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FILED PURSUANT TO RULE 424(b)(3)
REGISTRATION NO. 333-42425
PROSPECTUS
MODIFIED GUARANTEED ANNUITY CONTRACTS
ISSUED BY
American Foundation Life Insurance Company
("American Foundation")
2801 Highway 280 South
Birmingham, Alabama 35223
(800) 456-6330
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This Prospectus describes interests in a non-participating group modified
guaranteed annuity contract. It is designed and offered to provide annuity
payments in connection with retirement programs that may or may not qualify for
special income tax treatment under the Internal Revenue Code. Persons who have
established accounts with certain broker-dealers that have entered into
distribution agreements to offer interests in the group modified guaranteed
annuity contract, and members of other eligible groups may purchase interests in
the group modified guaranteed annuity contract. A Participant's interest in the
group modified guaranteed annuity contract is evidenced by the issuance of a
certificate. The group modified guaranteed annuity contract and certificates are
hereafter referred to collectively as the "Contract."
The Annuity Premium payments accepted by American Foundation under the
Contract will be allocated to and accounted for in a non-unitized separate
account. The assets of this separate account equal to the reserves and other
contract liabilities are not chargeable with the liabilities arising out of any
other business the Company conducts.
An Annuity Premium of at least $10,000 is required to purchase a Contract.
Additional Annuity Premium payments may be accepted. Regardless of the number of
Annuity Premium payments made, only one Contract will be issued. American
Foundation reserves the right not to accept any Annuity Premium payment and to
limit the total amount of your Annuity Premiums.
Each Annuity Premium payment (less premium taxes, if applicable) will be
allocated at your direction to one or more Sub-Accounts which correspond to the
Guaranteed Periods chosen by you, and will accumulate at the Guaranteed Interest
Rate or Rates applicable to such Guaranteed Periods. American Foundation
currently offers several Guaranteed Periods. PARTIAL AND FULL SURRENDERS MADE
PRIOR TO THE END OF A GUARANTEED PERIOD MAY BE SUBJECT TO A SURRENDER CHARGE,
AND WILL BE SUBJECT TO A MARKET VALUE ADJUSTMENT, WHICH COULD EITHER INCREASE OR
DECREASE YOUR ACCOUNT VALUE. American Foundation guarantees that Annuity Premium
held to the end of a Guaranteed Period will accumulate at its Guaranteed
Interest Rate, and will not be subject to a Surrender Charge or a Market Value
Adjustment.
PLEASE READ THIS PROSPECTUS CAREFULLY. INVESTORS SHOULD KEEP A COPY FOR
FUTURE REFERENCE.
AN INVESTMENT IN THE CONTRACT IS NOT A DEPOSIT OR OBLIGATION OF, OR GUARANTEED
OR ENDORSED BY, ANY BANK, NOR IS THE CONTRACT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. AN INVESTMENT IN
THE CONTRACT INVOLVES CERTAIN RISKS, INCLUDING THE LOSS OF ANNUITY DEPOSITS
(PRINCIPAL).
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1998
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CAPSULE SUMMARY OF THE CONTRACT
This Prospectus describes certificates issued pursuant to a group modified
guaranteed annuity contract issued by American Foundation Life Insurance Company
("American Foundation"). The group modified guaranteed annuity contract and
certificates are referred to collectively as the "Contract."
The Contract may be issued pursuant to nonqualified retirement plans or
plans qualifying for special tax treatment including Individual Retirement
Annuities or Accounts, certain Tax Sheltered Annuities and H.R. 10 plans.
You must submit properly completed application information along with an
Annuity Premium payment to receive a Contract. Your initial Annuity Premium must
be at least $10,000 unless approved by the Company. Additional Annuity Premium
payments may be accepted. Regardless of the number of Annuity Premium payments
made, only one Contract will be issued. We reserve the right not to accept any
Annuity Premium payment and to limit the total amount of your Annuity Premium.
Each Annuity Premium payment will be allocated to one or more Sub-Accounts
which correspond to the Guaranteed Periods that you specify. A Guaranteed Period
is the period of years for which a rate of interest is guaranteed. You select
Initial Guaranteed Period(s) from among those offered by us at the time the
Annuity Premium is paid. During an Initial Guaranteed Period, Annuity Premium
allocated to a Sub-Account will earn interest at the Initial Guaranteed Interest
Rate established by the Company.
At the end of the Initial Guaranteed Period a Subsequent Guaranteed Period
will begin. Unless you instruct us otherwise in Writing, the Sub-Account value
at the end of the Guaranteed Period will become the Sub-Account Premium for a
Subsequent Guaranteed Period with the same duration as the previous Guaranteed
Period, if it does not extend beyond the Annuity Commencement Date. Otherwise,
the Subsequent Guaranteed Period will be the longest Guaranteed Period then
offered which does not extend beyond the Annuity Commencement Date. The
Sub-Account will earn interest at the Subsequent Guaranteed Interest Rate. The
Subsequent Guaranteed Interest Rate will be determined at the beginning of the
Subsequent Guaranteed Period and may not be equal to the Initial Guaranteed
Interest Rate then offered for an Initial Guaranteed Period of the same
duration. Initial and Subsequent Guaranteed Interest Rates will not be less than
an annual effective interest rate of 3%.
AMERICAN FOUNDATION LIFE INSURANCE COMPANY WILL MAKE THE FINAL DETERMINATION
AS TO GUARANTEED RATES TO BE DECLARED. WE CANNOT PREDICT NOR DO WE GUARANTEE
FUTURE INTEREST RATES TO BE DECLARED. (See "Establishment of Guaranteed Interest
Rates".)
We make no charges to your Annuity Premium when it is received by us (except
deduction for premium taxes, where applicable). Full and partial surrenders from
each Sub-Account are permitted subject to certain restrictions. A full or
partial surrender made prior to the end of a Guaranteed Period will be subject
to a Market Value Adjustment and may be subject to a Surrender Charge, which
could result in the receipt of less than your Annuity Premium(s). A Surrender
Charge will apply during each Guaranteed Period. For Guaranteed Periods with
durations longer than seven years, a Surrender Charge will only apply during the
first seven years. The Surrender Charge is equal to a specified Surrender Charge
Percentage (maximum 7%) applied to the amount of each full or partial surrender
requested adjusted by the Market Value Adjustment, less any amount available as
an Interest Withdrawal. (See "Interest Withdrawals" and "Surrender Charges".)
After the first Premium Year of any Sub-Account, you may request a
withdrawal of all, or a portion of the interest credited to that Sub-Account
during the prior Premium Year. Your request must be in Writing and you may only
make one such request per Premium Year. No Surrender Charge or Market Value
Adjustment will be imposed on these interest withdrawals. Any such withdrawal
may, however, be subject to tax, including a 10% penalty tax under the Internal
Revenue Code. (See "Federal Tax Matters".)
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A Market Value Adjustment is applied when you make a full or partial
surrender from a Sub-Account prior to the end of the Sub-Account's Guaranteed
Period. The Market Value Adjustment reflects the relationship between (i) the
Guaranteed Interest Rate initially established for the Sub-Account from which
the surrender is being made; and, (ii) the Guaranteed Interest Rate in effect at
the time of the surrender for a Guaranteed Period equivalent to the original
duration of the Guaranteed Period from which the surrender is being made reduced
by the number of completed years elapsed since the Guaranteed Period was
established. It is possible that the interest rate for a Guaranteed Period
equivalent to the time remaining in the Sub-Account from which the surrender is
being made may be higher at the time of surrender than the Guaranteed Interest
Rate credited at the time a Sub-Account was established. In this case, the
amount you would receive upon a surrender may be less than the amount allocated
to the Sub-Account plus the interest credited thereon. If the interest rate for
a Guaranteed Period equivalent to the time remaining in the Sub-Account from
which the surrender is being made is lower than the Guaranteed Interest Rate
credited when the Sub-Account was established, you could receive an amount
larger than the amount allocated to the Sub-Account plus the interest credited.
(See "Market Value Adjustment".)
Partial or full surrenders are generally taxable, and may also may be
subject to a 10% penalty tax under the Internal Revenue Code (See "Federal Tax
Matters".) We may defer payment of any full or partial surrender for a period
not exceeding 6 months from the Surrender Date, or the period permitted by
applicable state insurance law, if less.
On the Annuity Commencement Date, American Foundation will apply the Account
Value, less applicable premium taxes, to the Annuity option you have selected.
To elect an Annuity option, you must notify us of the Annuity option you are
electing 30 days prior to the Annuity Commencement Date. (See "Annuity
Benefits".)
The Contract provides for a Death Benefit. If an Owner dies while the
Contract is in force and before the Annuity Commencement Date, a Death Benefit
may be payable to the Beneficiary. If no Beneficiary designation is in effect or
if no Beneficiary is living at the time of an Owner's death, the Estate of the
deceased Owner will be the Beneficiary.
Only one Death Benefit is payable under the Contract. (See "Death Benefit".)
For Contracts subject to premium tax, the premium tax may be deducted from
the Annuity Premium when received or upon full or partial surrender, or from the
Death Benefit or the amount applied to an Annuity option. Currently, New York
does not impose premium tax.
We will furnish you with a report annually showing your Account Value,
Sub-Account Values, and all other information required by law. The report will
not include our financial statements.
You may cancel your Contract within thirty days after receipt by returning
or mailing it to us or the person who sold you the Contract. We will refund the
Account Value adjusted by the Market Value Adjustment (except for Individual
Retirement Annuities returned within seven days of issuance) and cancel the
Contract, as though it had never been issued.
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TABLE OF CONTENTS
<TABLE>
<S> <C> <C> <C>
GLOSSARY OF SPECIAL TERMS......................................................................... 6
DESCRIPTION OF CONTRACTS.......................................................................... 8
A. General................................................................................ 8
B. Application Information, Annuity Premium............................................... 8
C. Initial and Subsequent Guaranteed Periods.............................................. 8
D. Determination of Guaranteed Interest Rates............................................. 10
E. Surrenders............................................................................. 10
1. Market Value Adjustment..................................................... 10
2. Surrender Charge............................................................ 11
3. Interest Withdrawals........................................................ 12
F. Premium Taxes.......................................................................... 12
G. Death Benefit.......................................................................... 12
H. Annuity Benefits....................................................................... 13
1. Electing the Annuity Commencement Date and Form of Annuity.................. 13
2. Change of Annuity Commencement Date, Annuity Option, or Annuitant........... 13
3. Annuity Options............................................................. 14
4. Annuity Payment............................................................. 14
5. Death of Annuitant or Participant After Annuity Commencement Date........... 14
INVESTMENTS BY AMERICAN FOUNDATION................................................................ 15
OTHER PROVISIONS.................................................................................. 16
A. Contract Transactions.................................................................. 16
B. Amendment of Contracts................................................................. 16
C. Assignment of Contracts................................................................ 16
DISTRIBUTION OF CONTRACTS......................................................................... 16
FEDERAL TAX MATTERS............................................................................... 16
A. Introduction........................................................................... 16
B. The Company's Tax Status............................................................... 17
C. Taxation of Annuities in General....................................................... 17
1. Tax Deferral During Accumulation Period..................................... 17
2. Taxation of Partial and Full Withdrawals.................................... 17
3. Taxation of Annuity Payments................................................ 18
4. Taxation of Death Benefit Proceeds.......................................... 18
5. Penalty Tax on Premature Distributions...................................... 18
6. Aggregation of Contracts.................................................... 19
7. Loss of Interest Deduction Where Contracts Are Held by or for the Benefit of
Certain Non-natural Persons............................................... 19
D. Qualified Retirement Plans............................................................. 19
1. In General.................................................................. 19
a. Individual Retirement Annuities.......................................... 20
b. Corporate and Self-Employed ("H.R. 10" and "Keogh") Pension and Profit-
Sharing Plans............................................................ 20
c. Tax-Sheltered Annuities.................................................. 21
2. Direct Rollover Rules....................................................... 21
E. Federal Income Tax Withholding......................................................... 21
</TABLE>
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<TABLE>
<S> <C> <C> <C>
AMERICAN FOUNDATION LIFE INSURANCE COMPANY........................................................ 22
A. Business............................................................................... 22
B. Selected Financial Data................................................................ 23
C. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 24
a. Known Trends and Uncertainties........................................... 26
b. Recently Issued Accounting Standards..................................... 29
1. Liquidity and Capital Resources............................................. 29
2. Impact of Inflation......................................................... 30
D. Insurance in Force..................................................................... 31
E. Underwriting........................................................................... 31
F. Investments............................................................................ 32
G. Indemnity Reinsurance.................................................................. 35
H. Policy Liabilities and Accruals........................................................ 35
I. Competition............................................................................ 35
J. Regulation............................................................................. 35
K. Employees.............................................................................. 37
DIRECTORS AND EXECUTIVE OFFICERS.................................................................. 38
EXECUTIVE COMPENSATION............................................................................ 40
A. Summary Compensation Table............................................................. 40
B. Aggregated Fy-end Option/SAR Values.................................................... 40
C. Performance Share Plan................................................................. 41
D. Pension Plan........................................................................... 42
E. Additional Agreements.................................................................. 43
1. Compensation Committee Interlocks and Insider Participation........................ 43
2. Management Ownership of PLC Stock.................................................. 44
CERTAIN TRANSACTIONS.............................................................................. 46
LEGAL PROCEEDINGS................................................................................. 46
EXPERTS........................................................................................... 46
LEGAL MATTERS..................................................................................... 46
REGISTRATION STATEMENT............................................................................ 46
APPENDIX A........................................................................................ A-1
</TABLE>
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THAT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH
THE OFFER CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED ON AS HAVING BEEN AUTHORIZED. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF, OR SOLICITATION OF AN OFFER TO
ACQUIRE, ANY CONTRACTS OFFERED BY THIS PROSPECTUS IN ANY JURISDICTION TO ANYONE
TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION IN SUCH
JURISDICTION.
GLOSSARY OF SPECIAL TERMS
"We", "us", "our", "American Foundation", and "Company" refer to American
Foundation Life Insurance Company. "You", "your", and "Participant" refer to a
person who has been issued a certificate, which represents an interest in the
group modified guaranteed annuity contract. Individuals as well as non-natural
persons, such as corporations and trusts, may be Participants.
DEFINITIONS
ACCOUNT VALUE: The sum of all Sub-Account Values.
ADMINISTRATIVE OFFICE: 2801 Highway 280 South, Birmingham, Alabama 35223.
Correspondence sent by U.S. Mail should be addressed to American Foundation at
P.O. Box 10648, Birmingham, Alabama 35202-0648.
ANNUITANT: Annuity payments may depend upon the continuation of the life of
a person. That person is called an Annuitant. If an Annuitant is not an
Participant and dies prior to the Annuity Commencement Date, the Participant
first named on the application will become the Annuitant, unless the Participant
designates otherwise.
ANNUITY: A series of periodic payments.
ANNUITY COMMENCEMENT DATE: The date on which Annuity payments are
determined. The initial payment must be made within one month of the Annuity
Commencement Date.
ANNUITY PREMIUM: Payments (less premium taxes, if applicable) made and
allocated to the Guaranteed Period(s) you select under the Contract. Each
Annuity Premium and each allocation to a Guaranteed Period must be at least
$10,000. We reserve the right not to accept any Annuity Premium payment and to
limit the total amount of your Annuity Premiums. Only one Contract will be
issued regardless of the number of Annuity Premiums you make.
BENEFICIARY: The person or persons entitled to receive the Death Benefit
under this Contract, if any, upon the death of an Participant.
PRIMARY--The Primary Beneficiary is the surviving Participant, if any. If
there is no surviving Participant, the Primary Beneficiary is the person
or persons designated on the application or, if changed by the
Participant, the person or persons so named in our records.
CONTINGENT--The person or persons named to receive the Death Benefit if
the Primary Beneficiary is not living at the time of an Participant's
death. If no Beneficiary designation is in effect or if no Beneficiary is
living at the time of an Participant's death, the Estate of the deceased
Participant will be the Beneficiary.
IRREVOCABLE--An irrevocable Beneficiary is one whose consent is needed to
change the Beneficiary designation, and to exercise certain other rights.
COMPANY: American Foundation Life Insurance Company.
DEATH BENEFIT: The amount payable to a Beneficiary upon the death of an
Participant prior to the Annuity Commencement Date. Only one Death Benefit is
payable under this Contract even though the Contract may, in some circumstances,
continue beyond an Participant's death.
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EFFECTIVE DATE: The date on which we begin crediting interest on your
initial Annuity Premium. The Effective Date is shown on the Schedule page of
your Contract. Contract Years are measured from the Effective Date.
GUARANTEED INTEREST RATE: The effective rate of interest, calculated after
daily compounding has been taken into account, which is established by the
Company for a Guaranteed Period. Guaranteed Interest Rates are designated either
"Initial" or "Subsequent".
GUARANTEED PERIOD: The period for which a Guaranteed Interest Rate will be
credited to a Sub-Account. Guaranteed Periods are designated as either "Initial"
or "Subsequent".
MARKET VALUE ADJUSTMENT: The adjustment made to a Sub-Account Value when a
full or partial surrender is made prior to the end of a Guaranteed Period.
NET ACCOUNT VALUE: The sum of all Net Sub-Account Values.
NET SUB-ACCOUNT VALUE: The Sub-Account Value after application of the
Market Value Adjustment and deductions for any Surrender Charges and applicable
premium taxes.
NET SURRENDER AMOUNT: The Surrender Amount after application of the Market
Value Adjustment and less any deductions for any Surrender Charges and
applicable premium taxes.
QUALIFIED CONTRACTS: Contracts issued in connection with retirement plans
that receive favorable tax treatment under sections 401, 403, 408, or 408A of
the Internal Revenue Code of 1986, as amended.
QUALIFIED PLAN: Retirement plans which receive favorable tax treatment
under sections 401, 403, or 408, or 408A of the Internal Revenue Code of 1986,
as amended.
SUB-ACCOUNT: Annuity Premium is allocated to one or more Sub-Accounts. A
Sub-Account is characterized by its Guaranteed Period and its corresponding
Guaranteed Interest Rate.
SUB-ACCOUNT PREMIUM: Annuity Premium allocated to a Sub-Account, or any
amount transferred to a Sub-Account at the end of a Guaranteed Period. Premium
Years are measured from the date the Sub-Account Premium is credited.
SUB-ACCOUNT VALUE: The Sub-Account Premium, increased by all interest
credited and decreased by previous full or partial surrenders (including
applicable Surrender Charges, Market Value Adjustments and premium taxes) and
previous interest withdrawals. The Sub-Account Value of each Sub-Account under
this Contract must be at least $10,000 at all times.
SURRENDER AMOUNT: The portion of the Sub-Account Value removed to satisfy a
written request for a full or partial surrender.
SURRENDER CHARGE: A charge imposed when a partial or full surrender is made
prior to the end of a Guaranteed Period.
SURRENDER DATE: The date on which we receive at our Administrative Office a
request in Writing for a full or partial surrender, or such later date that you
may request.
WRITING: A written form satisfactory to the Company received at the
Administrative Office. Correspondence sent by U.S. Mail should be addressed to
American Foundation, P. O. Box 10648, Birmingham, Alabama 35202-0648.
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DESCRIPTION OF CONTRACTS
A. GENERAL
The Contract is a flexible-premium, deferred, group modified guaranteed
annuity contract. The Contract may be issued pursuant to nonqualified retirement
plans or plans qualifying for special tax treatment including Individual
Retirement Annuities or Accounts, certain Tax Sheltered Annuities and H.R. 10
plans. We reserve the right to accept or decline a request to issue a Contract.
B. APPLICATION INFORMATION, ANNUITY PREMIUM
To apply for a Contract, an Annuity Premium must accompany properly
completed application information. The minimum Annuity Premium is $10,000.
American Foundation reserves the right not to accept any Annuity Premium payment
and to limit the total amount of your Annuity Premium. Currently, the maximum
aggregate amount of Annuity Premium that will be accepted without prior
Administrative Office approval is $1,000,000.
Each Annuity Premium (less premium taxes, if applicable) will be allocated
at your direction to one or more Sub-Accounts corresponding to the Guaranteed
Periods you choose. Each Annuity Premium will accumulate at specified Guaranteed
Interest Rate(s). Your Account Value is the sum of all of your Sub-Account
Values. Each Sub-Account Value is equal to the amount you allocated to the
Sub-Account (either as an Annuity Premium or as part of a transfer of a
Sub-Account Value at the end of the previous Guaranteed Period), plus the
interest credited thereto at the Guaranteed Interest Rate, as adjusted for any
prior full or partial surrenders (including Market Value Adjustments, Surrender
Charges, premium taxes thereon and previous interest withdrawals).
You will start earning interest on the day your Contract is issued, which is
also called the Effective Date. Additional Annuity Premium payments may be made
to the Contract, subject to our acceptance. Regardless of the number of Annuity
Premium payments made, only one Contract will be issued.
C. INITIAL AND SUBSEQUENT GUARANTEED PERIODS
You select the Guaranteed Periods for each Annuity Premium from those
durations offered by us at the time the Annuity Premium is made, provided no
Guaranteed Period may extend beyond the Annuity Commencement Date. All
Guaranteed Periods may not be available in all states at all times. We will
establish a Sub-Account for each Guaranteed Period you select. The minimum
allocation to a Sub-Account is $10,000. The Sub-Account Premium will earn
interest at the Initial Guaranteed Interest Rate which will be an effective
annual interest rate after taking into account daily compounding of interest.
Set forth below is an illustration of how interest will be credited to your
Account Value during each Guaranteed Period. For the purpose of this example we
have made the assumptions as indicated.
NOTE: THE FOLLOWING EXAMPLE ASSUMES NO SURRENDERS OR WITHDRAWALS OF ANY
AMOUNT AND NO PREMIUM TAX DUE ON ISSUANCE. A MARKET VALUE ADJUSTMENT AND
SURRENDER CHARGE MAY APPLY TO ANY SUCH PARTIAL OR FULL SURRENDER MADE PRIOR TO
THE END OF A GUARANTEED PERIOD (SEE "SURRENDERS"). THE HYPOTHETICAL INTEREST
RATES ARE ILLUSTRATIVE ONLY AND ARE NOT INTENDED TO PREDICT FUTURE INTEREST
RATES TO BE DECLARED UNDER THE CONTRACT. ACTUAL INTEREST RATES DECLARED FOR ANY
GIVEN GUARANTEED PERIOD MAY BE MORE OR LESS THAN THOSE SHOWN.
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EXAMPLE OF COMPOUNDING AT THE GUARANTEED INTEREST RATE
<TABLE>
<S> <C>
Premium: $100,000.00
Guaranteed Period: 5 years
Guaranteed Interest
Rate: 5.00%
</TABLE>
<TABLE>
<CAPTION>
YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Beginning of Year 1 Account Value: $ 100,000.00
X (1 + Guaranteed Interest Rate): 1.05%
= End of Year 1 Account Value: $ 105,000.00
Beginning of Year 2 Account Value: $ 105,000.00
X (1 + Guaranteed Interest Rate): 1.05%
= End of Year 2 Account Value: $ 110,250.00
Beginning of Year 3 Account Value: $ 110,250.00
X (1 + Guaranteed Interest Rate): 1.05%
= End of Year 3 Account Value: $ 115,762.50
Beginning of Year 4 Account Value: $ 115,762.50
X (1 + Guaranteed Interest Rate): 1.05%
= End of Year 4 Account Value: $ 121,550.62
Beginning of Year 5 Account Value: $ 121,550.62
X (1 + Guaranteed Interest Rate): 1.05%
= End of Year 5 Account Value: $ 127,628.16
Total Interest Credited in Guaranteed Period: $127,628.16 - $100,000.00 = $27,628.16
Account Value at End of Guaranteed Period: $100,000.00 + $27,628.16 = $127,628.16
</TABLE>
At the end of any Guaranteed Period a Subsequent Guaranteed Period will
begin. Unless you instruct us otherwise in Writing, the Sub-Account Value at the
end of a Guaranteed Period will become the Sub-Account Premium for a Subsequent
Guaranteed Period with the same duration as the previous Guaranteed Period, if
it does not extend beyond the Annuity Commencement Date. Otherwise, the
Subsequent Guaranteed Period will be the longest Guaranteed Period then offered
which does not extend beyond that date. The Company will always offer a 1-year
Subsequent Guaranteed Period in addition to other Guaranteed Periods then
available.
