EXHIBIT 10.7
May 14, 1997
Xx. Xxxxxxx X. Xxxxxx
0000 Xxxxx Xxxxx #00
Xxxxxxx, Xxxxx 00000
Dear Xx. Xxxxxx:
The purpose of this letter is to set forth the mutual agreement of Western
National Corporation (the "Company") and you with respect to the tax treatment
of an existing arrangement between you and the Company involving an
interest-bearing, non-recourse loan (the "Loan") made by the Company to you,
enabling you to purchase 100,000 shares (the "Shares") of the Common Stock of
the Company, which have been pledged to secure the Loan. You and the Company
agree as follows:
1. BACKGROUND.
----------
a. You purchased the Shares at the time of the Company's initial public
offering for $1,136,500 from Conseco, Inc., and borrowed the purchase price
from the Company by incurring the Loan. The Loan bears interest at the
Bankers Trust Company of New York prime rate and is payable, as to both
principal and interest, in one installment at maturity.
b. In all Securities Exchange Commission filings and other public
documents the Company has represented and described the transaction as a stock
purchase and related loan, and the Shares have been reflected in the
description of your stock ownership contained in all Company filings and in
your own Form 3, 4 and 5 filings with the Securities Exchange Commission.
c. It has been the intention of the parties at all times that the
transaction be treated for all purposes as a purchase of stock and the
incurrence of non-recourse indebtedness.
2. TAX TREATMENT.
--------------
a. Tax counsel has recently advised the Compensation Committee of the
Board of Directors of the Company that the treatment of the above described
transaction for federal income tax purposes would more likely than not differ
from that ordinarily accorded a stock purchase financed by borrowed money.
Page Two
May 14, 1997
b. The Committee has been advised that the transaction would probably be
recharacterized by the Internal Revenue Service as involving the grant and
exercise of a non-qualified stock option, giving rise to ordinary income
(measured in one of several ways depending on the circumstances in which the
Loan is repaid) to you (the taxpayer) and creating a deduction for
compensation expense to the Company (as your employer).
c. It is the mutual desire of you and the Company that the transaction
be reported for federal income tax purposes consistently on the Company's tax
return and on your personal tax return. It is the mutual desire of the
parties to avoid a tax controversy. However, the Company acknowledges that
adopting a consistent, conservative tax position will result in an anticipated
additional tax liability to you, and a corresponding tax benefit to the
Company.
3. TAX AGREEMENT.
--------------
a. You agree to (i) take a reporting position on your federal income tax
return that reflects treatment of the purchase of Shares and related Loan as
the exercise of a non-qualified stock option and (ii) refrain from taking any
action triggering such a reporting obligation at a time when the deductibility
to the Company of compensation expense paid to you is limited by Section
162(m) of the Internal Revenue Code. The Company agrees to make a payment to
you computed in accordance with the worksheet attached hereto as Annex A
(reduced by any amount necessary to give effect to Section 3(b) of the
Agreement).
b. In no event shall the Company make any payment to you that would
result in a net economic benefit from the transaction less favorable on an
after-tax basis to the Company that would have been the result had the
transaction received the tax characterization originally intended by the
parties.
c. It is the fundamental intention of the parties to this agreement that
the economic result to you of the purchase of the Shares and related Loan be
the same, on an after-tax basis, as if the transaction, for federal income tax
purposes, were treated as a purchase of stock and incurrence of related
indebtedness, rather than as the grant and exercise of a non-qualified stock
option. Accordingly, to the extent that any obligation hereunder of either
party requires modification to give effect to that intention, it shall be
deemed so modified.
Page Three
May 14, 1997
If the foregoing represents your understanding of our agreement, please
execute this letter in the space provided below.
Very truly yours,
/s/ Xxxxxxx X. Xxxxx
--------------------
Xxxxxxx X. Xxxxx
Accepted and agreed to as of the date set forth above:
/s/ Xxxxxxx X. Xxxxxx
---------------------
Xxxxxxx X. Xxxxxx
