Mortgage-backed securities 344,352 358,459 358,459 Total fixed maturities available for sale 463,701 483,606 483,606 Fixed maturities held to maturity 14,420 14,277 14,420 Total fixed maturities 478,121 497,883 498,026 Equity securities: Public utilities 2 3 3 Banks, trust and financial institutions 31 87 87 Industrial, miscellaneous and all other 57 65 65 Total equity securities 90 155 155 Policy loans 53,656 53,656 53,656 Mortgage loans 14,836 16,187 14,836 Real estate 15,467 15,467 15,467 Short term investments 85,994 85,994 85,994 Total investments $648,164 $669,342 $668,134 INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES SCHEDULE II - AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS, PROMOTERS, AND EMPLOYEES OTHER THAN RELATED PARTIES December 31, 1995, 1994 and 1993 Column A Column B Column C Balance at Beginning Name of Debtor of Period Additions December 31, 1995 $ -0- -0- December 31, 1994 Roy F. Mitte Non-interest bearing loan repayable in two years unless forgiven by Board of Directors $650,000 -0- December 31, 1993 Roy F. Mitte Non-interest bearing loan repayable in three years unless forgiven by Board of Directors $650,000 -0- INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES SCHEDULE II - AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS, PROMOTERS, AND EMPLOYEES OTHER THAN RELATED PARTIES December 31, 1995, 1994 and 1993, Continued Column A Column D Column E Amounts Balance Amounts Written at End of Name of Debtor Collected Off Period December 31, 1995 $ -0- -0- $ -0- December 31, 1994 Roy F. Mitte Non-interest bearing loan repayable in two years unless forgiven by Board of Directors $650,000 -0- $ -0- December 31, 1993 Roy F. Mitte Non-interest bearing loan repayable in three years unless forgiven by Board of Directors -0- -0- $650,000 INTERCONTINENTAL LIFE CORPORATION (PARENT COMPANY) SCHEDULE III - CONDENSED FINANCIAL STATEMENTS OF REGISTRANT BALANCE SHEETS December 31, 1995 and 1994 (in thousands of dollars) ASSETS 1995 1994 Short-term investments $ 7,022 $ 8,305 Cash and cash equivalents 63 195 Subordinated debenture receivables from Investors Life Insurance Company of North America, due September 30, 1999 72,835 87,795 Investments in and advances to subsidiaries 76,730 21,778 Accounts receivable 6,117 6,149 Property, plant and equipment, net 279 192 Federal income tax receivable -0- -0- Other assets 2,237 2,877 $ 165,283 $ 127,291 INTERCONTINENTAL LIFE CORPORATION (PARENT COMPANY) SCHEDULE III - CONDENSED FINANCIAL STATEMENTS OF REGISTRANTS BALANCE SHEETS, continued December 31, 1995 and 1994 (in thousands of dollars) LIABILITIES AND SHAREHOLDERS' EQUITY 1995 1994 Liabilities: Accounts payable and accrued expenses $ 5,293 $ 4,570 Senior loans 59,385 66,585 Senior subordinated debenture payable to Intercontinental Life Insurance Company -0- 200 Deferred gain on sale of real estate 1,066 1,175 65,744 72,530 Redeemable preferred stock: Class A preferred stock, $1 par value, shares authorized and issued 5,000 5,000 Class B preferred stock, $1 par value, shares authorized, and issued 15,000 15,000 20,000 20,000 Redeemable preferred stock, repurchased and held as treasury stock (20,000) (20,000) -0- -0- Shareholders' equity: Class C preferred stock, $1 par value, 10,000,000 shares authorized, none issued Common stock, $.22 par value, 10,000,000 shares authorized; 5,166,239 and 5,107,239 shares issued, 4,175,329 and 4,116,329 shares outstanding in 1995 and 1994 respectively 1,137 1,124 Additional paid-in capital 3,521 2,854 Net unrealized appreciation of securities held by insurance subsidiaries 748 568 Net unrealized gain (loss) on investments in fixed maturities available for sale held by insurance subsidiaries 12,938 (20,266) Retained earnings (including $78,639 and $68,654 of undistributed earnings of subsidiaries at December 31, 1995 and 1994, respectively) 81,759 71,045 Common treasury stock, at cost, 665,950 100,103 55,325 shares in 1995 and 1994 (564) (564) Total shareholders' equity 99,539 54,761 Total liabilities and shareholders' equity $165,283 $127,291 INTERCONTINENTAL LIFE CORPORATION (PARENT COMPANY) SCHEDULE III - CONDENSED FINANCIAL STATEMENTS OF REGISTRANT, STATEMENTS OF INCOME,continued Years Ended December 31, 1995, 1994 and 1993 (in thousands of dollars) 1995 1994 1993 Revenues charged to subsidiaries: Interest income $ 8,236 $ 7,888 $ 8,850 Other income 134 113 112 8,370 8,001 8,962 Operating expenses 1,779 1,386 4,409 Interest expense 5,469 4,914 5,666 7,248 6,300 10,075 Income (loss) from operations 1,122 1,701 (1,113) Federal income tax provision 393 970 3,215 Net income (loss) before equity in undistributed earnings from subsidiaries extraordinary item and change in accounting principle 729 731 (4,328) Equity in undistributed earnings from subsidiaries 9,985 9,186 16,528 Net income before extra- ordinary item and cumula- tive effect of change in accounting principle 10,714 9,917 12,200 Extraordinary Item: Cost of early extinguish- ment of debt, net of tax -0- -0- (6,253) Net income before cumula- tive effect of change in accounting principle 10,714 9,917 5,947 Cumulative effect of change in accounting principle -0- -0- (2,600) Net income $ 10,714 $ 9,917 $ 3,347 INTERCONTINENTAL LIFE CORPORATION (PARENT COMPANY) SCHEDULE III - CONDENSED STATEMENTS OF REGISTRANT STATEMENT OF CASH FLOWS, continued (in thousands of dollars) Year ended December 31, CASH FLOWS FROM OPERATING 1995 1994 1993 ACTIVITIES: Net income $ 10,714 $ 9,917 $ 3,347 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Amortization of deferred gain on sale of real estate (109) (109) (109) Unrealized appreciation (depreciation) of equity securities held by insurance subsidiaries 180 (377) 211 Decrease in accounts receivable 32 615 40 Increase in investment in and advances to subsidiaries (21,748) (3,742) (8,997) Increase (decrease) in accounts payable and accrued expenses 723 384 (1,496) Decrease in deferred federal income taxes, net -0- 83 417 Decrease (increase) in other assets 640 1,028 (1,541) Other (87) 79 38 Net Cash (used in) provided by operating activities (9,655) 7,878 (8,090) CASH FLOWS FROM INVESTING ACTIVITIES: Investments (purchased) sold 1,283 (302) 8,423 Net cash provided by (used in) investing activities 1,283 (302) 8,423 CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of debt (7,200) (17,415) (6,325) Payment on subordinated debenture payable (200) (50) (50) Stock options exercised 680 -0- -0- Payment received on subordinated debenture receivable 14,960 8,744 15,000 Accretion and dividends on preferred stock -0- -0- (8,012) Net cash provided by (used in) financing activities 8,240 (8,721) 613 Net increase in cash (132) (1,145) 946 Cash, beginning of year 195 1,340 394 Cash, end of year $ 63 $ 195 $ 1,340 INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES SCHEDULE VI - REINSURANCE CEDED AND ASSUMED For the years ended December 31, 1995, 1994 and 1993 (in thousands of dollars) Ceded To Assumed Direct Other From Other 1995 Amount Companies Companies Life insurance in-force $7,693,274 $ 864,512 $ 8,124 Premium: Life insurance $ 17,877 $ 8,773 $ 811 Accident-health insurance 2,260 (205) 38 Total $ 20,137 $ 8,568 $ 849 1994 Life insurance in-force $7,056,436 $ 427,611 $ 24,073 Premium: Life insurance $ 20,712 $ 9,998 $ 676 Accident-health insurance 3,703 909 133 Total $ 24,415 $ 10,907 $ 809 1993 Life insurance in-force $7,728,737 $ 381,160 $ 20,147 Premium: Life insurance $ 23,061 $ 10,545 $ 684 Accident-health insurance 4,129 1,333 118 Total $ 27,190 $ 11,878 $ 802 INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES SCHEDULE VI - REINSURANCE CEDED AND ASSUMED For the years ended December 31, 1995, 1994 and 1993 (in thousands of dollars) Percentage Net Of Amount 1995 Amount Assumed Life insurance in-force 6,836,886 .12% Premium: Life insurance $ 9,915 8.18% Accident-health insurance 2,503 1.52% Total $ 12,418 6.84% 1994 Life insurance in-force $6,652,898 .36% Premium: Life insurance $ 11,390 5.94% Accident-health insurance 2,927 4.54% Total $ 14,317 5.65% 1993 Life insurance in-force $7,367,724 .27% Premium: Life insurance $ 13,200 5.18% Accident-health insurance 2,914 4.05% Total $ 16,114 4.98% Exhibit Index Exhibit Page Description Number Number 4(a) Certificate of Incorporation of Registrant filed May 22, 1969 and Amendments thereto (2) (i) Amendment filed July 16, 1973 (ii) Amendment filed August 4, 1977 (iii)Amendment filed February 10, 1983 (iv) Amendment filed December 14, 1988 (v) Amendment filed February 9, 1990 4(b) By-laws of Registrant. (3) 10(a) Registrant's Incentive Stock Option Plan. (1) 10(m) Lease dated December 20, 1985 between Registrant and Parker Road Associates for the rental of 40 Parker Road, Elizabeth, New Jersey. (4) 10(o) (i) Grid Note dated December 18, 1985 in the amount of $800,000 made by the Registrant and payable to Midlantic National Bank. (4) (ii) Demand Note dated December 18, 1985 in the amount of $491,165.03 made by Registrant and payable to Midlantic National Bank.(4) 10(ah) Credit Agreement for $125,000,000 dated as of December 28, 1988 among Registrant and certain banks identified therein. (5) 10(ai) Note Purchase Agreement dated as of December 31, 1988 between Registrant and a Rhode Island based insurance/financial services company. A Note Purchase Agreement in substantially identical form was executed with seven other entities identified in this exhibit. (5) 10(aj) Class A Preferred Stock Purchase Agreement dated as of December 1, 1988 between Registrant and Insurance Company of North America. (5) 10(ak) Class B Preferred Stock Purchase Agreement dated as of December 1, 1988 between Registrant and a Rhode Island based/insurance/financial services company. A Class B Preferred Stock Purchase Agreement in substantially identical form was executed with seven other entities identified in this exhibit. (5) 10(al) Pledge Agreement dated as of December 28, 1988 between Registrant and The First National Bank of Chicago, as Agent. (5) 10(am) Surplus Debenture dated as of December 28, 1988 in the amount of $140,000,000 made by Standard to Registrant. (5) 10(an) Warrant Agreement dated as of December 29, 1988 between Registrant and a Connecticut based insurance/financial services company. A Warrant Agreement in substantially identical form was executed with seven other entities. (5) 10(aq) Registrant's Defined Benefit Pension Plan, effective as of January 1, 1988. (6) 10(ar) Registrant's Employee Stock Purchase Plan, effective as of August 25, 1989. (6) 10(as) Registrant's Non-Qualified Stock Option Plan. (6) 10(at) Exchange and Amendment Agreement dated July 30, 1990 between Registrant and the holders of its Class A Preferred Stock and its Class B Preferred Stock. (7) 10(au) Amendment dated July 30, 1990 to Senior Loan Agreement among the Registrant and certain banks identified therein. (7) 10(av) InterCreditor Agreement dated June 12, 1991, among Investors Life Insurance Company of North America, Investors Life Insurance Company of California, Merrill Lynch Insurance Group, Inc. and Merrill Lynch & Co., Inc. (8) 10(aw) Note dated June 12, 1991 in the amount of $22.5 million made by Family Life Corporation in favor of Investors Life Insurance Company of North America. (8) 10(ax) Note dated June 12, 1991 in the amount of $2.5 million made by Financial Industries Corporation in favor of Investors Life Insurance Company of California. (8) 10(ay) InterCreditor Agreement among Investors Life Insurance Company of North America, Investors Life Insurance Company of California and the Agent under the Credit Agreement dated as of June 12, 1991. (8) 10(az) Option Agreement by Financial Industries Corporation in favor of Investors Life Insurance Company of North America and Investors Life Insurance Company of California. (8) 10(aaa) Hotel Lease Agreement dated as of August 22, 1991 between Investors Life Insurance Company of North America and FIC Realty Services, Inc. (9) 10(aab) Management Agreement dated as of September 4, 1991 between Investors Life Insurance Company of North America and FIC Property Management, Inc. (9) 10(aac) Amended and Restated Credit Agreement dated January 29, 1993 among the Registrant and certain banks identified therein. (10) 10(aad) Amended and Restated Pledge Agreement dated January 29, 1993 between the Registrant and the agent bank named therein. (10) 10(aae) Stock Option Agreement dated March 8, 1986 between Registrant and Financial Industries Corporation. (10) 10(aaf) Surplus Debenture dated as of November 13, 1986 in the amount of $15,000,000 made by New Standard to Registrant. (10) 10(aag) Terms and Conditions of Employment Contracts of James M. Grace, Eugene E. Payne and Joseph F. Crowe approved by Registrant's Board of Directors on May 16, 1991. (10) 10(aah) Letter agreement and addendum dated July 23, 1992 between Investors Life Insurance Company of North America and Mr. and Mrs. Theodore A. Fleron. (10) 10(aai) Letter agreement dated October 15, 1992 between Roy F. Mitte and Registrant evidencing surrender and cancellation of stock options. (10) 10(aaj) Note dated July 30, 1993 in the amount of $30 million made by Family Life Corporation in favor of Investors Life Insurance Company of North America. (11) 10(aak) Note dated July 30, 1993 in the amount of $4.5 million made by Family Life Insurance Investment Company in favor of Investors Life Insurance Company of North America. (11) 10(aal) Amendment No. 1 dated July 30, 1993 between Family Life Corporation and Investors Life Insurance Company of North America amending $22.5 million note. (11) 10(aam) Cancellation of Stock Option Agreement dated October 21, 1993 between Registrant and Roy F. Mitte. (11) 10(aan) Waiver and Amendment Agreement dated as of July 23, 1993 among the Registrant and certain banks identified therein. (12) 10(aao) Amendment Agreement dated as of December 20, 1993 among the Registrant and certain banks identified therein. (12) 10(aap) Amendment Agreement dated as of March 12, 1994 among the Registrant and certain banks identified therein. (12) 10(aaq) Amendment Agreement dated as of December 22, 1994 among the Registrant and certain banks identified therein. (12) 10(aar) Amendment Agreement dated as of February 10, 1995 among the Registrant and certain banks identified therein. (12) 10(aas) Data Processing Agreement dated as of November 30, 1994 between InterContinental Life Insurance Company and FIC Computer Services, Inc. (12) 10(aat) Data Processing Agreement dated as of November 30, 1994 between Investors Life Insurance Company of North America and FIC Computer Services, Inc. (12) 10(aau) Data Processing Agreement dated as of November 30, 1994 between Family Life Insurance Company and FIC Computer Services, Inc. (12) 10(aav) Lease Agreement dated as of September 30, 1994 between FIC Realty Services, Inc. and Atrium Beverage Corporation. (12) 10(aaw) Management Agreement dated as of September 30, 1994 between HCD Austin Corporation as agent for FIC Realty Services, Inc. and Atrium Beverage Corporation. (12) 10(aax) Amendment Agreement dated as of August 8, 1995 among the Registrant and certain banks identified therein. 10(aay) Amendment Agreement dated as of December 15, 1995 among the Registrant and certain banks identified therein. 10(aaz) Agreement of Sale dated as of September 5, 1995 between Omni Congress Joint venture as Buyer and Investors Life Insurance Company of North America as Seller, with exhibits, amendments and assignment. 21 Subsidiaries of the Registrant. 23 Consent of Price Waterhouse LLP. (1) Filed with the Registrant's Annual Report on Form 10- K for the fiscal year ended December 31, 1983, Commission File No. 0-7290, and incorporated herein by reference. (2) Filed with the Registrant's Registration Statement on Form S-8 (Registration No. 2085333) and incorporated herein by reference; except Amendment filed December 14, 1988 (item (iv)), which was filed with Registrant's Current Report on Form 8-K dated January 12, 1989, and incorporated herein by reference; and Amendment filed February 9, 1990, which was filed with Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, and incorporated herein by reference. (3) Filed with the Registrant's Annual Report on Form 10- K for the fiscal year ended December 31, 1984 and incorporated herein by reference. (4) Filed with the Registrant's Annual Report on Form 10- K for the fiscal year ended December 31, 1985 and incorporated herein by reference. (5) Filed with Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, and incorporated herein by reference. (6) Filed with Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, and incorporated herein by reference. (7) Filed with Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, and incorporated herein by reference. (8) Filed with Financial Industries Corporation's Current Report on Form 8-K dated June 25, 1991, and incorporated herein by reference. (9) Filed with Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, and incorporated herein by reference. (10) Filed with Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, and incorporated herein by reference. (11) Filed with Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, and incorporated herein by reference. (12) Filed with Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994, and incorporated herein by reference. EX-10 2 EXHIBIT 10(aax) INTERCONTINENTAL LIFE CORPORATION AMENDMENT AGREEMENT This Amendment Agreement (the "Agreement") is entered into as of August 8, 1995 by and among InterContinental Life Corporation (the "Company"), the undersigned lenders (the "Lenders") and The First National Bank of Chicago, as agent for the Lenders (the "Agent"). W I T N E S S E T H : WHEREAS, the Company, the Lenders and the Agent are parties to that certain Amended and Restated Credit Agreement dated as of January 29, 1993 (as amended, the "Credit Agreement"); WHEREAS, the Company, the Lenders and the Agent desire to amend the Credit Agreement as hereinafter set forth. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows: 1. Defined Terms. Capitalized terms used herein and not otherwise defined herein shall have the meanings attributed to such terms in the Credit Agreement. 2. Amendment to Credit Agreement. Section 6.19 of the Credit Agreement is hereby deleted in its entirety and the following is inserted in lieu thereof: "6.19. Fixed Asset Expenditures. The Company will not, nor will it permit any Subsidiary to, expend, or be committed to expend, in the acquisition of fixed assets (including leasehold improvements), on a non-cumulative basis, in the aggregate for the Company and the Subsidiaries, in excess of (a) $3,000,000 in the aggregate for the period covered by fiscal years 1993, 1994 and 1995 with respect to fixed assets other than leasehold improvements, (b) $1,000,000 during any fiscal year beginning in fiscal year 1996 with respect to fixed assets other than leasehold improvements, (c) $6,000,000 in the aggregate for the period covered by fiscal years 1993 and 1994 for leasehold improvements, and (d) and $2,000,000 in each fiscal year beginning in fiscal year 1995 for leasehold improvements. A commitment to expend in the acquisition of fixed assets (including leasehold improvements) pursuant to this Section 6.19 shall, for purposes of calculating the amounts set forth in the immediately preceding sentence, be included in the period or year in which such expenditure is to be paid." 3. Conditions Precedent. Section 2 of this Agreement shall not become effective unless and until the Company has furnished, or caused to be furnished, to the Agent, with sufficient copies for each Lender, the following: (i) A consent from FIC, in the form of Exhibit A to this Amendment. (ii) Copies, certified by the Secretary or Assistant Secretary of the Company, of its Board of Directors resolutions authorizing the execution of this Agreement. (iii) An incumbency certificate, executed by the Secretary or Assistant Secretary of the Company, which shall identify by name and title and bear the signature of the officers of the Company authorized to sign this Agreement, upon which certificate each Lender shall be entitled to rely until informed of any change in writing by the Company. 4. Representation and Warranty. The Company hereby represents and warrants to the Lenders that after giving effect to the amendment herein contained (i) all of the representations and warranties contained in the Credit Agreement are true and correct as of the date hereof, (ii) no Default or Unmatured Default exists or is continuing and (iii) the Company has performed all the agreements on its part to be performed prior to the date hereof as set forth in the Credit Agreement. 5. Effectiveness of Amendment. This Agreement shall become effective as of the date first above written provided that all of the conditions precedent set forth in Section 3 of this Agreement are satisfied and upon receipt by the Agent of counterparts of this Agreement duly executed by the Company and the Required Lenders. 6. Reference to and Effect on the Credit Agreement. a. Upon the effectiveness of Section 2 hereof, on or after the date hereof each reference in the Credit Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of like import and each reference to the Credit Agreement in the Notes and all other documents (the "Loan Documents") delivered in connection with the Credit Agreement shall mean and be a reference to the Credit Agreement as amended hereby. b. Except as specifically amended above, all of the terms, conditions and covenants of the Credit Agreement and all other Loan Documents shall remain unaltered and in full force and effect and shall continue to be binding upon the Company in all respects and are hereby ratified and confirmed. c. The execution, delivery and effectiveness of this Agreement shall not, except as expressly provided herein, operate as a waiver of (i) any right, power or remedy of the Lenders or the Agent under the Credit Agreement or any of the Loan Documents, or (ii) any Default or Unmatured Default under the Credit Agreement. 7. Costs, Expenses and Taxes. The Company agrees to pay on demand all costs and expenses of the Agent in connection with the preparation, execution and delivery of this Agreement, including the reasonable fees and out-of-pocket expenses of counsel for the Agent with respect thereto. 8. CHOICE OF LAW. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS (AND NOT THE LAW OF CONFLICTS) OF THE STATE OF ILLINOIS, BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS. 9. Execution in CounterParts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. IN WITNESS WHEREOF, the Company, the undersigned Lenders and the Agent have executed this Agreement as of the date first above written. INTERCONTINENTAL LIFE CORPORATION By: /s/ Roy F. Mitte Title: President THE FIRST NATIONAL BANK OF CHICAGO, Individually and as Agent By: /s/ Paul T. Schultz Title: Vice President BARCLAYS BANK, PLC By: /s/ Chris Cathcart Title: Vice President FIRST UNION NATIONAL BANK OF NORTH CAROLINA By: /s/ Jay S. Bullock Title: Vice President SHAWMUT BANK CONNECTICUT, N.A. By: /s/ James H. Steane Title: Senior Vice President CORESTATES PHILADELPHIA NATIONAL BANK N.A. By: /s/ Kathleen M. Petrelli Title: Assistant Vice President EXHIBIT A CONSENT OF GUARANTOR Financial Industries Corporation, as guarantor under the Amended and Restated Guaranty dated January 29, 1993 (the "Guaranty") in favor of the Lenders party to the Amended and Restated Credit Agreement dated as of January 29, 1993 (as amended, the "Credit Agreement") hereby consents to the Amendment Agreement dated as of August 8, 1995 and hereby confirms and agrees that the Guaranty is, and shall continue to be, in full force and effect and is hereby confirmed and ratified in all respects. This Consent is executed and delivered as of August 8, 1995. FINANCIAL INDUSTRIES CORPORATION By: Title: EX-10 3 EXHIBIT 10(aay) INTERCONTINENTAL LIFE CORPORATION AMENDMENT AGREEMENT This Amendment Agreement (the "Agreement") is entered into as of December 15, 1995 by and among InterContinental Life Corporation (the "Company"), the undersigned lenders (the "Lenders") and The First National Bank of Chicago, as agent for the Lenders (the "Agent"). W I T N E S S E T H : WHEREAS, the Company, the Lenders and the Agent are parties to that certain Amended and Restated Credit Agreement dated as of January 29, 1993 (as amended, the "Credit Agreement"); WHEREAS, the Company, the Lenders and the Agent desire to amend the Credit Agreement as hereinafter set forth. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows: 1. Defined Terms. Capitalized terms used herein and not otherwise defined herein shall have the meanings attributed to such terms in the Credit Agreement. 2. Amendment to Credit Agreement. The Credit Agreement is hereby amended as follows: (A) Section 6.16(b)(v) of the Credit Agreement is hereby amended by deleting the reference to "$18,000,000" contained in Section 6.16(b)(v) and inserting "$24,000,000" in lieu thereof. (B) Section 6.19 of the Credit Agreement is hereby amended to insert the following sentence to the end of Section 6.19: "Notwithstanding the foregoing, amounts which are permitted by Section 6.16(b)(v) hereof to be expended by Investors - North America in connection with the Bridgepoint Property (as defined in Section 6.16(b)(v) hereof) shall be excluded when testing compliance with this Section 6.19." 