<PAGE> 1
Securities and Exchange Commission
Washington, D. C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 2-39729
COTTON STATES LIFE INSURANCE COMPANY
------------------------------------
(Exact name of registrant as specified in its charter)
GEORGIA 58-0830929
------- ----------
(State of incorporation (I.R.S. Employer
and jurisdiction) Identification No.)
244 PERIMETER CENTER PARKWAY, N.E., ATLANTA, GEORGIA 30346
- ---------------------------------------------------- -----
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (404)39l-8600
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
EXEMPT-UNDER SECTION 12(g)(2)(G)
Indicate by check mark whether the registrant has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and has been subject to the filing requirements for at
least the past 90 days.
YES [X] NO [ ]
Indicate by check mark if the disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates was
$34,327,914 based on the closing price of $8.125 February 1, 2000, as reported
on the NASDAQ National Market.
As of February 1, 2000, there were 6,327,359 shares of registrant's common stock
outstanding.
The Exhibit Index is located on Page 50.
--
The total number of pages in this document is 56.
--
<PAGE> 2
PART I
ITEM 1. BUSINESS
GENERAL
Cotton States Life Insurance Company (the "Company") was organized
under the laws of the State of Georgia in 1955. The Company is currently
licensed to transact business in Alabama, Florida, Georgia, Kentucky, Louisiana,
Mississippi, North Carolina, South Carolina, Tennessee and Virginia.
The Company currently markets only individual life insurance, payroll
deduction life insurance, guaranteed-simplified issue life insurance and
individual annuities. The Company wrote group insurance only for its employees
and agents through January 1, 1996.
In July of 1989, the Company formed CSI Brokerage Services, Inc.
("CSI"). CSI brokers insurance products for the Company's exclusive agents not
offered by the Company's affiliated property and casualty companies.
In November of 1989, the Company acquired 60% of the outstanding common
stock of Cotton States Marketing Resources, Inc. ("CSMR"). During 1992, the
Company acquired the remaining 40% of CSMR's stock. CSMR brokers through the
Company's exclusive agents other insurance companies' life and accident and
health products not underwritten by the Company.
2
<PAGE> 3
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company's operations can be grouped into three major segments: (i)
individual life insurance, (ii) guaranteed issue and simplified issue life
insurance, and (iii) brokerage operations. These segments are differentiated
primarily by their respective methods of distribution and the nature of related
products, as the Company's operations in each segment are concentrated within
its southeastern states geographic market. Individual life insurance products
are distributed through the Company's multi-line exclusive agents, guaranteed
issue and simplified issue products are distributed through independent agents
as well as exclusive agents, and brokerage operations involve third party
products distributed through the Company's exclusive and independent agents.
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Individual life insurance:
Premiums $ 5,848,804 5,572,243 5,426,473
Mortality and expense charges 10,804,659 9,762,356 9,430,814
Net investment income 8,837,008 8,461,988 7,860,143
Realized investment gains 254,052 358,000 109,881
------------ ----------- -----------
Total revenue 25,744,523 24,154,587 22,827,311
Policyholder benefits 12,173,031 10,429,767 9,964,268
Operating expenses 7,525,275 6,292,769 7,063,553
------------ ----------- -----------
Total benefits and expenses 19,698,306 16,722,536 17,027,821
------------ ----------- -----------
Operating profit 6,046,217 7,432,051 5,799,490
------------ ----------- -----------
Guaranteed and simplified life insurance:
Premiums 5,843,177 3,794,585 1,922,379
Net investment income 316,301 159,182 58,524
Realized investment gains 9,093 6,735 818
------------ ----------- -----------
Total revenue 6,168,571 3,960,502 1,981,721
Policyholder benefits 3,358,022 2,317,006 1,107,883
Operating expenses 1,616,158 890,787 388,653
------------ ----------- -----------
Total benefits and expenses 4,974,180 3,207,793 1,496,536
------------ ----------- -----------
Operating profit 1,194,391 752,709 485,185
------------ ----------- -----------
Brokerage:
Brokerage income 3,828,087 3,214,216 3,141,695
Net investment income 99,061 62,698 48,661
Realized investment gains 211,483 103,180 89,072
------------ ----------- -----------
Total revenue 4,138,631 3,380,094 3,279,428
Operating expenses 1,086,777 1,006,605 1,047,407
------------ ----------- -----------
Operating profit 3,051,854 2,373,489 2,232,021
------------ ----------- -----------
Combined operating profit 10,292,462 10,558,249 8,516,696
Group life insurance and individual
accident and health results (109,127) (172,906) (39,602)
------------ ----------- -----------
Earnings before Federal income taxes $ 10,183,335 10,385,343 8,477,094
============ =========== ===========
</TABLE>
3
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NARRATIVE DESCRIPTION OF BUSINESS SEGMENTS
(I) INDIVIDUAL LIFE
The major forms of individual life insurance presently offered by the
Company include universal life, graded premium whole life, participating whole
life, term insurance, various supplemental riders including, but not limited to,
accidental death, disability waiver and guaranteed insurability, and disability
income riders. These products are sold by the Company's 283 multi-line exclusive
agents in Alabama, Florida, Georgia, Kentucky and Tennessee.