The Sub-Account Premium will earn interest at the Subsequent Guaranteed
Interest Rate. The Subsequent Guaranteed Interest Rate will be determined at the
beginning of the Subsequent Guaranteed Period and may not be equal to the
Initial Guaranteed Interest Rate then offered for an Initial Guaranteed Period
of the same duration.
Initial and Subsequent Guaranteed Interest Rates will not be less than an
annual effective interest rate of 3%. You may not transfer a Sub-Account Value
to any other Sub-Account before the end of the existing Sub-Account's Guaranteed
Period. At least 45 days, but no more than 75 days prior to the end of each
Guaranteed Period, we will send a written notice advising you of the maturity
date and maturity value of the Sub-Account. At your request during this period,
we will provide you with the then effective Guaranteed Interest Rate for each
specified Subsequent Guaranteed Period. THE ACTUAL GUARANTEED INTEREST RATE WILL
BE DETERMINED AT THE BEGINNING OF THE SUBSEQUENT GUARANTEED PERIOD(S) YOU
SELECT.
In no event may Guaranteed Periods extend beyond the Annuity Commencement
Date then in effect. The Annuity Commencement Date may not be later than the
Annuitant's 90th birthday (or a date to which we agree in writing). Any request
for extension of the Annuity Commencement Date beyond the Annuitant's 90th
birthday must be approved in writing by the Administrative Office. Annuity
Commencement Dates which occur at advanced ages, E.G., past age 85, may in some
circumstances have adverse income tax consequences. (See "Federal Tax Matters".)
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D. DETERMINATION OF GUARANTEED INTEREST RATES
From time to time, American Foundation Life Insurance Company, in its sole
discretion, determines the Guaranteed Interest Rate for each Initial and
Subsequent Guaranteed Period. The determination will be reflective of interest
rates available on the types of instruments in which the Company intends to
invest the proceeds attributable to the Contracts. (See "Investments By American
Foundation".) In addition, we may also consider various other factors in
determining Guaranteed Interest Rates, including regulatory and tax
requirements; sales commissions and administrative expenses incurred by the
Company; general economic trends; and, competitive factors.
Sub-Account Premium of $100,000 or more is currently credited with an
interest rate in excess of that credited to Sub-Account Premium of less than
$100,000. In addition, if your account value exceeds $100,000 all subsequent
Annuity Premiums and renewals will be credited with the increased interest rate.
American Foundation reserves the right to change or discontinue offering the
increased interest rate at its discretion. A Guaranteed Interest Rate credited
to a Sub-Account will never be changed prior to the end of the Guaranteed
Period. AMERICAN FOUNDATION LIFE INSURANCE COMPANY WILL MAKE THE FINAL
DETERMINATION AS TO GUARANTEED INTEREST RATES TO BE DECLARED. WE CANNOT PREDICT
NOR DO WE GUARANTEE FUTURE INTEREST RATES TO BE DECLARED.
E. SURRENDERS
Full surrenders may be made at any time. Partial surrenders may only be made
if each Sub-Account Value after the partial surrender is at least $10,000. You
must specify the Sub-Accounts from which the partial surrender is to be made,
but if a surrender is requested from a Sub-Account which has the same Guaranteed
Period as any other Sub-Account, the partial surrender must come from the
Sub-Account with the shortest time remaining.
In the case of certain Qualified Plans, Federal tax law imposes restrictions
on the form and manner in which benefits may be paid. For example, spousal
consent may be needed in certain instances before a distribution may be made.
1. MARKET VALUE ADJUSTMENT
The amount payable on a full or partial surrender made prior to the end of
any Guaranteed Period may be adjusted up or down by the application of the
Market Value Adjustment formula.
The Market Value Adjustment is equal to the Market Value Adjustment
Percentage indicated below, applied to the amount of each full or partial
surrender requested less any amount available under the "INTEREST WITHDRAWAL"
provision of this Contract at the time of the surrender. The Market Value
Adjustment does not apply to surrenders made from a Sub-Account at the end of
its Guaranteed Period. Such surrenders should be requested during the final 30
days of the Guaranteed Period.
MARKET VALUE ADJUSTMENT PERCENTAGE = (C - I + 0.25%) X (N/12), WHERE:
C = the Guaranteed Interest Rate currently in effect for a Guaranteed Period
with a duration equivalent to the time remaining in the Guaranteed Period
from which the surrender is being made. Linear interpolation will be used to
determine C when the time remaining is not an integral number of whole
years. When the time remaining is less than one year, C will be the current
one year rate;
I = the Guaranteed Interest Rate initially established for the Guaranteed
Period from which the surrender is being made;
N = The number of months remaining in the Guaranteed Period from which the
surrender is being made.
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C will be based upon the same factors used in determining I, including
whether the original Guaranteed Period was an Initial Guaranteed Period or a
Subsequent Guaranteed Period, and whether or not I included excess rate.
In the event a current Guaranteed Interest Rate is no longer calculated by
the Company, a suitable replacement index, subject to all necessary regulatory
approvals, will be used.
The Market Value Adjustment formula includes a set percentage factor (0.25%)
designed to compensate American Foundation for certain expenses and losses that
might be incurred as a direct or indirect result or consequence of surrenders.
Please refer to Appendix A of this Prospectus, which contains an example of
the Market Value Adjustment Percentage as it is applied to a surrender request.
2. SURRENDER CHARGES
A Surrender Charge, if applicable, will be applied to a full or partial
surrender from a Sub-Account requested prior to the end of a Guaranteed Period.
The Surrender Charge Percentage for each year of an Initial or Subsequent
Guaranteed Period is indicated in the appropriate table below. The Surrender
Charge is determined by applying the Surrender Charge Percentage to the amount
of each full or partial surrender requested adjusted by any applicable Market
Value Adjustment, less any amount available under the "INTEREST WITHDRAWAL"
provision of this Contract at the time of the surrender. The Surrender Charge
does not apply to Surrenders made from a Sub-Account at the end of its
Guaranteed Period.
SURRENDER CHARGE FOR INITIAL GUARANTEED PERIODS
<TABLE>
<CAPTION>
PREMIUM YEAR DURING WHICH SURRENDER IS TAKEN
GUARANTEED ----------------------------------------------------------
PERIOD 1 2 3 4 5 6 7 8 9 10
- ------------ ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1......... 1%
2......... 2% 1%
3......... 3% 2% 1%
4......... 4% 3% 2% 1%
5......... 5% 4% 3% 2% 1%
6......... 6% 5% 4% 3% 2% 1%
7-10........ 7% 6% 5% 4% 3% 2% 1% 0% 0% 0%
</TABLE>
SURRENDER CHARGE FOR SUBSEQUENT GUARANTEED PERIODS
<TABLE>
<CAPTION>
PREMIUM YEAR DURING WHICH SURRENDER IS TAKEN
GUARANTEED ----------------------------------------------------------
PERIOD 1 2 3 4 5 6 7 8 9 10
- ------------ ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1......... 1%
2......... 2% 1%
3......... 3% 2% 1%
4......... 4% 3% 2% 1%
5......... 5% 4% 3% 2% 1%
6......... 5% 5% 4% 3% 2% 1%
7-10........ 5% 5% 5% 4% 3% 2% 1% 0% 0% 0%
</TABLE>
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There is no Surrender Charge after the first seven years of Guaranteed
Periods with a duration greater than seven years. In addition, for purposes of
determining amounts subject to the Surrender Charge, we will consider
surrendered amounts first to be interest withdrawals, to the extent interest
credited to your Sub-Accounts during the prior Contract Year has not yet been
withdrawn. No Surrender Charge (or Market Value Adjustment) is imposed on these
interest withdrawal amounts. (See "Interest Withdrawals".)
The Surrender Charge and Market Value Adjustment will not apply to full or
partial surrenders from a Sub-Account at the end of its Guaranteed Period.
The Net Surrender Amount will be calculated by the Company on the Surrender Date
using the following formula:
(A - M - S - P), WHERE:
A= the Surrender Amount
M= the amount of the Market Value Adjustment;
S= the amount of the Surrender Charge;
P= the amount of unpaid premium taxes, if any.
The Company may defer payment of any partial or full surrender for the period
permitted by law. In no event will the deferral exceed 6 months from the
Surrender Date.
Full or partial surrender may be subject to Federal and state income tax,
including a 10 percent penalty tax (see "Federal Tax Matters"), and, in some
cases, premium tax (see "Premium Taxes"). Under certain Qualified Plans, the
consent of your spouse may be required. Under Tax-Sheltered Annuities,
withdrawals attributable to contributions made pursuant to a salary reduction
agreement may be made only in limited circumstances. (See "Federal Tax
Matters".)
3. INTEREST WITHDRAWALS
After the first Premium Year of any Sub-Account, you may request a
withdrawal of all, or a portion of the interest credited to that Sub-Account
during the prior Premium Year. Your request must be in Writing and you may only
make one such request per Premium Year. No Surrender Charge or Market Value
Adjustment will be imposed on these interest withdrawals. Any such withdrawal
may, however, be subject to tax, including the 10% penalty tax under the
Internal Revenue Code. Withdrawals are permitted from Contracts issued as Tax
Sheltered Annuities only under limited circumstances. (See "Federal Tax
Matters".)
F. PREMIUM TAXES
Premium taxes will be deducted, if applicable. For Contracts subject to
premium tax, the premium tax may be deducted from the Annuity Premium when
received or upon full or partial surrender, or from the Death Benefit or the
amount applied to an Annuity option. Where applicable, these tax rates range up
to 3.50%. Currently, New York does not impose premium tax.
G. DEATH BENEFIT
If the Annuitant is not an Owner and dies prior to the Annuity Commencement
Date, the Owner first named on the Application will become the new Annuitant
unless the Owner designates otherwise. If any Owner is not an individual, the
death of the Annuitant will be treated as the death of an Owner.
If any Owner dies while a Contract is in force prior to the Annuity
Commencement Date, a Death Benefit will be payable to the Beneficiary.
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The Death Benefit will be determined as of the date due proof of death is
received by the Company. If a claim for the Death Benefit is received at our
Administrative Office within 1 year of the date of death, the Death Benefit will
equal the greater of: (1) the Account Value, less applicable premium taxes; or
(2) the Net Account Value. If a claim is received later than 1 year after the
date of death, the Death Benefit will equal the Net Account Value. Only one
Death Benefit is payable under the Contract.
The Death Benefit may be taken in one sum immediately. In this event, the
Contract will terminate. If the Death Benefit is not taken in one sum
immediately, then the entire interest in the Contract must be distributed under
one of the following options.
(1) the entire interest must be distributed over the life of the
Beneficiary, or over a period not extending beyond the life expectancy of
the Beneficiary, with distributions beginning within one year of the
Participant's death, or
(2) the entire interest must be distributed within 5 years of the
Participant's death.
If the Beneficiary is the deceased Participant's spouse, then the surviving
spouse may elect, in lieu of receiving the Death Benefit, to continue the
Contract and become the new Participant. The surviving spouse may select a new
Beneficiary. Upon this spouse's death, the Death Benefit will become payable to
the new Beneficiary and must then be distributed to the new Beneficiary in one
sum immediately or according to either paragraph (1) or (2) above.
If there is more than one Beneficiary, the foregoing provisions will apply
to each Beneficiary individually.
You may change the Beneficiary at any time, but any such change must be in
Writing. We must also receive any Irrevocable Beneficiary's written consent to
make a change. The request will be effective on the date the request is signed,
but we will not be liable for any payment we make before we receive and
acknowledge the request at our Administrative Office.
H. ANNUITY BENEFITS
1. ELECTING THE ANNUITY COMMENCEMENT DATE AND FORM OF ANNUITY
Upon purchasing a Contract, you may select an Annuity Commencement Date. The
Annuity Commencement Date you select cannot be earlier than the end of any
Guaranteed Period nor later than the Annuitant's 90th Birthday. Any request for
extension of the maximum Annuity Commencement Date must be approved by our
Administrative Office. If no Annuity Commencement Date is selected, the Annuity
Commencement Date will be the end of the Contract Year immediately prior to the
Annuitant's 90th birthday. You may elect to have all, or a portion or your
Account Value applied to an Annuity option on the Annuity Commencement Date.
Annuity Commencement Dates which occur at advanced ages, E.G., past age 85, may
in some circumstances have adverse income tax consequences. (See "Federal Tax
Matters".) Distributions from Qualified Contracts may be required before the
Annuity Commencement Date. In the absence of such election, the Account Value
will be applied on the Annuity Commencement Date under Option 3-Life Income with
Payments for a 10-year Certain Period.
2. CHANGE OF ANNUITY COMMENCEMENT DATE, ANNUITY OPTION OR ANNUITANT
You may change the Annuity Commencement Date, the Annuity option, or both
from time to time. Any such change must be made in Writing and we must receive
it at least 30 days prior to the scheduled Annuity Commencement Date. The
Annuity Commencement Date you select cannot be earlier than the end of any
existing Guaranteed Period nor later than the Annuitant's 90th Birthday. You may
also change the Annuitant prior to the Annuity Commencement Date provided the
change is made in Writing. If any Participant is not an individual, the
Annuitant may not be changed. The new Annuitant's 90th birthday may not be
before the end of any existing Guaranteed Period. Once the request is received
and acknowledged at our Administrative Office, any change will relate back to
and take effect on the date the
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request was signed. If an Annuitant is not an Participant and dies prior to the
Annuity Commencement Date, the Participant first named on the application will
become the Annuitant, unless otherwise designated.
3. ANNUITY OPTIONS
Annuity payments will be paid to the Annuitant, unless directed otherwise by
the Participant. Currently, any one of the following Annuity options may be
elected. Other Annuity options may be offered in the future. For Contracts
issued to fund certain Qualified Plans, other Annuity options will be available
and certain restrictions may apply.
OPTION 1--Payment For a Certain Period. Guaranteed payments will be made
for any certain period from 5 to 30 years.
OPTION 2--Payments for Life. Payments are based upon the life of the
Annuitant and stop upon the Annuitant's death.
OPTION 3--Life Income with Payments for a Certain Period. Payments are
based on the life of the Annuitant. Payments will continue for the
lifetime of that person with payments guaranteed for the selected
certain period of 10 years. Payments stop upon the death of the
Annuitant or at the end of the certain period, whichever is later.
The dollar amount of guaranteed minimum monthly payments under each
available Annuity option for each $1,000 applied will be calculated in
accordance with the 1983 Individual Annuitant Mortality Table A projected 14
years with interest at 3% per annum. To determine future minimum monthly rates,
one year will be deducted from the attained age of the Annuitant for every three
completed years beyond the year 1997. Upon annuitization, if we have available
rates more favorable than those guaranteed, the higher rates will apply.
4. ANNUITY PAYMENT
We will send a written notice advising you of the Annuity Commencement Date
at least 45 days, but no more than 75, days before that date. If the Annuitant
is alive on the Annuity Commencement Date then the Account Value, less
applicable premium taxes, will be applied to the Annuity option you have
selected. In the absence of a selection, however, this amount will be applied
under OPTION 1--Payments for a 5 year Certain Period.
The first payment under any Annuity option will be made one month following
the Annuity Commencement Date. Subsequent payments will be made in accordance
with the manner of payment selected.
The Annuity option elected must result in a payment of an amount at least
equal to the minimum payment amount according to the Company's rules then in
effect. If at any time payments are less than the minimum payment amount, we
have the right to change the frequency to an interval resulting in a payment at
least equal to the minimum. If any amount due is less than the minimum per year,
we may make other arrangements that are equitable to the Annuitant.
The Contract may not be surrendered after the commencement of Annuity
payments.
5. DEATH OF ANNUITANT OR OWNER AFTER ANNUITY COMMENCEMENT DATE
If any Annuitant or Participant dies on or after the Annuity Commencement
Date and before all the benefits under the Annuity option selected have been
paid, any remaining payments will be distributed at least as rapidly as under
the Annuity option being used on the date of death.
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INVESTMENTS BY AMERICAN FOUNDATION
American Foundation's investment philosophy is to maintain a portfolio that
is matched to its liabilities with respect to yield, risk, and cash flow
characteristics. The types of assets in which American Foundation may invest are
governed by state laws which prescribe permissible investment assets. Within the
parameters of these laws, American Foundation invests its assets giving
consideration to such factors as liquidity needs, investment quality, investment
return, matching of assets and liabilities, and the composition of the
investment portfolio by asset type and credit exposure. Because liquidity is
important, the Company continually balances maturity against yield and quality
considerations in selecting new investments.
In establishing Guaranteed Interest Rates, the Company intends to take into
account the yields available on the instruments in which it intends to invest
the proceeds from the Contracts. (See "Determination of Guaranteed Interest
Rates" on page 10.) American Foundation's investment strategy with respect to
the proceeds attributable to the Contracts will be to invest in investment-grade
debt instruments having durations tending to match the applicable Guaranteed
Periods. It is also anticipated that some portion of the portfolio will be
invested in commercial mortgages. American Foundation may also invest in lower
than investment-grade issues, depending upon relative spreads in the capital
markets.
Investment-grade debt instruments in which American Foundation intends to
invest the proceeds from the Contracts include:
Securities issued by the United States Government or its agencies or
instrumentalities, which issues may or may not be guaranteed by the United
States Government.
Mortgaged-backed and corporate debt securities which have an investment
grade, at the time of purchase, within the four highest-grades assigned by
Moody's Investors Service, Inc. (Aaa, Aa, A, Baa), Standard & Poor's
Corporation ("S&P") (AAA, AA, A, or BBB) or any other nationally recognized
rating service. American Foundation considers bonds rated Baa or higher by
Moody's or BBB or higher by S&P to be investment grade. At December 31,
1997, 90.2% of bonds in which American Foundation invests were considered
investment grade; 37.4% of these bonds were rated Baa or BBB.
Debt obligations which have a Moody's or Standard & Poor's rating below
investment-grade may comprise a portion of the portfolio. Risks associated with
investments in less than investment-grade debt obligations may be significantly
higher than risks associated with investments in debt securities rated
investment-grade. Risk of loss upon default by the borrower is significantly
greater with respect to such debt obligations than with other debt securities
because these obligations may be unsecured or subordinated to other creditors.
Additionally, there is often a thinly traded market for such securities and
current market quotations are frequently not available for some of these
securities. Issuers of less than investment-grade debt obligations usually have
higher levels of indebtedness and are more sensitive to adverse economic
conditions, such as recession or increasing interest rates, than
investment-grade issuers. American Foundation carefully selects, and closely
monitors, such investments.
Fixed maturity securities rated BBB may have speculative characteristics and
changes in economic conditions or other circumstances are more likely to lead to
a weakened capacity of the issuer to make principal and interest payments than
is the case with higher rated fixed maturity securities. American Foundation
carefully selects, and closely moitors, such investments.
Annuity Premium payments accepted by the Company under the Contracts will be
allocated to and accounted for in a non-unitized separate account. The assets of
this separate account equal to the reserves and other contract liabilities are
not chargeable with the liabilities arising out of any other business the
Company conducts. The separate account is a pool of assets that provides an
additional measure of assurance that Participants will receive full payment. It
is not an investment vehicle in whose performance Participants will have any
interest. The federal government or its instrumentalities does not guarantee the
Contracts. American Foundation backs the guarantees associated with the
Contracts.
While the foregoing generally describes our investment strategy with respect
to the proceeds attributable to the Contracts, we are not obligated to invest
the proceeds attributable to the Contracts according to any particular strategy,
except as may be required by the insurance laws of Alabama and other states in
which we operate.
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OTHER PROVISIONS
CONTRACT TRANSACTIONS
Currently, each request for a change or transaction under your Contract
(such as making an additional Annuity Premium, requesting a surrender or
interest withdrawal, selecting certain Guaranteed Periods, changing the Annuity
Commencement Date, Annuity option, or Annuitant, or making a Death Benefit
claim) must be made in Writing on a form acceptable to the Company. The request
must provide all information that is necessary for us to make the change or
effect the transaction. For additional information on how to make a change or
effect a transaction, contact us at our Administrative Office.
AMENDMENT OF CONTRACTS
We reserve the right to amend the Contract to meet the requirements of
applicable Federal or state laws, regulations or rulings. We will notify you of
any such amendments.
ASSIGNMENT OF CONTRACTS
Your rights, as evidenced by a Contract, may be assigned as permitted by
applicable law. An assignment will not be binding upon us until we receive
notice from you in Writing. We assume no responsibility for the validity or
effect of any assignment. An assignment will have tax consequences. (See
"Federal Tax Matters".) Generally, Qualified Contracts cannot be assigned.
DISTRIBUTION OF CONTRACTS
Investment Distributors, Inc. ("IDI") serves as principal underwriter for
the Contracts. IDI has agreed to use its best efforts to sell the Contracts. IDI
is a wholly-owned subsidiary of Protective Life Corporation ("PLC") and is
registered with the Securities and Exchange Commission ("SEC") under the
Securities Exchange Act of 1934 as a broker-dealer and is a member of the
National Association of Securities Dealers, Inc. ("NASD").
IDI has entered into Distribution Agreements with certain broker-dealers
registered under the Securities Exchange Act of 1934. Under the Distribution
Agreements such broker-dealers may offer Contracts to persons who have
established an account with the broker-dealer. In addition, IDI may offer
Contracts to members of certain other eligible groups or certain individuals.
The maximum commission rate American Foundation will pay for either the sale of
a Contract or for a renewal into a Subsequent Guaranteed Period is 7%.
FEDERAL TAX MATTERS
INTRODUCTION
The following discussion of the federal income tax treatment of the
Contracts is not exhaustive, does not purport to cover all situations, and is
not intended as tax advice. The federal income tax treatment of the Contracts is
unclear in certain circumstances, and a qualified tax adviser should always be
consulted with regard to the application of law to individual circumstances.
This discussion is based on the Internal Revenue Code of 1986, as amended (the
"Code"), Treasury regulations, and interpretations existing on the date of this
Prospectus. These authorities, however, are subject to change by Congress, the
Treasury Department, and judicial decisions.
This discussion does not address state or local tax consequences associated
with the purchase of the Contracts. In addition, THE COMPANY MAKES NO GUARANTEE
REGARDING ANY TAX TREATMENT--FEDERAL, STATE OR LOCAL--OF ANY CONTRACT OR OF ANY
TRANSACTION INVOLVING A CONTRACT.
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THE COMPANY'S TAX STATUS
The Company is taxed as a life insurance company under Subchapter L of the
Code. The assets underlying the Contracts will be owned by the Company, and the
income derived from such assets will be includable in the Company's income for
federal income tax purposes.
TAXATION OF ANNUITIES IN GENERAL
TAX DEFERRAL DURING ACCUMULATION PERIOD
Under existing provisions of the Code (and except as described below), the
Contracts should be treated as annuities and any increase in an Participant's
Account Value is generally not taxable until received, either in the form of
Annuity payments as contemplated by the Contracts, or in some other form of
distribution.
As a general rule, Contracts held by "non-natural persons" such as a
corporation, trust or other similar entity, as opposed to a natural person, are
not treated as annuities for federal tax purposes. The income on such Contracts
(as defined in the tax law) is taxed as ordinary income that is received or
accrued by the Participant during the taxable year. There are several exceptions
to this general rule for Contracts held by non-natural persons. First, Contracts
will generally be treated as held by a natural person if the nominal owner is a
trust or other entity which holds the Contract as an agent for a natural person.
However, this special exception will not apply in the case of any employer who
is the nominal owner of a Contract under a non-qualified deferred compensation
arrangement for its employees.
In addition, exceptions to the general rule for non-natural Contract owners
will apply with respect to (1) Contracts acquired by an estate of a decedent by
reason of the death of the decedent, (2) Contracts issued in connection with
certain Qualified Plans, (3) Contracts purchased by employers upon the
termination of certain Qualified Plans, (4) certain Contracts used in connection
with structured settlement agreements, and (5) Contracts purchased with a single
premium when the annuity starting date is no later than a year from purchase of
the Contract and substantially equal periodic payments are made, not less
frequently than annually, during the annuity period.