3. Conditions Precedent. Section 2 of this Agreement shall not become effective unless and until the Company has furnished, or caused to be furnished, to the Agent, with sufficient copies for each Lender, the following: (i) A consent from FIC, in the form of Exhibit A to this Amendment. (ii) Copies, certified by the Secretary or Assistant Secretary of the Company, of its Board of Directors resolutions authorizing the execution of this Agreement. (iii) An incumbency certificate, executed by the Secretary or Assistant Secretary of the Company, which shall identify by name and title and bear the signature of the officers of the Company authorized to sign this Agreement, upon which certificate each Lender shall be entitled to rely until informed of any change in writing by the Company. 4. Representation and Warranty. The Company hereby represents and warrants to the Lenders that after giving effect to the amendment herein contained (i) all of the representations and warranties contained in the Credit Agreement are true and correct as of the date hereof, (ii) no Default or Unmatured Default exists or is continuing and (iii) the Company has performed all the agreements on its part to be performed prior to the date hereof as set forth in the Credit Agreement. 5. Effectiveness of Amendment. This Agreement shall become effective as of the date first above written provided that all of the conditions precedent set forth in Section 3 of this Agreement are satisfied and upon receipt by the Agent of counterparts of this Agreement duly executed by the Company and the Required Lenders. 6. Reference to and Effect on the Credit Agreement. a. Upon the effectiveness of Section 2 hereof, on or after the date hereof each reference in the Credit Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of like import and each reference to the Credit Agreement in the Notes and all other documents (the "Loan Documents") delivered in connection with the Credit Agreement shall mean and be a reference to the Credit Agreement as amended hereby. b. Except as specifically amended above, all of the terms, conditions and covenants of the Credit Agreement and all other Loan Documents shall remain unaltered and in full force and effect and shall continue to be binding upon the Company in all respects and are hereby ratified and confirmed. c. The execution, delivery and effectiveness of this Agreement shall not, except as expressly provided herein, operate as a waiver of (i) any right, power or remedy of the Lenders or the Agent under the Credit Agreement or any of the Loan Documents, or (ii) any Default or Unmatured Default under the Credit Agreement. 7. Costs, Expenses and Taxes. The Company agrees to pay on demand all costs and expenses of the Agent in connection with the preparation, execution and delivery of this Agreement, including the reasonable fees and out-of-pocket expenses of counsel for the Agent with respect thereto. 8. CHOICE OF LAW. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS (AND NOT THE LAW OF CONFLICTS) OF THE STATE OF ILLINOIS, BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS. 9. Execution in Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. IN WITNESS WHEREOF, the Company, the undersigned Lenders and the Agent have executed this Agreement as of the date first above written. INTERCONTINENTAL LIFE CORPORATION By: /s/ Roy F. Mitte Title: President THE FIRST NATIONAL BANK OF CHICAGO, Individually and as Agent By: /s/ Paul T. Schultz Title: Vice President BARCLAYS BANK, PLC By: /s/ Chris Cathcart Title: Vice President FIRST UNION NATIONAL BANK OF NORTH CAROLINA By: /s/ Jill A. White Title: Vice President FLEET NATIONAL BANK OF CONNECTICUT By: /s/ James H. Steane Title: Senior Vice President CORESTATES PHILADELPHIA NATIONAL BANK N.A. By: /s/ Kathleen M. Petrelli Title: Assistant Vice President EXHIBIT A CONSENT OF GUARANTOR Financial Industries Corporation, as guarantor under the Amended and Restated Guaranty dated January 29, 1993 (the "Guaranty") in favor of the Lenders party to the Amended and Restated Credit Agreement dated as of January 29, 1993 (as amended, the "Credit Agreement") hereby consents to the Amendment Agreement dated as of December 15, 1995 and hereby confirms and agrees that the Guaranty is, and shall continue to be, in full force and effect and is hereby confirmed and ratified in all respects. This Consent is executed and delivered as of December 15, 1995. FINANCIAL INDUSTRIES CORPORATION By: Title: EX-10 4 EXHIBIT 10(aaz) AGREEMENT OF SALE by and between OMNI CONGRESS JOINT VENTURE AS BUYER and INVESTORS LIFE INSURANCE COMPANY OF NORTH AMERICA AS SELLER September 5, 1995 TABLE OF CONTENTS 1. Purchase and Sale . . . . . . . . . . . . . . . . . . . . 5 2. Consideration . . . . . . . . . . . . . . . . . . . . . . 6 3. Documents and Deliveries at Closing; By Seller . . . . . . 6 4. Documents and deliveries at Closing; By Buyer . . . . . . 8 5. New Leases . . . . . . . . . . . . . . . . . . . . . . . 9 6a. Seller's Documents and Title Commitment to be Made Available . . . . . . . . . . . . . . . . . . . . . . . 9 6b. Delivery of Survey and Estoppel Certificates . . . . . . . . . . . . . . . . 10 7. Closing Expenses . . . . . . . . . . . . . . . . . . . . 10 8. Conditions to Obligations of Buyer . . . . . . . . . . . 11 9. Conditions to Obligations of Seller . . . . . . . . . . 12 10. Casualty to Property . . . . . . . . . . . . . . . . . . 12 11. Condemnation . . . . . . . . . . . . . . . . . . . . . . 14 12. Real Estate Broker . . . . . . . . . . . . . . . . . . . 14 13. Closing . . . . . . . . . . . . . . . . . . . . . . . . 15 14. Apportionments and Additional Payments . . . . . . . . . 15 15. Past Due Rents and Past Due Accounts . . . . . . . . . . 17 16. Inspection of the Property . . . . . . . . . . . . . . . 18 17a. Covenants of Seller . . . . . . . . . . . . . . . . . . 20 17b. Covenants of Buyer . . . . . . . . . . . . . . . . . . . 23 18a. Seller's Representations and Warranties . . . . . . . . 23 (a) Existing Leases . . . . . . . . . . . . . . . . . . 23 (b) Certificate of Occupancy, Law and Ordinances, Condemnation and Zoning . . . . . . . . . . . . . 24 (c) Operating Statements . . . . . . . . . . . . . . . 24 (d) Restrictions and Easements . . . . . . . . . . . . 25 (e) Service Contracts . . . . . . . . . . . . . . . . . 25 (f) Construction Contracts . . . . . . . . . . . . . . 25 (g) Licenses and Permits . . . . . . . . . . . . . . . 25 (h) Warranties and Guaranties . . . . . . . . . . . . . 26 (i) Trade Materials . . . . . . . . . . . . . . . . . . 26 (j) Legal Proceedings and Bankruptcy . . . . . . . . . 26 (k) FIRPTA . . . . . . . . . . . . . . . . . . . . . . 26 (l) Authority, Actions of Seller, Authorization and Consents . . . . . . . . . . . . . . . . . . . 26 18b. Buyer's Representations and Warranties . . . . . . . . . 27 19. Safe Deposit Boxes . . . . . . . . . . . . . . . . . . . 28 20. Baggage Inventory . . . . . . . . . . . . . . . . . . . 29 21. Indemnity and Survival . . . . . . . . . . . . . . . . . 30 22. Deposit . . . . . . . . . . . . . . . . . . . . . . . . 30 23. Termination, Default and Remedies . . . . . . . . . . . 30 24. Assignment . . . . . . . . . . . . . . . . . . . . . . . 32 25. Supplemental Documents . . . . . . . . . . . . . . . . . 32 26. Definitions . . . . . . . . . . . . . . . . . . . . . . 32 27. Notices . . . . . . . . . . . . . . . . . . . . . . . . 35 28. Section Headings . . . . . . . . . . . . . . . . . . . . 36 29. Entire Contract . . . . . . . . . . . . . . . . . . . . 36 30. Invalid Provisions . . . . . . . . . . . . . . . . . . . 36 31. Construction . . . . . . . . . . . . . . . . . . . . . . 36 32. Covenant Not to Record . . . . . . . . . . . . . . . . . 37 33. Choice of Law . . . . . . . . . . . . . . . . . . . . . 37 34. Binding Effect . . . . . . . . . . . . . . . . . . . . . 37 35. Counterparts and Copies . . . . . . . . . . . . . . . . 37 36. Effective Date . . . . . . . . . . . . . . . . . . . . . 37 Exhibits and Schedules Exhibit "A" - Metes and Bounds Description of Land Exhibit "B" - Tangible Personal Property Exhibit "C-1" - Office Leases Exhibit "C-2" - Residential Leases Exhibit "C-3" - EntelCom Leases Exhibit "D" - Permitted Exceptions Exhibit "E" - Form of Special Warranty Deed Exhibit "F" - Form of Assignment and Assumption of Leases Exhibit "G" - Form of Bill of Sale Exhibit "H" - Form of Assignment and Assumption of Contracts and Saint David's Lease Exhibit "I" - Form of Assignment and Assumption of Licenses and Permits Exhibit "J" - Form of Assignment and Assumption of Warranties and Guaranties Exhibit "K-1" - Form of Notice Letter to Office and Residential Tenants Exhibit "K-2" - Form of Notice Letter to Managers Exhibit "K-3" - Form of Notice Letter to Saint David's Lease Landlord Exhibit "L" - Form of Certificate of Corporate Officers and Resolution of Seller Exhibit "M" - Form of Estoppel Certificate Exhibit "N" - Description of EntelCom System Exhibit "O" - Registration Agreement, Confidentiality Agreement - Principal and Confidentiality Agreement - Agent dated June 1, 1995 Schedule "1" - Rent Roll Schedule "2" - Matters pertaining to Existing Leases Schedule "3" - Certificate of Occupancy Schedule "4" - Schedule of Service Contracts Schedule "5" - Schedule of Construction Contracts Schedule "6" - Schedule of Licenses and Permits Schedule "7" - Schedule of Warranties and Guaranties Schedule "8" - Schedule of Trade Materials Schedule "9" - Schedule of Legal Proceedings Schedule "10" - Schedule of Advertising Contracts and Contracts for Billboard Space AGREEMENT OF SALE THIS AGREEMENT OF SALE (this "Agreement") is made as of the Effective Date (as defined in Section 36 hereof) between INVESTORS LIFE INSURANCE COMPANY OF NORTH AMERICA, a Washington corporation ("Seller"), and OMNI CONGRESS JOINT VENTURE, a Texas joint venture ("Buyer"). RECITALS: 1. Seller owns a certain parcel of real estate situated in the City of Austin, Travis County, Texas, as more particularly described on Exhibit "A" attached hereto (the "Land"). 2. The Land is improved with a multi-use complex (the "Improvements") known as "Austin Centre", comprised of: (a) a central atrium, an office tower and ground level retail space with approximately 343,664 square feet of rentable space, an underground parking garage with approximately 654 parking spaces and common areas located in the atrium (the atrium, office tower and retail space, underground parking garage and the common areas being herein called the "Office Center"); (b) a hotel tower with approximately 314 rooms commonly known as the "Omni Austin Hotel" (the "Hotel"); (c) approximately 59,875 square feet of residential rentable space located in the air space directly above the Hotel, which is subject to residential leases (the "Residential Space"); and (d) all other buildings, structures, machinery and improvements located on the Land, including, but not limited to, any and all, if any, mechanical, electrical, heating, air-conditioning, plumbing, sprinkler, lighting, ventilating and cooling system, together with their respective appurtenant gas and electric ranges, refrigerators, engines, motors, generators, pipes, wiring and other apparatus, and all lighting fixtures, doors, cabinets, partitions, elevators, electric motors and pumps appurtenant to, and used in connection with the above described Office Center, Hotel and/or Residential Space. 3. Seller has agreed to sell and assign, or cause to be sold and assigned, to Buyer, and Buyer has agreed to purchase and take from Seller, the Land and the Improvements together with: (a) any and all of Seller's right, title and interest in and to all furniture, furnishings, working supplies and articles of personal property constructed, erected, affixed to, attached to, installed or placed in or upon and used in connection with the occupancy and operation of the Property (as hereinafter defined), including, but not limited to, any and all, if any, office furniture and equipment, partitions, vaults, safes, electrical, fire prevention and extinguishing equipment, radio, television and public address and amplifying systems, equipment, parts and supplies, chairs, tables, beds, bedsprings, mattresses, couches, lamps, waste baskets, desks, silverware, utensils, table and bed linen, towels, blankets, dishes, glassware, mirrors, carpets, rugs and other floor coverings, curtains, draperies, pictures, radio and television sets, stationery and office supplies, pianos, and all musical instruments, bars and bar equipment, kitchen utensils, and other furniture and furnishings for all lobbies, ballrooms, dining rooms, bedrooms, guest rooms, baths and other private and public rooms, and the furniture, typewriters, furnishings, equipment, tools, materials and supplies in all storerooms and offices, (collectively, the "Tangible Personal Property"), (a list which sets forth substantially all of such Tangible Personal Property is attached hereto as Exhibit "B"); provided, however, that Seller and its affiliated companies are Tenants (as hereinafter defined) and, therefore, "Tangible Personal Property" does not include, and Seller is not selling to Buyer, any personal property of Seller and its affiliated companies located on the Property that is not being used primarily in connection with the operation or management of the Property, including, without limitation, all personal property on the 12th, 13th and 14th floors of the Office Center; (b) any and all of Seller's right, title and interest in and to all leases, rental agreements, subleases, underleases or agreements with respect to the Property and/or use and occupancy thereof, together with any and all, if any, guaranties, security deposits, or other security for performance of a tenant's obligations thereunder, and all Amendments (as hereinafter defined) and/or other agreements forming a part thereof affecting or pertaining to the performance of the transactions or carrying on of the business contemplated herein, including but not limited to, the sale of alcoholic beverages in or on the Property (collectively, the "Leases"), including, but not limited to, (i) the leases set forth and described on Exhibit "C-1" attached hereto (the "Office Leases"), (ii) the leases set forth and described in Exhibit "C-2" attached hereto (the "Residential Leases"), (iii) the room, ballroom, banquet, convention and other types of use and/or rental agreements made in connection with the Hotel (the "Hotel Leases"), (iv) the leases and/or use agreements to Tenants (as hereinafter defined) and the Hotel for such Tenants' and the Hotel's use of the EntelCom System (as hereinafter defined), which leases and agreements are listed on Exhibit "C-3" attached hereto (the "EntelCom Leases") and (v) that certain lease agreement (which Seller shall cause FIC Realty to assign to Buyer or Buyer's designee), dated September 30, 1994, between FIC Realty Services, Inc., a Texas corporation ("FIC Realty"), as lessor, and Atrium Beverage Corporation, a Texas corporation, as lessee, covering the leasing of space in the Property to sell alcoholic beverages by Atrium Beverage Corporation (the "Atrium Beverage Lease"); (c) any and all of Seller's right, title and interest in and to (i) security deposits and/or prepaid rentals taken from any Tenant under any Office Lease or Residential Lease (the "Security Deposits"), and (ii) deposits taken from any guests, groups, conventions or others, and any other amounts prepaid in connection with services to be rendered on or after the Closing Date (as hereinafter defined) now in the possession of Seller or Omni Hotel (as hereinafter defined) or hereinafter received by Seller or Omni Hotel in connection with the running and operations of the Hotel (the "Reservation Deposits"); (d) any and all of Seller's right, title and interest in and to any and all, if any, agreements, and all Amendments thereof, for construction work, materials or equipment or for architectural services, professional engineering services or other services, which entitles the Person (as hereinafter defined) furnishing the same to file a lien against the Property and which has a term expiring after the Closing Date (as hereinafter defined) or under which any amount remains due and owing to the applicable Person (collectively the "Construction Contracts"); (e) any and all of Seller's right, title and interest in and to all contracts or agreements (other than the Construction Contracts), and Amendments thereof, for the furnishing of management, maintenance, repairs, supplies, equipment or other services to the Property, including, but not limited to, the equipment leases for the EntelCom System (other than the EntelCom Leases), which have a term expiring after the Closing Date (collectively, the "Service Contracts"), including, but not limited to, (i) that certain management agreement (the "FIC Management Agreement") dated September 4, 1991 between Seller and FIC Property Management, Inc., a Texas corporation ("FIC Management"), (ii) that certain hotel management agreement (the "Omni Hotel Agreement") dated May 6, 1992 between FIC Realty and Omni Hotels Management Corporation, a Delaware corporation ("Omni Hotel"), (which Seller shall cause FIC Realty to assign to Buyer), (iii) that certain parking management agreement (the "Central Parking Agreement") dated March 1, 1991 between Texas AP, Inc., Seller's predecessor in title, and Central Parking System of Texas, Inc. ("Central Parking") and (iv) that certain management agreement (the "Atrium Beverage Agreement") dated September 30, 1994 between HCD Austin Corporation, as agent for FIC Realty d/b/a Omni Austin Hotel and Atrium Beverage Corporation, which Seller shall cause FIC Realty to assign to Buyer or Buyer's designee, (FIC Management, FIC Realty, Omni Hotel, and Central Parking are hereinafter collectively referred to as the "Managers"); provided, however, that "Service Contracts" do not include the MCI Corporate Service Plan Agreement between Seller and MCI Telecommunications Corporation ("MCI") dated on or about March 31, 1994 (the "MCI Agreement") whereby MCI provides long-distance telecommunication services to Seller, its affiliates, Tenants of the Office Center and guests and employees of the Hotel (Seller is prohibited by the MCI Agreement from disclosing the financial provisions of the MCI Agreement to Buyer or any other third party); (f) any and all of Seller's right, title and interest in and to any and all, if any, building and other permits, certificates, licenses, franchises, authorizations and approvals granted by any Government Entity (as hereinafter defined) necessary or useful in connection with the Property and/or the operation of the Improvements or any part thereof (the "Licenses and Permits"), excluding all liquor licenses affecting or in use in any part of the Property, which enable liquor and alcoholic beverages to be sold and dispensed in certain portions of the Property (the "Liquor Licenses"), but including, but not limited to, that certain License Agreement (herein so called) dated May 6, 1986, and recorded in Volume 9824, Page 225 of the Real Property Records of Travis County, Texas; (g) all of the outstanding capital stock of Atrium Beverage Corporation (the holder of the Liquor Licenses) currently owned by FIC Realty, which Seller shall cause to be assigned to Buyer or Buyer's designee upon receipt of the necessary regulatory approvals on or after the Closing Date; (h) all goodwill owned by Seller related to the operation of the Property, including, without limitation any and all of Seller's right, title and interest in and to (i) the telephone numbers and listings of the Office Center and/or Hotel, (ii) any and all, if any, trade names, trademarks, service marks, logos and all copyrights used exclusively in connection with the Property or any portion thereof, except those belonging specifically to Omni Hotel or its affiliates or any Tenants, and (iii) any and all, if any, video tapes, films, brochures and other advertising and promotion materials of any kind or nature owned by Seller and used in connection with the advertising of the Property or any portion thereof (collectively the "Trade Materials"); (i) all books, records, Tenant, guest and customer lists for the Office Center, Residential Space and/or Hotel owned by Seller and in possession of Seller or any of the Managers together with any and all files, reports, surveys, studies, projections, budgets and strategic plans prepared for Seller in connection solely with the operation, maintenance or management of the Property or any portion thereof and in possession of Seller or any of the Managers (the "Books and Records"); (j) any and all of Seller's right, title and interest in and to any and all, if any, architects' and engineers' drawings, plans, specifications, models and work product, studies, surveys and other materials developed in connection with the construction, repair and maintenance of the Property or any portion thereof owned by Seller and in the possession of Seller or any of the Managers (the "Plans"); (k) any and all of Seller's right, title and interest in and to any and all, if any, unexpired warranties and guaranties and payment and/or performance bonds provided in connection with any work or services provided under the Construction Contracts, Service Contracts or otherwise in connection with the construction and/or operation of the Property (collectively, the "Warranties and Guaranties"); (l) any and all of Seller's right, title and interest in and to that certain parking lease agreement (the "Saint David's Lease"), dated April 1, 1992 between Protestant Episcopal Church Council of the Diocese of Texas and St. David's Episcopal Church, collectively as landlord (the "Saint David's Landlord"), and Seller, as tenant, providing for additional parking space for the use of the Property; and (m) all meat, fish and poultry inventories on hand at, and other food and non-alcoholic beverage inventories at, and for use at, the Property and owned by Seller at 12:01 a.m. on the Closing Date (the "Consumables"). 4. The Land, the Improvements, the Tangible Personal Property, the Leases, the Security Deposits, the Reservation Deposits, the Construction Contracts, the Service Contracts, the Licenses and Permits, the Trade Materials, the Books and Records, the Plans, the Warranties and Guaranties, the Saint David's Lease and the Consumables are sometimes referred to collectively as the "Property". NOW THEREFORE, in consideration of the premises, and for other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, and intending to be legally bound hereby, Seller and Buyer covenant and agree as follows: 1. Purchase and Sale. Seller shall, on the Closing Date, sell, grant, convey, assign, transfer and deliver the Property to Buyer, and Buyer agrees to purchase, acquire and accept the Property from Seller subject to only those Encumbrances (as hereinafter defined) listed on Exhibit "D" attached hereto (the "Permitted Exceptions"); provided, however, nothing contained in this Section shall affect Buyer's right to review and assert objections to the matters set forth on Exhibit "D" and in the Title Commitment (as hereinafter defined) during the Due Diligence Review (as hereinafter defined). 