The Company offers its insurance through multi-line exclusive agents
who also write all lines of property and casualty insurance for Cotton States
Mutual Insurance Company ("Mutual") and its subsidiary, Shield Insurance Company
("Shield"). See Item 13 of this report for an explanation of the relationship
between the Company, Mutual and Shield. Because its agents write all major lines
of insurance, the Company's commission rates are usually less than the
prevailing industry rate. Multi-line exclusive agents are under contract to the
Company, Mutual and Shield, and are paid on a commission basis. The Company's
multi-line exclusive agents are located in the following states:
<TABLE>
<CAPTION>
NUMBER OF AGENTS
----------------
DECEMBER 31,
------------
1999 1998 STATE
---- ---- -----
<S> <C> <C>
53 48 Alabama
24 25 Florida
164 163 Georgia
27 26 Kentucky
15 10 Tennessee
--- ---
TOTAL 283 272
=== ===
</TABLE>
Unless the need for a medical examination is indicated by the
application or an investigation, the Company writes individual life insurance
based on age without requiring blood and specimen in the following maximum
amounts:
<TABLE>
<CAPTION>
AGE GROUP MAXIMUM INSURANCE
--------- -----------------
<S> <C>
0-17 $100,000
18-40 74,999
41-50 50,000
51 and over 25,000
</TABLE>
Substandard life insurance risks are accepted by the Company at
increased rates, which are determined on an actuarial basis that the Company
believes will adequately compensate it for the additional risk involved. The
Company's retention of substandard policies varies with its classification of
the risk and age of the insured, but in no event exceeds $100,000 on any life
through age 65 or $35,000 for issue ages over 65. The Company has no fixed
maximum on the size of substandard policies and will entertain any application
on which it can obtain suitable reinsurance. The Company requires a medical
examination on the majority of all substandard risks. As of December 31, 1999,
less than 2.9% of the Company's individual life premiums and mortality and
expense charges were represented by substandard risks.
The Company, as do others in the insurance industry, reinsures with
other companies portions of the individual life insurance policies it
underwrites. Reinsurance enables an insurance company to write a policy in an
amount larger than the risk it desires to assume. A contingent liability exists
on insurance ceded to the reinsurer which might become a liability of the
Company in the event that the reinsurer fails to meet its obligations under the
reinsurance treaty.
The Company presently retains, with respect to individual life
policies, no more than $100,000 of insurance on any one life, which may be
reduced, depending upon the age and the physical classification of the insured.
All accidental death riders are 100% reinsured. As of December 31, 1999, the
aggregate amount of individual life insurance in force ceded by the Company
under its various reinsurance treaties totaled $1,113,205,844.
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<PAGE> 5
(II) GUARANTEED ISSUE AND SIMPLIFIED ISSUE WHOLE LIFE INSURANCE
The Company offers Guaranteed Issue and Simplified Issue whole life
insurance through its multi-line agency force and approximately 2,700
independent agents. The independent agents sell these products in all ten states
in which the Company is licensed.
Both plans are level-premium, cash value permanent life insurance
products issued from $2,500 to $25,000 face amounts. Both plans are frequently
used by individuals to cover final expenses. They are designed to be sold as
companion plans using a simple application and no medical exams or tests. If all
health questions can be answered "NO", the Simplified Issue policy may be
issued. Otherwise, the Guaranteed Issue policy will be issued.
Guaranteed Issue whole life is available for issue ages 46-80. The
death benefit in policy years one to three is limited to a return of premium
plus 10%. However, the full death benefit is payable in all years in case of
accidental death. After three years, the full death benefit is payable for any
cause of death.
Simplified Issue whole life is available for issue ages 0-80. The full
death benefit is payable from the issue date.
(III) BROKERAGE
The Company owns two brokerage subsidiaries, CSI and CSMR. CSI provides
the Company with commission income from brokerage agreements with other property
and casualty insurance carriers. These carriers supply the Company's multi-line
crop agents with property and casualty products that the Company's affiliated
property and casualty companies do not underwrite, such as non-standard auto
insurance, crop hail insurance, multi-peril crop insurance, mobile home
insurance, poultry house insurance and flood insurance.
34% and 20% of CSI's brokerage revenues come from the sale of
non-standard auto insurance through two carriers. 28% of CSI's revenue comes
from the sale of crop hail and multi-peril crop insurance through one carrier.
The contract with this carrier expires on June 30, 2006.
CSMR provides the Company with commission income from brokerage
agreements with other life and health insurance companies. These companies
supply the Company's multi-line agents with life and health products that the
Company does not choose to underwrite, such as individual major-medical
policies, impaired risk life insurance, first to die life insurance, group life
and health insurance. CSMR has contracted with approximately 2,700 independent
agents to write the Company's Guaranteed Issue and Simplified Issue whole life
insurance.
REGULATION
The Company, like other insurance companies, is subject to regulation
and supervision by the states in which it transacts business. The insurance laws
of these states confer upon supervisory authorities broad administrative powers
relating to (i) the regulation and revocation of licenses to transact business,
(ii) the regulation of trade practices, (iii) the licensing of agents, (iv) the
approval of the form and content of policies and advertising, (v) the depositing
of securities for the benefit of policyholders, (vi) the type and amount of
investments permitted, and (vii) the maintenance of specified reserves and
capital for the protection of policyholders. In general, insurance laws and
regulations are designed primarily to protect policyholders rather than
shareholders.
The Company is also required under these laws to file detailed annual
reports with the supervisory agencies in each of the states in which it does
business. Under the rules of the National Association of Insurance
Commissioners, the Company's records are examined periodically by one or more of
the state supervisory agencies.
EMPLOYEES
In addition to its principal officers, the Company shares approximately
112 salaried employees with Shield and Mutual. The Company pays an allocated
portion of the shared employees' salaries, either based upon the Company's
5
<PAGE> 6
premium income in relation to the premium income of Mutual and Shield or the
actual time expended on each company's affairs. The Company and its subsidiaries
have 32 salaried employees who work on a full-time basis in its home office,
where all administrative functions, such as underwriting, billing and collection
of premiums, are centralized and from which all sales activities are directed.
None of the Company's employees is subject to a collective bargaining agreement.
The Company believes that its employee relations are good.
COMPETITION
The Company operates in a highly competitive industry. It competes with
a large number of stock and mutual insurance companies. Larger stock and mutual
insurance companies may have a competitive advantage in that they have greater
financial and human resources that enable them to offer more diversified lines
of coverage, develop new products faster, and develop economies of scale.
Mutual companies may also have an additional advantage compared to
stock insurers because all of their profits accrue to the policyholders.