If the Contract's Annuity Commencement Date occurs (or is scheduled to
occur) at a time when the Annuitant has reached an advanced age, E.G., past age
85, it is possible that the Contract would not be treated as an annuity for
federal income tax purposes. In that event, the income and gains under the
Contract could be currently includible in the Participant's income.
The remainder of this discussion assumes that the Contract will constitute
an annuity for federal tax purposes.
TAXATION OF PARTIAL AND FULL WITHDRAWALS
In the case of a partial withdrawal, amounts received generally are
includable in income to the extent the Participant's Account Value before the
withdrawal exceeds his or her "investment in the contract." In the case of a
full withdrawal, amounts received are includable in income to the extent they
exceed the "investment in the contract." For these purposes the investment in
the contract at any time equals the premiums paid under the Contract (to the
extent such premium payments were neither deductible when made nor excludable
from income as, for example, in the case of certain employer contributions to
Qualified Plans) less any amounts previously received from the Contract which
were not included in income.
Other than in the case of Contract issued in connection with certain
Qualified Plans (which generally cannot be assigned or pledged), any assignment
or pledge (or agreement to assign or pledge) any portion of the Account Value is
treated as a withdrawal of such amount or portion. The investment in the
contract is increased by the amount includable as income with respect to such
assignment or pledge, though it is not affected by any other aspect of the
assignment or pledge (including its release). If a Participant transfers a
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Contract without adequate consideration to a person other than the Participant's
spouse (or to a former spouse incident to divorce), the Participant will be
taxed on the difference between the Account Value and the investment in the
contract at the time of transfer. In such case, the transferee's investment in
the contract will be increased to reflect the increase in the transferor's
income.
There is some uncertainty regarding the treatment of the Market Value
Adjustment for purposes of determining the amount includable in income as a
result of any partial withdrawal or transfer without adequate consideration.
Congress has given the Internal Revenue Service ("IRS") regulatory authority to
address this uncertainty. However, as of the date of this Prospectus, the IRS
has not issued any regulations addressing these determinations.
TAXATION OF ANNUITY PAYMENTS
Normally, the portion of each Annuity payment taxable as ordinary income is
equal to the excess of the payment over the exclusion amount. The exclusion
amount is the amount determined by multiplying (1) the payment by (2) the ratio
of the investment in the contract, adjusted for any period certain or refund
feature, to the total expected value of Annuity payments for the term of the
Contract (determined under Treasury Department regulations).
Once the total amount of the investment in the contract is excluded using
this ratio, Annuity payments will be fully taxable. If Annuity payments cease
because of the death of the Annuitant and before the total amount of the
investment in the contract is recovered, the unrecovered amount generally will
be allowed as a deduction to the Annuitant in his last taxable year.
There may be special income tax issues present in situations where the
Participant and the Annuitant are not the same person and are not married to one
another. A tax advisor should be consulted in those situations.
TAXATION OF DEATH BENEFIT PROCEEDS
Prior to the Annuity Commencement Date, amounts may be distributed from a
Contract because of the death of an Participant or, in certain circumstances,
the death of the Annuitant. Such Death Benefit proceeds are includible in income
as follows: (1) if distributed in a lump sum, they are taxed in the same manner
as a full withdrawal, as described above, or (2) if distributed under an Annuity
Option, they are taxed in the same manner as Annuity payments, as described
above. After the Annuity Commencement Date, where a guaranteed period exists
under an Annuity Option and the Annuitant dies before the end of that period,
payments made to the Beneficiary for the remainder of that period are includible
in income as follows: (1) if received in a lump sum, they are includible in
income to the extent that they exceed the unrecovered "investment in the
Contract," at that time, or (2) if distributed in accordance with the existing
Annuity Option selected, they are fully excludable from income until the
remaining "investment in the Contract" is deemed to be recovered, and all
Annuity payments thereafter are fully includible in income.
Proceeds payable on death may be subject to federal income tax withholding
requirements. (See "Federal Income Tax Withholding".) In addition, in the case
of such proceeds from certain Qualified Plans, mandatory withholding
requirements may apply, unless a "direct rollover" of such proceeds is made.
(See "Direct Rollover Rules".)
PENALTY TAX ON PREMATURE DISTRIBUTIONS
Where a Contract has not been issued in connection with a Qualified Plan,
there generally is a 10% penalty tax on the taxable amount of any payment from
the Contract unless the payment is: (a) received on or after the Participant
reaches age 59 1/2; (b) attributable to the Participant becoming disabled (as
defined in the tax law); (c) made on or after the death of the Participant, or,
if a Participant is not an individual, on or after the death of the Primary
Annuitant (as defined in the tax law); (d) made as a series of substantially
equal periodic payments (not less frequently than annually) for the life (or
life expectancy) of the
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Annuitant or the joint lives (or joint life expectancies) of the Annuitant and a
designated Beneficiary (as defined in the tax law); or (e) made under a Contract
purchased with a single premium when the Annuity Commencement Date is no later
than a year from purchase of the Contract and substantially equal periodic
payments are made, not less frequently than annually, during the Annuity period.
(Similar rules, described below, generally apply in the case of Contracts issued
in connection with certain Qualified Plans.)
AGGREGATION OF CONTRACTS
In certain circumstances, the IRS may determine the amount of an Annuity
payment or a withdrawal from a Contract that is includable in income by
combining some or all of the Annuity contracts owned by an individual which are
not issued in connection with a Qualified Plan. For example, if a person
purchases a Contract offered by this Prospectus and also purchases at
approximately the same time an immediate annuity, the IRS may treat the two
contracts as one contract. In addition, if a person purchases two or more
deferred annuity contracts from the same insurance company (or its affiliates)
during any calendar year, all such contracts will be treated as one contract for
purposes of determining whether any payment not received as an annuity
(including withdrawals prior to the Annuity Commencement Date) is includable in
income. The effects of such aggregation are not clear; however, it could affect
the amount of a withdrawal or an Annuity payment that is taxable and the amount
which might be subject to the 10% penalty tax described above.
LOSS OF INTEREST DEDUCTION WHERE CONTRACTS ARE HELD BY OR FOR THE BENEFIT OF
CERTAIN NON-NATURAL PERSONS
In the case of Contracts issued after June 8, 1997 to a non-natural taxpayer
(such as a corporation or a trust), or held for the benefit of such an entity,
recent changes in the tax law may result in otherwise deductible interest no
longer being deductible by the entity, regardless of whether the income on such
Contracts is treated as ordinary income that is received or accrued by the
Participant during the taxable year. Entities that are considering purchasing
the Contract, or entities that will be beneficiaries under a Contract, should
consult a tax advisor.
QUALIFIED RETIREMENT PLANS
IN GENERAL
The Contracts are also designed for use in connection with certain types of
retirement plans which receive favorable treatment under the Code. Those who are
considering the purchase of a Contract for use in connection with a Qualified
Plan should consider, in evaluating the suitability of the Contract, that the
Contract requires an Annuity Premium of at least $10,000. Numerous special tax
rules apply to participants in Qualified Plans and to Contracts used in
connection with Qualified Plans. Therefore, no attempt is made in this
prospectus to provide more than general information about the use of the
Contracts with the various types of Qualified Plans.
The tax rules applicable to Qualified Plans vary according to the type of
plan and the terms and conditions of the plan itself. For example, both the
amount of the contribution that may be made, and the tax deduction or exclusion
that the Participant may claim for such contribution, are limited under
Qualified Plans and vary with the type of plan. Also, for full withdrawals,
partial withdrawals, and Annuity payments under Qualified Contracts, there may
be no "investment in the contract" and the total amount received may be taxable.
Similarly, loans from Qualified Contracts, where allowed, are subject to a
variety of limitations, including restrictions as to the amount that may be
borrowed, the duration of the loan, and the manner in which the loan must be
repaid. (Participants should always consult their tax advisors and retirement
plan fiduciaries prior to exercising their loan privileges.)
In addition, special rules apply to the time at which distributions must
commence and the form in which the distributions must be paid. For example, the
length of any guarantee period may be limited in
19
<PAGE>
some circumstances to satisfy certain minimum distribution requirements under
the Code. Furthermore, failure to comply with minimum distribution requirements
applicable to Qualified Plans will result in the imposition of an excise tax.
This excise tax generally equals 50% of the amount by which a minimum required
distribution exceeds the actual distribution from the Qualified Plan. In the
case of Individual Retirement Accounts or Annuities ("IRAs"), distributions of
minimum amounts (as specified in the tax law) must generally commence by April 1
of the calendar year following the calendar year in which the Participant
attains age 70 1/2. In the case of certain other Qualified Plans, distributions
of such minimum amounts generally must commence by the later of this date or
April 1 of the calendar year following the calendar year in which the employee
retires.
There is also a 10% penalty tax on the taxable amount of any payment from
certain Qualified Plans. (The amount of the penalty tax is 25% of the taxable
amount of any payment received from a "SIMPLE retirement account" during the 2
year period beginning on the date the individual first participated in any
qualified salary reduction agreement (as defined in the tax law) maintained by
the individual's employer.) There are exceptions to this penalty tax which vary
depending on the type of Qualified Plan. In the case of an IRA, exceptions
provide that the penalty tax does not apply to a payment (a) received on or
after the Participant reaches age 59 1/2, (b) received on or after the
Participant's death or because of the Participant's disability (as defined in
the tax law), or (c) made as a series of substantially equal periodic payments
(not less frequently than annually) for the life (or life expectancy) of the
Participant or for the joint lives (or joint life expectancies) of the
Participant and the Participant's designated Beneficiary (as defined in the tax
law). These exceptions, as well as certain others not described herein,
generally apply to taxable distributions from other Qualified Plans (although,
in the case of plans qualified under sections 401 and 403, exception "c" above
for substantially equal periodic payments applies only if the Participant has
separated from service). In addition, the penalty tax does not apply to certain
distributions from IRAs taken after December 31, 1997 which are used for
qualified first time home purchases or for higher education expenses. Special
conditions must be met for these two exceptions to the penalty tax. Those
wishing to take a distribution from an IRA for these purposes should consult
their tax advisor.
When issued in connection with a Qualified Plan, a Contract will be amended
as generally necessary to conform to the requirements of the plan. However,
Participants, Annuitants, and Beneficiaries are cautioned that the rights of any
person to any benefits under Qualified Plans may be subject to the terms and
conditions of the plans themselves, regardless of the terms and conditions of
the Contract. In addition, the Company shall not be bound by terms and
conditions of Qualified Plans to the extent such terms and conditions contradict
the Contract, unless the Company consents.
Following are brief descriptions of various types of Qualified Plans in
connection with which American Foundation will generally issue a Contract.
INDIVIDUAL RETIREMENT ANNUITIES. Section 408 of the Code permits eligible
individuals to contribute to an individual retirement program known as an "IRA."
IRAs are subject to limits on the amounts that may be contributed, the persons
who may be eligible and on the time when distributions may commence. Also,
subject to the direct rollover and mandatory withholding requirements discussed
below, distributions from certain Qualified Plans may be "rolled over" on a
tax-deferred basis into an IRA. The Contract may not, however, be used in
connection with an "Education IRA" under Section 530 of the Code, or as a
"SIMPLE IRA" under Section 408(p) of the Code.
CORPORATE AND SELF-EMPLOYED ("H.R.10" AND "KEOGH") PENSION AND
PROFIT-SHARING PLANS. Sections 401(a) and 403(a) of the Code permit corporate
employers to establish various types of tax-favored retirement plans for
employees. The Self-Employed Individuals' Tax Retirement Act of 1962, as
amended, commonly referred to as "H.R. 10" or "Keogh," permits self-employed
individuals also to establish such tax-favored retirement plans for themselves
and their employees. Such retirement plans may permit the purchase of the
Contract in order to provide benefits under the plans. Employers intending to
use the Contract in connection with such plans should seek competent advice.
20
<PAGE>
TAX-SHELTERED ANNUITIES. Section 403(b) of the Code permits public school
employees and employees of certain types of charitable, educational and
scientific organizations specified in Section 501(c)(3) of the Code to have
their employers purchase annuity contracts for them and, subject to certain
limitations, to exclude the amount of purchase payments from gross income for
tax purposes. These annuity contracts are commonly referred to as "tax-sheltered
annuities." Purchasers of the Contracts for such purposes should seek competent
advice as to eligibility, limitations on permissible amounts of purchase
payments and other tax consequences associated with the Contracts. Section
403(b) Policies contain restrictions on withdrawals of (i) contributions made
pursuant to a salary reduction agreement in years beginning after December 31,
1988, (ii) earnings on those contributions, and (iii) earnings after December
31, 1988 on amounts attributable to salary reduction contributions held as of
December 31, 1988. These amounts can be paid only if the employee has reached
age 59 1/2 separated from service, died, become disabled, or in the case of
hardship. Amounts permitted to be distributed in the event of hardship shall be
limited to actual contributions; earnings thereon shall not be distributed on
account of hardship. (These limitations on withdrawals do not apply to the
extent the Company is directed to transfer some or all of the Amount Value to
the issuer of another tax-sheltered annuity or into a Section 403(b)(7)
custodial account.)
DIRECT ROLLOVER RULES
In the case of Contracts used in connection with a pension, profit-sharing,
or annuity plan qualified under Sections 401(a) or 403(a) of the Code, or in the
case of a Section 403(b) Tax- Sheltered Annuity, any "eligible rollover
distribution" from the Contract will be subject to direct rollover and mandatory
withholding requirements. An eligible rollover distribution generally is any
taxable distribution from a qualified pension plan under Section 401(a) of the
Code, qualified annuity plan under Section 403(a) of the Code, or Section 403(b)
tax sheltered annuity or custodial account, excluding certain amounts (such as
minimum distributions required under Section 401(a)(9) of the Code and
distributions which are part of a "series of substantially equal periodic
payments" made for life or a specified period of 10 years or more).
Under these requirements, withholding at a rate of 20 percent will be
imposed on any eligible rollover distribution. In addition, the participant in
these qualified retirement plans cannot elect out of withholding with respect to
an eligible rollover distribution. However, this 20 percent withholding will not
apply if, instead of receiving the eligible rollover distribution, the
Participant elects to have amounts directly transferred to certain Qualified
Plans (such as to an Individual Retirement Annuity). Prior to receiving an
eligible rollover distribution, you will receive a notice (from the plan
administrator or the Company) explaining generally the direct rollover and
mandatory withholding requirements and how to avoid the 20% withholding by
electing a direct transfer.
FEDERAL INCOME TAX WITHHOLDING
The Company will withhold and remit to the U.S. government a part of the
taxable portion of each distribution made under a Contract unless the
distributee notifies the Company at or before the time of the distribution that
he or she elects not to have any amounts withheld. In certain circumstances,
American Foundation may be required to withhold tax. The withholding rates
applicable to the taxable portion of periodic Annuity payments (other than
eligible rollover distributions) are the same as the withholding rates generally
applicable to payments of wages. The withholding rate applicable to the taxable
portion of non-periodic payments (including withdrawals prior to the Annuity
Commencement Date) is 10%. Regardless of whether you elect not to have federal
income tax withheld, you are still liable for payment of federal income tax on
the taxable portion of the payment. As described above, the withholding rate
applicable to eligible rollover distributions is 20%.
21
<PAGE>
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
A. BUSINESS
American Foundation, a stock life insurance company, was founded in 1978.
All outstanding shares of the Company's common stock are owned by Protective
Life Insurance Company ("Protective"), which is the principal operating
subsidiary of Protective Life Corporation ("PLC"), an insurance holding company
whose common stock is traded on the New York Stock Exchange under the symbol
"PL". All outstanding shares of the Company's preferred stock are owned by PLC.
The Company is authorized to transact insurance business in 29 states, including
New York.
PLC through its subsidiaries provides financial services through the
production, distribution, and administration of insurance and investment
products. PLC operates through seven divisions whose principal strategic focuses
can be grouped into three general categories: life insurance, specialty
insurance products, and retirement savings and investment products. The life
insurance category includes the Acquisitions, Individual Life, and West Coast
Divisions. The specialty insurance products category includes the Dental and
Consumer Benefits ("Dental") and Financial Institutions Divisions. And the
retirement savings and investment products category includes the Guaranteed
Investment Contracts and Investment Products Divisions.
The Company, since it is licensed in the State of New York, is the entity
through which PLC markets, distributes, and services insurance and annuity
products in New York. As of December 31, 1997, the Company was involved in the
operations of two of PLC's Divisions: the Acquisitions Division and the Dental
Division. PLC's Investment Products Division has plans to begin marketing
through the Company in 1998. The Company has an additional business segment
which is described herein as Corporate and Other. Additionally, in late 1997,
PLC's Financial Institutions Division began selling credit insurance in the
State of New York through the Company. Due to the insignificant effect on the
Company's financial statements for 1997, the business activity related to the
Financial Institutions Division has been included in the Company's Corporate and
Other segment.
Protective has entered into an inter-company guaranty agreement, enforceable
by the Company or its successors, whereby Protective has guaranteed the
Company's payment of claims made by the holders of Company policies according to
the terms of such policies. The guarantee will remain in force until the earlier
of (a) when the Company achieves a claims-paying rating equal to or better than
Protective without the benefit of any inter-company guaranty agreement or (b) 90
days after the guaranty agreement is revoked by written instrument; provided,
however, even after any revocation or termination by such notice, the guarantee
shall remain effective as to policies issued during the existence of the
guaranty agreement.
ACQUISITIONS DIVISION
PLC is an active participant in the consolidation of the life and health
insurance industry. The Acquisitions Division focuses on acquiring, converting,
and servicing business acquired from other companies. These acquisitions may be
accomplished through acquisitions of companies or through the assumption or
reinsurance of life insurance and related policies. Thirty-nine transactions
have been entered into since 1970, including 12 since 1989. Some of these
transactions included the Company. Blocks of policies acquired through the
Acquisitions Division are usually administered as "closed" blocks, i.e., no new
policies are sold. Therefore, the amount of insurance in force for a particular
acquisition is expected to decline with time due to lapses and deaths of the
insureds.
PLC believes that its highly focused and disciplined approach to the
acquisition process and its extensive experience in the assimilation,
conservation, and servicing of purchased books of business give it a significant
competitive advantage over many other companies that attempt to make similar
acquisitions. PLC expects acquisition opportunities to continue to be available
as the life and health industry continues to consolidate; however, management
believes that PLC may face increased competition for future acquisitions.
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<PAGE>
Total revenues and income before income tax from the Acquisitions Division
are expected to decline with time unless new acquisitions are made. Therefore,
the Division's revenues and earnings may fluctuate from year to year depending
upon the level of acquisition activity involving the Company.
DENTAL DIVISION
The PLC Dental Division's primary strategic emphasis is on indemnity and
managed-care dental products. The Company supports this effort by providing
indemnity dental insurance in the State of New York. Also included in this
Division of the Company is a closed block of group life insurance policies
issued in New York.
INVESTMENT PRODUCTS DIVISION
The Investment Products Division of PLC manufactures, sells, and supports
fixed and variable annuity products. These products are primarily sold through
stockbrokers, but are also sold through financial institutions and the
Individual Life Division's sales force. The demand for annuity products is
related to the general level of interest rates and performance of equity
markets. Some of the Division's annuity products are also sold through Pro
Equities, Inc., an affiliated securities broker-dealer. The Company has not had
any business activity related to this Division to date. However, the Company
plans to begin marketing certain annuity products in the State of New York in
1998.
CORPORATE AND OTHER
The Corporate and Other segment of PLC consists of net investment income,
revenue and expenses not attributable to the business segments described above
(including net investment income on capital). The earnings of this segment may
fluctuate from year to year.
B. SELECTED FINANCIAL DATA
The following Selected Financial Data for the Company should be read in
conjunction with the consolidated financial statements and notes thereto
included elsewhere in this Prospectus.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------- -------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Premiums and policy fees................ $ 8,415,833 $ 9,458,003 $ 6,925,097 $ 8,252,019 $ 7,701,233
Net investment income................... 6,233,845 6,611,489 5,507,867 5,500,891 6,075,300
Realized investment gains (losses)...... (59,889) (28,070) 838,977 801,587 184,985
Other income............................ 8,718 2,406 (8) 3 (13)
-------------- -------------- -------------- ------------- -------------
Total revenues...................... $ 14,598,507 $ 16,043,828 $ 13,271,933 $ 14,554,500 $ 13,961,505
-------------- -------------- -------------- ------------- -------------
-------------- -------------- -------------- ------------- -------------
Benefits and expenses................... $ 11,802,364 $ 12,383,026 $ 9,088,603 $ 10,032,858 $ 11,972,768
Income tax expense...................... $ 950,689 $ 1,244,673 $ 1,422,332 $ 1,446,926 $ 664,642
Net income.............................. $ 1,845,454 $ 2,416,129 $ 2,760,998 $ 3,074,716 $ 1,324,998
<CAPTION>
DECEMBER 31
----------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------- -------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Total assets............................ $ 106,147,458 $ 110,954,096 $ 119,052,638 $ 94,249,702 $ 95,716,079
Redeemable preferred stock.............. -- -- $ 2,000,000 $ 2,000,000 $ 2,000,000
Stockholders' equity.................... $ 25,450,141 $ 22,547,113 $ 22,602,564 $ 21,986,464 $ 23,503,219
Stockholders' equity excluding net
unrealized gains and losses on
investments........................... $ 24,740,954 $ 22,995,500 $ 21,679,371 $ 25,680,107 $ 23,514,065
</TABLE>
23
<PAGE>
C. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
PREMIUMS AND POLICY FEES
The following table sets forth for the periods shown the amount of premiums
and policy fees and the percentage change from the prior period:
PREMIUMS AND POLICY FEES
<TABLE>
<CAPTION>
PERCENTAGE
YEAR ENDED INCREASE
DECEMBER 31 AMOUNT (DECREASE)
- --------------------------------------------- --------------- ---------
<S> <C> <C>
1995....................................... $ 6,925,097 (16.1)%
1996....................................... 9,458,003 36.6
1997....................................... 8,415,833 (11.0)
</TABLE>
Premiums and policy fees increased $2.5 million or 36.6% in 1996 over 1995.
Increases in premiums and policy fees from the Dental Division represent an
increase of $2.0 million. Increases in the Acquisitions Division were $0.5
million. Premiums and policy fees decreased $1.0 million or 11.0% in 1997 as
compared to 1996. Decreases in the Dental and Acquisitions Divisions were $0.8
million and $0.3 million, respectively.
NET INVESTMENT INCOME
The following table shows the amount of net investment income for the stated
period, the percentage change from the prior period, and the percentage earned
on average cash and investments:
NET INVESTMENT INCOME
<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE EARNED
YEAR ENDED INCREASE ON AVERAGE CASH
DECEMBER 31 AMOUNT (DECREASE) AND INVESTMENTS
- --------------------------------------------- -------------- --------- ------------------
<S> <C> <C> <C>
1995....................................... $ 5,507,867 0.1% 7.0%
1996....................................... 6,611,489 20.0 7.5
1997....................................... 6,233,845 (5.7) 6.5
</TABLE>
Net investment income for 1996 was $6.6 million, 20.0% higher, and for 1997
was $6.2 million, 5.7% lower, than for the preceding year. The increase from
1995 to 1996 is due primarily to an increase in invested assets brought about by
the Company assuming a block of group life insurance policies at December 31,
1995. The decline from 1996 to 1997 was caused by a shift in the make-up of the
Company's invested assets--from higher yielding commercial mortgage loans to
somewhat lower yielding corporate bonds.
The percentage earned on average cash and investments was 7.5% in 1996 and
6.5% in 1997.
REALIZED INVESTMENT GAINS (LOSSES)
The Company generally purchases its investments with the intent to hold them
to maturity by purchasing investments that match future cash flow needs.
However, the Company may sell any of its investments to maintain proper matching
of assets and liabilities. Accordingly, the Company has classified its fixed
maturities and certain other securities as "available for sale." The sales of
investments that have
24
<PAGE>
occurred generally result from portfolio management decisions to maintain proper
matching of assets and liabilities. The following table sets forth realized
investment gains for the periods shown:
REALIZED INVESTMENT GAINS (LOSSES)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31 AMOUNT
- --------------------------------------------- --------------
<S> <C>
1995....................................... $ 838,977
1996....................................... (28,070)
1997....................................... (59,889)
</TABLE>
Realized investment losses in 1996 of $251.4 thousand were largely offset by
realized investment gains of $223.3 thousand. Realized investment losses in 1997
of $69.9 thousand were offset by realized investment gains of $10.0 thousand.