2. Consideration. Buyer will purchase the Property and pay therefor the sum of Sixty-Two Million Six Hundred and Seventy-Five Thousand and No/100 Dollars ($62,675,000.00) (the "Purchase Price"), in lawful currency of the United States of America, as follows: (a) A Five Hundred Thousand and No/100 Dollars ($500,000.00) earnest money deposit (the "Deposit") in cash, wire transfer, or by cashier's or certified check, to be delivered on September 5, 1995 to Heritage Title Company of Austin, Inc. (the "Title Company"), as Escrow Agent, who shall hold and disburse the Deposit in accordance with the provisions of Section 22 of this Agreement. (b) The Balance (herein so called), in cash or by cashier's or certified check, or by federal funds wire, subject to closing apportionment adjustments as hereinafter set forth, payable on the Closing Date. 3. Documents and Deliveries at Closing; By Seller. At the time and place of Closing (as hereinafter defined), upon payment in full of the Purchase Price and satisfaction of all of Buyer's obligations under this Agreement, Seller shall: (a) Convey and deliver title to the Land and the Improvements by Special Warranty Deed (herein so called) to Buyer, in form substantially as that set forth in Exhibit "E" attached hereto, duly executed and acknowledged by Seller. (b) Assign and deliver to Buyer any and all of Seller's right, title and interest in and to the Leases, together with any Security Deposits, Reservation Deposits and advances and prepayments paid by the Tenants in connection therewith, by an Assignment and Assumption of Leases (herein so called), in form substantially as that set forth in Exhibit "F" attached hereto, duly executed and acknowledged by Seller. (c) Assign and deliver to Buyer any and all of Seller's right, title and interest in and to all Tangible Personal Property, Trade Materials, Books and Records, the Plans and the Consumables by a Bill of Sale (herein so called), in form substantially as that set forth in Exhibit "G" attached hereto, duly executed and acknowledged by Seller. (d) Assign and deliver to Buyer any and all of Seller's right, title and interest in and to the Construction Contracts and the Service Contracts (hereinafter collectively referred to as the "Contracts") (other than such of the Contracts which by their own terms have terminated prior to or at the Closing), and the Saint David's Lease by an Assignment and Assumption of Contracts and Saint David's Lease (herein so called), in form substantially as that set forth in Exhibit "H" attached hereto, duly executed and acknowledged by Seller. (e) To the extent assignable, assign and deliver to Buyer any and all of Seller's right, title and interest in and to the Licenses and Permits, excluding the Liquor Licenses, by an Assignment and Assumption of Licenses and Permits (herein so called), in form substantially as that set forth in Exhibit "I" attached hereto, duly executed and acknowledged by Seller. (f) Cause FIC Realty to assign and transfer to Buyer or Buyer's designee all of the outstanding capital stock of Atrium Beverage Corporation. (g) To the extent assignable, assign and deliver to Buyer any and all of Seller's right, title and interest in and to the Warranties and Guaranties by an Assignment and Assumption of Warranties and Guaranties (herein so called), in form substantially as that set forth in Exhibit "J" attached hereto, duly executed and acknowledged by Seller. (h) Deliver to Buyer Notice Letters (herein so called) originally executed by Seller and individually addressed to (i) each Tenant under an Office Lease, Residential Lease or EntelCom Lease, in form substantially as that set forth in Exhibit "K-1", attached hereto, (ii) each Manager, in form substantially as that set forth in Exhibit "K-2" attached hereto, and (iii) the landlord under the Saint David's Lease, in form substantially as that set forth in Exhibit "K-3" attached hereto. (i) Deliver to Buyer a certificate of the corporate secretary of Seller attaching to it, inter alia, a true copy of the minutes of the board of directors of Seller evidencing then currently effective action by such board, in form substantially as that set forth in Exhibit "L" attached hereto. (j) Deliver to Buyer copies of all ad valorem tax statements for the Property for the calendar year of the Closing, if available and if not previously presented to Buyer. (k) In respect of the amount of all Security Deposits and Reservations Deposits and all other sums due Buyer under the apportionments described in Section 14 hereof, deliver to Buyer either (x) a cashier's or certified check in good and immediately available funds or (y) a credit against the Balance. (l) Deliver to Buyer the originals of the Leases, the Saint David's Lease and the Contracts, and, if available, copies of the Licenses and Permits and the Warranties and Guaranties. (m) Deliver to Buyer the Books and Records in Seller's possession together with the originals and/or copies of all Plans in Seller's possession. (n) Deliver to Buyer an affidavit originally executed by Seller to the effect that Seller is not a foreign person for purposes of 26 U.S.C. 1445(b)(2). (o) Deliver to Buyer possession of the Property, subject to the rights of Tenants in possession of the Property under written leases or other occupancy agreements, in writing, delivered and assigned to Buyer at Closing, together with all keys and passcards to the Property. (p) Deliver to Buyer any other documents or items required to be delivered by Seller to Buyer under the terms of this Agreement. The documents described in this Section 3 are hereinafter collectively referred to as the "Seller's Closing Documents". 4. Documents and Deliveries at Closing; By Buyer. At the time and place of Closing (as hereinafter defined), Buyer shall: (a) Execute and deliver to Seller the documents listed in Sections 3(a)-(g) and such other documents as may be necessary to effect as of the Closing Date an assumption by Buyer of all obligations of Seller under the Contracts, the Leases, the Licenses and Permits, the Warranties and Guaranties, the Saint David's Lease, all obligations with respect to the Security Deposits and Reservation Deposits, and all other obligations or liabilities of Seller or the Property to be assumed by Buyer pursuant to the terms of this Agreement. In addition, Buyer shall use its reasonable best efforts to obtain releases of Seller from all such obligations referred to in the preceding sentence. To the extent that Buyer is unable to obtain such releases, Buyer shall indemnify and hold Seller harmless of and from all such obligations, including all costs, expenses and attorney fees incurred by Seller in connection therewith. (b) Deliver to Seller such documents as Seller may reasonably require that evidence the organization, formation, and authority of Buyer. (c) Deliver to Seller the Balance. The documents described in this Section 4 are hereinafter collectively referred to as the "Buyer's Closing Documents." 5. New Leases. During the Inspection Period (as hereinafter defined), Seller shall have the right, without the consent of Buyer, to enter into new leases covering space located in the Property ("New Leases") as long as any such New Lease provides for (i) a market rental rate for comparable space, (ii) a term not to exceed five (5) years, (iii) a leasing commission not to exceed four percent (4%) of gross rents for the lease term, and (iv) a tenant finish allowance not to exceed $17.50 per square foot contained in the leased premises. Any New Lease not meeting the foregoing criteria must be approved by Buyer. Buyer, at the Closing, shall reimburse Seller for all tenant concession expenses (including without limitation all finish out expenses and tenant relocation expenses), all brokerage commissions and all architectural and space planning expenses with respect to any New Lease meeting the criteria described above and any New Lease approved by Buyer pursuant to Section 17a(c) paid by Seller prior to Closing, and such New Lease shall become part of the Leases assigned to, and assumed by, Buyer at Closing. 6a. Seller's Documents and Title Commitment to be Made Available. On or before the close of business on the date that is five (5) business days following the Effective Date of this Agreement (the "Delivery Date"), Seller shall deliver to Buyer Exhibits "B", "C-1", "C-2", and "C-3" and Schedules "1" through "10" and shall deliver to Buyer or make available at the Property copies of the documents referred to in the Exhibits and Schedules and copies of the following documents and information: A. Seller's existing as-built survey for improvements (buildings, parking, utilities, etc.) B. All fire, hazard, liability, and other insurance policies held by Seller on the Property. C. All of the most recent real estate and personal property tax statements with respect to the Property. D. All environmental, structural, and mechanical evaluations, reports, or studies performed on the Property in the past twenty four months. E. The "as built" plans and specifications with respect to the Property, if available. F. Information on utility and repair expenses incurred by Seller for operations of the Property for each month for the preceding two years. G. A commitment for Title Insurance (the "Title Commitment") issued by the Title Company, together with a copy of any and all instruments creating any exceptions listed in the Title Commitment. In addition, Seller shall make available at the Property any and all other written material concerning the Property and its ownership, condition, operation and maintenance, as well as all financial records of the operation of all the assets of the Property. 6b. Delivery of Survey and Estoppel Certificates. Within twenty (20) days from the Effective Date of this Agreement, Seller, at Seller's sole cost and expense, shall provide to Buyer an updated on the ground survey (the "Survey") of the Property dated after the Effective Date, prepared by Donald J. Kirby, a Registered Professional Land Surveyor No. 2508, or such other licensed professional engineer or surveyor acceptable to Seller, Buyer and Title Company. The Survey shall be in a form acceptable to the Title Company to modify the survey exception in the Title Policy to read only "shortages in area". At least five (5) business days prior to the last day of the Inspection Period (as hereinafter defined) Seller shall deliver to Buyer Estoppel Certificates (herein so called), in form substantially as that set forth in Exhibit "M" attached hereto, originally executed by at least 75% of the Tenants under the Office Leases (collectively the "Estoppel Certificates"). To the extent any Tenants do not execute and deliver an Estoppel Certificate, Seller shall execute and deliver to Buyer an Estoppel Certificate with respect to such Tenants substantially in the form of Exhibit M. 7. Closing Expenses. Seller shall pay the cost of the Survey, the premium for the Title Policy (as hereinafter defined) (provided, Buyer shall pay any additional premium to modify the survey exception to read only "shortages in area") and Seller's attorney's fees. Buyer shall pay the cost of recording the applicable Seller's Closing Documents, the additional premium for modifying the survey exception in the Title Policy to read only "shortages in area", if Buyer elects to have that exception so modified, and Buyer's attorneys' fees. Except as provided in Section 14 below, all other costs in connection with the Closing shall be paid by the party incurring such cost. 8. Conditions to Obligations of Buyer. The obligations of Buyer to perform Buyer's obligations under this Agreement are and shall be subject to the satisfaction of each of the following conditions at or prior to the Closing: (a) Seller shall have executed (where applicable) and delivered the Seller's Closing Documents to be executed and delivered by Seller. (b) Seller, at Seller's sole cost and expense, shall provide to Buyer at Closing an Owner's Policy of Title Insurance issued by the Title Company in the amount of $62,675,000.00 (the "Title Policy"), insuring good and indefeasible title to the Property in Buyer, free and clear of all restrictions, easements, encumbrances and liens except for the Permitted Exceptions. (c) All of the representations and warranties of Seller contained in this Agreement shall have been true and correct when made in all material respects and (after giving effect to the revised Schedules, if any, furnished to Buyer by Seller at the Closing), shall be true and correct on the Closing Date in all material respects with the same effect as if made on and as of such date. (d) Seller shall have performed, observed and complied with all covenants, agreements and conditions required by this Agreement to be performed, observed and complied with on its part prior to or as of the Closing hereunder in all material respects. (e) To the extent that any of the approvals, consents, authorizations, licenses or permits of the Texas Alcoholic Beverage Commission have not been received by Buyer or Buyer's designee at or prior to the Closing, the assignment of the Atrium Beverage Lease and Atrium Beverage Agreement and the transfer of all of the outstanding capital stock of Atrium Beverage Corporation to Buyer or Buyer's designee shall be postponed until such time after the Closing as such approvals, consents, authorizations, licenses or permits have been received by Buyer or Buyer's designee. (f) The FIC Management Agreement and Hotel Lease Agreement dated August 22, 1991 between Seller, as lessor, and FIC Realty, as lessee, shall have been terminated as of the Closing Date. 9. Conditions to Obligations of Seller. The obligations of Seller to perform Seller's obligations under this Agreement are and shall be subject to the satisfaction of each of the following conditions at or prior to the Closing: (a) Buyer shall have executed (where applicable) and delivered the Buyer's Closing Documents to be executed and delivered by Buyer. (b) All of the representations and warranties of Buyer contained in this Agreement shall have been true and correct in all material respects when made, and shall be true and correct in all material respects on the Closing Date with the same effect as if made on and as of such date. (c) Buyer shall have performed, observed and complied with all covenants, agreements and conditions required by this Agreement to be performed, observed and complied with on its part prior to or as of the Closing hereunder. 10. Casualty to Property. Promptly after the occurrence of any fire or other casualty affecting the Property or any portion thereof occurring between the date hereof and the Closing Date (the "Casualty"), Seller shall give Buyer written notice thereof (the "Casualty Notice"), which Casualty Notice shall state the type, location and amount of damage to the Property. (a) If prior to the Closing such a Casualty shall occur and the cost to complete repairs necessitated by such Casualty shall equal $500,000 or more, then in any such event, Buyer or Seller may at its sole option terminate this Agreement by written notice to the other party (the "Casualty Termination Notice") within twenty (20) days after the giving of the Casualty Notice (provided, however, if the Closing is scheduled for a date which is less than 20 days after the giving of the Casualty Notice, the Closing shall be adjourned until 20 days after the giving of the Casualty Notice). In the event either party gives the Casualty Notice, the Deposit, together with all interest earned thereon, shall be returned to Buyer, this Agreement shall be null and void and neither party shall have any further liability or obligations to the other (other than the obligation of Buyer to keep confidential all documents and other material furnished to Buyer pursuant to the transactions contemplated by this Agreement and the indemnity obligation owed by Buyer to Seller in connection with Buyer's Due Diligence Review, as provided in Section 16 hereof). If neither Buyer nor Seller elects to terminate this Agreement, then the Closing shall take place as provided herein without abatement of the Purchase Price, and at the Closing there shall be assigned to Buyer all of Seller's rights, titles and interests in and to any insurance proceeds covering such Casualty and Seller shall pay to Buyer the lesser of (x) the actual cost to complete repairs necessitated by such Casualty less the amount of the insurance proceeds or (y) the cash amount of the deductible under the property insurance carried by Seller. (b) If prior to the Closing such a Casualty shall occur and the cost to complete repairs necessitated by such Casualty shall be less than $500,000, then, in any such event, Buyer shall have no right to terminate its obligations under this Agreement, but Seller shall be obligated to restore the Property to substantially the condition as existed prior to such Casualty. Under such circumstances, the Closing shall be postponed to a date no later than ten (10) days after such restoration shall have been substantially completed (substantial completion shall mean: (i) final completion (excluding completion and correction of all "punch list" items) of such repair, free of any liens, so that the Property is restored to as good or better condition as existed on the date of this Agreement, as approved by Buyer, which approval shall not be unreasonably withheld or delayed; (ii) that all approvals and permits required by the City of Austin or any other political subdivision or agency thereof in connection with the repair have been obtained; and (iii) any interruption or impairment of services or function caused by the Casualty or the repair work have been cured). Should such restoration not be substantially completed six (6) months after the occurrence of such Casualty, Buyer may at its sole option terminate this Agreement by delivering a Casualty Termination Notice to Seller, in which event the Deposit, together with all interest earned thereon, shall be returned to Buyer, this Agreement shall be null and void and neither party shall have any further liability or obligations to the other (other than the obligation of Buyer to keep confidential all documents and other material furnished to Buyer pursuant to the transactions contemplated by this Agreement and the indemnity obligation owed by Buyer to Seller in connection with Buyer's Due Diligence Review, as provided in Section 16 hereof). Notwithstanding the foregoing, in the event Buyer's loan commitment allows Buyer's proposed lender to terminate the loan commitment as a result of any such Casualty, Buyer shall use its best efforts to obtain an extension of such commitment, but if Buyer is not successful in obtaining such extension, Buyer shall have the right to terminate this Agreement by written notice to Seller within thirty (30) days after the giving of the Casualty Notice and have the Deposit returned to Buyer. 11. Condemnation. In the event of any taking of all or any part of the Property by eminent domain proceedings or the commencement of any such proceedings from the date hereof to Closing, Seller shall promptly give Buyer written notice of such proceeding stating the amount, type and location of such taking or proposed taking and Buyer shall proceed as follows: (a) Should any portion of the Improvements be condemned, Buyer shall be permitted to terminate this Agreement by written notice to that effect to Seller on or before the date fixed for Closing, and the Deposit and interest earned thereon shall be returned to Buyer. Thereafter, this Agreement shall become null and void and neither party shall have any other liability or obligation to the other (other than the obligations of Buyer to keep confidential all documents and other material furnished to Buyer pursuant to the transactions contemplated by this Agreement and the indemnity obligation owed by Buyer to Seller in connection with Buyer's Due Diligence Review, as provided in Section 16 hereof). (b) If only a portion of the Property (not comprising any portion of the Improvements) is condemned, and the same would not materially interfere with the present use thereof, Buyer will be liable and obligated to take title to the remaining portion of the Property without abatement of the Purchase Price, in which event Seller shall assign to Buyer all of Seller's right, title and interest in and to any award resulting from such condemnation. 12. Real Estate Brokers. Seller shall pay to CB Commercial Real Estate Group, Inc. ("Broker") any and all commissions, fees, or other amounts owed to Broker in connection with the sale of the Property pursuant to a separate agreement between Seller and Broker. Seller shall pay to Omni Commercial Realty Advisors, Inc. a commission of $300,000 and FIC Realty a commission of two- tenths of one percent (0.2%) of the net sales price. Seller shall defend, indemnify, and hold harmless, Buyer from any claim by any party claiming under Seller for any brokerage, commission, finder's or other fees relative to this Agreement or the sale of the Property, and any court costs, attorneys' fees, or other costs or expenses arising therefrom, and alleged to be due by authorization of Seller. Buyer shall defend, indemnify, and hold harmless Seller from any claim by any party claiming under Buyer for any brokerage, commission, finder's, or other fees relative to this Agreement or the sale of the Property, and any court costs, attorneys' fees, or other costs or expenses arising therefrom, and alleged to be due by authorization of Buyer. Notwithstanding anything contained in this Agreement to the contrary, the terms of this Section 12 shall survive the Closing or earlier termination of this Agreement. 13. Closing. Consummation of the transactions contemplated by this Agreement (the "Closing") shall be held on the first business day (the "Closing Date") that is ten (10) days after the earlier of (i) the date on which Buyer notifies Seller that it has obtained the third party financing to purchase the Property or (ii) the end of the Financing Feasibility Period as described in Section 16(c), subject to any extension required by Section 10 hereof. The Closing shall be held at 10:00 a.m. Austin, Texas time at a location in the City of Austin, Texas to be agreed upon. Seller and Buyer may mutually agree in writing upon an earlier or later date for the Closing. 14. Apportionments and Additional Payments. The following apportionments and payments are to be made as of the Closing Date: (a) Real property taxes, assessments (including without limitation assessments made by the Austin Downtown Public Improvement District), water and waste water charges and other municipal charges, if any, shall be apportioned on the basis of the tax year or other period for which assessed. (b) All (i) rents, additional rents and percentage rents under the Office Leases, Residential Leases, EntelCom Leases and the Atrium Beverage Lease as, when and to the extent actually collected, all income of any type arising from the Hotel, subject to Section 14(e) below, and (ii) all charges payable under the Saint David's Lease and the Contracts shall be apportioned. (c) Charges for the consumption of electricity, fuel oil on the Property, steam, gas, telephone services and other utility services, if any, shall be apportioned (except that no apportionment shall be made for any such items that are furnished and charged by the applicable utility company directly to Tenants under Leases). (d) At the Closing, Buyer shall pay to Seller, in cash or by cashier's or certified check, or by federal funds wire transfer, a sum equivalent to all monies in house banks, petty cash and cash registers, other than monies that Atrium Beverage Corporation owns or is entitled to receive, which it shall retain. Such monies shall be counted jointly by representatives of Seller and Buyer on the Closing Date. (e) Transient rentals for guests and income from rooms and lodging for the day and night of the Closing Date and income from food and beverage operations for the day and night of the Closing Date shall belong to Seller. (f) The fees for Licenses and Permits assigned hereby shall be apportioned. (g) All prepaid rents, room rental deposits, and all other deposits for advance reservations, banquets or future services shall be paid over to Buyer. (h) At the Closing, Buyer shall pay to Seller, in cash or by cashier's or certified check, or by federal funds wire transfer, a sum equivalent to the cost of all Consumables based on an inventory of such items made by representatives of Seller and Buyer at 12:01 a.m. on the Closing Date. Cost shall be the cost actually paid by Seller for the Consumables as evidenced by Seller's paid invoices for such items. (i) Advertising expenses and unused advertising contracts shall be apportioned, and Buyer shall assume existing contracts for billboard space and shall be responsible for payments thereon that accrue for the period after the Closing Date. All such advertising contracts and contracts for billboard space are set forth in Schedule "10" attached hereto. (j) Trade publications and subscriptions, and hotel and trade association dues shall be apportioned. (k) Music and entertainment expenses, music license fees and broadcasting charges shall be apportioned. (l) Except as herein otherwise provided, all unpaid commissions, fees or other charges due real estate brokers or other Persons with respect to any Lease shall be paid by Seller at or prior to Closing. Except as herein otherwise provided, all apportionments provided for in this Agreement shall be made as of 12:01 a.m. on the Closing Date and based upon the actual number of days in the period covered by the sum being apportioned. Seller shall use reasonable efforts to have all utility companies and applicable Governmental Entities provide meter readings to the Closing Date. Closing adjustments and apportionments made pursuant to the foregoing provisions shall be determined jointly by representatives of Buyer and Seller tentatively at the Closing and payment of the net figure resulting from such adjustment shall be made by Buyer or Seller, as the case may be, by check or by adjustment at the Closing. A final closing adjustment shall be made by such representatives seventy-five (75) days after the Closing, and to the extent that any additional payment or repayment is indicated on such final closing adjustment, such payment or repayment shall be made within five (5) days after such final adjustment shall have been made. 15. Past Due Rents and Past Due Accounts. (a) Omni Hotel shall act as collecting agent for Seller in respect to the collection of all account receivable balances due to Seller originating prior to the Closing Date from the operations of the Hotel from tenants, guests and patrons of the Hotel for rents and customary hotel and restaurant and cocktail lounge charges (whether comprised of credit card receivable payments or otherwise). All payments collected by Omni Hotel after the Closing Date attributable to Seller's accounts receivable shall be promptly remitted to Seller. Seller shall contract with Omni Hotel separately for Omni Hotel to act as Seller's agent in the collection of Seller's accounts receivable. Seller shall have the right to institute any proceedings and take any steps, in Seller's own name or in the name of the Managers, to effect collection thereof; provided, however, that Seller hereby agrees to indemnify, defend, exonerate and hold Buyer harmless for all loss, liability, damage, cost, charge or expenses (including Fees-and-Costs) incurred by, or asserted against, Buyer resulting from any such action and/or Seller's dealing with the particular Person with respect to the particular controversy involved. (b) Seller shall be solely responsible for the collection of any rent, additional rent or other charges in arrears as of the Closing Date, from any Tenant under an Office Lease, Residential Lease or EntelCom Lease. Seller shall have the right to institute any proceedings and take any steps, in Seller's own name or in the name of the Managers,, to collect rent, additional rent, or other charges due Seller in arrears as of the Closing Date, together with the cost of collection thereof; but in no event shall Seller seek any remedy other than collection of funds from the particular Tenant which are in arrears as of the Closing Date (and Seller shall not be entitled to seek a termination of such Tenant's Lease or eviction of the Tenant); provided, however, that Seller hereby agrees to indemnify, defend, exonerate and hold Buyer harmless for all loss, liability, damage, cost, charge or expense (including Fees-And-Costs) incurred by, or asserted against, Buyer resulting from any such action and/or Seller's dealing with the particular Person with respect to the particular controversy involved. (c) Neither party shall have an obligation to collect on behalf of the other party any such past due accounts or rents referred to in Subsection 15(a) and (b) above. 