The Company has certain advantages that enable it to keep its premium
rates competitive with similar policies offered by competing companies. These
advantages are:
1. The Company offers most of its insurance through the same
agents who write property and casualty insurance for Mutual
and Shield. The sale of insurance through the same agents who
sell property and casualty insurance enables the Company to
incur less agency development and sales expense than is
customary in the industry;
2. Because the Company's agents can provide customers with
coverage for all major lines of insurance they may utilize
"account" selling. Account selling enables insureds to contact
one agent regarding their total insurance needs; and
3. The Company shares certain facilities, equipment and personnel
with Mutual and Shield. The Company believes that sharing
these expenses has a favorable impact on the ratio of expenses
to premium income and enables the Company to enjoy economies
of scale.
In order to keep pace with trends in the industry, the Company
introduces new products with premium rates and benefits that it believes are
competitive with the industry.
ITEM 2. PROPERTIES
The Company, Mutual and Shield occupy offices located at 244 Perimeter
Center Parkway, Atlanta, Georgia. The building is owned by a general partnership
composed of Mutual and Gold Kist Inc. ("Gold Kist"). The Company has no
ownership interest in the partnership. The facility consists of a three-story
office building containing approximately 260,000 square feet of space of which
the Company, Mutual and Shield share approximately 90,000 square feet. The
Company believes that the facility is suitable to its business. Rental expense
is allocated to the Company based on its proportionate share of square footage
occupied.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in various actions incidental to the conduct
of its business. While the ultimate outcome of these matters cannot be estimated
with certainty, management does not believe the actions will result in any
material loss to the Company.
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<PAGE> 7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
On January 1, 2000, there were approximately 1,880 shareholders of the
Company's common stock. The stock (symbol "CSLI") is traded over-the-counter on
the NASDAQ National Market System. Price history as provided by NASDAQ and
dividends declared during the past two years are presented below:
<TABLE>
<CAPTION>
Stock Price (1) Dividend
High Low Declared
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------
1999
First Quarter $14.50 11.75 .04
Second Quarter 12.50 10.38 .04
Third Quarter 12.38 9.00 .04
Fourth Quarter 10.38 7.50 .04
- --------------------------------------------------------------------------
1998
First Quarter $18.75 14.38 .04
Second Quarter 18.25 13.75 .04
Third Quarter 15.50 9.63 .04
Fourth Quarter 16.75 9.00 .04
</TABLE>
(1) The prices presented above are sale prices which represent price between
broker-dealers and do not include mark-ups or mark-downs or any commission
to the broker-dealer. Therefore, the prices presented above do not reflect
prices in actual transactions.
7
<PAGE> 8
ITEM 6. SELECTED FINANCIAL DATA
TEN-YEAR SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
AS OF DECEMBER 31
Total assets $190,516,318 180,773,289 165,337,309 148,824,187 139,381,979
------------ ----------- ----------- ----------- -----------
Total liabilities $135,729,241 126,282,437 115,941,296 105,910,335 99,694,942
------------ ----------- ----------- ----------- -----------
Total shareholders' equity $ 54,787,077 54,490,852 49,396,013 42,913,852 39,687,037
------------ ----------- ----------- ----------- -----------
Book value per share $ 8.66 8.56 7.72 6.71 6.23
------------ ----------- ----------- ----------- -----------
Closing price per share $ 8.63 14.88 15.25 7.60 4.80
------------ ----------- ----------- ----------- -----------
YEARS ENDED DECEMBER 31
Premium income $ 12,497,438 10,172,998 8,189,370 6,702,922 7,842,595
------------ ----------- ----------- ----------- -----------
Mortality and expense
charges $ 10,804,659 9,762,356 9,430,814 8,697,621 7,218,946
------------ ----------- ----------- ----------- -----------
Net investment income, realized
investment gains and brokerage
income $ 13,555,085 12,365,999 11,308,794 9,458,474 8,814,035
------------ ----------- ----------- ----------- -----------
Total revenue $ 36,857,182 32,301,353 28,928,978 24,859,017 23,875,576
------------ ----------- ----------- ----------- -----------
Benefits and expenses $ 26,673,847 21,916,010 20,451,884 18,735,863 18,548,121
------------ ----------- ----------- ----------- -----------
Net earnings $ 7,327,945 7,240,585 6,304,558 4,832,577 4,070,871
------------ ----------- ----------- ----------- -----------
Basic net earnings per share $ 1.16 1.13 .99 .76 .64
------------ ----------- ----------- ----------- -----------
Diluted net earnings per share $ 1.14 1.10 .96 .74 .63
------------ ----------- ----------- ----------- -----------
Dividends per share $ .160 .160 .126 .102 .072
------------ ----------- ----------- ----------- -----------
AS OF DECEMBER 31 1994 1993 1992 1991 1990
------------ ----------- ----------- ----------- -----------
Total assets $124,412,468 116,237,515 111,133,117 102,258,764 94,837,003
------------ ----------- ----------- ----------- -----------
Total liabilities $ 90,855,648 85,285,402 82,346,176 75,210,219 68,395,286
------------ ----------- ----------- ----------- -----------
Total shareholders' equity $ 33,556,820 30,952,113 28,786,941 27,048,545 26,441,717
------------ ----------- ----------- ----------- -----------
Book value per share $ 5.28 5.10 4.74 4.46 4.20
------------ ----------- ----------- ----------- -----------
Closing price per share $ 3.63 3.20 2.77 2.77 3.09
------------ ----------- ----------- ----------- -----------
YEARS ENDED DECEMBER 31
Premium income $ 7,991,806 8,005,457 9,671,662 9,444,004 8,778,515
------------ ----------- ----------- ----------- -----------
Mortality and expense
charges $ 7,136,723 5,529,950 4,803,708 4,314,299 3,962,877
------------ ----------- ----------- ----------- -----------
Net investment income, realized
investment gains and brokerage
income $ 7,597,136 7,271,267 7,111,110 7,069,597 6,291,331
------------ ----------- ----------- ----------- -----------
Total revenue $ 22,725,665 20,806,674 21,586,480 20,827,900 19,032,723
------------ ----------- ----------- ----------- -----------
Benefits and expenses $ 18,333,697 18,149,664 19,122,882 19,182,874 17,027,478
------------ ----------- ----------- ----------- -----------
Net earnings $ 3,303,024 2,435,355 2,108,597 1,292,026 1,655,245
------------ ----------- ----------- ----------- -----------
Basic net earnings per share $ .54 .40 .33 .21 .26
------------ ----------- ----------- ----------- -----------
Diluted net earnings per share $ .51 .39 .33 .20 .25
------------ ----------- ----------- ----------- -----------
Dividends per share $ .060 .051 .068 .119 .119
------------ ----------- ----------- ----------- -----------
</TABLE>
Note: All share and per share amounts have been adjusted for the following stock
splits:
October 1995 five-for-four
April 1997 five-for-four
January 1998 three-for-two
8
<PAGE> 9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Premiums, mortality and expense charges, and investment income are the
Company's major sources of cash flow used to meet its short-term and long-term
cash requirements.