INCOME BEFORE INCOME TAX
The following table sets forth income or loss before income tax by business
segment for the periods shown:
INCOME (LOSS) BEFORE INCOME TAX
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------
<S> <C> <C> <C>
BUSINESS SEGMENT 1995 1996 1997
- ---------------------------------------------------- ------------ ------------ ------------
Acquisitions........................................ $ 3,238,042 $ 3,096,645 $ 1,629,048
Dental.............................................. 106,311 599,964 609,843
Corporate and Other................................. 838,977 (35,807) 557,252
------------ ------------ ------------
$ 4,183,330 $ 3,660,802 $ 2,796,143
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
Earnings from the Acquisitions Division are normally expected to decline
over time (due to the lapsing of policies resulting from deaths of insureds or
terminations of coverage) unless new acquisitions are made. In the ordinary
course of business, the PLC Acquisitions Division regularly considers
acquisitions of smaller insurance companies or blocks of policies of which some
transactions may from time to time involve the Company. However, no such
transaction has involved the Company since 1995. Pretax earnings from the
Division decreased $0.1 million in 1996 as compared to 1995. The Division's 1997
pretax earnings decreased $1.5 million to $1.6 million.
Dental 1996 pretax earnings were $0.5 million higher than 1995. The
Division's 1997 pretax earnings of $0.6 million were even with 1996.
The Corporate and Other segment consists of net investment income and other
operating expenses not identified with the preceding operating divisions.
Corporate and Other earnings were $0.9 million lower in 1996 as compared to
1995. Pretax earnings for this segment were $0.6 million higher in 1997 as
compared to 1996.
INCOME TAX EXPENSE
The following table sets forth the effective income tax rates for the
periods shown:
25
<PAGE>
INCOME TAX EXPENSE
<TABLE>
<CAPTION>
YEAR ENDED EFFECTIVE
DECEMBER 31 INCOME TAX RATES
- ---------------------------------------------------------------------------- -------------------
<S> <C>
1995...................................................................... 34.0%
1996...................................................................... 34.0
1997...................................................................... 34.0
</TABLE>
Management's current estimate of the effective income tax rate for 1998 is
28%.
NET INCOME
The following table sets forth net income for the periods shown:
NET INCOME
<TABLE>
<CAPTION>
PERCENTAGE
YEAR ENDED INCREASE
DECEMBER 31 AMOUNT (DECREASE)
- ------------------------------------------------------------ ----------------- ---------
<S> <C> <C>
1995...................................................... $ 2,760,998 (10.2)%
1996...................................................... 2,416,129 (12.5)
1997...................................................... 1,845,454 (23.6)
</TABLE>
Compared to 1995, net income in 1996 decreased 12.5%, reflecting declining
earnings in the Acquisitions Division and the Corporate and Other segment as
well as lower realized investment gains which were partially offset by improved
earnings in the Dental Division. Compared to 1996, net income in 1997 decreased
23.6% reflecting declining earnings in the Acquisitions Division and an increase
in realized investment losses which were partially offset by improved earnings
in the Dental Division and the Corporate and Other segment.
KNOWN TRENDS AND UNCERTAINTIES
The operating results of companies in the insurance industry have
historically been subject to significant fluctuations due to competition,
economic conditions, interest rates, investment performance, maintenance of
insurance ratings, and other factors. Certain known trends and uncertainties
which may affect future results of the Company are discussed more fully below.
MATURE INDUSTRY/COMPETITION. Life and health insurance is a mature
industry. In recent years, the industry has experienced virtually no growth in
life insurance sales, though the aging population has increased the demand for
retirement savings products. Insurance is a highly competitive industry, and the
Company encounters significant competition in all lines of business from other
insurance companies, many of which have greater financial resources than the
Company and PLC, as well as competition from other providers of financial
services.
The life and health insurance industry is consolidating with larger, more
efficient organizations emerging from consolidation. Also, mutual insurance
companies are converting to stock ownership which will give them greater access
to capital markets.
Management believes that the Company's ability to compete is dependent upon,
among other things, its ability to attract and retain distribution channels to
market its insurance and investment products, its ability to develop competitive
and profitable products, its ability to maintain low unit costs, and its
maintenance of strong claims-paying and financial strength ratings from rating
agencies.
The Company competes against other insurance companies and financial
institutions in the origination of commercial mortgage loans.
26
<PAGE>
RATINGS. Ratings are an important factor in the competitive position of
insurance companies. Rating organizations periodically review the financial
performance and condition of insurers, including the Company and its affiliates.
A downgrade in the ratings of the Company and its affiliates could adversely
affect its ability to sell its products and its ability to compete for
attractive acquisition opportunities.
Rating organizations assign ratings based upon several factors. While most
of the considered factors relate to the rated company, some of the factors
relate to general economic conditions and circumstances outside the rated
company's control. For the past several years, rating downgrades in the industry
have exceeded upgrades.
The Company's current ratings by Standard & Poors and Duff and Phelps are
based on an inter-company guaranty agreement, enforceable by the Company or its
successors, whereby Protective has guaranteed the Company's payment of claims
made by the holders of Company policies according to the terms of such policies.
The guarantee will remain in force until the earlier of (a) when the Company
achieves a claims-paying rating equal to or better than Protective without the
benefit of any inter-company guaranty agreement, or (b) 90 days after the
guaranty agreement is revoked by written instrument; provided, however, even
after any revocation or termination by such notice, the guarantee shall remain
effective as to policies issued during the existence of the guaranty agreement.
POLICY CLAIMS FLUCTUATIONS. The Company's results may fluctuate from year
to year on account of fluctuations in policy claims received by the Company.
LIQUIDITY AND INVESTMENT PORTFOLIO. Many of the products offered by PLC's
insurance subsidiaries (including the Company) allow policyholders and
contractholders to withdraw their funds under defined circumstances. PLC
considers the design of its products to configure its investment portfolios to
provide and maintain sufficient liquidity to support anticipated withdrawal
demands and contract benefits and maturities. Formal asset/liability management
programs and procedures are used continuously to monitor the relative duration
of PLC's assets and liabilities. While PLC owns a significant amount of liquid
assets, many of its assets are relatively illiquid. Significant unanticipated
withdrawal or surrender activity could, under some circumstances, compel PLC to
dispose of illiquid assets on unfavorable terms, which could have a material
adverse effect on the Company.
INTEREST RATE FLUCTUATIONS. Sudden and/or significant changes in interest
rates expose insurance companies to the risk of not earning anticipated spreads
between the interest rate earned on investments and the credited rates paid on
outstanding policies. Both rising and declining interest rates can negatively
affect the Company's spread income. For example, certain of the Company's
insurance and investment products guarantee a minimum credited rate. While the
Company develops and maintains asset/liability management programs and
procedures designed to preserve spread income in rising or falling interest rate
environments, no assurance can be given that sudden and/or significant changes
in interest rates will not materially affect such spreads.
Lower interest rates may result in lower sales of the Company's insurance
and investment products.
REGULATION AND TAXATION. The Company and its affilitates are subject to
government regulation in each of the states in which they conduct business. Such
regulation is vested in state agencies having broad administrative power over
all aspects of the insurance business including premium rates, marketing
practices, advertising, policy forms, and capital adequacy, and is concerned
primarily with the protection of policyholders rather than stockholders. The
Company cannot predict the form of any future regulatory initiatives.
Under the Internal Revenue Code of 1986, as amended (the Code), income tax
payable by policyholders on investment earnings is deferred during the
accumulation period of certain life insurance and annuity products. This
favorable tax treatment may give certain of the Company's products a competitive
advantage over other non-insurance products. Congress is currently reviewing
certain proposals contained in President Clinton's Fiscal Year 1999 Budget that,
if enacted, would adversely impact the tax treatment of
27
<PAGE>
variable annuity and certain other life insurance products. To the extent that
the Code is revised to reduce the tax-deferred status of life insurance and
annuity products, or to increase the tax-deferred status of competing products,
all life insurance companies, including the Company and its affiliates, would be
adversely affected with respect to their ability to sell such products, and,
depending on grandfathering provisions, the surrenders of existing annuity
contracts and life insurance policies. The Company cannot predict what future
initiatives the President or Congress may propose that may affect the Company.
LITIGATION. A number of civil jury verdicts have been returned against
insurers in the jurisdictions in which the Company does business involving the
insurers' sales practices, alleged agent misconduct, failure to properly
supervise agents, and other matters. Increasingly these lawsuits have resulted
in the award of substantial judgments against the insurer that are
disproportionate to the actual damages, including material amounts of punitive
damages. In some states (including Alabama), juries have substantial discretion
in awarding punitive damages which creates the potential for unpredictable
material adverse judgments in any given punitive damages suit. The Company and
its affiliates, like other insurers, in the ordinary course of business, are
involved in such litigation. The outcome of any such litigation cannot be
predicted with certainty. In addition, in some class action and other lawsuits
involving insurers' sales practices, insurers have made material settlement
payments.
INVESTMENT RISKS. The Company's invested assets are subject to customary
risks of credit defaults and changes in market values. The value of the
Company's commercial mortgage portfolio depends in part on the credit worthiness
of the tenants occupying the properties which the Company has financed. Factors
that may affect the overall default rate on, and market value of, the Company's
invested assets include interest rate levels, financial market performance, and
general economic conditions, as well as particular circumstances affecting the
businesses of individual borrowers and tenants.
CONTINUING SUCCESS OF ACQUISITION STRATEGY. PLC has actively pursued a
strategy of acquiring blocks of insurance policies and small insurance companies
of which some transactions may from time-to-time involve the Company. This
acquisition strategy has increased the earnings of PLC and its affiliates in
part by allowing PLC and its affiliates to position themselves to realize
certain operating efficiencies associated with economies of scale. There can be
no assurance, however, that suitable acquisitions, presenting opportunities for
continued growth and operating efficiencies, will continue to be available to
PLC, or that PLC will realize the anticipated financial results from its
acquisitions.
RELIANCE ON THE PERFORMANCE OF OTHERS. The Company has entered into various
ventures involving other parties. Examples include, but are not limited to: many
of the Company's products are sold through independent distribution channels;
the Investment Products Division's variable annuity deposits are to be invested
in funds managed by unaffiliated investment managers. Therefore the Company's
results may be affected by the performance of others.
YEAR 2000. Older computer hardware and software often denote the year using
two digits rather than four; for example, the year 1997 often is denoted by such
hardware and software as "97." It is probable that such hardware and software
will malfunction when calculations involving the year 2000 are attempted because
the hardware and/or software will interpret "00" as representing the year 1900
rather than the year 2000. This "Year 2000" issue potentially affects all
individuals and companies (including Protective, its affiliates, its customers,
business partners, suppliers, banks, custodians and administrators) who rely on
computers or devices containing computer chips.
On behalf of itself and its affiliates, Protective has developed and is
implementing a Year 2000 transition plan intended to identify and modify or
replace primary hardware and/or software systems on which it relies that have a
Year 2000 issue. Protective is also developing and implementing a plan to
identify and modify or replace secondary hardware and/or software systems on
which it relies that have a Year 2000 issue. Substantial resources are being
devoted to this effort; however the costs to develop and implement these plans
are not expected to be material. Protective is also confirming that its service
28
<PAGE>
providers are implementing plans to identify and modify or replace their systems
that have a Year 2000 issue.
Protective currently anticipates that its systems will be able to process
transactions dated beyond 1999 on or before December 31, 1999. There can be no
assurance, however, that Protective's efforts will be successful, that
interaction with other service providers with Year 2000 issues will not impair
Protective's operations, or that the Year 2000 issue will not otherwise
adversely affect Protective.
REINSURANCE. As is customary in the insurance industry, the Company cedes
insurance to other insurance companies. However, the ceding insurance company
remains liable with respect to ceded insurance should any reinsurer fail to meet
the obligations assumed by it. Additionally, the Company assumes policies of
other insurers. Any regulatory or other development affecting the ceding insurer
could also have an effect on the Company.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 132, "Employers' Disclosures About Pension and Other
Postretirement Benefits." This statement revises the footnote disclosures about
pension and other postretirement benefit plans. This Statement will have no
effect on the Company's financial condition.
LIQUIDITY AND CAPITAL RESOURCES
Funds necessary to meet the capital requirements of all states in which the
Company does business, and to support the Company's operations, have been
provided principally by capital contributions from Protective Life Insurance
Company, and from investment income.
Furthermore, Protective has entered into an inter-company guaranty
agreement, enforceable by the Company or its successors, whereby Protective has
guaranteed the Company's payment of policy claims made by the holders of Company
policies according to the terms of such policies. The guarantee will remain in
force until the earlier of (a) when the Company achieves a claims-paying rating
equal to or better than Protective without the benefit of any inter-company
guaranty agreement, or (b) 90 days after the guaranty agreement is revoked by
written instrument; provided, however, even after any revocation or termination
by such notice, the guarantee shall remain effective as to policies issued
during the existence of the guaranty agreement.
The Company's investments in debt and equity securities are reported at
market value, and investments in mortgage loans are reported at amortized cost.
At December 31, 1997, the fixed maturity investments (bonds) had a market value
of $68.2 million, which is 1.6% above amortized cost of $67.1 million. The
Company had $10.9 million in mortgage loans at December 31, 1997. While the
Company's mortgage loans do not have quoted market values, at December 31, 1997,
the Company estimates the market value of its mortgage loans to be $11.6 million
(using discounted cash flows from the next call date) which is 6.4% above
amortized cost. Most of the Company's mortgage loans have significant prepayment
penalties. These assets are invested for terms approximately corresponding to
anticipated future benefit payments. Thus, market fluctuations should not
adversely affect liquidity.
At December 31, 1997, delinquent mortgage loans and foreclosed properties
were 0.3% of assets. Bonds rated less than investment grade were 6.3% of assets.
The Company does not expect these investments to adversely affect its liquidity
or ability to maintain proper matching of assets and liabilities.
Policy loans at December 31, 1997, were $11.6 million, a decrease of $1.9
million from December 31, 1996. Policy loan rates are generally in the 4.5% to
8.0% range. Such rates at least equal the assumed interest rates used for future
policy benefits.
The Company believes its asset/liability management programs and procedures
and certain product features provide significant protection for the Company
against the effects of changes in interest rates.
29
<PAGE>
However, most of the Company's liabilities relate to products (primarily whole
life insurance) the profitability of which may be affected by changes in
interest rates. The effect of such changes in any one year is not expected to be
material. Additionally, the Company believes its asset/liability management
programs and procedures provide sufficient liquidity to enable it to fulfill its
obligation to pay benefits under its various insurance and deposit contracts.
The Company's asset/liability management programs and procedures involve the
monitoring of asset and liability durations for various product lines; cash flow
testing under various interest rate scenarios; and the continuous rebalancing of
assets and liabilities with respect to yield, risk, and cash flow
characteristics. It is the Company's general policy to maintain asset and
liability durations within one-half year of one another, although from time to
time a broader interval may be allowed.
As disclosed in the Notes to the Financial Statements, $6.1 million of
stockholders' equity, excluding net unrealized investment gains and losses,
represented net assets of the Company that cannot be transferred to Protective
Life Insurance Company in the form of dividends, loans, or advances.
A life insurance company's statutory capital is computed according to rules
prescribed by the National Association of Insurance Commissioners ("NAIC"), as
modified by the insurance company's state of domicile. Statutory accounting
rules are different from generally accepted accounting principles and are
intended to reflect a more conservative view by, for example, requiring
immediate expensing of policy acquisition costs. The NAIC's risk-based capital
requirements require insurance companies to calculate and report information
under a risk-based capital formula. The achievement of long-term growth will
require growth in the statutory capital of the Company. The Company may secure
additional statutory capital through various sources, such as retained statutory
earnings or equity contributions by Protective Life Insurance Company.
Under insurance guaranty fund laws in most states, insurance companies doing
business in a participating state can be assessed up to prescribed limits for
policyholder losses incurred by insolvent companies. The Company does not
believe that any such assessments will be materially different from amounts
already reflected in the financial statements.
The Company, like other insurers, in the course of business is involved in
litigation. Although the outcome of any litigation cannot be predicted with
certainty, the Company believes that at the present time there are no pending or
threatened lawsuits that are reasonably likely to have a material adverse effect
on the financial position, results of operations, or liquidity of the Company.
President Clinton's recent budget proposal contains provisions that would
change the way insurance companies and certain of their products are taxed,
which, if enacted by Congress would negatively affect the Company.
The Company is not aware of any material pending or threatened regulatory
action with respect to the Company or any of its affilitates.
IMPACT OF INFLATION
Inflation increases the need for life insurance. Many policyholders who once
had adequate insurance programs may increase their life insurance coverage to
provide the same relative financial benefits and protection. Inflation increases
the cost of health care. The adequacy of premium rates in relation to the level
of health claims is constantly monitored, and where appropriate, premium rates
on such policies are increased as policy benefits increase. Failure to make such
increases commensurate with healthcare cost increases may result in a loss from
health insurance.
The higher interest rates that have traditionally accompanied inflation may
also affect the Company's investment operation. Policy loans increase as policy
loan interest rates become relatively more attractive. As interest rates
increase, disintermediation of annuity deposits and individual life policy cash
values may increase, the market value of the Company's fixed-rate, long-term
investments may decrease, and the
30
<PAGE>
Company may be unable to implement fully the interest rate reset and call
provisions of its mortgage loans. The difference between the interest rate
earned on investments and the interest rate credited to life insurance and
investment products may also be adversely affected by rising interest rates.
D. INSURANCE IN FORCE
The Company's total consolidated life insurance in force at December 31,
1997 was $596.9 million. The following table shows sales by face amount and
insurance in force for the Company's business segments.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
New Business Written
Dental............................................................ $ 1,508 $ 984 $ 1,333
Acquisitions 0 95 70
Corporate and Other............................................... 9,485 0 0
---------- ---------- ----------
Total........................................................... $ 10,993 $ 1,079 $ 1,403
---------- ---------- ----------
---------- ---------- ----------
Business Acquired
Acquisitions...................................................... $ 428,849
----------
Total........................................................... $ 428,849
----------
----------
Insurance in Force at End of Year (1)
Acquisitions...................................................... $ 387,427 $ 446,823 $ 490,380
Dental............................................................ 200,410 349,808 300,993
Corporate and Other............................................... 9,056 0 0
---------- ---------- ----------
Total........................................................... $ 596,893 $ 796,631 $ 791,373
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
- ------------------------
(1) Reinsurance assumed has been included; reinsurance ceded (1997-$133,080;
1996-$169,330; 1995-$42,165) has not been deducted.
The ratio of voluntary terminations of individual life insurance to mean
individual life insurance in force, which is determined by dividing the amount
of insurance terminated due to lapses during the year by the mean of the
insurance in force at the beginning and end of the year, adjusted for the timing
of major acquisitions and assumptions was:
<TABLE>
<CAPTION>
RATIO OF
YEAR ENDED VOLUNTARY
DECEMBER 31 TERMINATIONS
- -------------------------------------------------------------------------------- ----------------
<S> <C>
1995.......................................................................... 4.1%
1996.......................................................................... 6.5
1997.......................................................................... 9.2
</TABLE>
Net terminations reflect voluntary lapses and cash surrenders, some of which
may be due to the replacement of the Company's products with competitors'
products. Also, a higher percentage of voluntary lapses typically occurs in the
first 15 months of a policy, and accordingly, lapses will tend to increase or
decrease in proportion to the change in new insurance written during the
immediately preceding periods.
E. UNDERWRITING
The underwriting policies of the Company are established by management. With
respect to individual insurance, the Company uses information from the
application and, in some cases, inspection reports, attending physician
statements, or medical examinations to determine whether a policy should be
issued as applied for, rated, or rejected. Medical examinations of applicants
are required for individual life insurance in excess of certain prescribed
amounts (which vary based on the type of insurance) and for most ordinary
31
<PAGE>
insurance applied for by applicants over age 50. Medical examinations are
requested of any applicant, regardless of age and amount of requested coverage,
if an examination is deemed necessary to underwrite the risk. Substandard risks
may be referred to reinsurers for full or partial reinsurance of the substandard
risk.
The Company requires blood samples to be drawn with individual insurance
applications for coverage at age 16 and above, except in the payroll deduction
market where the face amount must be $100,000 or more before blood testing is
required. Blood samples are tested for a wide range of chemical values and are
screened for antibodies to the HIV virus. Applications also contain questions
permitted by law regarding the HIV virus which must be answered by the proposed
insureds.
Group insurance underwriting policies are administered by experienced group
underwriters. The underwriting policies are designed for single employer groups.
Initial premium rates are based on prior claim experience and manual premium
rates with relative weights depending on the size of the group and nature of the
benefits.
F. INVESTMENTS
The types of assets in which the Company may invest are influenced by state
laws which prescribe qualified investment assets. Within the parameters of these
laws, the Company invests its assets giving consideration to such factors as
liquidity needs, investment quality, investment return, matching of assets and
liabilities, and the composition of the investment portfolio by asset type and
credit exposure.
The following table shows the Company's investments at December 31, 1997,
valued on the basis of generally accepted accounting principles.
<TABLE>
<CAPTION>
PERCENT OF TOTAL
ASSET VALUE INVESTMENTS
---------------------- ----------------
<S> <C> <C>
Fixed maturities:
Bonds:
Mortgage-backed securities......................... $ 11,696,619 12.7%
United States Government and government agencies
and authorities.................................. 8,983,333 9.8
Public utilities................................... 9,421,219 10.2
Convertibles and bonds with warrants attached...... 525,875 0.6
All other corporate bonds.......................... 37,574,513 40.8
------------ -----
Total fixed maturities............................. 68,201,559 74.1
------------ -----
Mortgage loans on real estate.......................... 10,902,986 11.9
Investment real estate................................. 407,624 0.4
Policy loans........................................... 11,635,376 12.6
Short-term investments................................. 873,844 1.0
------------ -----
Total investments................................ $ 92,021,389 100.0%
------------ -----
------------ -----
</TABLE>
A significant portion of the Company's bond portfolio is invested in
mortgage-backed securities. Mortgage-backed securities are constructed from
pools of residential mortgages, and may have cash flow volatility as a result of
changes in the rate at which prepayments of principal occur with respect to the
underlying loans. Prepayments of principal on the underlying residential loans
can be expected to accelerate with decreases in interest rates and diminish with
increases in interest rates. In its mortgage-backed securities portfolio, the
Company has focused on sequential, planned amortization class, and targeted
amortization class securities, which tend to be less volatile than other classes
of mortgage-backed securities.
The Company obtains ratings of its fixed maturities from Moody's Investor
Service, Inc. ("Moody's") and Standard & Poor's Corporation ("S&P"). If a bond
is not rated by Moody's or S&P, the Company uses
32
<PAGE>
ratings from the Securities Valuation Office of the National Association of
Insurance Commissioners ("NAIC"), or the Company rates the bond based upon a
comparison of the unrated issue to rated issues of the same issuer or rated
issues of other issuers with similar risk characteristics. At December 31, 1997,
approximately 93% of bonds were rated by Moody's, S&P, or the NAIC.
The following table shows the approximate percentage distribution of the
Company's fixed maturities by rating, utilizing S&P's rating categories, at
December 31, 1997:
<TABLE>
<CAPTION>
PERCENTAGE OF
FIXED
TYPE MATURITIES
- -------------------------------------------------------------------------------- --------------
<S> <C>
Bonds
AAA........................................................................... 26.8%
AA............................................................................ 1.7
A............................................................................. 24.3
BBB........................................................................... 37.4
BB or less.................................................................... 9.8
-----
Total........................................................................... 100.0%
-----
-----
</TABLE>
At December 31, 1997, approximately $61.5 million of the Company's $68.2
million bond portfolio was invested in U.S. Government or agency-backed
securities or investment grade corporate bonds and only approximately $6.7
million of its bond portfolio was rated less than investment grade.
Approximately $5.1 million of bonds are not publicly traded.
While considered to be investment grade securities, bonds that are rated BBB
by S&P may have speculative characteristics and changes in economic conditions
or other circumstances are more likely to lead to a weakened capacity of the
issuer to make principal and interest payments than is the case with higher
rated securities.