16. Inspection of the Property. (a) NOTWITHSTANDING ANYTHING HEREIN TO THE CONTRARY, SELLER IS CONVEYING THE PROPERTY TO BUYER "AS IS", "WHERE IS", AND WITH ALL FAULTS AND SPECIFICALLY AND EXPRESSLY EXCEPT AS SET FORTH IN SECTION 18a, WITHOUT ANY WARRANTIES, REPRESENTATIONS OR GUARANTEES, EITHER EXPRESS OR IMPLIED, OF ANY KIND, NATURE, OR TYPE WHATSOEVER FROM OR ON BEHALF OF THE SELLER. BUYER ACKNOWLEDGES AND AGREES THAT DURING THE INSPECTION PERIOD, BUYER WILL CONDUCT ITS OWN INDEPENDENT INVESTIGATION AND INSPECTION OF ALL ASPECTS OF THE PROPERTY. BUYER FURTHER ACKNOWLEDGES AND AGREES THAT ANY INFORMATION PROVIDED BY SELLER TO BUYER WITH RESPECT TO THE PROPERTY HAS BEEN OBTAINED FROM A VARIETY OF SOURCES AND THAT SELLER HAS NOT MADE ANY INDEPENDENT INVESTIGATION OR VERIFICATION OF SUCH INFORMATION. (b) Buyer shall have until 45 days after the later of (i) the Effective Date or (ii) the date on which Seller has notified Buyer that substantially all of the documents and information described in Section 6a have been made available to Buyer (the "Inspection Period") to inspect and review, at Buyer's sole cost and expense, all matters relating to the Property (the "Due Diligence Review"), including without limitation all plans and specifications, the physical condition of the Property, Contracts, Leases, Licenses and Permits, Trade Materials, Books and Records, Plans, Warranties and Guaranties, Survey, Title Commitment, Estoppel Certificates, ad valorem property tax statements, as well as any reports obtained by Buyer, all documents relating to the construction, replacement or repair of any portion of the Improvements, and any other document or other aspect of the Property (if the same are available to Seller). After execution of this Agreement and delivery of the Deposit to the Title Company, Seller shall provide reasonable access to the Property to Buyer and Buyer's agents and Seller shall make available to Buyer documents in Seller's or Manager's possession relating to the Property at the offices of the Manager of the Property, all during normal business hours. Buyer shall not interfere with Seller's or any Tenant's business operations and shall not contact any Tenant or Manager without the prior approval and participation of Seller. If Buyer, at its sole and exclusive discretion, chooses not to proceed to Closing, Buyer shall give written notice (the "Inspection Termination Notice") to Seller of such fact on or before the close of business on the last day of the Inspection Period (the "Cutoff Date"). If Buyer does not timely give the Inspection Termination Notice to Seller, Buyer shall be deemed to be satisfied with the Property and all matters relating thereto, including, without limitation, the Survey, Title Commitment, Estoppel Certificates and other documents and information made available to Buyer during its Due Diligence Review. If Buyer timely gives the Inspection Termination Notice to Seller, the Deposit together with all interest earned thereon shall be immediately returned to Buyer, less and with the exception of One Hundred and No/100 Dollars ($100.00) of the Deposit together with all interest earned on such $100 which shall be immediately delivered to Seller in consideration for the Due Diligence Review and Sellers' entering into this Agreement. If Buyer timely gives the Inspection Termination Notice to Seller, all rights and obligations of the parties hereto shall terminate (other than the obligation of Buyer to keep confidential all documents and other material furnished to Buyer pursuant to the transactions contemplated by this Agreement and the indemnity obligation owed by Buyer to Seller in connection with Buyer's Due Diligence Review, as provided in this Section 16), and this Agreement shall be null and void and of no further force and effect. Buyer shall be solely responsible for all damage or loss of any kind or nature whatsoever, whether to persons or to property, which may arise as a result of or otherwise because of the acts or omissions of Buyer or its agents in connection with the Due Diligence Review and Buyer shall promptly and at its expense restore the Property and repair any damage occasioned by such review to the condition the Property was in prior to such review. Buyer does hereby indemnify and hold Seller harmless from and against all loss, cost, damage, claim and liability of any kind and nature which may arise as a result of or otherwise because of any act or omission of Buyer or its agents. All matters reviewed or discovered by Buyer in the course of the Due Diligence Review and all other documents and materials furnished by or on behalf of Seller to Buyer pursuant to the transactions contemplated by this Agreement shall be strictly confidential and shall be deemed to be "Evaluation Material" under the Confidentiality Agreement - Principal between Buyer and Broker ("Confidentiality Agreement"). The Confidentiality Agreement, the Confidentiality Agreement-Agent and the Registration Agreement attached hereto as Exhibit "O" are incorporated herein by reference. If no Closing occurs hereunder, this paragraph, the preceding paragraph and the Confidentiality Agreement shall survive the termination of this Agreement. (c) Buyer shall have ninety (90) days after the Effective Date (the "Financing Feasibility Period") to obtain third party financing upon terms acceptable to Buyer. If, after the Cut-Off Date, Buyer determines that Buyer is unable to obtain acceptable financing, Buyer shall give written notice (the "Financing Termination Notice") to Seller of such fact on or before the close of business on the last day of the Financing Feasibility Period. If Buyer timely gives the Financing Termination Notice to Seller, the Deposit together with all interest earned thereon shall be immediately returned to Buyer, less and with the exception of an amount certified by Seller equal to Seller's out of pocket expenses incurred in connection with this Agreement and the transactions contemplated hereby paid to third parties including, without limitation, Seller's attorneys' fees and expenses, costs of the Survey, and architectural and engineering consulting expenses, and photocopying and reproduction expenses, up to but not exceeding $40,000, which amount shall be immediately delivered to Seller. If Buyer timely gives the Financing Termination Notice to Seller, all rights and obligations of the parties hereto shall terminate (other than the obligation of Buyer to keep confidential all documents and other material furnished to Buyer pursuant to the transactions contemplated by this Agreement and the indemnity obligation owed by Buyer to Seller in connection with Buyer's Due Diligence Review, as provided in this Section 16), and this Agreement shall be null and void and of no further force and effect. If Buyer does not timely give the Financing Termination Notice, the Deposit shall become fully non-refundable except for Seller's uncured default or failure to close on the Closing Date. 17a. Covenants of Seller. Seller hereby agrees that (unless a different period is specified) during the period between the date hereof and the Closing Date: (a) After the Effective Date until the Closing Date, Seller (i) will manage the Property or cause the Property to be managed in accordance with past practices and shall continue to offer services and amenities in accordance with such past practices, and (ii) continue past normal practice with respect to maintenance and repairs of the Property and the Property will be of at least the same quality on the Closing Date as on the Effective Date, except for normal wear and tear and any Casualty covered by Section 10 of this Agreement. (b) After the Cut-Off Date until the Closing Date, Seller will not, without the prior written consent of Buyer (which shall not be unreasonably withheld or delayed), (i) terminate or modify in any material way any Office Lease, Residential Lease, EntelCom Lease, Contract, License and Permit, or Warranty and Guaranty or (ii) enter into any new Contract. (c) After the Cut-Off Date until the Closing Date, Seller will not, without the prior written consent of Buyer (which shall not be unreasonably withheld or delayed), enter into any New Lease. (d) Seller shall promptly notify Buyer of any material change in any condition with respect to the Property or of any event or circumstance which makes any representation or warranty of Seller to Buyer under this Agreement untrue or misleading in any material respect. (e) Seller shall allow Buyer or Buyer's representatives access to the Property, and to the Books and Records relating to the Property as well as to the Leases, Contracts, Licenses and Permits, Plans, Trade Materials, Warranties and Guaranties and other documents required to be delivered under this Agreement upon reasonable prior notice and at reasonable times. Seller shall cooperate with Buyer and its representatives and allow them, at Buyer's expense, to make extracts and photocopies from the Books and Records and other items described in this Subsection 17(e). Buyer's access to the Property under this Subsection 17(e) shall be subject to the same conditions as set forth in Section 16 above. (f) After the Cut-Off Date, Seller shall cooperate in good faith with Buyer to obtain all consents, authorizations, orders, licenses, permits, certificates or approvals of (or filing or registrations with) any federal, state, local or city governmental or regulatory body required for the execution, delivery and performance of the transactions contemplated by this Agreement (including, without limitation, all approvals of the Texas Alcoholic Beverage Commission required for the assignment of the Atrium Beverage Lease and Atrium Beverage Agreement to Buyer or Buyer's designee and the transfer of all of the outstanding capital stock of Atrium Beverage Corporation to Buyer or Buyer's designee) and to diligently and in good faith perform and comply with or cause Atrium Beverage Corporation to perform and comply with all requirements and conditions that may be imposed by any such governmental or regulatory body on Buyer, Seller or Atrium Beverage Corporation in connection with the issuance of such approvals, consents, authorizations, licenses or permits. (g) Immediately upon obtaining knowledge of the institution of any proceeding for the condemnation of the Property or any portion thereof, or any other proceeding arising out of injury or damage to the Property or any portion thereof, Seller will notify Buyer of the pendency of such proceedings. (h) Prior to termination of this Agreement, Seller will not enter into any agreement that will dispose of the Property, or any part thereof (other than in the ordinary course of business). (i) Seller will not, without the prior written consent of Buyer, create, place, or permit the placing of, any deed of trust, mortgage, lien, security interest, encumbrance, or charge on the Property, except for the lien for ad valorem taxes on the Property which are not delinquent, and should any of the foregoing become attached hereafter in any manner to any part of the Property without the prior written consent of Buyer, Seller will cause the same to be promptly discharged and released. (j) Seller shall cause FIC Realty to assign the Atrium Beverage Lease and Atrium Beverage Agreement and to transfer all of the outstanding capital stock of Atrium Beverage Corporation to Buyer or Buyer's designee at the Closing or as soon as practical after the Closing when the necessary regulatory approvals for such assignment and transfer are obtained. (k) Seller shall complete the replacement of the roof on the Property at Seller's sole expense, whether such completion occurs before or after Closing. If the roof is not completed by the Closing Date, Seller shall deposit with the Title Company as Escrow Agent an amount sufficient to complete the roof replacement in accordance with the roof construction contract. (l) On or before the Delivery Date, Seller will furnish the Buyer binders which contain a copy of each Lease, Service Contract, Construction Contract, License and Permit and Warranty and Guaranty. (m) After the Cut-Off Date until the Closing Date, Seller will, at Buyer's request, use its reasonable best efforts (i) to obtain MCI's written consent to long distance telecommunication services being provided pursuant to the MCI Agreement after the Closing Date to Buyer (with separate billing to Buyer) for the Tenants of the Office Center and guests and employees of the Hotel or (ii) obtain for Buyer long-distance telecommunication services from another provider at rates comparable to those under the MCI Agreement. 17b. Covenants of Buyer. Buyer hereby agrees that: (a) St. David's Lease. Buyer shall provide to the St. David's Landlord such financial information as the St. David's Landlord may require in order for it to approve or disapprove the creditworthiness of Buyer pursuant to Section 29 of the St. David's Lease. (b) Omni Hotel Agreement. Buyer shall provide to Omni Hotel such information as Omni Hotel may require in order for it to make its determination with respect to Buyer's financial responsibility and reputation pursuant to Section 16.3(a) of the Omni Hotel Agreement. If Omni Hotel terminates the Omni Hotel Agreement pursuant to Section 16.3(a) thereof effective as of the Closing Date, Buyer shall assume all of Seller's obligations under Articles XIX and XXI of the Omni Hotel Agreement. (c) Property Management Staff. If Buyer does not acquire the Property pursuant to this Agreement, Buyer agrees that for a period of one year from the Effective Date, it will not employ any of the property management staff of the Property currently employed by FIC Management and its affiliates. This covenant shall survive the termination of this Agreement. (d) Financial Statements. Within twenty (20) days after the Effective Date, Buyer will deliver to Seller current financial statements of Buyer and all Persons who are or will become general and limited partners of, and other equity investors in, Buyer. (e) Seller's Name and Logos. After the Closing, Buyer shall not use the name or logos of Seller or any of Seller's affiliated companies, including, without limitation, the word "FIC", in connection with the Property, its advertising or otherwise. 18a. Seller's Representations and Warranties. Seller represents and warrants to Buyer as follows, which representations and warranties shall be true and correct in all material respects as of the date hereof and, after giving effect to the revised Schedules, if any, furnished to Buyer by Seller at the Closing, as of the Closing Date, and which shall not survive the Closing and conveyance of title: (a) Existing Leases. (i) To Seller's knowledge, Exhibits C-1, C-2 and C-3 attached hereto are lists of each and every Lease affecting or encumbering all or a portion of the Office Space, Residential Space or EntelCom System, respectively, together with all Amendments thereof (such leases together with the Atrium Beverage Lease being hereinafter collectively referred to as the "Existing Leases"). (ii) To Seller's knowledge, Schedule "1" attached hereto is a Rent Roll (herein so called) of the Existing Leases, current through the date hereof, containing the following information for the Existing Leases where applicable: (1) the Tenant's name, (2) the suite, office or apartment number, (3) the approximate amount of square footage leased, (4) annual rent, (5) the amount of prepaid rental, (6) the amount of the security deposit, (7) the date of the Existing Lease, (8) any rent arrearages and (9) actual current rent with respect to such leased space as of the date of the Rent Roll. (iii) To Seller's knowledge, except as described on Schedule "2" attached hereto, (A) the Existing Leases are in full force and effect; (B) no Tenant has failed and is continuing to fail to observe or perform any agreement, covenant or obligation under an Existing Lease, including, but not limited to, the payment of any sum due under an Existing Lease; and (C) Seller is not aware of any failure of Seller, which is continuing, in the observance or performance of any agreement, covenant or obligation on the part of the landlord/lessor under an Existing Lease. (iv) To Seller's knowledge, except as set forth on Schedule "2" attached hereto, there are no material disputes with any Tenant concerning any of the Existing Leases presently existing or threatened. (v) To Seller's knowledge, except for the Tenants in the Hotel, Seller and the Managers, and except as set forth on Schedule "2" attached hereto, there are no Persons occupying space in the Property as tenants, subtenants or occupants other than the Tenants specifically named in the Existing Leases, employees and agents of such Tenants, and, in the case of Fred Wells, who operates executive office suites on the fifth floor of the Office Center, licensees of Mr. Wells. (b) Certificate or Occupancy, Law and Ordinances, Condemnation and Zoning. (i) The certificate of occupancy set forth in Schedule "3" is a true and correct copy of the certificate of occupancy for the Property. (ii) To Seller's knowledge, no notice of any material Violation of any zoning, building or other law, ordinance, regulation, requirement or directive of any type against the Property or any portion thereof has been received by Seller. (iii) To Seller's knowledge, no notice of a pending condemnation, expropriation, eminent domain or similar proceeding affecting all or any portion of the Property has been received by Seller. (c) Operating Statements. On or before the Delivery Date, Seller will deliver to Buyer copies of all monthly, quarterly, annual and other operating reports prepared by either FIC Management or Omni Hotel covering the Office Center and Hotel, respectively, for the years 1993 and 1994 and the first six months of 1995, and Seller shall forward promptly to Buyer all such future reports made after the date hereof until the earlier of the Closing Date or the termination of this Agreement. (d) Restrictions and Easements. To Seller's knowledge, no material default or breach exists under any of the covenants, conditions, restrictions, rights-of-way or easements, if any, affecting all or any portion of the Property which are to be performed or complied with by the owner of the Property, including, but not limited to, the License Agreement. (e) Service Contracts. To Seller's knowledge, (i) Schedule "4" attached hereto sets forth a list of all Service Contracts affecting the Property, (ii) except as set forth on Schedule "4", there are no material disputes with the contractors, vendors or Managers under such Service Contracts presently existing or threatened and (iii) except as listed on Schedule "4", each such Service Contract is terminable by Seller without penalty on not more than thirty (30) days' prior notice. (f) Construction Contracts. To Seller's knowledge, (i) Schedule "5" attached hereto sets forth a list of all Construction Contracts under which work affecting the Property is not yet complete, and (ii) except as set forth on Schedule "5", there are no material disputes with the contractors thereunder presently existing or threatened. (g) Licenses and Permits. To Seller's knowledge, (i) Schedule "6" attached hereto sets forth a list of all Licenses and Permits currently affecting the Property, and (ii) except as set forth on Schedule "6", there are no material disputes with any Government Entity or other Person thereunder presently existing or threatened. (h) Warranties and Guaranties. To Seller's knowledge, (i) Schedule "7" attached hereto sets forth a list of all Warranties and Guaranties currently covering the Property or any portion thereof or issued and to cover the Property in the future, and (ii) except as set forth on Schedule"7", there are no material disputes with any Person thereunder presently existing or threatened. (i) Trade Materials. To Seller's knowledge, (i) Schedule "8" attached hereto contains a description of all Trade Materials and (ii) there are no material disputes with any Government Entity or Person with respect to any Trade Material presently existing or threatened. (j) Legal Proceedings and Bankruptcy. (i) To Seller's knowledge, except as set forth in Schedule "9" attached hereto, there are no outstanding judgments, orders, writs, injunctions or decrees of any Government Entity, no pending Legal Proceedings or threats of any material Legal Proceedings, and no proceedings to foreclose any mortgage, security instrument, lien or other claim against: (A) the Property; or (B) Seller in connection with the Property. (ii) There is not pending, with regard to Seller, any petition or proceeding in bankruptcy or for the appointment of a receiver or trustee nor has Seller committed any act of bankruptcy or been adjudicated a bankrupt or entered into an assignment for the benefit of creditors, nor is there pending, with regard to Seller, any petition for its reorganization, nor has Seller admitted in writing its inability to pay its debts as they mature. (k) FIRPTA. Seller is not a foreign person within the meaning of Section 1445(b)(2) of the Internal Revenue Code of 1986, as amended. (l) Authority, Actions of Seller, Authorization and Consents. Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Washington. Seller has all necessary power and lawful authority to own and operate its assets and properties, including, but not limited to the Property, and to carry on its business. Seller has delivered to Buyer a copy of the articles of incorporation and by-laws of Seller together with all Amendments thereof. The execution and delivery by Seller of this Agreement and the Seller's Closing Documents, and the consummation by Seller of the transactions contemplated thereby, have been duly authorized by all necessary action of Seller and duly approved by the board of directors of Seller. Other than the consents and/or approvals of the shareholders and/or board of directors of Seller and those contemplated by this Agreement, there are no other approvals, authorizations, consents or other actions by or filings with any Person which are required to be obtained or completed by Seller in connection with the execution and delivery of this Agreement or any of Seller's Closing Documents (or any other agreement or instrument required hereunder) or in connection with any other action required to be taken by Seller hereunder at or before the Closing. All of the outstanding capital stock of Atrium Beverage Corporation is owned by FIC Realty and when such stock is transferred by FIC Realty to Buyer pursuant to this Agreement, Buyer will acquire valid title thereto, free and clear of all liens and encumbrances. (m) EXCEPT AS SET FORTH IN THIS SECTION 18a, SELLER HAS NOT MADE, DOES NOT MAKE AND SPECIFICALLY DISCLAIMS ANY AND ALL REPRESENTATIONS, WARRANTIES, PROMISES, COVENANTS, AGREEMENTS OR GUARANTIES OF ANY KIND OR CHARACTER WHATSOEVER, WHETHER EXPRESS OR IMPLIED, ORAL OR WRITTEN, PAST, PRESENT OR FUTURE, OF, AS TO, CONCERNING OR WITH RESPECT TO THE PROPERTY, INCLUDING, BUT NOT LIMITED TO: (A) THE NATURE, QUALITY OR CONDITION OF THE PROPERTY; (B) THE INCOME TO BE DERIVED FROM THE PROPERTY; (C) THE SUITABILITY OF THE PROPERTY FOR ANY AND ALL ACTIVITIES AND USES WHICH BUYER MAY CONDUCT THEREON; (D) THE COMPLIANCE OF OR BY THE PROPERTY OR ITS OPERATION WITH ANY LAWS, RULES, ORDINANCES OR REGULATIONS OF ANY APPLICABLE GOVERNMENTAL AUTHORITY OR BODY, INCLUDING, BUT NOT LIMITED TO, ANY STATE OR FEDERAL ENVIRONMENTAL LAW, RULE OR REGULATION; (E) THE HABITABILITY, MERCHANTABILITY OR FITNESS OF THE PROPERTY FOR A PARTICULAR PURPOSE; OR (F) ANY OTHER MATTER WITH RESPECT TO THE PROPERTY. BUYER HEREBY WAIVES ANY SUCH REPRESENTATION, WARRANTY, PROMISES, COVENANTS, AGREEMENTS OR GUARANTIES. At the Closing, Seller, if necessary, may furnish to Buyer revisions to the Schedules attached hereto so as to reflect changes to the information presented thereon between the date of this Agreement and the Closing Date. 18b. Buyer's Representations and Warranties. Buyer represents and warrants to Seller as follows, which representations and warranties shall be true and correct as of the date hereof and as of the Closing Date, and which shall not survive the Closing and conveyance of title: (a) Buyer is a Texas joint venture validly existing under the laws of the State of Texas; (b) Buyer is duly organized, is in good standing and authorized to do business in Texas, and has the power to carry out its obligations under this Agreement. (c) This Agreement is a valid and legally binding obligation of Buyer in accordance with its terms. (d) The execution, delivery and performance by Buyer of this Agreement do not and will not violate any provision of law, of any order, judgment or decree of any court or other governmental authority, or of any agreement or other instrument to which Buyer is a party or by which Buyer is bound, and will not result in a breach of or constitute a default under any agreement or other instrument which could result in the creation or imposition of any lien, charge or encumbrance of any kind upon the Property. (e) No actions, suits, investigations, litigation, bankruptcy, reorganization or other proceedings are pending at law or in equity or before any federal, state, territorial, municipal or other government department, commission, board, bureau, agency, courts or instrumentality, or to its knowledge, are threatened against or affecting Buyer which would prohibit Buyer from purchasing the Property. (f) The execution, delivery and performance of the Agreement, and any and all documents to be executed by or received by it will not constitute a breach or default under any other agreement to which Buyer is a party or by which Buyer may be bound or affects, or a violation of any law or court order which may affect Buyer's ability to purchase the Property. (g) Buyer is reasonably confident that it will be able to obtain the third party financing it needs to consummate the purchase of the Property from Seller pursuant to the terms of this Agreement. (h) Buyer has delivered to Seller a copy of its joint venture or partnership agreement and all other documents that govern its organization, authority and operation. 