The Company's short-term obligations consist primarily of operating
expenses and policyholder benefits. The Company has been able to meet these
funding requirements out of operating cash and cash equivalents. The Company
does not anticipate that it will become necessary to sell long-term investments
to meet short-term obligations.
The Company's principal long-term obligations are fixed contractual
obligations incurred in the sale of its life insurance products. The premiums
and mortality and expense charges billed for these products are based on
conservative and actuarially sound assumptions as to mortality, persistency and
interest. The Company believes these assumptions will produce revenues
sufficient to meet its future contractual benefit obligations and operating
expenses, and provide an adequate profit margin to finance future growth without
a major entry into the debt or equity markets.
INVESTMENT SECURITIES AND SECURITIES AVAILABLE FOR SALE
Following is a summary of fixed maturities held for investment and
available for sale by rating class:
<TABLE>
<CAPTION>
HELD FOR INVESTMENT AVAILABLE FOR SALE
------------------- ------------------
12/31/99 12/31/98 12/31/99 12/31/98
-------- -------- -------- --------
<S> <C> <C> <C> <C>
U. S. Government $ 1,498,783 1,497,876 21,711,038 28,943,831
A or better 14,578,094 15,092,152 73,243,403 62,320,885
BBB or better - - 7,817,693 9,589,060
----------- ---------- ----------- -----------
$16,076,877 16,590,028 102,772,134 100,853,776
----------- ---------- ----------- -----------
</TABLE>
MORTGAGE LOANS
The Company's mortgage loan policy stipulates that the Company will
loan no more than 80% of the value on residential loans and no more than 75% of
the value on commercial loans. The Company grants loans only to employees
(excluding officers and directors) and agents.
The loan-to-value ratio on delinquent loans is 28%. Therefore, the
Company does not anticipate any loss should it choose to foreclose.
POLICY LOANS
All policy loans are secured by the cash surrender value of the
policies.
SHORT-TERM INVESTMENTS
All short-term investments are in U.S. Treasury Bills.
OTHER INVESTMENTS
Other investments consist of the Company's equity in a limited
partnership. The partnership invests in other insurance companies and related
industries.
9
<PAGE> 10
RISK-BASED CAPITAL
The Company's insurance operations require capital to support premium
writings. The National Association of Insurance Commissioners ("NAIC") developed
a model law and risk-based capital formula designed to help regulators identify
life insurers that may be inadequately capitalized. Under the NAIC's
requirements, an insurer must maintain total capital and surplus above a
calculated threshold or face varying levels of regulatory action. The Company's
capital and surplus at December 31, 1999 was above the minimum regulatory
threshold.
RESULTS OF OPERATIONS
The Company's operations can be grouped into three major segments: (i)
individual life insurance, (ii) guaranteed issue and simplified issue life
insurance, and (iii) brokerage operations. These segments are differentiated
primarily by their respective methods of distribution and the nature of related
products, as the Company's operations in each segment are concentrated within
its southeastern states geographic market. Individual life insurance products
are distributed through the Company's multi-line exclusive agents, guaranteed
issue and simplified issue products are distributed through independent agents
as well as exclusive agents, and brokerage operations all involve third party
products distributed through the Company's exclusive and independent agents.
PREMIUM INCOME AND MORTALITY AND EXPENSES CHARGES:
INDIVIDUAL LIFE INSURANCE
Premium income and mortality and expense charges produced by the
Company's multi-line exclusive agency force for the last three years are as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Premium income $ 5,848,804 5,572,243 5,426,473
Mortality and expense charges 10,804,659 9,762,356 9,430,814
----------- ---------- ----------
$16,653,463 15,334,599 14,857,287
=========== ========== ==========
</TABLE>
The total income amount for 1999 represents a 8.6% increase over 1998,
compared with a 3.2% increase in 1998 over 1997. Improvements in two key
products in late 1998 helped generate additional growth in these lines.
GUARANTEED ISSUE AND SIMPLIFIED ISSUE LIFE INSURANCE
Guaranteed issue and simplified issue products are distributed by
approximately 2,700 independent agents and the Company's multi-line exclusive
agents. The Company began selling these products in 1996. Premium income from
these products were $5,843,177, $3,794,585 and $1,922,379 in 1999, 1998 and
1997, respectively. The Company expects continued growth in this line of
business.
OTHER
The Company also receives premium income from individual accident and
health policies and group life premiums from participation in the Federal
employee and servicemen pools. The earnings effect from these sources of premium
income is not significant.
INVESTMENT INCOME
Investment income increased 5%, 9% and 6% in 1999, 1998 and 1997,
respectively. Growth in the overall investment portfolio, fluctuations in
interest rates on new investments, and the mix of securities account for the
variance in yearly increases.
10
<PAGE> 11
REALIZED INVESTMENT GAINS
Realized investment gains during the past three years resulted from the
sale of bonds by the Company and the sale of equity securities by CSI. The
Company anticipates that future gains will be approximately $200,000 per year.