Risks associated with investments in less than investment grade debt
obligations may be significantly higher than risks associated with investments
in debt securities rated investment grade. Risk of loss upon default by the
borrower is significantly greater with respect to such debt obligations than
with other debt securities because these obligations may be unsecured or
subordinated to other creditors. Additionally, there is often a thinly traded
market for such securities and current market quotations are frequently not
available for some of these securities. Issuers of less than investment grade
debt obligations usually have higher levels of indebtedness and are more
sensitive to adverse economic conditions, such as recession or increasing
interest rates, than investment-grade issuers.
The Company also invests a significant portion of its portfolio in mortgage
loans. Results for these investments have been excellent due to careful
management and a focus on a specialized segment of the market. The Company
generally does not lend on speculative properties and has specialized in making
loans on either credit-oriented commercial properties, or credit-anchored strip
shopping centers. There were no new loans made during 1997. The average size
mortgage loan in the Company's portfolio is approximately $0.5 million. The
largest single loan amount is $2.0 million.
The following table shows a breakdown of the Company's mortgage loan
portfolio by property type:
<TABLE>
<CAPTION>
PERCENTAGE OF
MORTGAGE LOANS
PROPERTY TYPE ON REAL ESTATE
- ----------------------------------------------------------------------------- -------------------
<S> <C>
Retail....................................................................... 46%
Office Building.............................................................. 44
Warehouses................................................................... 10
---
Total........................................................................ 100%
---
---
</TABLE>
33
<PAGE>
Retail loans are generally on strip shopping centers located in smaller
towns and anchored by one or more strong regional or national retail stores. The
anchor tenants enter into long-term leases with the Company's borrowers. These
centers provide the basic necessities of life, such as food, pharmaceuticals,
and clothing, and have been relatively insensitive to changes in economic
conditions. The following are some of the largest anchor tenants (measured by
the Company's exposure) in the strip shopping centers at December 31, 1997:
<TABLE>
<CAPTION>
PERCENTAGE OF
MORTGAGE LOANS
ANCHOR TENANTS ON REAL ESTATE
- ----------------------------------------------------------------------------- ------------------
<S> <C>
Babcock Industries........................................................... 9.0%
Ahold USA.................................................................... 6.4%
</TABLE>
Office building loans are generally on professional offices where the owner
may be a tenant. The loans may be further secured with personal guarantees of
the owner.
The Company's mortgage lending criteria generally require that the
loan-to-value ratio on each mortgage be at or under 75% at the time of
origination. Projected rental payments from credit anchors (i.e., excluding
rental payments from smaller local tenants) generally exceed 70% of the
property's projected operating expenses and debt service.
Many of the Company's mortgage loans have call or interest rate reset
provisions after five to seven years. However, if interest rates were to
significantly increase, the Company may be unable to increase the interest rates
on its existing mortgage loans commensurate with the significantly increased
market rates, or call the loans.
At December 31, 1997, $0.4 million or 3.7% of the mortgage loan portfolio
was nonperforming. It is the Company's policy to cease to carry accrued interest
on loans that are over 90 days delinquent. For loans less than 90 days
delinquent, interest is accrued unless it is determined that the accrued
interest is not collectible. If a loan becomes over 90 days delinquent, it is
the Company's general policy to initiate foreclosure proceedings unless a
workout arrangement to bring the loan current is in place.
As a general rule, the Company does not invest directly in real estate. The
investment real estate held by the Company consists largely of properties
obtained through foreclosures or the acquisition of other insurance companies.
In the Company's experience, the appraised value of foreclosed properties often
approximates the mortgage loan balance on the property plus costs of
foreclosure. Also, foreclosed properties often generate a positive cash flow
enabling the Company to hold and manage the property until the property can be
profitably sold.
For further discussion regarding the Company's investments and the maturity
of and the concentration of risk among the Company's invested assets, see Note C
to the Consolidated Financial Statements.
The following table shows the investment results of the Company for the
years 1995 through 1997:
<TABLE>
<CAPTION>
PERCENTAGE
CASH, ACCRUED EARNED ON
INVESTMENT INCOME, NET AVERAGE OF REALIZED
YEAR ENDED AND INVESTMENTS AT INVESTMENT CASH AND INVESTMENT
DECEMBER 31 DECEMBER 31 INCOME INVESTMENTS GAINS (LOSSES)
- --------------------------------------------------- ------------------ ------------ --------------- --------------
<S> <C> <C> <C> <C>
1995............................................. $ 80,452,365 $ 5,507,367 7.0% $ 838,977
1996............................................. 97,968,992 6,611,489 7.5 (28,070)
1997............................................. 95,470,119 6,233,845 6.5 (59,889)
</TABLE>
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations-- Liquidity and Capital Resources" included herein for certain
information relating to the Company's investments and liquidity.
34
<PAGE>
G. INDEMNITY REINSURANCE
As is customary in the insurance industry, the Company cedes insurance to
other insurance companies. The ceding insurance company remains liable with
respect to ceded insurance should any reinsurer fail to meet the obligations
assumed by it. The Company sets a limit on the amount of insurance retained on
the life of any one person. In the individual lines it will not retain more than
$500,000, including accidental death benefits, on any one life. For group
insurance, the maximum amount retained on any one life is generally $100,000. In
many cases the retention is less. At December 31, 1997, the Company had
insurance in force of $596.9 million of which approximately $133.1 million was
ceded to reinsurers.
H. POLICY LIABILITIES AND ACCRUALS
The applicable insurance laws under which the Company operates require that
each insurance company report policy liabilities to meet future obligations on
the outstanding policies. These liabilities are the amounts which, with the
additional premiums to be received and interest thereon compounded annually at
certain assumed rates, are calculated in accordance with applicable law to be
sufficient to meet the various policy and contract obligations as they mature.
These laws specify that the liabilities shall not be less than liabilities
calculated using certain named mortality tables and interest rates.
The policy liabilities and accruals carried in the Company's financial
reports (presented on the basis of generally accepted accounting principles)
differ from those specified by the laws of the various states and carried in the
Company's statutory financial statements (presented on the basis of statutory
accounting principles mandated by state insurance regulation). For policy
liabilities other than those for universal life policies and annuity contracts,
these differences arise from the use of mortality and morbidity tables and
interest rate assumptions which are deemed under generally accepted accounting
principles to be more appropriate for financial reporting purposes than those
required for statutory accounting purposes; from the introduction of lapse
assumptions into the reserve calculation; and from the use of the net level
premium method on all business. Policy liabilities for universal life policies
and annuity contracts are carried in the Company's financial reports at the
account value of the policy or contract.
I. COMPETITION
Life and health insurance is a mature industry. In recent years, the
industry has experienced virtually no growth in life insurance sales, though the
aging population has increased the demand for retirement savings products. Life
and health insurance is a highly competitive industry and the Company's
divisions encounter significant competition in all their respective lines of
business from other insurance companies, many of which have greater financial
resources than the Company, as well as competition from other providers of
financial services.
The life and health insurance industry is consolidating with larger, more
efficient organizations emerging from consolidation. Also, mutual insurance
companies are converting to stock ownership which will give them greater access
to capital markets.
Management believes that the Company's ability to compete is dependent upon,
among other things, its ability to attract and retain distribution channels to
market its insurance and investment products, its ability to develop competitive
and profitable products, its ability to maintain low unit costs, and its
maintenance of strong claims-paying and financial strength ratings from rating
agencies.
The Company competes against other insurance companies and financial
institutions in the origination of commercial mortgage loans.
J. REGULATION
The Company is subject to government regulation in each of the states in
which it conducts business. Such regulation is vested in state agencies having
broad administrative power dealing with all aspects of the insurance business,
including premium rates, marketing practices, advertising, policy forms and
capital adequacy, and is concerned primarily with the protection of
policyholders rather than stockholders. The Company cannot predict the form of
any future proposals or regulation.
35
<PAGE>
A life insurance company's statutory capital is computed according to rules
prescribed by the National Association of Insurance Commissioners ("NAIC") as
modified by the insurance company's state of domicile. Statutory accounting
rules are different from generally accepted accounting principles and are
intended to reflect a more conservative view, for example, by requiring
immediate expensing of policy acquisition costs and more conservative
computations of policy liabilities. The NAIC's risk-based capital requirements
require insurance companies to calculate and report information under a
risk-based capital formula. These requirements are intended to allow insurance
regulators to identify inadequately capitalized insurance companies based upon
the types and mixtures of risks inherent in the insurer's operations. The
formula includes components for asset risk, liability risk, interest rate
exposure, and other factors. Based upon the December 31, 1997 statutory
financial reports, the Company is adequately capitalized under the formula.
The Company is required to file detailed annual reports with the supervisory
agencies in each of the jurisdictions in which it does business and its business
and accounts are subject to examination by such agencies at any time. Under the
rules of the NAIC, insurance companies are examined periodically (generally
every three to five years) by one or more of the supervisory agencies on behalf
of the states in which they do business. To date, no such insurance department
examinations have produced any significant adverse findings regarding the
Company.
Under insurance guaranty fund laws in most states, insurance companies doing
business in such a state can be assessed up to prescribed limits for
policyholder losses incurred by insolvent or failed insurance companies.
Although the Company cannot predict the amount of any future assessments; most
insurance guaranty fund laws currently provide that an assessment may be excused
or deferred if it would threaten an insurer's financial strength. The Company
was assessed immaterial amounts in 1997, which will be partially offset by
credits against future state premium taxes.
In addition, many states, including the state in which the Company is
domiciled, have enacted legislation or adopted regulations regarding insurance
holding company systems. These laws require registration of and periodic
reporting by insurance companies domiciled within the jurisdiction which control
or are controlled by other corporations or persons so as to constitute an
insurance holding company system. These laws also affect the acquisition of
control of insurance companies as well as transactions between insurance
companies and companies controlling them. Most states, including Alabama, where
the Company is domiciled, require administrative approval of the acquisition of
control of an insurance company domiciled in the state or the acquisition of
control of an insurance holding company whose insurance subsidiary is
incorporated in the state.
The Company is subject to various state statutory and regulatory
restrictions on its ability to pay dividends to Protective Life Insurance
Company. In general, dividends up to specified levels are considered ordinary
and may be paid without prior approval. Dividends in larger amounts are subject
to approval by the insurance commissioner of the state of domicile. The maximum
amount that would qualify as ordinary dividends to Protective Life Insurance
Company by the Company in 1998 is estimated to be $3.4 million. No assurance can
be given that more stringent restrictions will not be adopted from time to time
by the state in which the Company is domiciled, which restrictions could have
the effect, under certain circumstances, of significantly reducing dividends or
other amounts payable by the Company without affirmative prior approval by state
regulatory authorities.
The Company may act as a fiduciary and is subject to regulation by the
Department of Labor ("DOL") when providing a variety of products and services to
employee benefit plans governed by the Employee Retirement Income Security Act
of 1974 ("ERISA"). Severe penalties are imposed by ERISA on fiduciaries which
violate ERISA's prohibited transaction provisions by breaching their duties by
ERISA-covered plans. In a case decided by the United States Supreme Court in
December 1993 (JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY V. HARRIS TRUST AND
SAVINGS BANK), the Court concluded that an insurance company general account
contract that had been issued to a pension plan should be divided into its
guaranteed and nonguaranteed components and that certain ERISA fiduciary
obligations applied with respect to the assets underlying the nonguaranteed
components. Although the Company has not issued contracts identical to the one
involved in HARRIS TRUST, some of its policies relating to ERISA-covered plans
may be deemed to have nonguaranteed components subject to the principles
announced by the Court.
36
<PAGE>
The full extent to which HARRIS TRUST makes the fiduciary standards and
prohibited transaction provisions of ERISA applicable to all or part of
insurance company general account assets, however, cannot be determined at this
time. The Supreme Court's opinion did not resolve whether the assets at issue in
the case may be subject to ERISA for some purposes and not others. The life
insurance industry requested that the DOL issue exemptions from the prohibited
transaction provisions of ERISA in view of HARRIS TRUST. In July of 1995, the
DOL published, in final form, a prohibited transaction class exemption (PTE
95-60) which exempts from the prohibited transaction rules, prospectively and
retroactively to January 1, 1975, certain transactions engaged in by insurance
company general accounts in which employee benefit plans have an interest. The
exemption does not cover all such transactions, and the insurance industry is
seeking further relief. Pursuant to the Small Business Job Protection Act signed
into law on August 20, 1996, the DOL has published proposed final regulations
attempting to clarify the HARRIS TRUST decision. Until these and other matters
are clarified, the Company is unable to determine whether the decision will
result in any liability and, if so, its nature and scope.
The Federal Government has from time to time advocated changes to the
current health care delivery system which will address both affordability and
availability issues. In addition to the federal initiatives, a number of states
are considering legislative programs that are intended to affect the
accessibility and affordability of health care. Some states have enacted health
care reform legislation. However, in light of the small relative proportion of
the Company's earnings attributable to group health insurance, management does
not expect that either the federal or state proposals will have a material
adverse effect on the Company's earnings.
The Federal Government has advocated the repeal the Glass-Steagall Act and
certain other legislative changes, which would allow banks to diversify into
securities and other businesses, including possibly insurance. The ultimate
scope and effective date of any proposals are unknown at this time and are
likely to be modified as they are considered for enactment. It is anticipated
that these proposals may increase competition and, therefore, may adversely
affect the Company.
Additional issues related to regulation of the Company are discussed in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" included herein.
K. EMPLOYEES
The Company has no employees. The Company has contracts with PLC and
Protective under which it receives investment, legal and data processing on a
fee basis and other managerial and administrative services on a shared cost
basis. In addition, the Company and its affiliates have a joint contract
relating to allocation of costs for services performed by employees of one
affiliate for another.
37
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS
The executive officers and directors of American Foundation are as follows:
<TABLE>
<S> <C> <C>
Wayne E. Stuenkel 44 President, Chief Actuary and a Director
R. Stephen Briggs 48 Executive Vice President and a Director
Jim E. Masssengale 55 Executive Vice President, Acquisitions and a Director
Executive Vice President, Investments and Treasurer, and a
A.S. Williams, III 61 Director
Danny L. Bentley 40 Senior Vice President, Group and a Director
Richard J. Bielen 37 Senior Vice President, Investments and a Director
Carolyn King 47 Senior Vice President, Investment Products and a Director
Senior Vice President, General Counsel, Secretary and a
Deborah J. Long 44 Director
Steven A. Schultz 44 Senior Vice President, Financial Institutions and a Director
Jerry W. DeFoor 45 Vice President and Controller
John D. Johns 46 Director
Drayton Nabers,
Jr. 57 Director
</TABLE>
All executive officers and directors are elected annually. Executive
officers serve at the pleasure of the Board of Directors and directors are
elected by Protective at the annual meeting of shareholders of American
Foundation. None of the individuals listed above is related to any director of
PLC or Protective or to any executive officer.
Mr. Stuenkel has been President and Chief Actuary of American Foundation
since June 1996. He was Senior Vice President and Chief Actuary of American
Foundation from May 1990 to June [1996] and PLC since March 1987. Mr. Stuenkel
is a Fellow in the Society of Actuaries.
Mr. Briggs has been Executive Vice President of PLC and American Foundation
since October 1993. From January 1993 to October 1993, he was Senior Vice
President, Life Insurance and Investment Products of American Foundation and
PLC. Mr. Briggs had been Senior Vice President, Ordinary Marketing of PLC since
August 1988 and of American Foundation since May 1986.
Mr. Massengale has been Executive Vice President, Acquisitions of American
Foundation and PLC since August 1996. From May 1992 to August 1996, he served as
Senior Vice President of American Foundation and PLC. From May 1989 to May 1992,
Mr. Massengale was Senior Vice President, Operations and Systems of American
Foundation and PLC.
Mr. Williams has been Executive Vice President, Investments and Treasurer of
American Foundation and PLC since August 1996. From July 1981 to August 1996, he
was Senior Vice President, Investments and Treasurer of PLC and from October
1993 to August 1996, he was Senior Vice President, Investments of American
Foundation.
Mr. Bentley has been Senior Vice President, Group of American Foundation and
PLC since August 1996. From May 1989 to August 1996, he was Vice President,
Group Marketing of American Foundation.
Mr. Bielen has been Senior Vice President, Investments of PLC and American
Foundation since August 1996. From August 1991 to August 1996, he was Vice
President, Investments of American Foundation.
Ms. King has been Senior Vice President, Investment Products Division of PLC
and American Foundation since April 1995. From August 1994 to March 1995, she
served as Senior Vice President and Chief Investment Officer of Provident Life
and Accident Insurance Company and of its parent company, Provident Life and
Accident Insurance Company of America. She served as President of Provident
National Assurance Company from November 1987 to March 1995. From November 1986
to August 1994, she served as Vice President of Provident Life and Accident
Insurance Company of America.
38
<PAGE>
Ms. Long has been Senior Vice President, Secretary and General Counsel of
PLC since November 1996 and of American Foundation since September 1996. Ms.
Long was Senior Vice President and General Counsel of PLC from February 1994 to
November 1996 and of American Foundation from February 1994 to September 1996.
From August 1993 to January 1994, Ms. Long served as General Counsel of PLC and
from February 1984 to January 1994, she practiced law with the law firm of
Maynard, Cooper & Gale, P.C.
Mr. Schultz has been Senior Vice President, Financial Institutions of
American Foundation and PLC since March 1993. Mr. Schultz served as Vice
President, Financial Institutions of American Foundation from February 1989 to
March 1993 and of PLC from February 1993 to March 1993.
Mr. DeFoor has been Vice President and Controller, and Chief Accounting
Officer of PLC since April 1989. Mr. DeFoor has been Vice President and
Controller of American Foundation since May 1989. Mr. DeFoor is a certified
public accountant.
Mr. Johns has been President and Chief Operating Officer of PLC since August
1996 and a Director of American Foundation since June 1996. He was Executive
Vice President and Chief Financial Officer of PLC from October 1993 to August
1996. He was Executive Vice President and Chief Financial Officer of American
Foundation from October 1993 to June 1996. From August 1988 to October 1993, he
served as Vice President and General Counsel of Sonat Inc. He is a director of
National Bank of Commerce of Birmingham and Alabama National Bancorporation.
Mr. Nabers has been a Director of American Foundation since June 1996. Mr.
Nabers has been Chairman of the Board and Chief Executive Officer of PLC and a
Director since August 1996. From May 1994 to August 1996, Mr. Nabers was
Chairman of the Board, President and Chief Executive Officer and a Director of
PLC. From May 1992 to May 1994, he was President and Chief Executive Officer and
a Director of PLC. Mr. Nabers was President and Chief Executive Officer and a
Director of PLC from August 1982 until May 1992. He is also a director of
Energen Corporation, National Bank of Commerce of Birmingham, and Alabama
National Bancorporation.
39
<PAGE>
EXECUTIVE COMPENSATION
Executive officers of the Company also serve as executive officers and/or
directors of one or more affiliate companies of PLC. Compensation allocations
are made as to each individual's time devoted to duties as an executive officer
of the Company and its affiliates. The following table shows the total
compensation paid to the chief executive officer of the Company by the Company
or any of its affiliates including PLC. No other officer of the Company received
total annual salary and bonus attributable to the Company during the last fiscal
year. Directors of the Company who are also employees receive no compensation in
addition to their compensation as employees of the Company.
PLC has established a Deferred Compensation Plan for Officers of PLC (the
"Officers' Plan") whereby eligible officers may voluntarily elect to defer to a
specified date receipt of all or any portion of their Annual Incentive Plan and
Performance Share Plan bonuses. The bonuses so deferred are credited to the
officers in cash or PLC stock equivalents or a combination thereof. The cash
portion earns interest at approximately PLC's short-term borrowing rate. The
stock equivalent portion is credited with dividends in the form of additional
stock equivalents. Deferred bonuses will be distributed in stock or cash as
specified by the officers in accordance with the Officers' Plan unless
distribution is accelerated under certain provisions, including upon a change in
control of PLC.
A. SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
----------------------
AWARDS PAYOUTS
---------- ----------
SECURITIES LONG-TERM
ANNUAL COMPENSATION UNDERLYING INCENTIVE
NAME AND PRINCIPAL ---------------------- OPTIONS/ PLAN ALL OTHER
POSITION YEAR SALARY BONUS SARS(#) PAYOUTS COMPENSATION
(a) (b) (1)(c) (1)(2)(d) (g) (2)(3)(h) (4)(i)
- ------------------------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
WAYNE E. STUENKEL........ 1997 $ 180,833 $ 86,000 -0- $ 321,871 $ 4,800
President and Chief 1996 174,167 65,600 7,500 204,605 4,500
Actuary 1995 168,667 90,100 -0- 209,405 4,500
</TABLE>
- ------------------------
(1) Includes amounts that the named executives may have voluntarily elected to
contribute to PLC's 401(k) and Stock Ownership Plan.
(2) Includes amounts that the named executives may have voluntarily deferred
under PLC's Deferred Compensation Plan for Officers.
(3) For further information, see the "Long-Term Incentive Plan--Awards In Last
Fiscal Year" table.
(4) Matching contributions to PLC's 401(k) and Stock Ownership Plan.
The above table sets forth certain information for the three years ended
December 31, 1997 relating to the Chief Executive Officer.
B. AGGREGATED FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
FY-END(#) FY-END($)
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
(a) (d) (e)
- ------------------------- --------------- ---------------
<S> <C> <C>
Wayne E. Stuenkel........ 0/7,500 $0/$186,563
</TABLE>
40
<PAGE>
C. PERFORMANCE SHARE PLAN
LONG-TERM INCENTIVE PLAN--AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
PERFORMANCE OR ESTIMATED FUTURE PAYOUTS UNDER NON-STOCK
NUMBER OF OTHER PERIOD
SHARES, UNITS UNTIL PRICE-BASED PLANS (IN SHARES)
OR OTHER MATURATION OR -------------------------------------------------
NAME RIGHTS(#)(1) PAYOUT THRESHOLD TARGET MAXIMUM
(a) (b) (c) (d) (e) (f)
- ------------------------- --------------- --------------- --------------- ------ ---------------
<S> <C> <C> <C> <C> <C>
December 31,
Wayne E. Stuenkel........ 1,670 2000 835 2,088 2,839
</TABLE>
In 1997, the Compensation and Management Succession Committee of PLC's Board
of Directors awarded performance shares, as indicated, to the above named
executive, which are not payable, if at all, until the results of the comparison
group of companies for the four-year period ending December 31, 2000 are known.
With respect to 1997 awards awarded to the named executive officer, 125% of
the award is earned if either PLC's average return on average equity or total
rate of return for the four-year period ranks at the top 25% of the comparison
group. If PLC ranks at the top 10% of the comparison group, 170% of the award is
earned. If PLC ranks at the median of the comparison group, 50% of the award is
earned and if PLC's results are below the median of the comparison group, no
portion of the award is earned. The Performance Share Plan provides for
interpolation between thresholds to determine the exact percentage to be paid.
41
<PAGE>
D. PENSION PLAN
PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF SERVICE
----------------------------------------------------------
RENUMERATION 15 20 25 30 35
- ------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
$ 125,000 $ 27,802 $ 37,070 $ 46,337 $ 55,604 $ 64,872
150,000 33,802 45,070 56,337 67,604 78,872
175,000* 39,802 53,070 66,337 79,604 92,872
200,000* 45,802 61,070 76,337 91,604 106,872
225,000* 51,802 69,070 86,337 103,604 120,872
250,000* 57,802 77,070 96,337 115,604 134,872*
275,000* 63,802 85,070 106,337 127,604* 148,872*
300,000* 69,802 93,070 116,337 139,604* 162,872*
400,000* 93,802 125,070* 156,337* 187,604* 218,872*
500,000* 117,802 157,070* 196,337* 235,604* 274,872*
600,000* 141,802* 189,070* 236,337* 283,604* 330,872*
700,000* 165,802* 221,070* 276,337* 331,604* 386,872*
800,000* 189,802* 253,070* 316,337* 379,604* 442,872*
900,000* 213,802* 285,070* 356,337* 427,604* 498,872*
1,000,000* 237,802* 317,070* 396,337* 475,604* 554,872*
1,100,000* 261,802* 349,070* 436,337* 523,604* 610,872*
1,200,000* 285,802* 381,070* 476,337* 571,604* 666,872*
1,300,000* 309,802* 413,070* 516,337* 619,604* 722,872*
</TABLE>
- ------------------------
* Current pension law limits the maximum annual benefit payable at normal
retirement age under a defined benefit plan to $130,000 for 1998 and is
subject to increase in later years. In addition, in 1997, such a plan may not
take into account annual compensation in excess of $160,000, which amount is
similarly subject to increase in later years. PLC's Excess Benefit Plan
("Excess Benefit Plan"), adopted effective September 1, 1984, and amended and
restated as of January 1, 1989, provides for payment, outside of the PLC
Pension Plan ("Pension Plan"), of the difference between (1) the fully accrued
benefits which would be due under the Pension Plan absent both of the
aforesaid limitations and (2) the amount actually payable under the Pension
Plan as so limited.