19. Safe Deposit Boxes. On the Closing Date, Seller shall deliver to Buyer all keys to the safe deposit boxes in the Hotel, all receipts and agreements relating to such safe deposit boxes and a complete list of such safe deposit boxes which list shall contain the name and room number of each depositor. On the Closing Date, Seller shall send written notice to the guests in the Hotel who have safe deposit boxes advising them of the sale of the Hotel to Buyer and the procedures to be followed pursuant to this Section 19 and requesting the removal and verification of the contents thereof within five (5) days after the Closing Date. Seller at its own expense shall have a representative at the Hotel during said 5 day period. All such removals and verifications during said 5 days shall be under the supervision of a representative of Buyer and the representative of Seller. Boxes of guests who have not responded to such written notice shall be listed at the end of such 5 day period. Said boxes shall be opened in the presence of the representatives of Buyer and Seller and the contents recorded. Any such property so recorded and thereafter remaining in the safe deposit boxes under the control of Buyer shall be the responsibility of Buyer. 20. Baggage Inventory. All baggage checked with or left in the possession of Seller shall be listed on an inventory to be prepared in duplicate on the Closing Date and signed by representatives of Seller and of Buyer and all books, records and keys concerning such baggage shall be delivered by Seller to Buyer at the Closing. Buyer shall be responsible for all baggage listed in such inventory on the Closing Date. Any baggage or other property of guests retained by Seller as security for unpaid account receivables may be left on the Property for a period of ninety (90) days after the Closing Date without any responsibility or liability therefor on the part of Buyer and Seller hereby agrees to indemnify, defend, exonerate and hold Buyer harmless against any claim, cost or expense in connection with such retained baggage. 21. Indemnity and Survival. (a) Upon the Closing, Seller agrees to and does hereby indemnify, defend, exonerate and save Buyer harmless from and against any and all liability, loss, damage, claims and expenses incurred or suffered by Buyer arising out of or incidental to the operation of the Property by Seller prior to the Closing Date, even though same may be asserted after the Closing Date; provided, however, Seller shall not indemnify, defend, exonerate or save Buyer harmless from or against any liability, loss, damage, claims or expenses incurred or suffered by Buyer arising out of or incidental to the physical condition of the Land, Improvements or Tangible Personal Property (the "Physical Conditions Exception"). Buyer agrees to and does hereby indemnify, defend, exonerate and save Seller harmless from and against any and all liability, loss, damage, claims and expense incurred or suffered by Seller arising out of or incidental to the operation of the Property by Buyer after the conveyance of the Property to Buyer. (b) The covenants and agreements set forth in Sections 14, 15, 17a(f), 17a(k), 17a(l), 17b(b), 17b(e), 19, 20, and 21, the indemnities set forth in Sections 4(a), 12, 15, 16, 20 and 21 and any claim or cause of action based on fraud shall remain operative and shall survive the Closing and the execution and delivery of the Special Warranty Deed and shall not be merged therein; no other representation, warranty, covenant or agreements in this Agreement shall so survive. If no Closing occurs hereunder, the covenants, agreements and indemnities set forth in Sections 12, 16(b) and 17b(c) shall survive the termination of this Agreement. 22. Deposit. (a) At the Closing, the Title Company, as Escrow Agent, shall deliver the Deposit to Seller and deliver all interest earned on the Deposit to Seller, and all such interest shall be received by Seller as a credit against, and in reduction of, the Balance. (b) If title to the Property has not closed under this Agreement because of the inability of Seller to close under this Agreement, or because of a default by Seller causing a failure to close under this Agreement or because of Buyer's termination of this Agreement as permitted by and in accordance with the provisions herein contained, or because any of the conditions to the obligations of Buyer set forth in Section 8 have not been satisfied, the Title Company shall promptly return the Deposit, plus all interest earned thereon, to Buyer, less any amount to be paid to Seller pursuant to Section 16, upon being notified in writing by Buyer and Seller (i) of the amount, if any, to be paid to Seller pursuant to Section 16 and (ii) that Buyer has returned to Seller all documents provided by Seller or Broker to Buyer pursuant to this Agreement and the Confidentiality Agreement. (c) If (i) Buyer has not terminated this Agreement as permitted by and in accordance with the provisions herein contained and (ii) title to the Property has not closed under this Agreement because of the inability of Buyer to close under this Agreement, or because of a default by Buyer under this Agreement, Seller shall retain the Deposit, plus all interest earned thereon. 23. Termination, Default and Remedies. (a) If this Agreement is terminated by either party pursuant to a right expressly given it to do so hereunder (herein referred to as a "Permitted Termination"), except for a termination by Seller because of the default of Buyer, the Deposit together with all interest earned thereon shall immediately be returned to Buyer, less any amount to be paid to Seller pursuant to Section 16, upon being notified in writing by Buyer and Seller (i) of the amount, if any, to be paid to Seller pursuant to Section 16 and (ii) that Buyer has returned to Seller all documents provided by Seller or Broker to Buyer pursuant to this Agreement and the Confidentiality Agreement (b) Default by Seller. (i) Seller shall be in default hereunder upon the occurrence of any one or more of the following events: (A) any of Sellers' warranties or representations set forth herein are untrue or inaccurate in any material respect; or (B) Seller shall fail, in any material way, to meet, comply with or perform any covenant, agreement or obligation on its part required, within the time limits and in the manner required in this Agreement, for any reason other than a Permitted Termination. (ii) In the event of a default by Seller hereunder, Buyer may, at Buyer's option, either: (A) terminate this Agreement by written notice delivered to Seller at or prior to the Closing, in which event the Deposit and all interest earned thereon shall be paid to Buyer; (B) enforce specific performance of this Agreement against Seller (it being understood, however, that should an expenditure in excess of $250,000 be required to be made in order to remedy any such default, Seller shall be obligated to expend no more that $250,000, and, in any event, should such default not be remedied within 6 months after the scheduled Closing Date, Buyer's sole remedy shall be under either Section 23(b)(ii)(A) or 23(b)(ii)(C)); or (C) pursue an action for damages (it being understood, however, that the sole measure of damages in any such action shall be recovery of Fees-And-Costs expended by Buyer in its Due Diligence Review, such Fees-And-Costs not to exceed, in any event, $250,000). (iii) In the event of a default by Seller in the covenant set forth in Section 17a(j) hereof (excluding, however, involuntary liens or encumbrances), Buyer may, at Buyer's option, either: (A) enforce specific performance of this Agreement against Seller, without any limitation on the expenditure by Seller to cure such voluntary lien or encumbrance; or (B) pursue Buyer's remedies under Section 23(b)(ii)(A) or 23(b)(ii)(C). (c) Default by Buyer. (i) Buyer shall be in default hereunder upon the occurrence of any one or more of the following events: (A) any of Buyer's warranties or representations set forth herein are untrue or inaccurate in any material respect; or (B) Buyer shall fail, in any material way, to meet, comply with or perform any covenant, agreement or obligation on its part required, within the time limits and in the manner required in this Agreement, for any reason other than a Permitted Termination. (ii) In the event of a default by Buyer hereunder, Seller may as its sole remedy terminate this Agreement by notice to Buyer and retain the Deposit together with all interest earned thereon, it being agreed between Buyer and Seller that such sum shall be liquidated damages for a default by Buyer hereunder because of the difficulty, inconvenience and uncertainty of ascertaining actual damages for such default. (d) Notice and Opportunity to Cure. In the event that either party is in default under the terms of this Agreement, the non-defaulting party shall give the defaulting party written notice specifically setting forth such default, and the defaulting party shall have five (5) business days to cure such default. If the defaulting party fails to cure the default within such five (5) business day period, the non-defaulting party shall have the right to pursue its remedies as set forth in this Section 23. 24. Assignment. This Agreement shall not be assigned by either party hereto without the prior written consent of the other party; provided, however, that Buyer may assign its rights and obligations under this Agreement to an entity in which Buyer or its principals are the principals, if such other entity timely complies with Section 17b(a) and (b) and Buyer remains liable under this Agreement. 25. Supplemental Documents. The parties agree to execute all documents which may reasonably be required to effectuate the terms and provisions of this Agreement. 26. Definitions. (a) In this Agreement, and in the Exhibits and Schedules attached hereto (unless expressly defined otherwise), the following words and phrases shall have the following meanings: "Amendment" means an amendment, renewal, supplement, modification, expansion, restatement, extension, or any other change or revision. "Encumbrance" means any and every mortgage, security agreement, security interest, lien, levy, lease, pledge, hypothecation, charge, claim, license, judgment, covenant, easement, and/or any other encumbrance or restriction of any and every kind whatsoever. "EntelCom System" means an enhanced telecommunications system made available for lease by Seller to the Tenants in the Property providing the services more particularly described on Exhibit "N" attached hereto. "Fees-And-Costs" means reasonable fees, charges and expenses of attorneys, architects, engineers, expert witnesses, consultants and other Persons, and all other charges due any of the foregoing (including costs of photographic reproduction, word processing, transcripts and printing of briefs and records on appeal). "Government Entity" means the United States, the State of Texas, the City of Austin, Texas, any other State in which a party to this Agreement is incorporated and any municipality or other political subdivision of any of the foregoing, and any agency, authority, department, court, commission or other legal entity of any of the foregoing asserting jurisdiction over the Property or any portion thereof or over any of the operations of businesses located within the Property. "Hazardous Materials" means (a) asbestos, radon gas, urea formaldehyde foam insulation, transformers or other equipment which contain dielectric fluid containing levels of polychlorinated byphenyls in excess of federal or Texas safety guidelines, whichever are more stringent, (b) any solid or liquid wastes (including hazardous wastes), hazardous air pollutants, hazardous substances, hazardous chemical substances and mixtures, toxic substances, pollutants and contaminants, as such terms are defined in the National Environmental Policy Act (42 U.S.C. Section 4321 et seq.), the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (42 U.S.C. Section 9601 et seq.), as amended by the Superfund Amendments and Reauthorization Act of 1986, the Resource Conservation and Recovery Act (42 U.S.C. Section 6901 et seq.), as amended by the Hazardous and Solid Wastes Amendments of 1984, the Hazardous Materials Transportation Act, the Toxic Substances Control Act, the Clean Water Act (33 U.S.C. Section 1321 et seq.), the Clean Air Act, the Occupational Safety and Health Act (29 U.S.C. Section 651 et seq.), and laws of any other Government Entity having jurisdiction over the Property regulating any of the foregoing matters or items, as such laws and regulations may be amended and/or supplemented from time to time, and (c) any other chemical material or substance, exposure to which is prohibited, or, to the extent limited or regulated, limited or regulated by any Government Entity. "Legal Proceeding" means any action, litigation, arbitration, administrative proceedings, and other legal or equitable proceeding of any kind. "Person" means an individual person, a corporation, partnership, trust, joint venture, proprietorship, estate, association, Government Entity or other incorporated or unincorporated enterprise, entity or organization of any kind. "Seller's knowledge" means the current actual knowledge of the officers and directors of Seller and FIC Property Management, Inc. ("Seller's Knowledgeable Parties") and does not include constructive knowledge. No examination, inspection or research is required or implied, nor is there any obligation that any of Seller's Knowledgeable Parties make any special inquiry. However, the phrase does obligate Seller to make a reasonable inquiry of Seller's Knowledgeable Parties to determine if any of them have current actual knowledge relating to any of the representations or warranties made by Seller in this Agreement. "Tenant" means a tenant, subtenant, undertenant or occupant under a Lease. "Violation" means any note or notice of any violation of law noted in or issued by any Government Entity against or with respect to the Property. (b) Unless specified to the contrary, references to Sections, Exhibits and Schedules mean the particular Section, Exhibit or Schedule in or to this Agreement, all of which Exhibits and Schedules are made a part hereof for all purposes the same as if set forth herein verbatim; it being expressly understood that if any Exhibit attached hereto which is to be executed and delivered at Closing contains blanks, the same shall be completed correctly and in accordance with the terms and provisions contained herein and as contemplated herein prior to or at the time of execution and delivery thereof. (c) Wherever used in this Agreement; (i) the words "include" or "including" shall be construed as incorporating, also, "but not limited to" or "without limitation"; (ii) the word "day" means a calendar day unless otherwise specified; (iii) the word "party" means each and every Person on whose behalf this Agreement has been signed at the end of this Agreement; (iv) the word "law" (or "laws") means any statute, ordinance, resolution, regulation, code, rule, order, decree, judgment, injunction, mandate or other legally binding requirement of a Government Entity; and (v) each reference to the Property shall be deemed to include "and/or any portion thereof". 27. Notices. Any notice or demand provided for or given pursuant to this Agreement shall be in writing and served on the parties at the addresses listed below. Any notice shall be either (a) personally delivered to the address set forth below, in which case it shall be deemed delivered on the date of delivery to the addressee; (b) sent by registered or certified mail/return receipt requested, in which case it shall be deemed delivered three (3) business days after deposited in the U.S. Mail; (c) sent by a nationally recognized overnight courier, in which case it shall be deemed delivered one (1) business day after deposit with such courier; or (d) sent by telecommunications ("Fax") in which case it shall be deemed delivered on the day sent, provided an original is received by the addressee by a nationally recognized overnight courier within one (1) business day of the Fax. The addresses and Fax number listed herein may be changed by written notice to the other parties, provided, however, that no notice of a change of address or Fax number shall be effective until date of delivery of such notice. Copies of notice are for informational purposes only and a failure to give or receive copies of any notice shall not be deemed a failure to give notice. For purposes of notice, the addresses of the parties shall be as follows: If to Seller: Investors Life Insurance Company of North America 701 Brazos, Suite 1400 Austin, Texas 78701 Attn: James M. Grace Executive Vice President Fax Number: (512) 404-5051 with a copy to: William D. Brown, Esq. Sneed, Vine, Wilkerson, Selman & Perry 901 Congress Avenue Austin, Texas 78701 Fax Number: (512) 476-1825 If to Buyer: Omni Congress Joint Venture 823 Congress Avenue Suite 1111 Austin, Texas 78701 Attn: Tom Stacy Fax Number: (512) 476-9099 with a copy to: Bruce T. Morrison Attorney at Law 5929 Balcones Dr., Suite 300 Austin, Texas 78731 Fax Number: (512) 452-6395 28. Section Headings. The section headings are inserted solely for the convenience of reference and shall not affect the construction or interpretation of this Agreement. 29. Entire Contract. This Agreement constitutes the entire contract between the parties hereto and there are no other understandings, oral or written, relating to the subject matter hereof, other than the Confidentiality Agreement, which continues in effect. This Agreement may not be changed, modified or amended, in whole or in part, except in writing, signed by all parties. 30. Invalid Provisions. If any one or more of the provisions of this Agreement, or the applicability or any such provision to a specific situation, shall be held invalid or unenforceable, such provision shall be modified to the minimum extent necessary to make it or its application valid and enforceable, and the validity and enforceability of all other provisions of this Agreement and all other applications of any such provision shall not be affected thereby. 31. Construction. The words "herein", "hereof", "hereunder" and other similar compounds of the words "here" when used in this Agreement shall refer to the entire Agreement and not to any particular provision or section. If the last day of any time period stated herein shall fall on a Saturday, Sunday or legal holiday, then the duration of such time period shall be extended so that it shall end on the next succeeding day which is not a Saturday, Sunday or legal holiday. Whenever used in this Agreement, the singular shall include the plural, the plural the singular, and the use of any gender shall be applicable to all genders. Marginal notes are inserted for convenience only and shall not form part of the text of this Agreement. 32. Covenant Not to Record. Buyer will not record this Agreement. An attempted recording of this Agreement shall constitute a default hereunder on the part of Buyer. 33. Choice of Law. This Agreement shall be construed in accordance with and enforceable under the laws of Texas and shall be fully performable in Travis County, Texas. 34. Binding Effect. Subject to the provisions of Section 24, this Agreement and terms and conditions shall extend to and be binding upon the parties hereto and their successors and assigns. 35. Counterparts and Copies. This Agreement may be executed in several counterparts, which when taken together shall be deemed to be an original. Each executed copy shall be deemed an original. 36. Effective Date. The date of formation of this Agreement (herein called the "Effective Date", "date of this Agreement" or "date hereof") shall for all purposes be September 5, 1995. WITNESS the due execution hereof as of the day and year set forth below. SELLER: INVESTORS LIFE INSURANCE COMPANY OF NORTH AMERICA By:/s/ Roy F. Mitte Title: President Date of Execution: 9-1-95 BUYER: OMNI CONGRESS JOINT VENTURE By:/s/ Tom Stacy Title: Managing Venturer Date of Execution: 9-1-95 RECEIPT OF DEPOSIT AND AGREEMENT OF ESCROW AGENT Escrow Agent hereby acknowledges the receipt of the following: (i) one (1) fully signed and executed copy of this Agreement; and (ii) the Deposit in the amount of $500,000.00. Escrow Agent hereby agrees to act as Escrow Agent under and pursuant to the terms of this Agreement. ESCROW AGENT: HERITAGE TITLE COMPANY OF AUSTIN, INC. By:/s/ Jan Cox Dwyer Title: Senior Vice President Date of Execution: 9-5-95 Exhibit "A" METES AND BOUNDS DESCRIPTION OF LAND Exhibit "B" TANGIBLE PERSONAL PROPERTY (to be delivered by Delivery Date) EXHIBIT "C-1" AUSTIN CENTRE OFFICE LEASES (to be delivered by Delivery Date) EXHIBIT "C-2" AUSTIN CENTRE RESIDENTIAL LEASES (to be delivered by Delivery Date) EXHIBIT "C-3" AUSTIN CENTRE ENTELCOM LEASES (to be delivered by Delivery Date) Exhibit "D" PERMITTED EXCEPTIONS 1. Taxes for 1995 and subsequent years. 2. Terms, conditions and stipulations set out in City of Austin License Agreement dated May 6, 1986, recorded in Volume 9824, Page 225 in the Real Property Records of Travis County, Texas, said Agreement having been affected by Assignment and Assumption of License Agreement dated August 22, 1991, by and between Texas AP, Inc. and Investors Life Insurance Company of North America, recorded in Volume 11506, Page 188 of the Real Property Records of Travis County, Texas (pertains to rights and obligations to maintain landscaping in the right-of-way). 3. Cable Television Installation Agreement dated October 2, 1992, recorded in Volume 11791, Page 816 of the Real Property Records of Travis County, Texas. 4. Rights of tenants in possession under written leases or occupancy agreements. 