Larger gains in 1999 resulted from the Company and CSI taking advantage of
market conditions to increase its overall portfolio yield.
BROKERAGE INCOME
CSI provides the Company with commission income from brokerage
agreements with other property and casualty insurance carriers. These carriers
supply the Company's multi-line agents with property and casualty products that
the Company's affiliated property and casualty companies do not underwrite. CSI
earned $1,641,193 in 1999, $1,271,450 in 1998 and $1,236,114 in 1997. In late
1996, CSI, in conjunction with its property and casualty affiliate, finalized a
contract to transfer management of its property and casualty affiliate's
multi-peril crop and crop hail insurance to Blakely Crop Hail, a Kansas based
company. Through the brokerage agreement with Blakely, CSI will receive an
override commission based on premium volume generated by sales of multi-peril
crop and crop hail insurance. During 1999, 1998 and 1997, $699,000, $537,000 and
$780,000, respectively, of gross income was realized under this agreement.
CSI also received override commissions of $871,000, $819,000 and
$855,000 from a non-standard auto insurer during 1999, 1998 and 1997,
respectively. In 1998, CSI added an additional non-standard automobile insurer.
Override commission received in 1999 and 1998 was $509,000 and $326,000,
respectively, from this new carrier.
During the third quarter of 1999, CSI reached production levels with
one of its brokerage affiliated property and casualty companies which resulted
in approximately $100,000 of additional brokerage income. Production levels are
determined annually for the period October 1 to September 30 of each agreement
year; however, there is no guarantee that CSI will achieve the stated goals each
year. Hence brokerage income under this arrangement may fluctuate.
Another subsidiary, CSMR, provides the Company with commission income
from brokerage agreements with other life and health insurance companies. These
companies supply the Company's multi-line agents with life and health products
that the Company does not want to underwrite. CSMR earned $373,031 in 1999,
$295,053 in 1998 and $305,086 in 1997. The decline in CSMR earnings in 1998
resulted from the utilization of all of its tax loss carry forwards during 1997.
On an overall basis, total brokerage revenues amounted to $3,828,087 $3,214,216
and $3,141,695 in 1999, 1998 and 1997, respectively.
BENEFITS
Benefits, including reserve increases, for the last three years on
individual life and guaranteed issue/simplified issue products are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Individual $12,173,031 10,429,767 9,964,268
Guaranteed issue
simplified issue $ 3,358,022 2,317,006 1,107,883
</TABLE>
Benefits for individual life and guaranteed issued simplified issue as a
percentage of premiums and mortality and expense charges for those products were
69% in 1999, 67% for 1998 and 66% for 1997. The Company expects the ratio to
range between 65% and 70%.
During the year, the Company experienced increased mortality across all
lines of business. Based on the Company's analysis, the mortality fluctuations
were not concentrated in any one particular product line or age group. The
Company understands that it can and will experience fluctuations in mortality.
The Company is insulated from abnormal mortality fluctuations having routinely
purchased "stop loss" reinsurance coverage to limit its exposure. The Company
reached the attachment point of the reinsurance program during the third quarter
and recorded a pretax reinsurance recovery of approximately $500,000 in the
third quarter and $600,000 in the fourth quarter of 1999.
11
<PAGE> 12
FEDERAL INCOME TAXES
The effective tax rates of the Company were 28% for 1999, 30% for 1998
and 26% for 1997. The increase in effective tax rates from 1997 to 1998, was due
to CSMR utilizing all of its tax loss carryforwards in the fourth quarter of
1997 and the increase in deferred acquisition costs and other temporary
differences which are taxed at a rate of 34% and do not reflect the impact of
the small company deduction. The Company anticipates that future tax rates will
range from 28% to 33%.
QUARTERLY RESULTS
Quarterly earnings may fluctuate significantly during the year. These
fluctuations are due to irregular claims occurrences and the timing of certain
investment transactions.
INFLATION
Prolonged inflation can adversely affect insurance operations. Expenses
tend to increase while premiums are generally fixed for the life of the policy.
Real and nominal interest rates have fluctuated considerably over the years,
causing major swings in investment market values and growth in related
investment income. In an effort to control these effects, management is
continuing to emphasize cost control and to invest in short-term and
intermediate-term investments.
YEAR 2000
The Company did not experience any material date-related problems with
its internal information or other systems and has not experienced any material
disruptions in connection with external information systems and data exchanges.
The Company will continue to monitor its internal and external information
systems and data exchanges throughout the year for first date occurrence events.
Based on the information now available, the Company does not expect any material
disruptions with respect to such events during the coming year.
FORWARD-LOOKING STATEMENTS
The Company has made certain forward-looking statements in this Annual
Report for the year ended December 31, 1999, and has and will make such
statements in other contexts. Forward-looking statements are statements not
based on historical information and which relate to future operations,
strategies, financial results, or other developments. Statements using verbs
such as "expect," "anticipate," "believe" or words of similar import generally
involve forward-looking statements. Without limiting the foregoing,
forward-looking statements include statements which represent the Company's
beliefs concerning future levels of sales and redemptions of the Company's
products, investment spreads and yields, or the earnings and profitability of
the Company's activities.
Forward-looking statements are necessarily based on estimates and
assumptions that are inherently subject to significant business, economic and
competitive uncertainties and contingencies, many of which are beyond the
Company's control and many of which are subject to change. These uncertainties
and contingencies could cause actual results to differ materially from those
expressed in any forward-looking statements made by, or on behalf of, the
Company. Whether or not actual results differ materially from forward-looking
statements may depend on numerous foreseeable and unforeseeable developments.
Some may be national in scope, such as general economic conditions, changes in
tax law and changes in interest rates. Some may be related to the insurance
industry generally, such as pricing competition, regulatory developments and
industry consolidation. Others may relate to the Company specifically, such as
credit, volatility and other risks associated with the Company's investment
portfolio. Investors are also directed to consider other risks and uncertainties
discussed in documents filed by the Company with the Securities and Exchange
Commission. If the Company's assumptions and estimates are incorrect or do not
come to fruition, or if the Company does not achieve all of these key factors,
then the Company's actual performance could vary materially from the
forward-looking statements made herein. The Company disclaims any obligation to
update forward-looking information.