The above table illustrates estimated gross annual benefits which would be
payable for life in a straight life annuity commencing at normal retirement age
under the Pension Plan and the Excess Benefit Plan for employees with average
compensation (remuneration under the table above) and years of service. Benefits
in the above table are not reduced by social security or other offset amounts.
Compensation covered by the Pension Plan (for purposes of pension benefits)
excludes commissions and performance share awards and generally corresponds to
that shown under the heading "Annual Compensation" in the Summary Compensation
Table. Compensation is calculated based on the average of the highest level of
compensation paid during a period of 36 consecutive whole months. Only three
Annual Incentive Plan bonuses (whether paid or deferred under a Deferred
Compensation Plan maintained by PLC) may be included in obtaining the average
compensation.
The named executive and his estimated length of service as of December 31,
1997 are provided in the following table.
<TABLE>
<CAPTION>
NAME YEARS OF SERVICE
- ------------------------------------------------------------------------------ -------------------
<S> <C>
Wayne E. Stuenkel............................................................. 19
</TABLE>
42
<PAGE>
E. ADDITIONAL AGREEMENTS
PLC has entered into an Employment Continuation Agreement with the named
executive which provides for certain benefits in the event such executive's
employment is actually or constructively (by means of a reduction in duties or
compensation) terminated following certain events constituting a "change in
control". Such benefits include (i) a payment equal to three times the sum of
the annual base salary in effect at the time of the change in control and the
average annual incentive plan bonus for the three years preceding the change in
control; (ii) continuation (for twenty-four months) in PLC's hospital, medical,
accident, disability, and life insurance plans as provided to the executive
immediately prior to the date of his termination of employment; (iii) delivery
of an annuity to equal increased benefits under the Pension Plan and the Excess
Benefit Plan resulting from an additional three years of credited service
(subject to the Pension Plan's maximum on crediting service); and (iv) an
additional payment, if necessary, to reimburse the executive for any additional
tax (other than normal Federal, state and local income taxes) incurred as a
result of any benefits received in connection with the change in control.
1. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of PLC's Compensation and Management Succession Committee
("Committee") are Messrs. McMahon (Chairman), Woods, Dahlberg, Kuehn, and
Sklenar. No member of the Committee has ever been an officer or employee of PLC
or any of its subsidiaries.
Mr. Dahlberg is the Chairman of the Board, President and Chief Executive
Officer of Southern Company. PLC is a 25% member of a limited liability company
which acquired an office building adjacent to PLC's home office from an
affiliate of Southern Company which continues to lease portions of the building.
During 1997, the limited liability company received a total of $138,410 in lease
payments from affiliates of Southern Company. The lease expired at the end of
1997.
43
<PAGE>
2. MANAGEMENT OWNERSHIP OF PLC STOCK
No director or named executive officer of the Company owns any stock of the
Company or of any affiliated corporation except for the shares of PLC common
stock which are shown as owned as of March, 1998:
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP(1)
--------------------------------- PERCENT OF
NAME AND BENEFICIAL OWNER SOLE POWER SHARED POWER(2) CLASS(1)
- ------------------------------------ ----------- ----------------- ----------
<S> <C> <C> <C>
Drayton Nabers, Jr. 140,662(3) 10,815 *
R. Stephen Briggs 72,000(4) 412 *
John D. Johns 20,541(5) 2,100 *
Deborah J. Long 4,864(6) -0- *
Jim E. Massengale 62,726(7) 350 *
Danny L. Bentley 22,239(8) -0- *
Richard J. Bielen 10,951(9) -0- *
Wayne E. Stuenkel 34,321(10) -0- *
A. S. Williams III 50,427(11) -0- *
Steven A. Schultz 16,945(12) -0- *
Carolyn King 4,123(13) -0- *
Jerry W. DeFoor 15,368(14) -0- *
All directors and executive officers
as a group (12 persons) 455,167(15) 13,677(2) 1.47%
</TABLE>
- --------------------------
* less than one percent
(1) The number of shares reflected are shares which under applicable
regulations of the Securities and Exchange Commission are deemed to be
beneficially owned. Shares deemed to be beneficially owned, under such
regulations, include shares as to which, directly or indirectly, through any
contract, relationship, understanding or otherwise, either voting power or
investment power is held or shared. The total number of shares beneficially
owned is subdivided, where applicable, into two categories: shares as to
which voting/investment power is held solely and shares as to which
voting/investment power is shared. Unless otherwise indicated in the
following notes, if a beneficial owner has sole power, he has sole voting
and investment power, and if a beneficial owner has shared power, he has
shared voting and investment power. The percentage calculation is based on
the aggregate number of shares beneficially owned.
(2) This column may include shares held in the name of a spouse, minor
children, or certain other relatives sharing the same home as the director
or officer, or held by the director or officer, or the spouse of the
director or officer, as a trustee or as a custodian for children, as to all
of which beneficial ownership is disclaimed by the respective directors and
officers except as otherwise noted below.
(3) Includes 6,095 shares held in PLC's 401(k) and Stock Ownership Plan as of
January 31, 1998 for which Mr. Nabers has sole voting power. Also, includes
98,664 share equivalents allocated to Mr. Nabers' deferred compensation
account pursuant to the terms of PLC's Deferred Compensation Plan for
Officers. Upon distribution, share equivalents will be distributed in shares
of PLC Common Stock. Such shares will be issued directly to Mr. Nabers who
will have sole voting power over the shares at that time. Does not include
150,000 stock appreciation rights awarded under PLC's 1996 Stock Incentive
Plan.
(4) Includes 13,249 shares held in PLC's 401(k) and Stock Ownership Plan as of
January 31, 1998 for which Mr. Briggs has sole voting power. Also, includes
34,504 share equivalents allocated to Mr. Briggs' deferred compensation
account pursuant to the terms of PLC's Deferred Compensation Plan for
Officers. Upon distribution, share equivalents will be distributed in shares
of PLC Common Stock. Such shares will be issued directly to Mr. Briggs who
will have sole voting power over the shares at that time. Does not include
20,000 stock appreciation rights awarded under PLC's 1996 Stock Incentive
Plan.
44
<PAGE>
(5) Includes 1,423 shares held in PLC's 401(k) and Stock Ownership Plan as of
January 31, 1998 for which Mr. Johns has sole voting power. Also, includes
16,918 share equivalents allocated to Mr. Johns' deferred compensation
account pursuant to the terms of PLC's Deferred Compensation Plan for
Officers. Upon distribution, share equivalents will be distributed in shares
of PLC Common Stock. Such shares will be issued directly to Mr. Johns who
will have sole voting power over the shares at that time. Does not include
75,000 stock appreciation rights awarded under PLC's 1996 Stock Incentive
Plan.
(6) Includes 2,532 shares held in PLC's 401(k) and Stock Ownership Plan as of
January 31, 1998 for which Ms. Long has sole voting power. Also includes
1,839 share equivalents allocated to Ms. Long's deferred compensation
account pursuant to the terms of PLC's Deferred Compensation Plan for
Officers. Upon distribution, share equivalents will be distributed in shares
of PLC Common Stock. Such shares will be issued directly to Ms. Long who
will have sole voting powers over the shares at that time.
(7) Includes 25,330 shares held in PLC's 401(k) and Stock Ownership Plan as of
January 31, 1998 for which Mr. Massengale has sole voting power. Also
includes 22,546 share equivalents allocated to Mr. Massengale's deferred
compensation account pursuant to the terms of PLC's Deferred Compensation
Plan for Officers. Upon distribution, share equivalents will be distributed
in shares of PLC Common Stock. Such shares will be issued directly to Mr.
Massengale who will have sole voting power over the shares at that time.
Does not include 20,000 stock appreciation rights awarded under PLC's 1996
Stock Incentive Plan.
(8) Includes 4,286 shares held in PLC's 401(k) and Stock Ownership Plan as of
January 31, 1998 for which Mr. Bentley has sole voting power. Also includes
13,899 share equivalents allocated to Mr. Bentley's deferred compensation
account pursuant to the terms of PLC's Deferred Compensation Plan for
Officers. Upon distribution, share equivalents will be distributed in shares
of PLC Common Stock. Such shares will be issued directly to Mr. Bentley who
will have sole voting power over the shares at that time.
(9) Includes 4,092 shares held in PLC's 401(k) and Stock Ownership Plan as of
January 31, 1998 for which Mr. Bielen has sole voting power. Also, includes
3,121 share equivalents allocated to Mr. Bielen's deferred compensation
account pursuant to the terms of PLC's Deferred Compensation Plan for
Officers. Upon distribution, share equivalents will be distributed in shares
of PLC Common Stock. Such shares will be issued directly to Mr. Bielen who
will have sole voting power over the shares at that time.
(10) Includes 3,064 shares held in PLC's 401(k) and Stock Ownership Plan as of
January 31, 1998 for which Mr. Stuenkel has sole voting power. Also includes
26,489 share equivalents allocated to Mr. Stuenkel's deferred compensation
account pursuant to the terms of PLC's Deferred Compensation Plan for
Officers. Upon distribution, share equivalents will be distributed in shares
of PLC Common Stock. Such shares will be issued directly to Mr. Stuenkel who
will have sole voting power over the shares at that time.
(11) Includes 12,201 shares held in PLC's 401(k) and Stock Ownership Plan as of
January 31, 1998 for which Mr. Williams has sole voting power. Also,
includes 30,744 share equivalents allocated to Mr. Williams' deferred
compensation account pursuant to the terms of PLC's Deferred Compensation
Plan for Officers. Upon distribution, share equivalents will be distributed
in shares of PLC Common Stock. Such shares will be issued directly to Mr.
Williams who will have sole voting power over the shares at that time. Does
not include 20,000 stock appreciation rights awarded under PLC's 1996 Stock
Incentive Plan.
(12) Includes 2,701 shares held in PLC's 401(k) and Stock Ownership Plan as of
January 31, 1998 for which Mr. Schultz has sole voting power. Also includes
13,034 share equivalents allocated to Mr. Schultz's deferred compensation
account pursuant to the terms of PLC's Deferred Compensation Plan for
Officers. Upon distribution, share equivalents will be distributed in shares
of PLC Common Stock. Such shares will be issued directly to Mr. Schultz who
will have sole voting power over the shares at that time.
(13) Includes 441 shares held in PLC's 401(k) and Stock Ownership Plan as of
January 31, 1998 for which Ms. King has sole voting power. Also, includes
3,682 share equivalents allocated to Ms. King's deferred compensation
account pursuant to the terms of PLC's Deferred Compensation Plan for
Officers. Upon distribution, share equivalents will be distributed in shares
of PLC Common Stock. Such shares will be issued directly to Ms. King who
will have sole voting power over the shares at that time.
(14) Includes 5,224 shares held in PLC's 401(K) and Stock Ownership Plan as of
January 31, 1998 for which Mr. DeFoor has sole voting power. Also, includes
10,144 share equivalents allocated to Mr. DeFoor's deferred compensation
account pursuant to the terms of PLC's Deferred Compensation Plan for
Officers. Upon distribution, share equivalents will be distributed in shares
of PLC Common Stock. Such shares will be issued directly to
45
<PAGE>
Mr. DeFoor who will have sole voting power over those shares at that time.
(15) Included are the interests of the persons as of January 31, 1998 in 144,430
shares held in PLC's 401(k) and Stock Ownership Plan, which owned a total of
1,289,516 shares on such date. Each 401(k) and Stock Ownership Plan
participant has sole voting power with respect to the shares held in the
participant's accounts. The 693,346 shares held in PLC's 401(k) Stock
Ownership Plan Trust which have not been allocated to participants will be
voted by the Trustees in accordance with the majority vote of all
participants. Also, includes 286,017 share equivalents allocated to the
deferred compensation accounts of participating directors and executive
officers as a group pursuant to the PLC's Deferred Compensation Plan for
Directors Who Are Not Employees of the PLC and the PLC's Deferred
Compensation Plan for Officers.
CERTAIN TRANSACTIONS
PLC is a 25% member of a limited liability company which acquired an office
building adjacent to PLC's home office from an affiliate of Southern Company in
1994. Since that time, the Seller has continued to lease portions of the
building. During 1997, the limited liability company received a total of
$138,410 in lease payments from affiliates of Southern Company. Mr. Dahlberg is
the Chairman of the Board, President and Chief Executive Officer of Southern
Company. This lease expired at the end of 1997.
LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than ordinary routine
litigation incidental to the business of PLC and the Company, to which PLC or
the Company is a party or of which any of PLC or the Company's properties is the
subject.
EXPERTS
The consolidated balance sheets of the Company as of December 31, 1997 and
1996 and the consolidated statements of income, stockholder's equity, and cash
flows for each of the three years in the period ended December 31, 1997 and the
related financial statement schedules, in this Prospectus, have been included
herein in reliance on the report of Coopers & Lybrand L.L.P., independent
certified public accountants, given on the authority of that firm as experts in
auditing and accounting.
LEGAL MATTERS
Sutherland, Asbill & Brennan LLP of Washington, D.C. has provided advice on
certain matters relating to federal securities laws.
REGISTRATION STATEMENT
A Registration Statement has been filed with the Securities and Exchange
Commission under the Securities Act of 1933 as amended with respect to the
Contracts. This Prospectus does not contain all information set forth in the
Registration Statement, its amendments and exhibits, to all of which reference
is made for further information concerning the Company and the Contracts.
Statements contained in this Prospectus as to the content of the Contracts and
other legal instruments are summaries. For a complete statement of the terms
thereof, reference is made to the instruments as filed in the Registration
Statement.
46
<PAGE>
APPENDIX A
MARKET VALUE ADJUSTMENT
The Market Value Adjustment is equal to the Market Value Adjustment
Percentage indicated below, applied to the amount of each full or partial
surrender requested. We will consider surrendered amounts to be interest
withdrawals first to the extent interest credited during the prior Contract Year
has not yet been withdrawn from the Contract at the time of the full or partial
surrender. (See "Market Value Adjustment".)
MARKET VALUE ADJUSTMENT PERCENTAGE = (C - I + 0.25%) X (N/12), WHERE:
C = the Guaranteed Interest Rate currently in effect for a Guaranteed Period
with a duration equivalent to the time remaining in the Guaranteed Period
from which the surrender is being made. Linear interpolation will be used to
determine C when the time remaining is not an integral number of whole
years. When the time remaining is less than one year, C will be the current
one year rate;
I = the Guaranteed Interest Rate initially established for the Guaranteed
Period from which the surrender is being made;
N = The number of months remaining in the Guaranteed Period from which the
surrender is being made.
A Surrender Charge will apply during the first seven years of each Initial
and each Subsequent Guaranteed Period. The Surrender Charge is equal to a
specified Surrender Charge Percentage applied to the amount of each full or
partial surrender requested, adjusted by the Market Value Adjustment, less any
amount available under the Interest Withdrawals. (See "Surrender Charges".)
MARKET VALUE ADJUSTMENT AND SURRENDER CHARGE EXAMPLES
FULL SURRENDER AFTER COMPLETION OF YEAR 3
<TABLE>
<CAPTION>
GUARANTEED PERIOD (YEARS): 3 5 7 TOTAL
- --------------------------------------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Initial--
Annuity Deposit: $ 10,000.00 $ 10,000.00 $ 10,000.00 $ 30,000.00
Guaranteed Interest Rate: 5.00% 5.20% 5.40%
Year 1--
Beginning of Year Account Value: $ 10,000.00 $ 10,000.00 $ 10,000.00 $ 30,000.00
X (1 + Guaranteed Interest Rate): 1.050 1.052 1.054 $ 31,560.00
= End of Year Account Value: $ 10,500.00 $ 10,520.00 $ 10,540.00 $ 30,000.00
- Beginning of Year Account Value: $ 10,000.00 $ 10,000.00 $ 10,000.00 $ 1,560.00
= Interest Earned during Year: $ 500.00 $ 520.00 $ 540.00
Year 2--
Beginning of Year Account Value: $ 10,500.00 $ 10,520.00 $ 10,540.00 $ 31,560.00
X (1 + Guaranteed Interest Rate): 1.050 1.052 1.054 $ 33,201.20
= End of Year Account Value: $ 11,025.00 $ 11,067.04 $ 11,109.16 $ 31,560.00
- Beginning of Year Account Value: $ 10,500.00 $ 10,520.00 $ 10,540.00 $ 1,641.20
= Interest Earned during Year: $ 525.00 $ 547.04 $ 569.16
</TABLE>
A-1
<PAGE>
MARKET VALUE ADJUSTMENT AND SURRENDER CHARGE EXAMPLES
FULL SURRENDER AFTER COMPLETION OF YEAR 3 (CONTINUED)
<TABLE>
<CAPTION>
GUARANTEED PERIOD (YEARS): 3 5 7 TOTAL
- --------------------------------------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Year 3--
Beginning of Year Account Value: $ 11,025.00 $ 11,067.04 $ 11,109.16 $ 33,201.20
X (1 + Guaranteed Interest Rate): 1.050 1.052 1.054 $ 34,927.83
= End of Year Account Value: $ 11,576.25 $ 11,642.53 $ 11,709.05 $ 33,201.20
- Beginning of Year Account Value: $ 11,025.00 $ 11,067.04 $ 11,109.16 $ 1,726.63
= Interest Earned during Year: $ 551.25 $ 575.49 $ 599.89
After Completion of Year 3--
Account Value: $ 11,576.25 $ 11,642.53 $ 11,709.05 $ 34,927.83
- Prior Year's Interest: $ 551.25 $ 575.49 $ 599.89 $ 1,726.63
= Amount Subject to Market $ 11,025.00 $ 11,067.04 $ 11,109.16 $ 33,201.20
Value Adjustment:
Number of Months Remaining in the Guaranteed Period: 0 24 48
EXAMPLE #1--INCREASING INTEREST RATE ENVIRONMENT
Current Remaining Interest Rate: 5.50% 5.70% 5.90% $ 33,201.20
- Initial Guaranteed Interest Rate: 5.00% 5.20% 5.40% $ 499.28
+ 0.25%: 0.25% 0.25% 0.25%
X Number Months Remaining / 12: 0.00 2.00 4.00
= Market Value Adjustment Percentage: 0.00% 1.50% 3.00%
X Subjected Amount: $ 11,025.00 $ 11,067.04 $ 11,109.16
= Market Value Adjustment: $ 0.00 $ 166.01 $ 333.27
Account Value: $ 11,576.25 $ 11,642.53 $ 11,709.05 $ 34,927.83
- Market Value Adjustment: $ 0.00 $ 166.01 $ 333.27 $ 499.28
= Adjusted Account Value: $ 11,576.25 $ 11,476.52 $ 11,375.76 $ 34,428.55
- Prior Year's Interest: $ 551.25 $ 575.49 $ 599.89 $ 1,726.63
= Amount Subject to Surrender Charge: $ 11,025.00 $ 10,901.03 $ 10,775.89 $ 32,701.92
X Surrender Charge Percentage: 0.00% 2.00% 4.00% $ 649.06
= Surrender Charge: $ 0.00 $ 218.02 $ 431.04
Account Value: $ 11,576.25 $ 11,642.53 $ 11,709.05 $ 34,927.83
- Market Value Adjustment: $ 0.00 $ 166.01 $ 333.27 $ 499.28
- Surrender Charge: $ 0.00 $ 218.02 $ 431.04 $ 649.06
= Surrender Value: $ 11,576.25 $ 11,258.50 $ 10,944.74 $ 33,779.49
EXAMPLE #2--DECREASING INTEREST RATE ENVIRONMENT
Current Remaining Interest Rate: 4.50% 4.70% 4.90% $ 33,201.20
- Initial Interest Rate: 5.00% 5.20% 5.40% $ (166.43)
+ 0.25%: 0.25% 0.25% 0.25%
X Number Months Remaining / 12: 0.00 2.00 4.00
= Market Value Adjustment Percentage: 0.00% -0.50% -1.00%
X Subjected Amount: $ 11,025.00 $ 11,067.04 $ 11,109.16
= Market Value Adjustment: $ 0.00 $ (55.34) $ (111.09)
</TABLE>
A-2
<PAGE>
MARKET VALUE ADJUSTMENT AND SURRENDER CHARGE EXAMPLES
FULL SURRENDER AFTER COMPLETION OF YEAR 3 (CONTINUED)
<TABLE>
<CAPTION>
GUARANTEED PERIOD (YEARS): 3 5 7 TOTAL
- --------------------------------------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Account Value: $ 11,576.25 $ 11,642.53 $ 11,709.05 $ 34,927.83
- Market Value Adjustment: $ 0.00 $ (55.34) $ (111.09) $ (166.43)
= Adjusted Account Value: $ 11,576.25 $ 11,697.86 $ 11,820.15 $ 35,094.26
- Prior Year's Interest: $ 551.25 $ 575.49 $ 599.89 $ 1,726.63
= Amount Subject to Surrender Charge: $ 11,025.00 $ 11,122.38 $ 11,220.25 $ 33,367.63
X Surrender Charge Percentage: 0.00% 2.00% 4.00% $ 671.26
= Surrender Charge: $ 0.00 $ 222.45 $ 448.81
Account Value: $ 11,576.25 $ 11,642.53 $ 11,709.05 $ 34,927.83
- Market Value Adjustment: $ 0.00 $ (55.34) $ (111.09) $ (166.43)
- Surrender Charge: $ 0.00 $ 222.45 $ 448.81 $ 671.26
= Surrender Value: $ 11,576.25 $ 11,475.41 $ 11,371.34 $ 34,423.00
</TABLE>
A-3
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants..................................................... F-2
Statements of Income for the years ended December 31, 1997, 1996, and 1995............ F-3
Balance Sheets as of December 31, 1997 and 1996....................................... F-4
Statements of Stockholders' Equity for the years ended December 31, 1997, 1996, and
1995................................................................................ F-5
Statements of Cash Flows for the years ended December 31, 1997, 1996, and 1995........ F-6
Notes to Financial Statements......................................................... F-7
Financial Statement Schedules:
Schedule III -- Supplementary Insurance Information................................. S-1
Schedule IV -- Reinsurance.......................................................... S-2
</TABLE>
All other schedules to the financial statements required by Article 7 of
Regulation S-X are not required under the related instructions or are
inapplicable and therefore have been omitted.