5. Improvements consisting of steps, vault entrances with gas meter and water meter, thresholds, vents, lighted fabric banners, pump test connection and fire stand pipes situated outside of property boundary, as shown on survey dated July 15, 1991 and revised on July 30, 1991, prepared by Donald J. Kirby, a Registered Professional Land Surveyor No. 2508. Exhibit "E" Grantee's Address: Omni Congress Joint Venture 823 Congress Avenue Suite 1111 Austin, Texas 78701 SPECIAL WARRANTY DEED STATE OF TEXAS KNOW ALL MEN BY THESE PRESENTS: COUNTY OF TRAVIS THAT INVESTORS LIFE INSURANCE COMPANY OF NORTH AMERICA, a Washington corporation ("Grantor"), for and in consideration of the sum of Ten Dollars ($10.00) cash and other good and valuable consideration paid by OMNI CONGRESS JOINT VENTURE, a Texas joint venture ("Grantee"), whose address is 823 Congress Avenue, Suite 1111, Austin, Texas 78701, HAS GRANTED, BARGAINED, SOLD and CONVEYED, and by these present DOES GRANT, BARGAIN, SELL and CONVEY unto Grantee all that certain land situated in Travis County, Texas, and described on Exhibit "A" which is attached hereto and incorporated herein by reference for all purposes, together with all appurtenances thereon or in anywise appertaining thereto and all buildings, structures, fixtures and improvements located thereon (said land, improvements and appurtenances being herein together referred to as the "Property"). This conveyance is made subject to the Permitted Exceptions set forth in Exhibit "B" hereto. TO HAVE AND TO HOLD the Property unto Grantee, and Grantee's successors and assigns forever, and Grantor does hereby bind Grantor, and Grantor's successors and assigns to WARRANT and FOREVER DEFEND, all and singular the Property unto Grantee and Grantee's successors and assigns, against every person whomsoever lawfully claiming or to claim the same or any part thereof, by, through or under Grantor, but not otherwise. For the same consideration, Grantor hereby GRANTS, BARGAINS, SELLS and CONVEYS, without warranty, express or implied, all interest, if any, of Grantor in (i) strips or gores, if any, between the Property and abutting properties and (ii) any easements, covenants and other rights appurtenant thereto and (iii) any land lying in the bed of any street, road, avenue or alley, open or closed, in front of or adjoining the Property, to the center line thereof. GRANTEE ACKNOWLEDGES AND AGREES THAT GRANTOR HAS NOT MADE, DOES NOT MAKE AND SPECIFICALLY DISCLAIMS ANY AND ALL REPRESENTATIONS, WARRANTIES, PROMISES, COVENANTS, AGREEMENTS OR GUARANTIES OF ANY KING OR CHARACTER WHATSOEVER, WHETHER EXPRESS OR IMPLIED, ORAL OR WRITTEN, PAST, PRESENT OR FUTURE, OF, AS TO, CONCERNING OR WITH RESPECT TO THE PROPERTY, INCLUDING, BUT NOT LIMITED TO: (A) THE NATURE, QUALITY OR CONDITION OF THE PROPERTY; (B) THE INCOME TO BE DERIVED FROM THE PROPERTY;(C) THE SUITABILITY OF THE PROPERTY FOR ANY AND ALL ACTIVITIES AND USES WHICH GRANTEE MAY CONDUCT THEREON; (D) THE COMPLIANCE OF OR BY THE PROPERTY OR ITS OPERATION WITH ANY LAWS, RULES, ORDINANCE OR REGULATIONS OF ANY APPLICABLE GOVERNMENTAL AUTHORITY OR BODY, INCLUDING, BUT NOT LIMITED TO, ANY STATE OR FEDERAL ENVIRONMENTAL LAW, RULE OR REGULATION; (E) THE HABITABILITY, MERCHANTABILITY OR FITNESS OF THE PROPERTY FOR A PARTICULAR PURPOSE; OR (F) ANY OTHER MATTER WITH RESPECT TO THE PROPERTY. EXCEPT AS SET FORTH IN THE AGREEMENT OF SALE DATED September 5, 1995 FOR THE SALE OF THE PROPERTY, GRANTEE HEREBY WAIVES ANY SUCH REPRESENTATION, WARRANTY, PROMISES, COVENANTS, AGREEMENTS OR GUARANTIES. EXECUTED this day of , 1995. GRANTOR: INVESTORS LIFE INSURANCE COMPANY OF NORTH AMERICA, a Washington corporation By: Title: GRANTEE: OMNI CONGRESS JOINT VENTURE, a Texas joint venture By: Title: STATE OF TEXAS COUNTY OF TRAVIS This instrument was acknowledged before me on , 1995, by , of Investors Life Insurance Company of North America, a Washington corporation, on behalf of said corporation. Notary Public in and for the State (S E A L) of Texas STATE OF TEXAS COUNTY OF TRAVIS This instrument was acknowledged before me on , 1995, by , of Omni Congress Joint Venture, a Texas joint venture, on behalf of said joint venture. Notary Public in and for the State (S E A L) of Texas Exhibit "F" ASSIGNMENT AND ASSUMPTION OF LEASES THIS ASSIGNMENT AND ASSUMPTION OF LEASES (the "Assignment") is made as of , 1995, by and between INVESTORS LIFE INSURANCE COMPANY OF NORTH AMERICA, a Washington corporation ("Assignor"), whose mailing address is 701 Brazos, Suite 1400, Austin, Texas 78701 and OMNI CONGRESS JOINT VENTURE, a Texas joint venture ("Assignee"), whose mailing address is 823 Congress Avenue, Suite 1111, Austin, Texas 78701. Introductory Provisions: The following provisions form a part of this Assignment: A. Assignor or Assignor's predecessor in title heretofore entered into certain leases (the "Leases") with tenants covering office space, retail space, apartment units, hotel rooms and other hotel facilities and the use of a telephone system all located in a certain multi-use complex known as Austin Centre, located on certain land situated in Travis County, Texas (the "Property") and described on Exhibit "A" which is attached hereto and incorporated herein by reference for all purposes. B. Attached hereto as Exhibit "B" and incorporated herein by reference for all purposes is a true and correct copy of a list of the Leases presently in force. C. Assignee desires to purchase from Assignor, and Assignor desires to sell and assign to Assignee, all of Assignor's interest in the Leases and all of the rights, benefits and privileges of the lessor thereunder. THEREFORE, in consideration of the foregoing and the agreements and covenants herein set forth, together with the sum of Ten Dollars ($10.00) and other good and valuable consideration this day paid and delivered by Assignee to Assignor, the receipt and sufficiency of all of which are hereby acknowledged by Assignor, Assignor does hereby ASSIGN, TRANSFER, SET OVER and DELIVER unto Assignee any and all of Assignor's right, title and interest in and to all Leases pertaining to the Property, and all of the rights, benefits and privileges of the lessor thereunder including without limitation those with respect to all security deposits, prepaid rentals and reservation deposits made under Leases and not returned to tenants, but subject to all terms, conditions, reservations and limitations set forth in the Leases (all such Leases, properties, rights and interests, subject as aforesaid, being hereinafter collectively referred to as the "Assigned Leases"). This Assignment is made subject to the Permitted Exceptions set forth in Exhibit "C" hereto. TO HAVE AND TO HOLD all and singular the Assigned Leases unto Assignee, and Assignee's successors, and assigns forever, and Grantor does hereby bind Grantor, and Grantor's successors and assigns to WARRANT and FOREVER DEFEND, all and singular the Property unto Grantee and Grantee's successors and assigns, against every person whomsoever lawfully claiming or to claim the same or any part thereof, by, through or under Grantor, but not otherwise. 1. Words and phrases not defined herein shall have the meanings attributed to them in that certain Agreement of Sale (herein so called) dated September 5, 1995, executed by Assignor and Assignee covering the sale of the Property from Assignor to Assignee. 2. Assignor hereby agrees that, subject to the provisions of Section 5 of the Agreement of Sale, that it shall perform all of the terms, covenants and conditions of the Leases on the part of the lessor therein required to be performed prior to the date hereof (but not those required to be discharged or performed from and after the date thereof). 3. By accepting this Assignment of Leases and by its execution hereof, Assignee hereby assumes and agrees to perform all of the terms, covenants and conditions of the Leases on the part of the lessor therein required to be performed, from and after the date hereof (but not those required to be performed prior thereto, except as specifically provided in Section 5 of the Agreement of Sale). 4. Assignee hereby agrees to indemnify and hold harmless Assignor from and against and all loss, cost or expense (including, without limitation, Fees and Costs) resulting by reason of Assignee's failure to perform any of the obligations assumed by Assignee hereunder. Except for the Physical Conditions Exception as described in Section 21(a) of the Agreement of Sale and the matters described in Section 5 of the Agreement of Sale, Assignor hereby agrees to indemnify and hold harmless Assignee from and against any and all loss, cost or expense (including, without limitation, Fees and Costs) resulting by reason of the failure of Assignor to perform any of the obligations of the lessor under any of the Leases prior to the date hereof. 5. All of the covenants, terms and conditions set forth herein shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. 6. This Assignment may only be modified, altered, amended, or terminated by the written agreement of Assignor and Assignee. 7. Any notice, request, demand, statement or consent made hereunder or in connection herewith to any party shall be in writing and shall be sent to the addresses and in the manner specified in the Agreement of Sale. 8. If any term, covenant or condition of this Assignment shall be held to be invalid, illegal or unenforceable in any respect, this Assignment shall be construed without such provision. 9. This Assignment shall be governed by and construed under the laws of the State of Texas without regard to the principles of conflicts of law. IN WITNESS WHEREOF, Assignor and Assignee have duly executed this Assignment as of the date first above written. ASSIGNOR: INVESTORS LIFE INSURANCE COMPANY OF NORTH AMERICA a Washington corporation By: Title: ASSIGNEE: OMNI CONGRESS JOINT VENTURE a Texas joint venture By: Title: STATE OF TEXAS COUNTY OF TRAVIS This instrument was acknowledged before me on , 1995, by , of Investors Life Insurance Company of North America, a Washington corporation, on behalf of said corporation. (S E A L) Notary Public in and for the State of Texas STATE OF TEXAS COUNTY OF TRAVIS This instrument was acknowledged before me on , 1995, by , of Omni Congress Joint Venture, a , on behalf of said . (SEAL) Notary Public in and for the State of Texas Exhibit "G" BILL OF SALE THIS BILL OF SALE (the "Bill of Sale") is executed by INVESTORS LIFE INSURANCE COMPANY OF NORTH AMERICA, a Washington corporation ("Assignor") to and for the benefit of OMNI CONGRESS JOINT VENTURE, a Texas joint venture ("Assignee"), whose mailing address is 823 Congress Avenue, Suite 1111, Austin, Texas 78701. Introductory Provisions: The following provisions form a part of this Bill of Sale: A. Assignor and Assignee are parties to that certain Agreement of Sale dated September 5, 1995 (the "Agreement of Sale"), which provides, among other things, for the sale by Assignor to Assignee of that certain land (the "Land") lying and being situated in Travis County, Texas, and described on Exhibit "A" which is attached hereto and incorporated herein by reference for all purposes, together with the multi-use complex located on the Land and commonly known as Austin Centre (the said Land and the improvements thereon being herein referred to as the "Property"), and the execution of this Bill of Sale. B. It is the desire of Assignor hereby to sell, assign, transfer and convey to Assignee all of Assignor's rights, titles and interests in the below described items affixed or attached to, or placed or situated upon, or used or acquired in any way whatsoever in connection with the complete and comfortable use, enjoyment, occupancy or operation of the Property, except those not owned by Assignor. THEREFORE, in consideration of the foregoing and Ten Dollars ($1.00) and other good and valuable consideration in hand paid by Assignee to Assignor, the receipt and sufficiency of which are hereby acknowledged and confessed by Assignor, Assignor does hereby ASSIGN, TRANSFER, SET OVER and DELIVER to Assignee all of the following (the "Assigned Properties"): a. any and all of Assignor's right, title and interest in and to all fixtures, furniture, furnishings, working supplies and articles of personal property constructed, erected, affixed to, attached to, installed or placed in or upon and used in connection with the occupancy and operation of the Property including, but not limited to:(i) any and all, if any, mechanical, elecrtical, heating, air-conditioning, plumbing, sprinkler, lighting, ventilating and cooling systems, together with their respective appurtenant gas and electric ranges, refrigerators, engines, motors, generators, pipes, wiring and other apparatus, and all lighting fixtures, doors, cabinets, partitions, elevators, electric motors, pumps office furniture and equipment, partitions, vaults, safes, electrical, fire prevention and extinguishing equipment, radio, television, and public address and amplifying systems, equipment, parts and supplies, chairs, tables, beds, bedsprings, mattresses, couches, lamps, waste baskets, desks, silverware, utensils, table and bed linen, towels, blankets, dishes, glassware, mirrors, carpets, rugs, other floor coverings, curtains, draperies, pictures, radio and television sets, stationery and office supplies, pianos, and all musical instruments, bars and bar equipment, kitchen utensils, and other furniture and furnishings for all lobbies, ballrooms, dining rooms, bedrooms, guest rooms, baths and other private and public rooms, and the furniture, typewriters, furnishings, equipment, tools, materials and supplies in all storerooms and offices; and (ii) those items more particularly described on Exhibit "B" which is attached hereto and incorporated by reference for all purposes; b. all goodwill owned by Assignor related to the operation of the Property, including, without limitation any and all of Seller's right, title and interest in and to (i) the telephone numbers and listings of the Property or any portion thereof, (ii) any and all, if any, trade names, trademarks, service marks, logos and all copyrights used exclusively in connection with the Property or any portion thereof, except those belonging specifically to Omni Hotels Management Corporation or its affiliates or any tenants of the Property, and (iii) any and all, if any, video tapes, films, brochures and other advertising and promotion materials of any kind or nature owned by Assignor and used in connection with the advertising of the Property or any portion thereof; c. all books, records, tenant, guest and customer lists for the Property or any portion thereof owned by Assignor and in the possession of Assignor or any of the Managers, together with any and all, if any, files, reports, surveys, studies, projections, budgets and strategic plans prepared for Assignor in connection solely with the operation, maintenance and management of the Property or any portion thereof and in the possession of Assignor or any of the Managers; d. any and all of Seller's right, title and interest in and to any and all, if any, architects' and engineers' drawings, plans, specifications, models and work product, studies, surveys and other materials developed in connection with the construction, repair and maintenance of the Property or any portion thereof owned by Assignor and in the possession of Assignor or any of the Managers of the Property or any portion thereof; and e. all meat, fish and poultry inventories on hand at and other food and non-alcoholic beverage inventories at, and for use at, the Property and owned by Seller at 12:01 a.m. on the date hereof. This Bill of Sale is made subject to the Permitted Exceptions set forth in Exhibit "C" hereto. TO HAVE AND TO HOLD the Assigned Properties unto Assignee, and Assignee's successors and assigns forever, and Assignor does hereby bind Assignor, Assignor's successor and assigns to WARRANT and FOREVER DEFEND, all and singular the Assigned Properties unto Assignee and Assignee's successors and assigns, against every person whomsoever lawfully claiming or to claim the same or any part thereof, by, through or under Assignor, but not otherwise. The Assigned Properties are in a used condition, and Assignor is neither a manufacturer nor a distributor of, nor dealer or merchant in, the Assigned Properties. ASSIGNEE ACKNOWLEDGES AND AGREES THAT ASSIGNOR HAS NOT MADE, DOES NOT MAKE AND SPECIFICALLY DISCLAIMS ANY AND ALL REPRESENTATIONS, WARRANTIES, PROMISES, COVENANTS, AGREEMENTS OR GUARANTIES OF ANY KIND OR CHARACTER WHATSOEVER, WHETHER EXPRESS OR IMPLIED, ORAL OR WRITTEN, PAST, PRESENT OR FUTURE, OF, AS TO, CONCERNING OR WITH RESPECT TO THE ASSIGNED PROPERTIES, INCLUDING, BUT NOT LIMITED TO: (A) THE NATURE, QUALITY OR CONDITION OF THE ASSIGNED PROPERTIES; (B) THE INCOME TO BE DERIVED FROM THE ASSIGNED PROPERTIES; (C) THE SUITABILITY OF THE ASSIGNED PROPERTIES FOR ANY AND ALL ACTIVITIES AND USES WHICH ASSIGNEE MAY CONDUCT THEREON; (D) THE COMPLIANCE OF OR BY THE ASSIGNED PROPERTIES OR ITS OPERATION WITH ANY LAWS, RULES, ORDINANCES OR REGULATION OF ANY APPLICABLE GOVERNMENTAL AUTHORITY OR BODY, INCLUDING, BUT NOT LIMITED TO, ANY STATE OR FEDERAL ENVIRONMENTAL LAW, RULE OR REGULATION; (E) THE HABITABILITY, MERCHANTABILITY OR FITNESS OF THE ASSIGNED PROPERTIES FOR A PARTICULAR PURPOSE; OR (F) ANY OTHER MATTER WITH RESPECT TO THE ASSIGNED PROPERTIES. EXCEPT AS SET FORTH IN THE AGREEMENT OF SALE DATED September 5, 1995 FOR THE SALE OF THE PROPERTY, ASSIGNEE HEREBY WAIVES ANY SUCH REPRESENTATION, WARRANTY, PROMISES, COVENANTS, AGREEMENTS OR GUARANTIES. NOTWITHSTANDING ANYTHING HEREIN TO THE CONTRARY, ASSIGNOR IS CONVEYING THE ASSIGNED PROPERTIES TO ASSIGNEE "AS IS", "WHERE IS", AND WITH ALL FAULTS AND SPECIFICALLY AND EXPRESSLY WITHOUT ANY WARRANTIES, REPRESENTATIONS OR GUARANTEES, EITHER EXPRESS OR IMPLIED, OF ANY KIND, NATURE, OR TYPE WHATSOEVER FROM OR ON BEHALF OF THE ASSIGNOR 1. Words and phrases defined in the Agreement of Sale shall have the same meaning herein. 2. If any term, covenant or condition of this Bill of Sale shall be held to be invalid, illegal or unenforceable in any respect, this Bill of Sale shall be construed without such provision. 3. This Bill of Sale shall be governed by and construed under the laws of the State of Texas without regard to the principles of conflicts of law. EXECUTED this day of , 1995. ASSIGNOR: INVESTORS LIFE INSURANCE COMPANY OF NORTH AMERICA a Washington corporation By: Title: ASSIGNEE: OMNI CONGRESS JOINT VENTURE a Texas joint venture By: Title: Exhibit "H" ASSIGNMENT AND ASSUMPTION OF CONTRACTS AND THE SAINT DAVID'S LEASE THIS ASSIGNMENT AND ASSUMPTION OF CONTRACTS AND THE SAINT DAVID'S LEASE (the "Assignment") is made as of , 1995, by and between INVESTORS LIFE INSURANCE COMPANY OF NORTH AMERICA, a Washington corporation ("Assignor"), whose mailing address is 701 Brazos, Suite 1400, Austin, Texas 78701, and OMNI CONGRESS JOINT VENTURE, a Texas joint venture ("Assignee"), whose mailing address is 823 Congress Avenue, Suite 1111, Austin, Texas 78701. Introductory Provisions: A. Assignor and Assignee are parties to that certain Agreement of Sale dated September 5, 1995 (the "Agreement of Sale"), which provides, among other things, for the sale by Assignor to Assignee of that certain tract of land located in Travis County, Texas, as more particularly described on Exhibit "A" attached hereto and made part hereof for all purposes, together with the multi-use complex located thereon more commonly known as Austin Centre (the "Property"), and the execution and delivery of this Assignment. B. Assignor has certain rights, title and interest in and to: 1. the contracts or agreements, and all Amendments thereof, for construction work, materials, or equipment or for architectural services, professional engineering services, or other services, which entitles the Person furnishing the same to file a lien against the Property and which has a term expiring after the date hereof or under which any amount remains due and owing to the applicable Person, as more particularly described on Exhibit "B" attached hereto and made part hereof for all purposes (collectively the "Construction Contracts"); 2. the contracts or agreements (other than the Construction Contracts) and Amendments thereof, for the furnishing of management, maintenance, repairs, supplies, equipment, or other services to the Property, including but not limited to, the equipment leases for the Entelcom System, which have a term expiring after the date hereof, as more particularly described on Exhibit "C" attached hereto (collectively, the "Service Contracts"); and 3. that certain parking lease agreement (the "Saint David's Lease"), dated April 1, 1992, between Protestant Episcopal Church Council of the Diocese of Texas and St. David's Episcopal Church, collectively as landlord (the "Saint David's Landlord") and Assignor, as tenant, providing for additional parking space for the use of the Property. C. The Agreement of Sale requires Assignor to assign to Assignee any and all of Assignor's right, title and interest in and to the Construction Contracts, Service Contracts, and Saint David's Lease and requires Assignee to assume Assignor's obligations under the Construction Contracts, Service Contracts and Saint David's Lease. THEREFORE, in consideration of the foregoing and the agreements and covenants herein set forth, together with the sum of Ten Dollars ($10.00) and other good and valuable consideration this day paid and delivered by Assignee to Assignor, the receipt and sufficiency of all of which are hereby acknowledged by Assignor, Assignor does hereby ASSIGN, TRANSFER, SET OVER and DELIVER unto Assignee any and all of Assignor's right, title and interest in and to the Construction Contracts, the Service Contracts, the Saint David's Lease and any and all of the rights, benefits and privileges of Assignor thereunder (collectively, the "Assigned Agreements"). This Assignment is made subject to the Permitted Exceptions set forth in Exhibit "A" attached hereto. TO HAVE AND TO HOLD all and singular the Assigned Agreements unto Assignee, and Assignee's successors, and assigns forever. 1. Words and phrases defined in the Agreement of Sale shall have the same meaning herein. 2. Assignor agrees that it shall be responsible to any contractors and vendors under the Construction Contracts and Service Contracts and the Saint David's Landlord under the Saint David's Lease for the discharge or performance of any duties or obligations to be performed or discharged by Assignor thereunder prior to the date hereof, but Assignor shall not be responsible to any contractors or vendors under the Construction Contracts and Service Contracts or the Saint David's Landlord under the Saint David's Lease for the discharge or performance of such duties or obligations to be performed or discharged by Assignor thereunder from and after the date hereof. 3. Assignee hereby assumes and agrees to perform all of the terms, covenants and conditions of the Assigned Agreements on the part of Assignor required to be performed thereunder, from and after the date hereof (but not those required to be performed prior thereto). 4. Assignee hereby agrees to indemnify and hold harmless Assignor from and against any and all loss, liability, cost, claim, damage or expense (including Fees and Costs) incurred to enforce any rights and/or secure any remedies under this Assignment resulting by reason of the failure of Assignee to perform its obligations under the Assigned Agreements as specified in this Assignment and/or Assignee's failure to perform its obligations under this Assignment. 5. Except as to the Physical Conditions Exception described in Section 21(a) of the Agreement of Sale, Assignor hereby agrees to indemnify and hold harmless Assignee from and against any and all loss, liability, cost, claim, damage or expense (including Fees and Costs) incurred to enforce any rights and/or secure any remedies under this Assignment resulting by reason of the failure of Assignor to perform its obligations under the Assigned Agreements as specified in this Assignment and/or Assignor's failure to perform its obligations under this Assignment. 6. Each party shall sign and give such notices and consents as shall be necessary to confirm the provisions of this Assignment to any other Persons having rights or obligations under the Assigned Agreements, as the other may request from time to time, and each party shall execute and deliver to the other such further instruments, documents and agreements as the other may reasonably require to make this Assignment effective. 7. All of the covenants, terms and conditions set forth herein shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. 8. This Assignment may only be modified, altered, amended, or terminated by the written agreement of Assignor and Assignee. 9. Any notice, request, demand, statement or consent made hereunder or in connection herewith to any party shall be in writing and shall be sent to the addresses and in the manner specified in the Agreement of Sale. 10. In any term, covenant or condition of this Assignment shall be held to be invalid, illegal or unenforceable in any respect, this Assignment shall be construed without such provisions. 11. This Assignment shall be governed by and construed under the laws of the State of Texas without regard to principles of conflicts of law. IN WITNESS WHEREOF, Assignor and Assignee have duly executed this Assignment as of the day and year first above written. ASSIGNOR: INVESTORS LIFE INSURANCE COMPANY OF NORTH AMERICA a Washington corporation By: Title: ASSIGNEE: OMNI CONGRESS JOINT VENTURE a Texas joint venture By: Title: Exhibit "I" ASSIGNMENT AND ASSUMPTION OF LICENSES AND PERMITS THIS ASSIGNMENT AND ASSUMPTION OF LICENSES AND PERMITS (the "Assignment") is made as of , 1995, by and between INVESTORS LIFE INSURANCE COMPANY OF NORTH AMERICA, a Washington corporation ("Assignor"), whose mailing address is 701 Brazos, Suite 1400, Austin, Texas 78701, and OMNI CONGRESS JOINT VENTURE, a Texas joint venture ("Assignee"), whose mailing address is 823 Congress Avenue, Suite 1111, Austin, Texas 78701. Introductory Provisions: The following provisions form a part of this Assignment: A. Assignor and Assignee are parties to that certain Agreement of Sale dated September 5, 1995 (the "Agreement of Sale") which provides, among other things, for the sale by Assignor to Assignee of that certain tract of land located in Travis County, Texas, as more particularly described on Exhibit "A" attached hereto and made part hereof for all purposes, together with the multi-use complex located thereon more commonly known as Austin Centre (the "Property"), and the execution and delivery of this Assignment. B. Assignor has certain rights, title and interest in and to the building and other permits, certificates, licenses, franchises, authorizations and approvals granted by Government Entities necessary or useful in connection with the Property and/or the operation of the Improvements or any part thereof, as more particularly described on Exhibit "B" attached hereto and made a part hereof for all purposes (the "Licenses and Permits"). C. The Agreement of Sale requires Assignor to assign to Assignee any and all of Assignor's right, title and interest in and to the Licenses and Permits and requires Assignee to assume Assignor's obligations under the Licenses and Permits. THEREFORE, in consideration of the foregoing and the agreements and covenants herein set forth, together with the sum of Ten Dollars ($10.00) and other good and valuable consideration this day paid and delivered by Assignee to Assignor, the receipt and sufficiency of all of which are hereby acknowledged by Assignor, Assignor does hereby ASSIGN, TRANSFER, SET OVER and DELIVER unto Assignee any and all of Assignor's right, title and interest in and to the Licenses and Permits, excluding the Liquor Licenses, and any and all of the rights, benefits and privileges of Assignor thereunder. This Assignment is made subject to the Permitted Exceptions set forth in Exhibit "C" attached hereto. TO HAVE AND TO HOLD all and singular the Licenses and Permits unto Assignee, and Assignee's successors, and assigns forever. 