12
<PAGE> 13
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
CREDIT RISK
Credit Risk is the risk that issuers of securities owned by the Company
will default, or other parties, including reinsurers which owe the Company
money, will not pay. The Company attempts to minimize this risk by adhering to a
conservative investment strategy and by contracting with reinsuring companies
that meet certain rating criteria and other qualifications.
INTEREST RATE RISK
The Company's fixed maturity investments are subject to interest rate
risk. Increases and decreases in interest rates typically result in decreases
and increases in the fair market values of these securities. The changes in fair
market values of the available for sale portfolio are presented as a component
of shareholders equity in accumulated other comprehensive income-net of taxes.
The Company invests in government, governmental agency and high quality
corporate bonds. The fixed maturity portfolio had an effective duration of 5.1
years and an average rating of AA3 at December 31, 1999. Company policy is to
have an effective duration of less than ten years and to not purchase bonds with
less than an A rating. Through cash flow models, the Company works to lessen the
impact of interest rate fluctuations on its available for sale portfolio.
The Company's liabilities for interest sensitive products are carried at
full account value. The Company has changed the credited interest rate in the
past to reflect changes in market interest rates.
13
<PAGE> 14
The table below summarizes the Company's interest rate risk and shows
the effect of a hypothetical 100 and 200 basis point increase/decrease in
interest rates on the market values of the fixed investment portfolio. The
selection of 100 and 200 basis point increases/decreases in interest rates
should not be construed as a prediction by the Company's management of future
market events, but rather, to illustrate the potential impact of such events.
These calculations may not fully capture the impact of the changes in the ratio
of long-term rates to short-term rates.
<TABLE>
<CAPTION>
HYPOTHETICAL
ESTIMATED FAIR PERCENTAGE
ESTIMATED VALUE AFTER INCREASE (DECREASE)
ESTIMATED CHANGE IN HYPOTHETICAL IN SHAREHOLDER
VALUE INTEREST RATES CHANGE IN EQUITY BEFORE
DECEMBER 31, 1999 (BP-BASIS POINTS) INTEREST RATES TAXES
----------------- ----------------- -------------- -----
(dollars in thousands)
<S> <C> <C> <C> <C>
Held for investment:
U.S. Treasury securities and obligations
of U.S government corporations
and agencies $ 1,503 200 bp decrease 1,547 N/A
100 bp decrease 1,520 N/A
100 bp increase 1,487 N/A
200 bp increase 1,472 N/A
Debt securities issued by
foreign governments $ 2,016 200 bp decrease 2,082 N/A
100 bp decrease 2,048 N/A
100 bp increase 1,983 N/A
200 bp increase 1,953 N/A
Corporate securities $ 12,457 200 bp decrease 13,105 N/A
100 bp decrease 12,768 N/A
100 bp increase 12,158 N/A
200 bp increase 11,859 N/A
Available for sale:
U.S. Treasury and obligations
of U.S. government corporations
and agencies $ 5,003 200 bp decrease 5,353 .61
100 bp decrease 5,216 .39
100 bp increase 4,935 (.12)
200 bp increase 4,615 (.71)
Corporate securities $ 80,811 200 bp decrease 92,991 22.23
100 bp decrease 87,495 12.20
100 bp increase 77,562 (5.93)
200 bp increase 69,173 (21.24)
Mortgage-backed securities $ 16,958 200 bp decrease 18,169 2.21
100 bp decrease 17,705 1.36
100 bp increase 16,351 (1.11)
200 bp increase 15,710 (2.28)
Total fixed maturities $118,748 200 bp decrease 133,229
======== 100 bp decrease 126,752
100 bp increase 114,476
200 bp increase 104,782
</TABLE>
14
<PAGE> 15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
ASSETS 1999 1998
------------- ------------
<S> <C> <C>
Investments:
Fixed maturities, held for investment, at amortized
cost $ 16,076,877 16,590,028
Fixed maturities, available for sale, at fair value 102,772,134 100,853,776
Equity securities, at fair value 2,623,214 --
First mortgage loans on real estate 2,898,757 3,531,728
Policy loans 8,591,609 8,155,752
Short-term investments 5,494,839 7,196,901
Other invested assets 1,000,000 1,000,000
------------- ------------
Total investments 139,457,430 137,328,185
Cash 610,695 938,728
Accrued investment income 2,232,351 1,913,456
Amounts receivable, principally premiums 2,443,015 2,547,510
Amount due from reinsurers 4,038,669 2,492,493
Deferred policy acquisition costs 41,263,817 34,950,104
Other assets 470,341 602,813
------------- ------------
$ 190,516,318 180,773,289
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits $ 122,605,977 112,423,878
Policy claims and benefits payable 1,455,077 1,053,061
------------- ------------
Total policy liabilities and accruals 124,061,054 113,476,939
Federal income taxes:
Current 670,347 80,869
Deferred 3,435,378 5,621,684
Other liabilities 7,562,462 7,102,945
------------- ------------
Total liabilities 135,729,241 126,282,437
------------- ------------
Shareholders' equity:
Common stock of $1 par value. Authorized 20,000,000
shares; issued 6,754,504 shares 6,754,504 6,754,504
Additional paid-in capital 1,528,178 1,478,639
Accumulated other comprehensive income (loss), net (3,466,876) 1,779,920
Retained earnings 53,732,985 47,420,827
Less:
Unearned compensation - restricted stock (362,458) (317,860)
Treasury stock, at cost (427,145 shares in 1999 and
392,716 shares in 1998) (3,399,256) (2,625,178)
------------- ------------
Total shareholders' equity 54,787,077 54,490,852
------------- ------------
$ 190,516,318 180,773,289
============= ============
</TABLE>
See accompanying notes to consolidated financial statements
15
<PAGE> 16
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Earnings
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Premium income:
Life $12,359,612 10,038,981 8,014,887
Accident and health 137,826 134,017 174,483
----------- ---------- ----------
Total premium income 12,497,438 10,172,998 8,189,370
Mortality and expense charges 10,804,659 9,762,356 9,430,814
Net investment income 9,252,370 8,787,048 8,056,400
Realized investment gains 474,628 364,735 110,699
Brokerage income 3,828,087 3,214,216 3,141,695
----------- ---------- ----------
Total revenues 36,857,182 32,301,353 28,928,978