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Directors and Stockholders
American Foundation Life Insurance Company
Birmingham, Alabama
We have audited the financial statements and financial statement schedules
of American Foundation Life Insurance Company listed in the index on page F-1 of
this Form S-1. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of American Foundation Life
Insurance Company as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
In addition, in our opinion, the financial statement schedules referred to
above, when considered in relation to the basic financial statements taken as a
whole, present fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
February 11, 1998
Birmingham, Alabama
F-2
<PAGE>
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
REVENUES
Premiums and policy fees (net of reinsurance ceded:
1997-$3,010,990; 1996-$2,768,199; 1995-$2,620,919).............. $ 8,415,833 $ 9,458,003 $ 6,925,097
Net investment income............................................. 6,233,845 6,611,489 5,507,867
Realized investment gains (losses)................................ (59,889) (28,070) 838,977
Other income...................................................... 8,718 2,406 (8)
------------- ------------- -------------
Total revenues.................................................. 14,598,507 16,043,828 13,271,933
------------- ------------- -------------
BENEFITS AND EXPENSES
Benefits and settlement expenses (net of reinsurance
ceded: 1997-$4,430,527; 1996-$4,031,931; 1995-$2,997,130)....... 9,075,762 9,675,240 6,347,405
Amortization of deferred policy acquisition costs................. 320,288 346,710 444,570
Other operating expenses (net of reinsurance ceded:
1997-$60,900; 1996-$75,843; 1995-$88,551)....................... 2,406,314 2,361,076 2,296,628
------------- ------------- -------------
Total benefits and expenses..................................... 11,802,364 12,383,026 9,088,603
------------- ------------- -------------
INCOME BEFORE INCOME TAX............................................ 2,796,143 3,660,802 4,183,330
------------- ------------- -------------
INCOME TAX EXPENSE (BENEFIT)
Current........................................................... 548,581 1,743,864 1,193,221
Deferred.......................................................... 402,108 (499,191) 229,111
------------- ------------- -------------
Total income tax expense........................................ 950,689 1,244,673 1,422,332
------------- ------------- -------------
NET INCOME.......................................................... 1,845,454 2,416,129 2,760,998
------------- ------------- -------------
PREFERRED STOCK DIVIDENDS........................................... 100,000 100,000 100,000
------------- ------------- -------------
INCOME AVAILABLE TO COMMON SHAREHOLDERS............................. $ 1,745,454 $ 2,316,129 $ 2,660,998
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See Notes to Financial Statements
F-3
<PAGE>
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
BALANCE SHEETS
AS OF DECEMBER 31
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities, at market (amortized cost: 1997-$67,110,502;
1996-$61,914,714)............................................................ $ 68,201,559 $ 61,224,888
Mortgage loans................................................................. 10,902,986 14,757,881
Investment real estate, net of accumulated depreciation (1997-$93,376;
1996-$82,659)................................................................ 407,624 420,341
Policy loans................................................................... 11,635,376 13,535,012
Short-term investments......................................................... 873,844 5,272,698
-------------- --------------
Total Investments............................................................ 92,021,389 95,210,820
-------------- --------------
Cash............................................................................. 2,218,201 1,574,181
Accrued investment income........................................................ 1,230,529 1,183,991
Accounts and premiums receivable, net of allowances for uncollectible accounts
(1997-$7,000; 1996-$7,000)..................................................... 1,233,659 1,042,547
Reinsurance receivables.......................................................... 7,680,586 9,938,962
Deferred policy acquisition costs................................................ 1,692,285 1,919,471
Other assets..................................................................... 70,809 84,124
-------------- --------------
$ 106,147,458 $ 110,954,096
-------------- --------------
-------------- --------------
LIABILITIES
Policy liabilities and accruals
Future policy benefits and claims.............................................. $ 56,254,682 $ 59,560,434
Unearned premiums.............................................................. 463,232 182,499
-------------- --------------
Total policy liabilities and accruals........................................ 56,717,914 59,742,933
-------------- --------------
Annuity deposits................................................................. 929,124 973,155
Other policyholders' funds....................................................... 12,080,458 17,946,695
Other liabilities................................................................ 8,964,653 8,764,449
Deferred income taxes............................................................ 2,005,168 979,751
-------------- --------------
80,697,317 88,406,983
-------------- --------------
COMMITMENTS AND CONTINGENT LIABILITIES--NOTE E
STOCKHOLDERS' EQUITY
Preferred stock, $1 par value; shares authorized, issued and outstanding:
2,000.......................................................................... 2,000 2,000
Common stock, $10 par value; shares authorized, issued and outstanding:
200,000........................................................................ 2,000,000 2,000,000
Additional paid-in capital....................................................... 6,200,000 6,200,000
Net unrealized gains (losses) on investments (net of income tax: 1997-
$381,870; 1996-$(241,439)...................................................... 709,187 (448,387)
Retained earnings................................................................ 16,538,954 14,793,500
-------------- --------------
25,450,141 22,547,113
-------------- --------------
$ 106,147,458 $ 110,954,096
-------------- --------------
-------------- --------------
</TABLE>
See Notes to Financial Statements
F-4
<PAGE>
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NET
ADDITIONAL UNREALIZED TOTAL
PREFERRED COMMON PAID-IN GAINS (LOSSES) RETAINED STOCKHOLDERS'
STOCK STOCK CAPITAL ON INVESTMENTS EARNINGS EQUITY
--------- ---------- ---------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994.............. $2,000,000 $3,863,733 $(2,400,868) $17,816,373 $21,279,238
-------------
Net income for 1995................... 2,760,998 2,760,998
Increase in net unrealized gains on
investments (net of income
tax-$2,083,521)..................... 3,869,396 3,869,396
Reclassification adjustment for
amounts included in net income (net
of income tax-$(293,642))........... (545,335) (545,335)
-------------
Comprehensive income for 1995......... 6,085,059
-------------
Common dividends ($25 per share)...... (5,000,000) (5,000,000)
Preferred dividends ($50 per share)... (100,000) (100,000)
Capital contribution.................. 338,267 338,267
--------- ---------- ---------- -------------- ----------- -------------
Balance, December 31, 1995.............. 2,000,000 4,202,000 923,193 15,477,371 22,602,564
-------------
Net income for 1996................... 2,416,129 2,416,129
Decrease in net unrealized gains on
investments (net of income
tax-$(748,368))..................... (1,389,826) (1,389,826)
Reclassification adjustment for
amounts included in net income (net
income tax-$9,824).................. 18,246 18,246
-------------
Comprehensive income for 1996......... 1,044,549
-------------
Redemption feature of preferred stock
removed-- Note G.................... $2,000 1,998,000 2,000,000
Common dividends ($15 per share)...... (3,000,000) (3,000,000)
Preferred dividends ($50 per share)... (100,000) (100,000)
--------- ---------- ---------- -------------- ----------- -------------
Balance, December 31, 1996.............. 2,000 2,000,000 6,200,000 (448,387) 14,793,500 22,547,113
-------------
Net income for 1997................... 1,845,454 1,845,454
Increase in net unrealized gains on
investments (net of income
tax-$602,348)....................... 1,118,646 1,118,646
Reclassification adjustment for
amounts included in net income (net
of income tax-$20,961).............. 38,928 38,928
-------------
Comprehensive income for 1997......... 3,003,028
-------------
Preferred dividends ($50 per share)... (100,000) (100,000)
--------- ---------- ---------- -------------- ----------- -------------
Balance, December 31, 1997.............. $2,000 $2,000,000 $6,200,000 $ 709,187 $16,538,954 $25,450,141
--------- ---------- ---------- -------------- ----------- -------------
--------- ---------- ---------- -------------- ----------- -------------
</TABLE>
See Notes to Financial Statements.
F-5
<PAGE>
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------
1997 1996 1995
-------------- -------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 1,845,454 $ 2,416,129 $ 2,760,998
Adjustments to reconcile net income to cash
Amortization of deferred policy acquisition costs....... 320,288 346,710 444,570
Deferred income taxes................................... 1,025,417 (499,191) 229,111
Interest credited to universal life and investment
products.............................................. 1,059,710 1,111,034 420,717
Policy fees assessed on universal life and investment
products.............................................. (1,048,883) (1,179,765) (562,637)
Change in accrued investment income and other
receivables........................................... 2,020,726 (6,955) 1,090,377
Change in policy liabilities and other policyholders'
funds of traditional life and health products......... (8,576,735) (1,612,231) (1,502,827)
Change in receivable from Protective Life Insurance
Company............................................... 0 24,817,851 0
Change in other liabilities............................. 200,205 (2,294,791) 9,672,280
Other, net.............................................. (79,787) (326,038) (499,410)
-------------- -------------- -------------
Net cash provided by operating activities................... (3,233,605) 22,772,753 12,053,179
-------------- -------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities and principal reductions of investments
Investments available for sale.......................... 135,907,273 98,454,653 57,139,644
Other................................................... 3,661,121 1,545,594 3,406,789
Sale of investments
Investments available for sale.......................... 4,386,839 46,567,425 10,993,261
Other................................................... 0 400,000 683,815
Cost of investments acquired
Investments available for sale.......................... (139,609,229) (165,042,338) (65,099,357)
Other................................................... 0 (310,000) (1,286,586)
-------------- -------------- -------------
Net cash (used in) provided by investing activities......... 4,346,004 (18,384,666) 5,837,566
-------------- -------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends to stockholders................................. (100,000) (3,100,000) (5,100,000)
Change in universal life products deposits................ (368,379) (723,167) (12,550,883)
Capital contribution...................................... 0 0 338,267
-------------- -------------- -------------
Net cash used in financing activities....................... (468,379) (3,823,167) (17,312,616)
-------------- -------------- -------------
INCREASE IN CASH............................................ 644,020 564,920 578,129
CASH AT BEGINNING OF YEAR................................... 1,574,181 1,009,261 431,132
-------------- -------------- -------------
CASH AT END OF YEAR......................................... $ 2,218,201 $ 1,574,181 $ 1,009,261
-------------- -------------- -------------
-------------- -------------- -------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year:
Income taxes............................................ $ 548,581 $ 1,830,301 $ 1,030,000
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES
Acquisitions and bulk reinsurance assumptions
Assets acquired......................................... $ 24,937,851
Liabilities assumed..................................... (25,678,706)
-------------
Net..................................................... $ (740,855)
-------------
-------------
</TABLE>
See Notes to Financial Statements
F-6
<PAGE>
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial statements of American Foundation Life Insurance
Company (the Company) are prepared on the basis of generally accepted accounting
principles. Such accounting principles differ from statutory reporting practices
used by insurance companies in reporting to state regulatory authorities. (see
also Note B.)
All outstanding shares of the Company's common stock are owned by Protective
Life Insurance Company (Protective), which is the principal operating subsidiary
of Protective Life Corporation (PLC), and insurance holding company domiciled in
the state of Delaware. All outstanding shares of the Company's preferred stock
are owned by PLC. Protective is a wholly-owned subsidiary of PLC. Other
affiliated insurers include Empire General Life Assurance Corporation, Wisconsin
National Life Insurance Company, Protective Life Insurance Corporation of
Alabama, Protective Life Insurance Company of Kentucky, Community National
Assurance Company, Capital Investors Life Insurance Company, West Coast Life
Insurance Company, Western Diversified Life Insurance Company, Western
Diversified Casualty Insurance Company and Citizen's Accident & Health Insurance
Company.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make various estimates
that affect the reported amounts of assets and liabilities, disclosures of
contingent assets and liabilities, as well as the reported amounts of revenues
and expenses.
NATURE OF OPERATIONS
The Company, since it is licensed in the State of New York, is the entity
through which PLC markets, distributes, and services insurance and annuity
products in New York. The operating results of companies in the insurance
industry have historically been subject to significant fluctuations due to
competition, economic conditions, interest rates, investment performance,
maintenance of insurance ratings, and other factors.
RECENTLY ISSUED ACCOUNTING STANDARDS
In 1997 the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities;" SFAS No. 130, "Reporting Comprehensive Income;"
and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information."
SFAS No. 130 requires the presentation of comprehensive income and its
components in a financial statement that is displayed with the same prominence
as other financial statements. The Company has reconfigured the Statements of
Stockholders' Equity presented herein in accordance with this Statement. SFAS
No. 131 requires additional disclosures with respect to the Company's operating
segments.
The adoption of these accounting standards did not have a material effect on
the Company's financial statements but has resulted in changed disclosure and
financial statement presentation.
INVESTMENTS
The Company has classified all of its investments in fixed maturities,
equity securities, and short-term investments as "available for sale."
F-7
<PAGE>
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Investments are reported on the following bases less allowances for
uncollectible amounts on investments, if applicable:
- Fixed maturities (bonds and redeemable preferred stocks)--at current
market value.
- Mortgage loans on real estate--at unpaid balances, adjusted for loan
origination costs, net of fees, and amortization of premium or discount.
- Investment real estate--at cost, less allowances for depreciation computed
on the straight-line method. With respect to real estate acquired through
foreclosure, cost is the lesser of the loan balance plus foreclosure costs
or appraised value.
- Policy loans--at unpaid balances.
- Short-term investments--at cost, which approximates current market value.
Substantially all short-term investments have maturities of three months or
less at the time of acquisition.
As prescribed by SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," certain investments are recorded at their market values
with the resulting unrealized gains and losses, net of income tax, reported as a
component of stockholders' equity. The market values of fixed maturities
increase or decrease as interest rates fall or rise. Therefore, although the
provisions of SFAS No. 115 do not affect the Company's operations, its reported
stockholders' equity will fluctuate significantly as interest rates change.
The Company's balance sheets at December 31, prepared on the basis of
reporting investments at amortized cost rather than at market values, are as
follows:
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
Total investments............................................ $ 90,930,332 $ 95,900,646
All other assets............................................. 14,126,069 15,743,276
-------------- --------------
$ 105,056,401 $ 111,643,922
-------------- --------------
-------------- --------------
Deferred income taxes........................................ $ 1,623,298 $ 1,221,190
All other liabilities........................................ 78,692,149 87,427,232
-------------- --------------
80,315,447 88,648,422
Stockholders' equity......................................... 24,740,954 22,995,500
-------------- --------------
$ 105,056,401 $ 111,643,922
-------------- --------------
-------------- --------------
</TABLE>
Realized gains and losses on sales of investments are recognized in net
income using the specific identification basis.
CASH
Cash includes all demand deposits reduced by the amount of outstanding
checks and drafts.
F-8
<PAGE>
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUES, BENEFITS, CLAIMS, AND EXPENSES
Traditional Life and Health Insurance Products--Traditional life insurance
products consist principally of those products with fixed and guaranteed
premiums and benefits and include whole life insurance policies, term life
insurance policies, limited-payment life insurance policies, and certain
annuities with life contingencies. Life insurance and immediate annuity premiums
are recognized as revenue when due. Health insurance premiums are recognized as
revenue over the terms of the policies. Benefits and expenses are associated
with earned premiums so that profits are recognized over the life of the
contracts. This is accomplished by means of the provision for liabilities for
future policy benefits and the amortization of deferred policy acquisition
costs.
Liabilities for future policy benefits on traditional life insurance
products have been computed using a net level method including assumptions as to
investment yields, mortality, persistency, and other assumptions based on the
Company's experience modified as necessary to reflect anticipated trends and to
include provisions for possible adverse deviation. The liability for future
policy benefits and claims on traditional life and health insurance products
included estimated unpaid claims that have been reported to the Company and
claims incurred but not yet reported. Policy claims are charged to expense in
the period that the claims are incurred.
Activity in the liability for unpaid claims is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Balance beginning of year........................... $ 5,008,998 $ 3,862,708 $ 4,215,218
Less reinsurance.................................. 801,709 370,612 523,208
------------ ------------ ------------
Net balance beginning of year....................... 4,207,289 3,492,096 3,692,010
------------ ------------ ------------
Incurred related to:
Current year........................................ 5,947,439 6,293,400 5,961,369
Prior year.......................................... (331,984) (153,466) (645,639)
------------ ------------ ------------
Total incurred.................................... 5,615,455 6,139,934 5,315,730
------------ ------------ ------------
Paid related to:
Current year........................................ 4,913,958 4,883,873 4,632,399
Prior year.......................................... 1,387,081 540,868 883,245
------------ ------------ ------------
Total paid........................................ 6,301,039 5,424,741 5,515,644
------------ ------------ ------------
Net balance end of year............................. 3,521,705 4,207,289 3,492,096
Plus reinsurance.................................. 203,199 801,709 370,612
------------ ------------ ------------
Balance end of year................................. $ 3,724,904 $ 5,008,998 $ 3,862,708
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
UNIVERSAL LIFE AND INVESTMENT PRODUCTS
Universal life and investment products include universal life insurance,
deferred annuities, and annuities without life contingencies. Revenues for
universal life and investment products consist of policy fees that have been
assessed against policy account balances for the costs of insurance, policy
administration, and surrenders. Benefit reserves for universal life and
investment products represent policy account balances before applicable
surrender charges plus certain deferred policy initiation fees that are
recognized in income over the term of the policies. Policy benefits and claims
that are charged to expense
F-9
<PAGE>
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
include benefit claims incurred in the period in excess of related policy
account balances and interest credited to policy account balances. Interest
credit rates for universal life and investment products ranged from 3.0% to 9.4%
in 1996.
At December 31, 1997, the surrender value of the Company's annuities which
approximates market value was approximately $900,000.
POLICY ACQUISITION COSTS
Commissions and other costs of acquiring traditional life and health
insurance that vary with and are primarily related to the production of new
business have been deferred. Traditional life and health insurance acquisition
costs are amortized over the premium-payment period of the related policies in
proportion to the ratio of annual premium income to total anticipated premium
income.
PARTICIPATING POLICIES
Participating business comprises approximately 4% of the ordinary life
insurance in force and 2% of the ordinary life insurance premium income.
Policyholder dividends totaled $159,315 in 1997, $164,204 in 1996 and $165,195
in 1995.
INCOME TAXES
The Company uses the asset and liability method of accounting for income
taxes. Income tax provisions are generally based on income reported for
financial statement purposes. Deferred federal income taxes arise from the
recognition of temporary differences between the bases of assets and liabilities
determined for financial reporting purposes and the bases determined for income
tax purposes. Such temporary differences are principally related to the deferral
of policy acquisition costs and the provision for future policy benefits and
expenses.
RECLASSIFICATIONS
Certain reclassifications have been made in the previously reported
financial statements and accompanying notes to make prior year amounts
comparable to those of the current year. Such reclassifications had no effect on
previously reported net income, total assets or stockholders' equity.
NOTE B -- RECONCILIATION WITH STATUTORY REPORTING PRACTICES
Financial statements prepared in conformity with generally accepted
accounting principles (GAAP) differ in some respects from statutory accounting
practices prescribed or permitted by insurance regulatory authorities. The most
significant differences are as follows: (a) acquisition costs of obtaining new
business are deferred and amortized over the approximate life of the policies
rather than charged to operations incurred; (b) benefit liabilities are computed
using a net level method and are based on realistic estimates of expected
mortality, and withdrawals as adjusted to provide for possible unfavorable
deviation from such assumptions; (c) deferred income taxes are provided for
temporary differences between financial and taxable earnings; (d) the Asset
Valuation Reserve and Interest Maintenance Reserve are restored to stockholders'
equity; (e) agents' debit balances, and prepaid expenses are reported as assets
rather than being charged directly to surplus (referred to as nonadmitted
items); (f) certain items of interest income, principally accrual of mortgage
and bond discounts, are amortized differently and (g) bonds are stated at market
instead of amortized cost.
F-10
<PAGE>
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE B -- RECONCILIATION WITH STATUTORY REPORTING PRACTICES (CONTINUED)
The reconciliations of net income and stockholder's equity prepared in
conformity with statutory reporting practices to that reported in the
accompanying financial statements are as follows:
<TABLE>
<CAPTION>
NET INCOME STOCKHOLDER'S EQUITY
---------------------------------- -------------------------------------
1997 1996 1995 1997 1996 1995
---------- ---------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
In conformity with statutory reporting
practices:............................ $2,794,015 $2,558,227 $3,329,528 $20,467,722 $18,031,163 $18,781,333
Additional (deductions) by adjustment
Deferred policy acquisition costs, net
of amortization..................... (320,288) (346,710) (444,570) 1,692,285 1,919,471 2,266,181
Deferred income taxes................. 402,108 499,191 (229,111) (2,005,168) (979,751) (2,217,485)
Asset Valuation Reserve............... 730,240 560,732 428,236
Interest Maintenance Reserve.......... (85,826) (89,611) (92,251) 161,051 285,805 360,767
Nonadmitted items..................... 10,431 7,090 19,491
Redeemable preferred stock............ (2,000,000)
Other valuation and timing
differences......................... (944,555) (204,968) 197,402 4,393,580 2,722,603 4,419,378
---------- ---------- ---------- ----------- ----------- -----------
In conformity with generally accepted
accounting principles................. $1,845,454 $2,416,129 $2,760,998 $25,450,141 $22,547,113 $22,602,564
---------- ---------- ---------- ----------- ----------- -----------
---------- ---------- ---------- ----------- ----------- -----------
</TABLE>
NOTE C -- INVESTMENT OPERATIONS
Major categories of net investment income for the years ended December 31
are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Fixed maturities........................................................ $ 4,701,611 $ 4,708,490 $ 3,402,581
Mortgage loans on real estate........................................... 1,146,325 1,431,687 1,618,753
Investment real estate.................................................. 65,584 73,756 141,147
Policy loans............................................................ 643,653 752,828 621,733
Other, principally short-term investments............................... 112,127 160,644 119,116
------------ ------------ ------------
6,669,300 7,127,405 5,903,330
Investment expenses..................................................... 435,455 (515,916) (395,463)
------------ ------------ ------------
$ 6,233,845 $ 6,611,489 $ 5,507,867
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
Realized investment gains (losses) for the years ended December 31 are
summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Fixed maturities........................................................ $ (59,889) $ 22,247 $ (49,213)
Mortgage loans and other investments.................................... 0 (50,317) 888,190
------------ ------------ ------------
$ (59,889) $ (28,070) $ 838,977
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-11
<PAGE>
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE C -- INVESTMENT OPERATIONS (CONTINUED)
In 1997 gross gains on the sale of investments available for sale (fixed
maturities and short-term investments) were approximately $10,000 and gross
losses were approximately $70,000. In 1996 gross gains were approximately
$20,000. In 1995 gross gains were approximately $30,000, and gross losses were
approximately $80,000.
The amortized cost and estimated market values of the Company's investments
classified as available for sale at December 31 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
1997 COST GAINS LOSSES VALUES
- --------------------------------------------------------- ------------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
Fixed maturities:
Mortgage-backed securities............................. $ 11,348,224 $ 348,395 $ 0 $ 11,696,619
US Government and authorities.......................... 8,746,050 242,265 4,982 8,983,333
Public utilities....................................... 9,228,405 198,255 5,441 9,421,219
Convertibles and bonds with warrants................... 694,485 0 168,610 525,875
All other corporate bonds.............................. 37,093,338 572,155 90,980 37,574,513
------------- ------------ ----------- -------------
67,110,502 1,361,070 270,013 68,201,559
Short-term investments................................... 873,844 0 0 873,844
------------- ------------ ----------- -------------
$ 67,984,346 $ 1,361,070 $ 270,013 $ 69,075,403
------------- ------------ ----------- -------------
------------- ------------ ----------- -------------
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
1996 COST GAINS LOSSES VALUES
- --------------------------------------------------------- ------------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
Fixed maturities:
Mortgage-backed securities............................. $ 13,735,012 $ 339,977 $ 2,226 $ 14,072,763
US Government and authorities.......................... 12,422,028 126,802 228,413 12,320,417
Public utilities....................................... 9,362,109 121,808 225,851 9,258,066
Convertibles and bonds with warrants................... 694,263 0 173,638 520,625
All other corporate bonds.............................. 25,701,302 46,069 694,354 25,053,017
------------- ----------- ------------ -------------
61,914,714 634,656 1,324,482 61,224,888
Short-term investments................................... 5,272,698 5,272,698
------------- ----------- ------------ -------------
$ 67,187,412 $ 634,656 $ 1,324,482 $ 66,497,586
------------- ----------- ------------ -------------
------------- ----------- ------------ -------------
</TABLE>
F-12
<PAGE>
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE C -- INVESTMENT OPERATIONS (CONTINUED)
The amortized cost and estimated market values of fixed maturities at
December 31, by expected maturity, are shown as follows. Expected maturities are
derived from rates of prepayment that may differ from actual rates of
prepayment.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
1997 COST VALUES
- --------------------------------------------------------------- ------------- -------------
<S> <C> <C>
Due in one year or less........................................ $ 2,171,455 $ 2,177,162
Due in one year through five years............................. 27,762,163 28,202,077
Due in five years through ten years............................ 34,516,587 35,136,758
Due after 10 years............................................. 2,660,297 2,685,564
------------- -------------
$ 67,110,502 $ 68,201,559
------------- -------------
------------- -------------
<CAPTION>
ESTIMATED
AMORTIZED MARKET
1996 COST VALUES
- --------------------------------------------------------------- ------------- -------------
<S> <C> <C>
Due in one year or less........................................ $ 4,495,939 $ 4,476,940
Due in one year through five years............................. 10,399,809 10,573,805
Due five years through ten years............................... 41,732,094 41,093,106
Due after 10 years............................................. 5,286,872 5,081,037
------------- -------------
$ 61,914,714 $ 61,224,888
------------- -------------
------------- -------------
</TABLE>
The approximate percentage distribution of the Company's fixed maturity
investments by quality rating at December 31 is as follows:
<TABLE>
<CAPTION>
RATING 1997 1996
- --------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
AAA........................................................................ 26.8% 40.5%
AA......................................................................... 1.7 5.2
A.......................................................................... 24.3 9.8
BBB........................................................................ 37.4 37.0
BB or Less................................................................. 9.8 7.5
--------- ---------
100.0% 100.0%
--------- ---------
--------- ---------
</TABLE>
At December 31, 1997 and 1996, the Company had bonds which were rated less
than investment grade of $6.7 million and $4.5 million, having an amortized cost
of $6.8 million and $4.8 million, respectively.