1. Words and phrases defined in the Agreement of Sale shall have the same meaning herein. 2. Assignor agrees that it shall be responsible to all applicable Government Entities and Persons under the Licenses and Permits for the discharge or performance of any duties or obligations to be performed or discharged by Assignor thereunder prior to the date hereof, but Assignor shall not be responsible to any Government Entities or Persons under the Licenses and Permits for the discharge or performance of such duties or obligations to be performed or discharged by Assignor thereunder from and after the date hereof. 3. Assignee hereby assumes and agrees to perform all of the terms, covenants and conditions of the Licenses and Permits on the part of Assignor required to be performed thereunder, from and after the date hereof (but not those required to be performed prior thereto). 4. Assignee hereby agrees to indemnify and hold harmless Assignor from and against any and all loss, liability, cost, claim, damage or expense (including Fees and Costs) incurred to enforce any rights and/or secure any remedies under this Assignment resulting by reason of the failure of Assignee to perform its obligations under the Licenses and Permits from and after the date hereof and/or Assignee's failure to perform its obligations under this Assignment. 5. Except as to the Physical Conditions Exception described in Section 21(a) of the Agreement of Sale, Assignor hereby agrees to indemnify and hold harmless Assignee from and against any and all loss, liability, cost, claim, damage or expense (including Fees and Costs) incurred to enforce any rights and/or secure any remedies under this Assignment resulting by reason of the failure of Assignor to perform its obligations under the Licenses and Permits prior to the date hereof and/or Assignor's failure to perform its obligations under this Assignment. 6. Each party shall sign and give such notices and consents as shall be necessary to confirm the provisions of this Assignment to any other Person having rights or obligations under the Licenses and Permits as the other may request from time to time, and each party shall execute and deliver to the other such further instruments, documents and agreements as the other may reasonably require to make this Assignment effective. 7. All of the covenants, terms and conditions set forth herein shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. 8. This Assignment may only be modified, altered, amended, or terminated by the written agreement of Assignor and Assignee. 9. Any notice, request, demand, statement or consent made hereunder or in connection herewith to any party shall be in writing and shall be sent to the addresses and in the manner specified in the Agreement of Sale. 10. If any term, covenant or condition of this Assignment shall be held to be invalid, illegal or unenforceable in any respect, this Assignment shall be construed without such provisions. 11. This Assignment shall be governed by and construed under the laws of the State of Texas without regard to principles of conflicts of law. IN WITNESS WHEREOF, Assignor and Assignee have duly executed this Assignment as of the day and year first above written. ASSIGNOR: INVESTORS LIFE INSURANCE COMPANY OF NORTH AMERICA a Washington corporation By: Title: ASSIGNEE: OMNI CONGRESS JOINT VENTURE a Texas joint venture By: Title: Exhibit "J" ASSIGNMENT AND ASSUMPTION OF WARRANTIES AND GUARANTIES THIS ASSIGNMENT AND ASSUMPTION OF WARRANTIES AND GUARANTIES (the "Assignment") is made as of , 1995, by and between INVESTORS LIFE INSURANCE COMPANY OF NORTH AMERICA, a Washington corporation ("Assignor"), whose mailing address is 701 Brazos, Suite 1400, Austin, Texas 78701 and OMNI CONGRESS JOINT VENTURE, a ("Assignee"), whose mailing address is 823 Congress Avenue, Suite 1111, Austin, Texas 78701. Introductory Provisions: The following provisions form a part of this Assignment: A. Assignor and Assignee are parties to that certain Agreement of Sale dated September 5, 1995 (the "Agreement of Sale"), which provides, among other things, for the sale by Assignor to Assignee of that certain tract of land located in Travis County, Texas, as more particularly described on Exhibit "A" attached hereto and made part hereof for all purposes, together with the multi-use complex located thereon more commonly known as Austin Centre (the "Property"), and the execution and delivery of this Assignment. B. Assignor has certain rights, title and interest in and to the unexpired warranties and guaranties and payment and/or performance bonds provided in connection with any work or services provided under the Construction Contracts, Service Contracts or otherwise in connection with the construction and/or operation of the Property, as more particularly described on Exhibit "B" attached hereto and made a part hereof for all purposes (the "Warranties and Guaranties"). C. The Agreement of Sale requires Assignor to assign to Assignee any and all of Assignor's right, title and interest in and to the Warranties and Guaranties and requires Assignee to assume Assignor's obligations under the Warranties and Guaranties. THEREFORE, in consideration of the foregoing and the agreements and covenants herein set forth, together with the sum of Ten Dollars ($10.00) and other good and valuable consideration this day paid and delivered by Assignee to Assignor, the receipt and sufficiency of all of which are hereby acknowledged by Assignor, Assignor does hereby ASSIGN, TRANSFER, SET OVER and DELIVER unto Assignee any and all of Assignor's right, title and interest in and to the Warranties and Guaranties and any and all of the rights, benefits and privileges of Assignor thereunder. This Assignment is made subject to the Permitted Exceptions set forth in Exhibit "C" attached hereto. TO HAVE AND TO HOLD all and singular the Warranties and Guaranties unto Assignee, and Assignee's successors, and assigns forever. 1. Words and phrases defined in the Agreement of Sale shall have the same meaning herein. 2. Assignor agrees that it shall be responsible to all applicable Persons under the Warranties and Guaranties for the discharge or performance of any duties or obligations to be performed or discharged by Assignor thereunder prior to the date hereof, but Assignor shall not be responsible to any Persons under the Warranties and Guaranties for the discharge or performance of such duties or obligations to be performed or discharged by Assignor thereunder from and after the date hereof. 3. Assignee hereby assumes and agrees to perform all of the terms, covenants and conditions of the Warranties and Guaranties on the part of Assignor required to be performed thereunder, from and after the date hereof (but not those required to be performed prior thereto). 4. Assignee hereby agrees to indemnify and hold harmless Assignor from and against any and all loss, liability, cost, claim, damage or expense (including Fees and costs) incurred to enforce any rights and/or secure any remedies under this Assignment resulting by reason of the failure of Assignee to perform its obligations under the Warranties and Guaranties from and after the date hereof and/or Assignee's failure to perform its obligations under this Assignment. 5. Except as to the Physical Conditions Exception described in Section 21(a) of the Agreement of Sale, Assignor hereby agrees to indemnify and hold harmless Assignee from and Against any and all loss, liability, cost, claim, damage or expense (including Fees and Costs) incurred to enforce any rights and/or secure any remedies under this Assignment resulting by reason of the failure of Assignor to perform its obligations under the Warranties and Guaranties prior to the date hereof and/or Assignor's failure to perform its obligations under this Assignment. 6. Each party shall sign and give such notices and consents as shall be necessary to confirm the provisions of this Assignment to any other Persons having rights or obligations under the Warranties and Guaranties as the other may request from time to time, and each party shall execute and deliver to the other such further instruments, documents and agreements as the other may reasonably require to make this Assignment effective. 7. All of the covenants, terms and conditions set forth herein shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. 8. This Assignment may only be modified, altered, amended, or terminated by the written agreement of Assignor and Assignee. 9. Any notice, request, demand, statement or consent made hereunder or in connection herewith to any party shall be in writing and shall be sent to the addresses and in the manner specified in the Agreement of Sale. 10. If any term, covenant or condition of this Assignment shall be held to be invalid, illegal or unenforceable in any respect, this Assignment shall be construed without such provision. 11. This Assignment shall be governed by and construed under the laws of the State of Texas without regard to principles of conflicts of law. IN WITNESS WHEREOF, Assignor and Assignee have duly executed this Assignment as of the day and year first above written. ASSIGNOR: INVESTORS LIFE INSURANCE COMPANY OF NORTH AMERICA a Washington corporation By: Title: ASSIGNEE: OMNI CONGRESS JOINT VENTURE a Texas joint venture By: Title: Exhibit "K-1" (Closing Date) To: (Name and address of Tenant) Re: Your space leased at Austin Centre, Austin, Texas Gentlemen: This is to inform you that on (Closing Date), Omni Congress Joint Venture ("Omni Congress") purchased the Austin Centre from Investors Life Insurance Company of North America ("Investors"), and that as of such date Omni Congress has succeeded to the rights and assumed the obligations of Investors as Landlord, under your Lease for your space at Austin Centre. Omni Congress acknowledges receipt of your security deposit in the amount of $ which has been delivered by Investors and will hold such security deposit in accordance with the terms of your Lease and the provisions of the law relating to security deposits. Kindly make all future rent payments under the Lease payable to the order of Omni Congress Joint Venture. All future rent payments, formal communications and all inquiries (including any request for return of security) should be sent to Omni Congress Joint Venture, 823 Congress Avenue, Suite 111, Austin, Texas 78701. Very truly yours, INVESTORS LIFE INSURANCE COMPANY OF NORTH AMERICA By: Title: OMNI CONGRESS JOINT VENTURE By: Title: Exhibit "K-2" (Closing Date) To: (Name and address of Manager) Attention: Re: Your Management Contract with Investors Life Insurance Company of North America in connection with Austin Centre, Austin, Texas Gentlemen: This is to inform you that as of (Closing Date), Omni Congress Joint Venture has succeeded to the rights and assumed the obligations of Investors Life Insurance Company of North America, as owner under the Management Contract dated , 19 with you regarding the Austin Centre. All future formal communications and inquiries should be sent to Omni Congress Joint Venture, 823 Congress, Suite 1111, Austin, Texas 78701. Very truly yours, INVESTORS LIFE INSURANCE COMPANY OF NORTH AMERICA By: Title: Exhibit "K-3" (Closing Date) To: St. David's Episcopal Church 304 West Seventh Street Austin, Texas 78701 Attention: Business Administrator Re: That certain Parking Lease (the "Lease") by and between the Protestant Episcopal Church Council of the Diocese of Texas and St. David's Episcopal Church (together, "Landlord"), as landlord, and Investors Life Insurance Company of North America, as tenant, dated April 1, 1992 covering the leasing to Investors Life Insurance Company of North America of certain parking spaces (the "Leased Premises") located in the parking garage situated on Lots 7, 8, 9 and 10, Block 86, Old City of Austin, Travis County, Texas Gentlemen: This is to inform you that as of (Closing Date), Omni Congress Joint Venture has succeeded to the rights and assumed the obligations of Investors Life Insurance Company of North America, as tenant, under the Lease. All future formal communications and inquiries should be sent to Omni Congress Joint Venture, 823 Congress Avenue, Suite 1111, Austin, Texas 78701. Very truly yours, INVESTORS LIFE INSURANCE COMPANY OF NORTH AMERICA By: Title: Exhibit "L" CERTIFICATE OF CORPORATE OFFICERS I, , hereby certify that I am now, and at all times mentioned herein have been, the duly elected, qualified, and acting (Assistant) Secretary of Investors Life Insurance Company of North America, a Washington corporation (the "Corporation"), and, as such officer, I have access to the records of the Corporation, which records of the Corporation reflect that: 1. Resolutions. Attached hereto as Annex 1 and incorporated herein by reference is a true and correct copy of resolutions which have been duly adopted by the Board of Directors of the Corporation in compliance with and not in contravention of the articles of incorporation and bylaws of the Corporation; none of such resolutions has been repealed or modified in any respect, and all of such resolutions are in full force and effect on the date hereof; and Exhibit A which is attached hereto and incorporated herein by reference is a true and correct copy of the Exhibit A referred to in such resolutions. 2. Incumbency. The following named individuals are duly elected, qualified and acting officers of the Corporation holding the offices set forth opposite their respective names as of the date hereof, and set forth opposite the respective titles of said officers are their true, authentic signatures. Name Title Specimen Signature President Executive Vice President Secretary Assistant Secretary 3. Articles of Incorporation and Bylaws. Attached hereto as Annexes 2 and 3, respectively, and incorporated herein by reference, are true and complete copies of the articles of incorporation and the bylaws of the Corporation. IN WITNESS WHEREOF, I have duly executed this Certificate this day of , 1995. (Assistant) Secretary I, hereby certify that I am now the duly elected, qualified and acting (Executive Vice) President of the Corporation; that the person executing and delivering the foregoing Certificate is the duly elected, qualified and acting officer of the Corporation as indicated in such Certificate, and the signature set forth above beside such person's name is such person's correct signature; and that the certifications set forth above are true and correct as of the date hereof. ANNEX 1 WHEREAS, it is proposed that Investors Life Insurance Company of North America, a Washington corporation (the "Corporation"), sell to Omni Congress Joint Venture (the "Purchaser"), the real estate more particularly described on Exhibit "A" which is attached hereto and made a part hereof for all purposes, together with the improvements located thereon commonly known as "Austin Centre", comprised of: (a) a central atrium, an office tower and ground level retail space with approximately 343,664 square feet of rentable space, an underground 667-car parking garage, and common areas located in the atrium; (b) a hotel tower with 314 rooms commonly known as the "Omni Austin Hotel;"; (c) approximately 68,474 square feet of residential rental space located in the air space directly above said hotel; and (d) all other items comprising the Property as defined in that certain Agreement of Sale dated September 5, 1995, executed by the Corporation and Purchaser (the "Sale"); WHEREAS, the Special Warranty Deed, Assignment and Assumption of Leases, Bill of Sale and other proposed papers evidencing, creating, governing or securing the Sale, or to be executed in connection therewith (the "Sale Documents"), have been submitted to, and reviewed by, the directors of the Corporation; NOW THEREFORE, RESOLVED, that the proposed Sale and the proposed Sale Documents be, and each is hereby, authorized and approved, and that the President or any Vice President of the Corporation be, and each is hereby, authorized, empowered and directed to execute the Sale Documents for and on behalf and in the name of the Corporation, with such changes in the terms and provisions thereof as the officer executing the same shall, in his sole discretion, deem necessary or desirable and in the best interest of the Corporation, his signature being conclusive evidence that he did so deem any such changes to be necessary or desirable and in the best interest of the Corporation; and FURTHER RESOLVED, that the President or any Vice President of the Corporation be, and each is hereby, authorized, empowered and directed to perform all acts and do all things which he may deem necessary or desirable to consummate the transactions contemplated by the Sale Documents, with such modifications, amendments or further assignments, certificates and other agreements, instruments or documents as he, in his discretion, may deem necessary or desirable and in the best interest of the Corporation, his taking of any such action, for and on behalf and in the name of the Corporation, and/or his execution and delivery, for and on behalf and in the name of the Corporation, of any such agreement, instrument or document to be conclusive evidence that he did so deem the same to be necessary or desirable and in the best interest of the Corporation; and FURTHER RESOLVED, that the Secretary and any Assistant Secretary of the Corporation be, and each is hereby, authorized, empowered and directed to certify and attest any documents which such officer may deem necessary or appropriate to consummate the transactions contemplated by the Sale Documents; but such certification or attestation shall not be required for the validity of the particular documents; and FURTHER RESOLVED, that any and all transactions by any of the officers or representatives of the Corporation, for and on behalf and in the name of the Corporation, with Purchaser prior to the adoption of the foregoing resolutions, including, but not limited to, the execution of the [application for the Sale?] and the negotiation of the Sale and the terms of the Sale Documents, be, and they are hereby, ratified, confirmed and approved in all respects for all purposes; and FURTHER RESOLVED, that the foregoing powers and authorizations shall continue in full force and effect until written notice of revocation has been given Purchaser and its receipt obtained therefor. Exhibit "M" ESTOPPEL CERTIFICATE Date: Re: Lease dated , 19 ("Lease") by and between ("Tenant") and Investors Life Insurance Company of North America ("Landlord") for the premises located at Suite , 701 Brazos, Austin, Texas (the "Property") To Omni Congress Joint Venture: The undersigned Tenant understands that Omni Congress Joint Venture intends to acquire the Property from the Landlord. The undersigned Tenant does hereby certify to you as follows: A. A true and correct copy of the Lease is attached hereto as Exhibit "A". B. The Lease is in full force and effect and has not been modified, supplemented or amended except as follows: C. No dispute exists between the Landlord and Tenant, Tenant is not in default under the Lease and the Tenant does not consider the Landlord in default under the Lease except as follows: D. Tenant does not claim any offsets or credits against rents payable under the Lease except as follows: E. Tenant has not paid a security or other deposit with respect to the Lease, except as follows: F. Tenant has fully paid rent due through the month of . G. Tenant has not paid any rentals in advance except for the current month of , 1995. H. There are no outstanding tenant improvements as provided for in the Lease except as follows: . I. Tenant has no knowledge of any leasing commissions due to any party other than as described in the Lease, except as follows: . J. The primary term of the Lease expires on , and the Tenant has no options to renew or extend the term of the Lease except as expressly provided in the Lease. By: (printed name) Its: Exhibit "N" AUSTIN CENTRE TELECOMMUNICATIONS SERVICES Advanced Telecommunications equipment and servicing system. EXHIBIT "O" (Copies of Registration Agreement, Confidentiality Agreement - Principal and Confidentiality Agreement - Agent) September 27, 1995 Omni Congress Joint Venture 823 Congress Avenue Suite 1111 Austin, Texas 78701 Attn: Mr. Tom Stacy Re: Agreement of Sale ("Agreement") between Investors Life Insurance Company of North America ("Seller"), as Seller, and Omni Congress Joint Venture ("Buyer"), as Buyer, for the purchase and sale of Austin Centre Dear Mr. Stacy: Buyer has informed Seller that Buyer is not presently in a position to deliver to Seller the financial statements that Buyer is required by Section 17b(d) of the Agreement to deliver by September 25, 1995. Seller is not willing to waive this requirement of the Agreement but would be agreeable to giving Buyer more time to fulfill that requirement. Seller proposes to amend the Agreement by deleting Section 17b(d) of the Agreement and inserting in lieu thereof the following: (d) Financial Statements. On or before October 26, 1995, Buyer will deliver to Seller current financial statements of Buyer and all Persons who are or will become general and limited partners of, and other equity investors in, Buyer. If Buyer does not deliver such financial statements to Seller by October 26, 1995, Seller shall have the right to terminate this Agreement by notice to Buyer. If Seller exercises its right to terminate this Agreement, such termination shall be a "Permitted Termination" as defined by Section 23(a) of this Agreement, and the Deposit shall be returned to Buyer in accordance with said Section 23(a). Please indicate Buyer's agreement with the foregoing amendment to the Agreement by signing and returning to Seller a copy of this letter agreement, whereupon the Agreement shall be amended by this letter agreement. Sincerely, INVESTORS LIFE INSURANCE COMPANY OF NORTH AMERICA By:/s/ James M. Grace James M. Grace Executive Vice President ACCEPTED AND AGREED: OMNI CONGRESS JOINT VENTURE By:/s/ Tom Stacy Tom Stacy Managing Venturer October 11, 1995 Omni Congress Joint Venture 823 Congress Avenue Suite 1111 Austin, Texas 78701 Attn: Mr. Tom Stacy Re: Agreement of Sale, as amended, ("Agreement") between Investors Life Insurance Company of North America ("Seller"), as Seller, and Omni Congress Joint Venture ("Buyer"), as Buyer, for the purchase and sale of Austin Centre Dear Mr. Stacy: Seller proposes to amend the Agreement by deleting the third sentence of Section 6b of the Agreement and inserting in lieu thereof the following sentence: On or before November 16, 1995, Seller shall deliver to Buyer Estoppel Certificates (herein so called), in form substantially as that set forth in Exhibit "M" attached hereto, originally executed by at least 75% of the Tenants under the Office Leases (collectively the "Estoppel Certificates"). Please indicate Buyer's agreement with the foregoing amendment to the Agreement by signing and returning to Seller a copy of this letter agreement, whereupon the Agreement shall be amended by this letter agreement. Sincerely, INVESTORS LIFE INSURANCE COMPANY OF NORTH AMERICA By:/s/ James M. Grace James M. Grace Executive Vice President ACCEPTED AND AGREED: OMNI CONGRESS JOINT VENTURE By:/s/ Tom Stacy Tom Stacy Managing Venturer Third Amendment to Agreement of Sale This Third Amendment to Agreement of Sale ("Third Amendment") is entered into by and between Investors Life Insurance Company of North America ("Seller") and Omni Congress Joint Venture ("Buyer") and is as follows: WHEREAS, Seller and Buyer entered into an Agreement of Sale (the "Agreement") having an effective date of September 5, 1995, wherein Seller agreed to sell and Buyer agreed to purchase the real property described on Exhibit "A" attached hereto and made a part hereof for all purposes (the "Property"); and WHEREAS, Seller and Buyer have previously amended the Agreement by letter agreement ("First Amendment") dated September 27, 1995, a copy of which is attached hereto as Exhibit "B" and made a part hereof for all purposes; and WHEREAS, Seller and Buyer have previously amended the Agreement by letter agreement ("Second Amendment") dated October 11, 1995, a copy of which is attached hereto as Exhibit "C" and made a part hereof for all purposes; and WHEREAS, Seller and Buyer have agreed to further amend certain terms and conditions of the Agreement as more specifically set forth herein; NOW, THEREFORE, for a good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Seller and Buyer do hereby agree to further amend the Agreement as follows: 1. The third sentence of Section 6b of the Agreement is deleted in its entirety and the following sentence shall be inserted in lieu thereof: On or before December 18, 1995, Seller shall deliver to Buyer Estoppel Certificates (herein so called), in form substantially as that set forth in Exhibit "M" attached hereto, originally executed by at least 75% of the Tenants under the Office Leases (collectively the "Estoppel Certificates"). 