----------- ---------- ----------
Benefits and expenses:
Life benefits and claims 16,191,608 13,409,685 11,713,161
Accident and health benefits and claims 244,320 302,087 227,428
Amortization of deferred policy acquisition costs 3,041,566 1,809,619 2,271,407
Other operating expenses 7,196,353 6,394,619 6,239,888
----------- ---------- ----------
Total benefits and expenses 26,673,847 21,916,010 20,451,884
----------- ---------- ----------
Earnings before Federal income taxes 10,183,335 10,385,343 8,477,094
----------- ---------- ----------
Federal income taxes:
Current 1,764,630 1,546,986 1,515,393
Deferred 1,090,760 1,597,772 657,143
----------- ---------- ----------
Total Federal income taxes 2,855,390 3,144,758 2,172,536
----------- ---------- ----------
Net earnings $ 7,327,945 7,240,585 6,304,558
=========== ========== ==========
Basic net earnings per share of
common stock $ 1.16 1.13 0.99
=========== ========== ==========
Diluted net earnings per share of
common stock $ 1.14 1.10 0.96
=========== ========== ==========
Weighted-average number of shares used in
computing basic earnings per share (note 1) 6,341,393 6,410,345 6,400,145
=========== ========== ==========
Weighted-average number of shares used in
computing diluted earnings per share (note 1) 6,444,202 6,562,370 6,576,236
=========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE> 17
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
Common stock - balance at beginning and
end of year $ 6,754,504 6,754,504 6,754,504
------------ ----------- -----------
Additional paid-in capital:
Balance at beginning of year 1,478,639 1,283,745 1,283,969
Treasury shares issued (acquired) (91,286) 9,894 (224)
Tax benefit arising from issuance of
restricted stock 140,825 185,000 --
------------ ----------- -----------
Balance at end of year 1,528,178 1,478,639 1,283,745
------------ ----------- -----------
Accumulated other comprehensive income:
Balance at beginning of year 1,779,920 1,285,556 297,609
------------ ----------- -----------
Change in unrealized gains (losses):
Unrealized gains (losses) during year (9,637,850) 848,053 1,802,499
Deferred (taxes) benefit 3,276,869 (288,338) (612,850)
Deferred acquisition cost adjustment 1,114,185 (65,351) (201,702)
------------ ----------- -----------
Other comprehensive income (loss) (5,246,796) 494,364 987,947
------------ ----------- -----------
Balance at end of year (3,466,876) 1,779,920 1,285,556
------------ ----------- -----------
Retained earnings:
Balance at beginning of year 47,420,827 41,204,889 35,713,441
Net earnings 7,327,945 7,240,585 6,304,558
Dividends of $.16 per share in 1999,
$.16 in 1998, and $.126 in 1997 (1,015,787) (1,024,647) (813,110)
------------ ----------- -----------
Balance at end of year 53,732,985 47,420,827 41,204,889
------------ ----------- -----------
Unearned compensation - restricted stock:
Balance at beginning of year (317,860) (188,850) --
Shares awarded (353,004) (381,306) --
Compensation expense recorded 308,406 252,296 --
------------ ----------- -----------
Balance at end of year (362,458) (317,860) --
------------ ----------- -----------
Treasury stock:
Balance at beginning of year (2,625,178) (1,132,681) (1,135,671)
Cost of shares purchased (75,000 in 1999 and
89,354 shares in 1998) (1,007,156) (1,581,678) --
Cost of shares issued (43,502 shares in 1999,
50,267 shares in 1998, and 934 shares in 1997) 233,078 89,181 2,990
------------ ----------- -----------
Balance at end of year (3,399,256) (2,625,178) (1,132,681)
------------ ----------- -----------
Total shareholders' equity (note 9) $ 54,787,077 54,490,852 49,396,013
============ =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE> 18
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Net earnings $ 7,327,945 7,240,585 6,304,558
----------- ---------- ----------
Other comprehensive income (loss) before tax:
Unrealized gains (losses) on securities
available for sale (8,998,293) 1,147,437 1,711,496
Reclassification adjustment for realized gains
included in net earnings (474,628) (364,735) (110,699)
----------- ---------- ----------
Total other comprehensive income
(loss) before tax (8,523,665) 782,702 1,600,797
Income tax expense (benefit) related to items
of other comprehensive income (loss) (3,276,869) 288,338 612,850
----------- ---------- ----------
Other comprehensive income (loss),
net of tax (5,246,796) 494,364 987,947
----------- ---------- ----------
Total comprehensive income $ 2,081,149 7,734,949 7,292,505
=========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE> 19
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 7,327,945 7,240,585 6,304,558
Adjustments to reconcile net earnings to net
cash provided from operating activities:
Increase in policy liabilities and accruals 10,182,099 7,851,348 7,370,515
Increase in deferred policy acquisition costs (5,079,456) (5,172,476) (3,254,178)
Change in Federal income taxes 1,820,865 1,845,101 591,122
Decrease (increase) in amounts receivable
and amounts due from reinsurers (1,441,681) 578,902 (1,220,114)
Other, net 549,824 613,080 1,567,988
------------ ----------- -----------
Net cash provided by operating
activities 13,359,596 12,956,540 11,359,891
------------ ----------- -----------
Cash flows from investing activities:
Purchase of fixed maturities held for investment -- -- --
Purchase of fixed maturities available for sale (27,539,338) (31,232,770) (18,827,126)
Purchase of equity securities (3,236,452) -- --
Purchase of other invested assets -- (1,000,000) --
Sale of fixed maturities available for sale 8,059,060 14,950,214 5,508,045
Sale of equity securities 704,605 -- --
Proceeds from maturities of fixed maturities
held for investment 500,000 1,500,000 2,118,719
Proceeds from maturity and redemption of
fixed maturities available for sale 7,751,371 8,090,844 3,765,544
First mortgage loans originated (178,000) -- (312,000)
Principal collected on first mortgage loans 810,971 684,234 866,315
Net increase in policy loans (435,857) (179,649) (938,358)
Other, net (36,186) (185,567) (201,946)
------------ ----------- -----------
Net cash used in investing activities (13,599,826) (7,372,694) (8,020,807)
------------ ----------- -----------