The change in unrealized gains (losses), net of income tax, on fixed
maturities for the year ended December 31 is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------- ------------
<S> <C> <C> <C>
Fixed maturities................................... $ 1,157,574 $ (1,371,579) $ 3,324,060
</TABLE>
At December 31, 1997, approximately 99% of the Company's mortgage loans were
commercial loans of which 46% were retail, 44% were office buildings, and 10%
were industrial. The Company specializes in making mortgage loans on either
credit-oriented or credit-anchored commercial properties, most of which are
strip shopping centers in smaller towns and cities. No single tenant's leased
space represents more than 10% of mortgage loans. Approximately 96% of the
mortgage loans are on properties located in the
F-13
<PAGE>
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE C -- INVESTMENT OPERATIONS (CONTINUED)
following states listed in decreasing order of significance: Tennessee, Alabama,
Virginia, Florida and Colorado.
Many of the mortgage loans have call provisions after five to seven years.
Assuming the loans are called at their next call dates, approximately $0.5
million would become due in 1999 to 2002.
At December 31, 1997, the average mortgage loan was $0.5 million, and the
weighted average interest rate was 9.84%. The largest single mortgage loan was
$2.0 million. While the Company's mortgage loans do not have quoted market
values, at December 31, 1997 and 1996, the Company estimates the market value of
its mortgage loans to be $11.6 million and $15.5 million, respectively, using
discounted cash flows from the next call date.
At December 31, 1997 and 1996, the Company's problem mortgage loans and
foreclosed properties totaled $0.4 million and $0.4 million, respectively. Since
the Company's mortgage loans are collateralized by real estate, any assessment
of impairment is based upon the estimated fair value of the real estate. Based
on the Company's evaluation of its mortgage loan portfolio, the Company does not
expect any material losses on its mortgage loans.
The Company believes it is not practicable to determine the fair value of
its policy loans since there is no stated maturity, and policy loans are often
repaid by reductions to policy benefits. Policy loan interest rates generally
range from 4.5% to 8.0%.
NOTE D -- FEDERAL INCOME TAXES
The Company's effective income tax rate varied from the maximum federal
income tax rate as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Statutory federal income tax rate applied to pretax income...................... 35.00% 35.00% 35.00%
Tax-exempt interest............................................................. (7.20) (7.33) (7.37)
Other adjustments............................................................... 6.20 6.33 6.37
--------- --------- ---------
Effective income tax rate....................................................... 34.00% 34.00% 34.00%
--------- --------- ---------
--------- --------- ---------
</TABLE>
The provision for federal income tax differs from amounts currently payable
due to certain items reported for financial statement purposes in periods which
differ from those in which they are reported for income tax purposes.
Details of the deferred income tax provision for the years ended December 31
are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ------------- -------------
<S> <C> <C> <C>
Deferred policy acquisition costs...................................... $ (100,971) $ (530,008) $ (344,176)
Benefit and other policy liability changes............................. (72,878) 1,698,144 1,371,080
Temporary differences of investment income............................. (199,660) (208,432) (4,063,846)
Other items............................................................ 775,617 (1,458,895) 3,266,053
----------- ------------- -------------
$ 402,108 $ (499,191) $ 229,111
----------- ------------- -------------
----------- ------------- -------------
</TABLE>
F-14
<PAGE>
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE D -- FEDERAL INCOME TAXES (CONTINUED)
The components of the Company's net deferred income tax liability as of
December 31 were as follows:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Deferred income tax assets
Policy and policyholder liability reserves.......................................... $ 401,636 $ 328,758
Deferred policy acquisition costs................................................... 195,580 94,609
------------ ------------
597,216 423,367
------------ ------------
Deferred income tax liabilities:
Unrealized gain on investments...................................................... 516,942 93,293
Other............................................................................... 2,085,442 1,309,825
------------ ------------
2,602,384 1,403,118
------------ ------------
Net deferred income tax liability................................................... $ 2,005,168 $ 979,751
------------ ------------
------------ ------------
</TABLE>
The Company's income tax returns are included in the consolidated income tax
returns of PLC. The allocation of income tax liabilities among affiliates is
based upon separate income tax return calculations. At December 31, 1997 and
1996 no amounts were payable to PLC for income tax liabilities.
NOTE E -- COMMITMENTS AND CONTINGENT LIABILITIES
Under insurance guaranty fund laws, in most states, insurance companies
doing business therein can be assessed up to prescribed limits for policyholder
losses incurred by insolvent companies. The Company does not believe such
assessments will be materially different from amounts already provided for in
the financial statements. Most of these laws do provide, however, that an
assessment may be excused or deferred if it would threaten an insurer's own
financial strength.
A number of civil jury verdicts have been returned against insurers in the
jurisdictions in which the Company does business involving the insurers' sales
practices, alleged agent misconduct, failure to properly supervise agents, and
other matters. Increasingly these lawsuits have resulted in the award of
substantial judgments against the insurer that are disproportionate to the
actual damages, including material amounts of punitive damages. In addition in
some class action and other lawsuits involving insurer's sales practices,
insurers have made material settlement payments. In some states (including
Alabama), juries have substantial discretion in awarding punitive damages which
creates the potential for unpredictable material adverse judgments in any given
punitive damage suit. The Company and its affiliates, like other insurers, in
the ordinary course of business, are involved in such litigation. Although the
outcome of any such litigation cannot be predicted with certainty, the Company
believes that at the present time there are no pending or threatened lawsuits
that are reasonably likely to have a material adverse effect on the financial
position, results of operation, or liquidity of the Company.
NOTE F -- STOCKHOLDERS' EQUITY AND RESTRICTIONS
Dividends on common stock are noncumulative and are paid as determined by
the Board of Directors. At December 31, 1997, approximately $6.1 million of
stockholders' equity excluding net unrealized gains and losses represented net
assets of the Company that cannot be transferred in the form of dividends,
loans, or advances to Protective Life. In general, dividends up to specified
levels are considered ordinary and may be paid thirty days after written notice
to the insurance commissioner of the state of domicile
F-15
<PAGE>
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE F -- STOCKHOLDERS' EQUITY AND RESTRICTIONS (CONTINUED)
unless such commissioner objects to the dividend prior to the expiration of such
period. Dividends in larger amounts are considered extraordinary and are subject
to affirmative prior approval by such commissioner. The maximum amount that
would qualify as ordinary dividends to Protective Life by the Company in 1998 is
estimated to be $3.4 million.
NOTE G -- PREFERRED STOCK
The Company's preferred stock has a provision for an annual minimum
cumulative dividend, when and if declared, of $50.00 per share, and additional
dividends to the extent the Company's statutory earnings for the immediately
preceeding year exceed $1.0 million. The minimum dividend and any accumulation
must be paid before any dividend on any other class of capital stock may be
paid. The additional dividends are noncumulative and are in preference to any
other dividend on any other class of capital stock. Dividends of $100,000 were
declared and paid in each of 1997, 1996 and 1995 on the participating preferred
stock. As of December 31, 1997, all cumulative preferred dividends have been
paid.
During 1996, the Company's articles of incorporation were amended such that
the preferred stock is redeemable at $1,000 per share solely at the Company's
discretion. At December 31, 1995, the preferred stock was reported as
"Redeemable Preferred Stock", whereas at December 31, 1996, it is reported as a
component of stockholders' equity.
NOTE H -- RELATED PARTY MATTERS
The Company has no employees; therefore, the Company purchases data
processing, legal, investment, and management services from PLC and other
affiliates. The cost of such services was $375,023 in 1997, $383,069 in 1996,
and $243,236 in 1995.
Receivables from related parties consisted of receivables from affiliates
under control of PLC in the amount of approximately $200,000 and approximately
$300,000 at December 31, 1997 and 1996, respectively. The Company routinely
receives from or pays to affiliates under the control of PLC reimbursements for
expenses incurred on one another's behalf. Receivables and payables among
affiliates are generally settled monthly.
NOTE I -- REINSURANCE
The Company assumes risks from and reinsures certain parts of its risks with
other insurers under yearly renewable term, coinsurance, and modified
coinsurance agreements. Yearly renewable term and coinsurance agreements are
accounted for by passing a portion of the risk to the reinsurer. Generally, the
reinsurer receives a proportionate part of the premiums less commissions and is
liable for a corresponding part of all benefit payments. Modified coinsurance is
accounted for similarly to coinsurance except that the liability for future
policy benefits is held by the original company, and settlements are made on a
net basis between the companies. While the amount retained on an individual life
will vary based upon age and mortality prospects of the risk, the Company
generally will not carry more than $500,000 individual life insurance on a
single risk. In many cases, the retention is less.
The Company has reinsured approximately $133 million, $163 million and $164
million, in face amount of life insurance risks with other insurers representing
$0.7 million, $0.9 million and $1.0 million of premium income for 1997, 1996 and
1995, respectively. The Company has also reinsured accident and health risks
representing $2.3 million, $1.9 million and $1.6 million, of premium income for
1997, 1996 and 1995, respectively. In 1997 and 1996, policy and claim reserves
relating to insurance ceded of $7.5 million
F-16
<PAGE>
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE I -- REINSURANCE (CONTINUED)
and $9.1 million respectively are included in reinsurance receivables. Should
any of the reinsurers be unable to meet its obligation at the time of the claim,
obligation to pay such claim would remain with the Company. At December 31, 1997
and 1996, the Company had paid $0.2 million and $0.8 million, respectively, of
ceded benefits which are recoverable from reinsurers.
NOTE J -- ESTIMATED MARKET VALUES OF FINANCIAL INSTRUMENTS
The carrying amount and estimated market values of the Company's financial
instruments at December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
---------------------------- ----------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT MARKET VALUES AMOUNT MARKET VALUES
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Assets (see Notes A and C):
Investments:
Fixed maturities.................................. $ 67,110,502 $ 68,201,559 $ 61,914,714 $ 61,224,888
Mortgage loans on real estate..................... 10,902,986 11,649,144 14,757,881 15,467,129
Short-term investments............................ 873,844 873,844 5,272,698 5,272,698
Cash................................................ 2,218,201 2,218,201 1,574,181 1,574,181
Liabilities (see Note A)............................
Annuity deposits.................................... 929,124 929,124 973,155 973,155
</TABLE>
NOTE K -- OPERATING SEGMENTS
PLC operates seven divisions whose principal strategic focuses can be
grouped into three general categories: Life Insurance, Specialty Insurance
Products, and Retirement Savings and Investment Products. Each division has a
senior officer of PLC responsible for its operations. A division is generally
distinguished by products and/or channels of distribution.
The Life Insurance category includes the Acquisitions, Individual Life, and
West Coast Divisions. The Specialty Insurance Products category includes the
Dental and Consumer Benefits ("Dental") and Financial Institutions Divisions.
And the Retirement Savings and Investment Products category includes the
Guaranteed Investment Contracts and Investment Products Divisions.
The Company, since it is licensed in the State of New York, is the entity
through which PLC markets and distributes products in New York. As of December
31, 1997, the Company was involved in the operations of two of PLC's Divisions:
the Acquisitions Division and the Dental Division. PLC's Investment Products
Division has plans to begin marketing through the Company in 1998.
The Company also has an additional business segment which is described
herein as Corporate and Other. The Corporate and Other segment primarily
consists of net investment income and expenses not attributable to the Divisions
above.
The Company uses the same accounting policies and procedures to measure
operating segment income and assets as it uses to measure its consolidated net
income and assets. Operating segment income is generally income before income
tax, adjusted to exclude any pre-tax minority interest in income of consolidated
subsidiaries. Premiums and policy fees, other income, benefits and settlement
expenses, and amortization of deferred policy acquisition costs are attributed
directly to each operating segment. Net investment income is allocated based on
directly related assets required for transacting the business of that
F-17
<PAGE>
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE K -- OPERATING SEGMENTS (CONTINUED)
segment. Realized investment gains (losses) and other operating expenses are
allocated to the segments in a manner which most appropriately reflects the
operations of that segment. Unallocated realized investment gains (losses) are
deemed not to be associated with any specific segment.
Assets are allocated based on policy liabilities and deferred policy
acquisition costs directly attributable to each segment.
There are no significant intersegment transactions.
Operating segment income and assets for the years ended December 31, are as
follows:
<TABLE>
<CAPTION>
DENTAL AND TOTAL
CONSUMER CORPORATE CONSOLIDATED
ACQUISITIONS BENEFITS AND OTHER ADJUSTMENTS NET INCOME
------------- ------------ ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
1997
Premiums and policy fees................... $ 4,257,328 $ 4,158,505 $ 0 $ 8,415,833
Net investment income...................... 4,590,650 1,026,054 617,141 6,233,845
Realized investment gains (losses)......... (59,889) (59,889)
Other income............................... 8,718 8,718
------------- ------------ ---------- ------------ -------------
Total revenues......................... 8,856,696 5,184,559 557,252 14,598,507
------------- ------------ ---------- ------------ -------------
Benefits and settlement expenses........... 5,994,962 3,080,800 9,075,762
Amortization of deferred acquisitions
costs.................................... 320,288 320,288
Other operating expenses................... 912,398 1,493,916 2,406,314
------------- ------------ ---------- ------------ -------------
Total benefits and expenses............ 7,227,648 4,574,716 0 11,802,364
------------- ------------ ---------- ------------ -------------
Income before income tax................... 1,629,048 609,843 557,252 2,796,143
Income tax expense......................... 950,689 950,689
------------- ------------ ---------- ------------ -------------
Net income................................. $ 1,845,454
------------- ------------ ---------- ------------ -------------
------------- ------------ ---------- ------------ -------------
1996
Premiums and policy fees................... $ 4,540,107 $ 4,917,896 $ 9,458,003
Net investment income...................... 5,569,799 1,049,427 $ (7,737) 6,611,489
Realized investment gains (losses)......... (28,070) (28,070)
Other income............................... 2,406 2,407
------------- ------------ ---------- ------------ -------------
Total revenues......................... 10,112,312 5,967,323 (35,807) 0 16,043,828
------------- ------------ ---------- ------------ -------------
Benefits and settlement expenses........... 5,813,515 3,861,725 9,675,240
Amortization of deferred acquisitions
costs.................................... 346,710 346,710
Other operating expenses................... 855,442 1,505,634 2,361,076
------------- ------------ ---------- ------------ -------------
Total benefits and expense............. 7,015,667 5,367,359 0 0 12,383,026
------------- ------------ ---------- ------------ -------------
Income before income tax................... 3,096,645 599,964 (35,807) 0 3,660,802
Income tax expenses........................ 1,244,673 1,244,673
------------- ------------ ---------- ------------ -------------
Net income................................. $ 2,416,129
------------- ------------ ---------- ------------ -------------
------------- ------------ ---------- ------------ -------------
</TABLE>
F-18
<PAGE>
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE K -- OPERATING SEGMENTS (CONTINUED)
<TABLE>
<CAPTION>
DENTAL AND TOTAL
CONSUMER CORPORATE CONSOLIDATED
ACQUISITIONS BENEFITS AND OTHER ADJUSTMENTS NET INCOME
------------- ------------ ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
1995
Premiums and policy fees................... $ 4,001,233 $ 2,923,864 $ 6,925,097
Net investment income...................... 5,504,153 3,714 5,507,867
Realized investment gains (losses)......... $ 838,977 838,977
Other income............................... (8) (8)
------------- ------------ ---------- ------------ -------------
Total revenues......................... 9,505,378 2,927,578 838,977 0 13,271,933
------------- ------------ ---------- ------------ -------------
Benefits and settlement expenses........... 4,888,566 1,458,839 6,347,405
Amortization of deferred acquisitions
costs.................................... 444,570 444,570
Other operating expenses................... 934,200 1,362,428 2,296,628
------------- ------------ ---------- ------------ -------------
Total benefits and expenses............ 6,267,336 2,821,267 0 0 9,088,603
------------- ------------ ---------- ------------ -------------
Income before income tax................... 3,238,042 106,311 838,977 0 4,183,330
Income tax expenses........................ $ 1,422,332 1,422,332
------------- ------------ ---------- ------------ -------------
Net Income................................. $ 2,760,998
------------- ------------ ---------- ------------ -------------
------------- ------------ ---------- ------------ -------------
</TABLE>
<TABLE>
<CAPTION>
DENTAL AND
CONSUMER CORPORATE AND
ACQUISITIONS BENEFITS OTHER TOTAL
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
1997
Investment and other assets........................ $ 76,644,539 $ 7,111,880 $ 20,698,754 $ 104,455,173
Deferred policy acquisition costs.................. 1,692,285 1,692,285
------------- ------------- ------------- --------------
Total Assets....................................... $ 78,336,824 $ 7,111,880 $ 20,698,754 $ 106,147,458
------------- ------------- ------------- --------------
------------- ------------- ------------- --------------
1996
Investment and other assets........................ $ 78,189,386 $ 12,870,675 $ 17,974,564 $ 109,034,625
Deferred policy acquisition costs.................. 1,919,471 1,919,471
------------- ------------- ------------- --------------
Total Assets....................................... $ 80,108,857 $ 12,870,675 $ 17,974,564 $ 110,954,096
------------- ------------- ------------- --------------
------------- ------------- ------------- --------------
1995
Investment and other assets........................ $ 83,689,559 $ 14,055,339 $ 19,021,559 $ 116,766,457
Deferred policy acquisition costs.................. 2,266,181 2,266,181
------------- ------------- ------------- --------------
Total Assets....................................... $ 85,955,740 $ 14,055,339 $ 19,021,559 $ 119,032,638
------------- ------------- ------------- --------------
------------- ------------- ------------- --------------
</TABLE>
F-19
<PAGE>
SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E COL. F
- -----------------------------------------------------------------------------------------------------------------
FUTURE ANNUITY
DEFERRED POLICY DEPOSITS PREMIUMS
POLICY BENEFITS AND OTHER AND NET
ACQUISITION AND UNEARNED POLICYHOLDERS' POLICY INVESTMENT
SEGMENT COSTS COSTS PREMIUMS FUNDS FEES INCOME
- ----------------------------------- ----------- ----------- -------- ------------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Year Ended December 31, 1997:
Acquisitions..................... $1,692,285 $56,177,703 $463,232 $ 6,048,563 $4,257,328 $4,590,650
Dental and Consumer Benefits..... 0 76,979 0 6,961,019 4,158,505 1,026,054
Corporate and Other.............. 0 0 0 0 0 617,141
----------- ----------- -------- ------------- ---------- -----------
$1,692,285 $56,254,682 $463,232 $13,009,582 $8,415,833 $6,233,845
----------- ----------- -------- ------------- ---------- -----------
----------- ----------- -------- ------------- ---------- -----------
Year Ended December 31, 1996:
Acquisitions..................... $1,919,471 $59,483,455 $182,499 $ 6,028,180 $4,540,107 $5,569,799
Dental and Consumer Benefits..... 0 76,979 0 12,891,670 4,917,896 1,049,427
Corporate and Other.............. 0 0 0 0 0 (7,737)
----------- ----------- -------- ------------- ---------- -----------
$1,919,471 $59,560,434 $182,499 $18,919,850 $9,458,003 $6,611,489
----------- ----------- -------- ------------- ---------- -----------
----------- ----------- -------- ------------- ---------- -----------
Year Ended December 31,1995:
Acquisitions..................... $2,266,181 $61,003,603 $71,803 $ 6,170,504 $4,001,233 $5,504,153
Dental and Consumer Benefits..... 0 650,651 0 13,170,351 2,923,864 3,714
Corporate and Other.............. 0 0 0 0 0 0
----------- ----------- -------- ------------- ---------- -----------
$2,266,181 $61,654,254 $71,803 $19,340,855 $6,925,097 $5,507,867
----------- ----------- -------- ------------- ---------- -----------
----------- ----------- -------- ------------- ---------- -----------
<CAPTION>
- ----------------------------------- -------------------------------------------------
COL. G COL. H COL. I COL. J
- ----------------------------------- -------------------------------------------------
AMORTIZATION
REALIZED BENEFITS OF
INVESTMENT AND DEFERRED
GAINS SETTLEMENT ACQUISITION
SEGMENT (LOSSES) EXPENSES COSTS EXPENSES (1)
- ----------------------------------- ---------- ----------- -------- ------------
<S> <C> <C> <C> <C>
Year Ended December 31, 1997:
Acquisitions..................... $ 0 $5,994,962 $320,288 $ 912,398
Dental and Consumer Benefits..... 0 3,080,800 0 1,493,916
Corporate and Other.............. (59,889) 0 0 0
---------- ----------- -------- ------------
$(59,889) $9,075,762 $320,288 $2,406,314
---------- ----------- -------- ------------
---------- ----------- -------- ------------
Year Ended December 31, 1996:
Acquisitions..................... $ 0 $5,813,515 $346,710 $ 855,442
Dental and Consumer Benefits..... 0 3,861,725 0 1,505,634
Corporate and Other.............. (28,070) 0 0 0
---------- ----------- -------- ------------
$(28,070) $9,675,240 $346,710 $2,361,076
---------- ----------- -------- ------------
---------- ----------- -------- ------------
Year Ended December 31,1995:
Acquisitions..................... 0 $4,888,566 $444,570 $ 934,200
Dental and Consumer Benefits..... 0 1,458,839 0 1,362,428
Corporate and Other.............. $838,977 0 0 0
---------- ----------- -------- ------------
$838,977 $6,347,405 $444,570 $2,296,628
---------- ----------- -------- ------------
---------- ----------- -------- ------------
</TABLE>
S-1
<PAGE>
SCHEDULE IV -- REINSURANCE
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E COL. F
- -----------------------------------------------------------------------------------------------
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
GROSS OTHER FROM OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1997:
Life insurance in force (1)...... $ 229,717 $ 133,080 $ 367,176 $ 463,813 79.2%
---------- ---------- ---------- ---------- ---
---------- ---------- ---------- ---------- ---
Premiums and policy fees:
Life insurance................... $2,926,434 $ 752,253 $2,124,374 $4,298,555 49.4%
Accident and health insurance.... 6,325,182 2,258,737 50,833 4,117,278 1.2%
---------- ---------- ---------- ----------
TOTAL............................ $9,251,616 $3,010,990 $2,175,207 $8,415,833
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Year Ended December 31, 1996:
Life insurance in force (1)...... $ 247,048 $ 169,330 $ 549,583 $ 627,301 87.6%
---------- ---------- ---------- ---------- ---
---------- ---------- ---------- ---------- ---
Premiums and policy fees:
Life insurance................... $3,222,836 $ 910,593 $2,698,743 $5,010,986 53.9%
Accident and health insurance.... 6,245,784 1,857,606 58,839 4,447,017 1.3%
---------- ---------- ---------- ----------
TOTAL............................ $9,468,620 $2,768,199 $2,757,582 $9,458,003
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Year Ended December 31, 1995:
Life insurance in force (1)...... $ 270,714 $ 42,165 $ 520,659 $ 749,208 69.5%
---------- ---------- ---------- ---------- ---
---------- ---------- ---------- ---------- ---
Premiums and policy fees:
Life insurance................... $3,821,959 $1,005,330 $ 753,690 $3,570,319 21.1%
Accident/health insurance........ 4,909,882 1,615,589 60,485 3,354,778 1.8%
---------- ---------- ---------- ----------
TOTAL............................ $8,731,841 $2,620,919 $ 814,175 $6,925,097
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
- ------------------------
(1) Dollars in thousands
S-2