2. The language "45 days after the later of (i) the Effective Date or (ii) the date on which Seller has notified Buyer that substantially all of the documents and information described in Section 6a have been made available to Buyer" in the first sentence of Section 16(b) of the Agreement is deleted and the date "November 27, 1995" shall be inserted in lieu thereof. 3. The third sentence of the second paragraph of Section 16(b) of the Agreement is deleted in its entirety and the following sentence shall be inserted in lieu thereof: If Buyer timely gives the Inspection Termination Notice to Seller, the Deposit together with all interest earned thereon shall be immediately returned to Buyer, less and with the exception of Fifteen Thousand and No/100 Dollars ($15,000.00) of the Deposit which shall be immediately delivered to Seller in consideration for the Due Diligence Review and Seller's entering into this Agreement. 4. The first sentence of Section 16(c) of the Agreement is deleted in its entirety and the following sentence shall be inserted in lieu thereof: Buyer shall have until January 4, 1996 (the "Financing Feasibility Period") to obtain third party debt financing upon terms acceptable to Buyer. 5. The third sentence of Section 16(c) of the Agreement is deleted in its entirety and the following sentence shall be inserted in lieu thereof: If Buyer timely gives the Financing Termination Notice to Seller, the Deposit together with all interest earned thereon shall be immediately returned to Buyer, less and with the exception of Forty Thousand and No/100 Dollars ($40,000.00) of the Deposit which shall be immediately delivered to Seller in consideration for the Due Diligence Review, Seller's entering into this Agreement and restricting Seller's ability to agree to sell the Property to any Person other than Buyer until the end of the Financing Feasibility Period. 6. Section 17b(d) of the Agreement is deleted in its entirety and the following shall be inserted in lieu thereof: (d) Equity Partners. On or before November 27, 1995, Buyer will deliver to Seller (i) current financial statements of Buyer, (ii) written commitments from all Persons who on such date are or will become general and limited partners of, and other equity investors in, Buyer (collectively, "Partners and Investors") that they will make the equity investments necessary to purchase the Property from Seller pursuant to this Agreement, subject only to Buyer's obtaining the third party debt financing upon terms acceptable to Buyer, and (iii) current financial statements of the Partners and Investors. Such Partners and Investors shall incur no legal liability to Seller or Buyer as a result of such commitments. Buyer may thereafter add or substitute Partners and Investors as Buyer deems necessary to complete the equity structure of Buyer. The withdrawal of any Partner or Investor of Buyer which prevents Buyer from closing the purchase of the Property from Seller shall constitute a default by Buyer under this Agreement only if Buyer has not timely given the Financing Termination Notice. If Buyer does not deliver such financial statements and commitments to Seller by November 27, 1995, Seller shall have the right to terminate this Agreement by notice to Buyer. If Seller exercises its right to terminate this Agreement, the Deposit together with all interest earned thereon shall be immediately returned to Buyer, less and with the exception of Fifteen Thousand and No/100 Dollars ($15,000.00) of the Deposit which shall be immediately delivered to Seller in consideration for the Due Diligence Review and Seller's entering into this Agreement. 7. This Third Amendment may be executed in multiple counterparts which, when combined together, shall constitute an original of this Third Amendment. In addition, facsimile signatures of the parties shall be effective on all counterparts of this Third Amendment. 8. All terms and conditions of the Agreement not specifically amended hereby are hereby ratified, confirmed, and shall continue in full force and effect. EXECUTED this 7th day of November, 1995. Seller: INVESTORS LIFE INSURANCE COMPANY OF NORTH AMERICA By:/s/ Roy F. Mitte Roy F. Mitte, President Buyer: OMNI CONGRESS JOINT VENTURE By:/s/ Tom Stacy Tom Stacy, Managing Venturer Fourth Amendment to Agreement of Sale This Fourth Amendment to Agreement of Sale ("Fourth Amendment") is entered into by and between Investors Life Insurance Company of North America ("Seller") and Omni Congress Joint Venture ("Buyer") and is as follows: WHEREAS, Seller and Buyer entered into an Agreement of Sale (the "Agreement") having an effective date of September 5, 1995, wherein Seller agreed to sell and Buyer agreed to purchase the real property described on Exhibit "A" attached hereto and made a part hereof for all purposes (the "Property"); and WHEREAS, Seller and Buyer have previously amended the Agreement by letter agreement ("First Amendment") dated September 27, 1995; and WHEREAS, Seller and Buyer have previously amended the Agreement by letter agreement ("Second Amendment") dated October 11, 1995; and WHEREAS, Seller and Buyer have previously amended the Agreement by an amendment ("Third Amendment") dated November 7, 1995; and WHEREAS, Seller and Buyer have agreed to further amend certain terms and conditions of the Agreement as more specifically set forth herein; NOW, THEREFORE, for a good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Seller and Buyer do hereby agree to further amend the Agreement as follows: 1. The third sentence of Section 6b of the Agreement is deleted in its entirety and the following sentence shall be inserted in lieu thereof: On or before December 27, 1995, Seller shall deliver to Buyer Estoppel Certificates (herein so called), in form substantially as that set forth in Exhibit "M" attached hereto, originally executed by at least 75% of the Tenants under the Office Leases (collectively the "Estoppel Certificates"). 2. The first sentence of Section 13 of the Agreement is deleted in its entirety and the following sentence shall be inserted in lieu thereof: Consummation of the transactions contemplated by this Agreement (the "Closing") shall be held on or before the first business day (the "Closing Date") that is ten (10) days after the end of the Financing Feasibility Period as described in Section 16(c), subject to any extension required by Section 10 hereof. 3. The date "November 27, 1995" in the first sentence of Section 16(b) of the Agreement is deleted and the date "December 4, 1995" shall be inserted in lieu thereof. 4. The first sentence of Section 16(c) of the Agreement is deleted in its entirety and the following sentences shall be inserted in lieu thereof: Buyer shall have until the close of business on the last day of the Financing Feasibility Period (as hereinafter defined) to obtain third party financing upon terms acceptable to Buyer. If Omni Hotel notifies Seller in writing of its intended termination of the Omni Hotel Agreement in accordance with Section 16.3 thereof, the "Financing Feasibility Period" shall end on February 5, 1996. If Omni Hotel notifies Seller in writing of its decision not to terminate the Omni Hotel Agreement pursuant to Section 16.3 thereof, the "Financing Feasibility Period" shall end on the later of (i) January 4, 1996 or (ii) fifteen (15) days after the date on which Seller receives such notice from Omni Hotel, but in no event shall the "Financing Feasibility Period" end later than January 19, 1996. If Omni Hotel does not give either notice referred to in the preceding two sentences within thirty (30) days of Omni Hotel's receipt of the information required to be furnished by Seller pursuant to Section 16.2 of the Omni Hotel Agreement, the "Financing Feasibility Period" shall end on the later of (i) January 4, 1996 or (ii) fifteen (15) days after the date on which said 30-day period ends, but in no event shall the "Financing Feasibility Period" end later than January 19, 1996. If the end of the "Financing Feasibility Period" cannot be determined with certainty because of a dispute with Omni Hotel as to whether or when Omni Hotel received the information required to be furnished by Seller pursuant to Section 16.2 of the Omni Hotel Agreement, the "Financing Feasibility Period" shall end on January 19, 1996. 5. The last sentence of Section 21(a) of the Agreement is deleted in its entirety and the following sentence shall be inserted in lieu thereof: Buyer agrees to and does hereby indemnify, defend, exonerate and save Seller harmless from and against any and all liability, loss, damage, claims and expense incurred or suffered by Seller (i) arising out of or incidental to the operation of the Property by Buyer after the conveyance of the Property to Buyer or (ii) as the result of any claim made against Seller relating to any addition or deletion of any general or limited partners of, or other equity investors in, Buyer or any other change in the information provided pursuant to Section 17b(b) of this Agreement or Article XVI of the Omni Hotel Agreement. 6. This Fourth Amendment may be executed in multiple counterparts which, when combined together, shall constitute an original of this Fourth Amendment. In addition, facsimile signatures of the parties shall be effective on all counterparts of this Fourth Amendment. 7. All terms and conditions of the Agreement not specifically amended hereby are hereby ratified, confirmed, and shall continue in full force and effect. Executed on this the 1st day of December, 1995. Seller: INVESTORS LIFE INSURANCE COMPANY OF NORTH AMERICA By:/s/ Roy F. Mitte Roy F. Mitte, President Buyer: OMNI CONGRESS JOINT VENTURE By:/s/ Tom Stacy Tom Stacy, Managing Venturer Fifth Amendment to Agreement of Sale This Fifth Amendment to Agreement of Sale ("Fifth Amendment") is entered into as follows: WHEREAS, Investors Life Insurance Company of North America ("Seller") and Omni Congress Joint Venture ("Buyer") entered into an Agreement of Sale (the "Agreement") having an effective date of September 5, 1995, wherein Seller agreed to sell and Buyer agreed to purchase the real property described on Exhibit "A" attached hereto and made a part hereof for all purposes (the "Property"); and WHEREAS, Seller and Buyer have previously amended the Agreement by letter agreement ("First Amendment") dated September 27, 1995; and WHEREAS, Seller and Buyer have previously amended the Agreement by letter agreement ("Second Amendment") dated October 11, 1995; and WHEREAS, Seller and Buyer have previously amended the Agreement by an amendment ("Third Amendment") dated November 7, 1995; and WHEREAS, Seller and Buyer have previously amended the Agreement by an amendment ("Fourth Amendment") dated December 1, 1995; and WHEREAS, Seller and Buyer have agreed to further amend certain terms and conditions of the Agreement as more specifically set forth herein; NOW, THEREFORE, for a good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Seller and Buyer do hereby agree to further amend the Agreement as follows: 1. Section 2(b) of the Agreement is hereby amended by adding the following sentence to the end of said Section 2(b): Seller agrees to pay One Million and No/100 Dollars ($1,000,000.00) of the Purchase Price to Buyer's reserve account for tenant improvement costs, commissions and capital reserves for the Property. Seller will have no control over, beneficial interest in or responsibility for said account. 2. The first sentence of Section 13 of the Agreement is deleted in its entirety and the following sentence shall be inserted in lieu thereof: Consummation of the transactions contemplated by this Agreement (the "Closing") shall be held on or before March 1, 1996 (the "Closing Date"), subject to any extension required by Section 10 hereof; provided, however, that Buyer shall have the right to extend the Closing Date to a date on or before March 29, 1996 if Buyer, prior to February 26, 1996, gives notice to Seller and the Title Company of such extension of the Closing Date and deposits with the Title Company, as Escrow Agent, an additional Two Hundred and Fifty Thousand and No/10 Dollars ($250,000.00), thereby increasing the Deposit to Seven Hundred and Fifty Thousand and No/100 Dollars ($750,000.00). 3. Section 15(c) of the Agreement is deleted in its entirety and the following shall be inserted in lieu thereof: (c) After the Closing, Seller shall promptly pay to Buyer, as collected, a fraction of the amounts collected on all accounts receivable balances referred to in Subsection 15(a) above, which fraction shall consist of $250,000.00 as the numerator and the total amount of such account receivable balances, outstanding on the Closing Date as the denominator. Seller shall use commercially reasonable efforts to collect such account receivable balances. 4. Seller and Buyer acknowledge and agree that the Financing Feasibility Period described in Section 16(c) of the Agreement has expired. Buyer hereby waives its right to give the Financing Termination Notice and acknowledges that the Deposit has become fully non-refundable except for Seller's uncured default or failure to close on the Closing Date or the failure of Seller to satisfy the conditions in Section 8 of the Agreement that Seller is obligated to satisfy prior to the Closing. 5. This Fifth Amendment may be executed in multiple counterparts which, when combined together, shall constitute an original of this Fifth Amendment. In addition, facsimile signatures of the parties shall be effective on all counterparts of this Fifth Amendment. 6. All terms and conditions of the Agreement not specifically amended hereby are hereby ratified, confirmed, and shall continue in full force and effect. Executed on this the 19th day of January, 1996. Seller: INVESTORS LIFE INSURANCE COMPANY OF NORTH AMERICA By:/s/ Theodore A. Fleron Theodore A. Fleron, Senior Vice President and Assistant Secretary Buyer: OMNI CONGRESS JOINT VENTURE, a Texas General Partnership By:/s/ Tom Stacy Name: Tom Stacy Title: Managing Venturer Sixth Amendment to Agreement of Sale This Sixth Amendment to Agreement of Sale ("Fifth Amendment") is entered into as follows: WHEREAS, Investors Life Insurance Company of North America ("Seller") and Omni Congress Joint Venture ("Buyer") entered into an Agreement of Sale (the "Agreement") having an effective date of September 5, 1995, wherein Seller agreed to sell and Buyer agreed to purchase the real property described on Exhibit "A" attached hereto and made a part hereof for all purposes (the "Property"); and WHEREAS, Seller and Buyer have previously amended the Agreement by letter agreement ("First Amendment") dated September 27, 1995; and WHEREAS, Seller and Buyer have previously amended the Agreement by letter agreement ("Second Amendment") dated October 11, 1995; and WHEREAS, Seller and Buyer have previously amended the Agreement by an amendment ("Third Amendment") dated November 7, 1995; and WHEREAS, Seller and Buyer have previously amended the Agreement by an amendment ("Fourth Amendment") dated December 1, 1995; and WHEREAS, Seller and Buyer have previously amended the Agreement by an amendment ("Fifth Amendment") dated January 19, 1996; and WHEREAS, Seller and Buyer have agreed to further amend certain terms and conditions of the Agreement as more specifically set forth herein; NOW, THEREFORE, for a good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Seller and Buyer do hereby agree to further amend the Agreement as follows: 1. The first sentence of Section 13 of the Agreement is deleted in its entirety and the following sentence shall be inserted in lieu thereof: Consummation of the transactions contemplated by this Agreement (the "Closing") shall be held on or before March 1, 1996 (the "Closing Date"), subject to any extension required by Section 10 hereof; provided, however, that Buyer shall have the right to extend the Closing Date to a date on or before March 29, 1996 if Buyer, prior to 10:00 a.m., Austin, Texas time, on February 27, 1996, gives notice to Seller and the Title Company of such extension of the Closing Date and deposits with the Title Company, as Escrow Agent, an additional Two Hundred and Fifty Thousand and No/10 Dollars ($250,000.00), thereby increasing the Deposit to Seven Hundred and Fifty Thousand and No/100 Dollars ($750,000.00). 2. This Sixth Amendment may be executed in multiple counterparts which, when combined together, shall constitute an original of this Sixth Amendment. In addition, facsimile signatures of the parties shall be effective on all counterparts of this Sixth Amendment. 3. All terms and conditions of the Agreement not specifically amended hereby are hereby ratified, confirmed, and shall continue in full force and effect. Executed on this the 23rd day of February, 1996. Seller: INVESTORS LIFE INSURANCE COMPANY OF NORTH AMERICA By:/s/ James M. Grace James M. Grace, Executive Vice President Buyer: OMNI CONGRESS JOINT VENTURE By:/s/ Tom Stacy Tom Stacy, Managing Venturer ASSIGNMENT AND ASSUMPTION OF AGREEMENT OF SALE THIS ASSIGNMENT AND ASSUMPTION OF AGREEMENT OF SALE (the "Assignment") is made as of January 19, 1996, by and between OMNI CONGRESS JOINT VENTURE, a Texas joint venture, ("Assignor"), whose mailing address is 823 Congress Avenue, Suite 1111, Austin, Texas 78701 and PROPERTY ASSET MANAGEMENT INC., a Delaware corporation, ("Assignee"), whose mailing address is 3 World Financial Center, New York, New York 10285. WHEREAS, Assignor has entered into that certain Agreement of Sale dated September 5, 1995 between Investors Life Insurance Company of North America ("Investors"), as Seller, and Assignor, as Buyer, as amended by the First Amendment to Agreement of Sale dated September 27, 1995, the Second Amendment to Agreement of Sale dated October 11, 1995, the Third Amendment to Agreement of Sale dated November 7, 1995, the Fourth Amendment to Agreement of Sale dated December 1, 1995 and Fifth Amendment to Agreement of Sale dated January 19, 1996 (said Agreement of Sale along with the First Second, Third and Fourth Amendments to Agreement of Sale being collectively referred to as the "Agreement") relating to the sale by Investors to Assignor of the real estate in Austin, Texas known as the Austin Centre and more particularly described on Exhibit "A" attached hereto (the "Property"); NOW, THEREFORE, in consideration of the foregoing and the agreements and covenants herein set forth, together with the sum of Ten Dollars ($10.00) and other good and valuable consideration this day paid and delivered by Assignee to Assignor, the receipt and sufficiency of all of which are hereby acknowledged by Assignor, Assignor does hereby ASSIGN, TRANSFER, SET OVER AND DELIVER unto Assignee all of Assignor's right, title and interest in and to the Agreement and all of the rights, benefits and privileges of Assignor thereunder, but not Assignor's obligations thereunder. TO HAVE AND TO HOLD all and singular the Agreement unto Assignee, and Assignee's successors and assigns forever. 1. Assignee hereby accepts the assignment of the Agreement (other than the obligations of the Assignor under the Agreement). This Assignment shall not be construed to currently obligate Assignee to take any action or incur any expense or perform or discharge any obligation, duty or liability under the Agreement. It is agreed and understood that if Assignor fails to meet any of its obligations pursuant to the Agreement, Assignee may, but is not required to, assume all of the obligations of the Buyer under the Agreement on its own behalf or on behalf of Assignor. Seller agrees to give Buyer written notice of any default by Assignor under the Agreement and Assignee shall have two (2) business days to assume in writing all of the obligations of the Buyer under the Agreement, including, but not limited to, the obligations of Buyer under Sections 17b (a) and (b) of the Agreement. If the time for compliance with any obligations of Buyer has expired prior to the valid assumption of such obligation by Assignee pursuant to the preceding sentence, Assignee shall be afforded a reasonable period of time under the circumstances to perform such obligation. If Assignee fails to timely assume in writing all of the obligations of the Buyer under the Agreement, the Agreement shall terminate and the Deposit shall be distributed to Seller in accordance with the Agreement. Notwithstanding this Assignment, Assignor hereby acknowledges and agrees that it shall remain fully liable to perform all of the obligations of the Buyer under the Agreement. 1.A Assignee acknowledges and agrees that the Financing Feasibility Period described in Section 16(c) of the Agreement has expired. Buyer has waived its right to give the Financing Termination Notice, and that the Deposit has become fully non- refundable except for Seller's uncured default or failure to close on the Closing Date or the failure of Seller to satisfy the conditions in Section 8 of the Agreement that Seller is obligated to satisfy prior to the Closing. 2. Assignor shall not enter into any agreement or do or fail to do any act under the Agreement or otherwise that will adversely affect the rights assigned to Assignee hereunder without the consent of Assignee. 3. Each party shall sign and give such notices and consents as shall be necessary to confirm the provisions of this Assignment to Investors or any other persons or entity having rights or obligations under the Agreement, as the other may request from time to time, and each party shall execute and deliver to the other such further instruments, documents and agreements as the other may reasonably require to make this Assignment effective. 4. All of the covenants, terms and conditions set forth herein shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. 5. This Assignment may only be modified, altered, amended or terminated by the written agreement of Assignor and Assignee. 6. Any notice, request, demand, statement or consent made hereunder or in connection herewith to any party shall be in writing and shall be sent (if to any party other than PAMI) to the addresses and in the manner specified in the Agreement, and if to PAMI, to 3 World Financial Center, New York, New York 10285, Attention: Edward J. Meylor. 7. If any term, covenant or condition of this Assignment shall be held to be invalid, illegal or unenforceable in any respect, this Assignment shall be construed without such provision. 8. This Assignment shall be governed by and construed under the laws of the State of New York without regard to principles of conflicts of law. 9. This Assignment may be executed in counterparts, which when taken together shall be deemed to be an original. 10. Each party hereto acknowledges and agrees that all parties hereto may rely upon execution of this Agreement and the Assignment by facsimile copy. 11. Capitalized terms used but not defined in this Assignment shall have the meanings given to them in the Agreement. IN WITNESS WHEREOF, Assignor and Assignee have duly executed this Assignment as of the day and year first above written. ASSIGNOR: OMNI CONGRESS JOINT VENTURE, a Texas joint venture By:/s/ Tom Stacy Name: Tom Stacy Title: Managing Venturer ASSIGNEE: PROPERTY ASSET MANAGEMENT INC. a Delaware corporation By:/s/ Edward J. Meylor Name: Edward J. Meylor Title: Vice President CONSENT OF SELLER Investors Life Insurance Company of North America hereby consents to the foregoing assignment of the Agreement from Assignor to Assignee. By its consent, Investors Life Insurance Company of North America agrees to accept, subject to Assignee's assumption in writing of all of the obligations of the Buyer under the Agreement, tender of performance by Assignee of any obligations of Assignor as buyer under the Agreement, including without limitation, the closing of the purchase of the Property. INVESTORS LIFE INSURANCE COMPANY OF NORTH AMERICA By:/s/ Theodore A. Fleron Name: Theodore A. Fleron Title: Senior Vice President and Assistant Secretary EX-21 5 EXHIBIT 21 SUBSIDIARIES OF REGISTRANT Investors Life Insurance Company of North America ILG Securities Corporation InterContinental Life Insurance Company ILG Sales Corporation InterContinental Growth Plans, Inc. InterContinental Life Agency, Inc. * Investors Life Insurance Company of Indiana * Wholly-owned subsidiary of InterContinental Growth Plans, Inc. EX-23 6 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 33-71074) of InterContinental Life Corporation of our report dated March 27, 1996 appearing on page F-2 of this Form 10-K. /s/ Price Waterhouse LLP PRICE WATERHOUSE LLP Dallas, Texas March 27, 1996 EX-27 7
7 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1995 DEC-31-1995 483,606 14,420 14,277 1,559 14,836 15,467 669,538 6,537 14,474 24,926 1,315,293 128,265 10,669 544,621 6,125 59,385 0 0 1,137 95,948 1,315,293 11,694 64,781 0 3,591 42,639 3,929 15,016 16,483 5,769 10,714 0 0 0 10,714 2.11 2.11 0 0 0 0 0 0 0
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