Cash flows from financing activities:
Cash dividends paid (1,015,787) (1,024,647) (813,110)
Purchase of treasury stock (1,007,156) (1,581,678) --
Sale of treasury stock 233,078 99,075 2,766
------------ ----------- -----------
Net cash used in financing activities (1,789,865) (2,507,250) (810,344)
------------ ----------- -----------
Net increase (decrease) in cash and
cash equivalents (2,030,095) 3,076,596 2,528,740
Cash and cash equivalents:
Beginning of year 8,135,629 5,059,033 2,530,293
------------ ----------- -----------
End of year $ 6,105,534 8,135,629 5,059,033
============ =========== ===========
Supplemental disclosures of cash paid during
the year - income taxes $ 1,034,326 1,299,657 1,292,128
============ =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE> 20
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles ("GAAP"), which
vary in certain respects from reporting practices prescribed or permitted
by the Insurance Department of the State of Georgia. The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the reported
amounts of revenues and expenses during the reporting period. Accounts
that the Company deem to be acutely sensitive to changes in estimates
include deferred policy acquisition costs and future policy benefits. In
addition, the Company must determine requirements for disclosure of
contingent assets and liabilities as of the date of the financial
statements based upon estimates. In all instances, actual results could
differ from estimates.
Following is a description of the most significant risks facing insurers
and how the Company mitigates those risks:
CREDIT RISK is the risk that issuers of securities owned by the
Company will default, or other parties, including reinsurers which
owe the Company money, will not pay. The Company attempts to
minimize this risk by adhering to a conservative investment
strategy and by contracting with reinsuring companies that meet
certain rating criteria and other qualifications.
INTEREST RATE RISK is the risk that interest rates will change and
cause a decrease in the value of an insurer's investments. The
Company attempts to mitigate this risk by attempting to match the
maturity schedule of its assets with the expected payout of its
liabilities. To the extent that liabilities come due more quickly
than assets mature, an insurer would have to sell assets prior to
maturity and recognize a gain or loss.
The significant accounting policies are as follows:
CONSOLIDATION POLICY
The consolidated financial statements include the accounts of the
Company, and its wholly owned subsidiaries, CSI Brokerage
Services, Inc. ("CSI") and Cotton States Marketing Resources, Inc.
("CSMR"). All significant intercompany balances and transactions
have been eliminated in consolidation.
RECOGNITION OF PREMIUM INCOME AND MORTALITY AND EXPENSE CHARGES
Premiums on traditional life and accident and health insurance
policies are recognized as income when due. Mortality and expense
charges on universal life policies are recognized as income when
earned.
FUTURE POLICY BENEFITS
Future policy benefits on traditional individual life insurance
policies are computed using a net level premium method based upon
conservative assumptions as to investment yields, withdrawals,
morbidity, and mortality. Future policy benefits on universal life
insurance policies and annuities represent the contract's
accumulated account value.
20
<PAGE> 21
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
DEFERRED POLICY ACQUISITION COSTS
The costs of acquiring most new individual life business are deferred and
amortized with interest over the premium-paying period of the related policies.
For traditional life policies, such amounts are amortized in proportion to the
ratio of the annual premium income to the total anticipated premium income. Such
anticipated premium income is estimated using the same assumptions as used for
computing future policy benefits. For universal life policies, deferrable costs
are amortized in proportion to the ratio of the contract's annual gross profits
to total anticipated gross profits. First-year excess expense charges are also
deferred and accreted to income in the same manner as deferrable costs are
amortized. Total anticipated gross profits are based on assumptions for
investment margins, surrender charges, mortality charges, and level expense
loads. The principal expenses deferred are commissions and certain expenses of
the product development, policy issue, underwriting, and agency departments, all
of which vary with and are primarily related to the production of new business.
Policy acquisition costs deferred were approximately $8,121,000 in 1999,
$6,982,000 in 1998, and $5,526,000 in 1997.
CASH AND CASH EQUIVALENTS
For purposes of presenting its statements of cash flows, the Company considers
all short-term investments to be cash equivalents. Short-term investments have
maturity dates of less than three months.
INVESTMENTS
The Company accounts for investments under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 115, Accounting for Certain
Investments in Debt and Equity Securities.
Fixed maturities held for investment are stated at amortized cost. Fixed
maturities available for sale are stated at fair value. The cost of securities
sold is determined by the identified certificate method. First mortgage loans
are stated at their aggregate unpaid balance. Policy loans are stated at their
aggregate unpaid balance and short-term investments are stated at cost.
Investments deemed to have a loss in value, which is other than temporary, are
written down to their estimated net realizable value. Unrealized gains and
losses on fixed maturities available for sale are excluded from earnings and are
reported within shareholders' equity as a component of accumulated other
comprehensive income, net of deferred taxes and amounts attributable to the
Company's universal life and annuity products.
INCOME TAXES
The Company, CSI and CSMR file a consolidated Federal income tax return.
Deferred taxes are recognized for the tax consequences of "temporary
differences" by applying enacted statutory rates applicable to future years to
differences between the financial statement carrying amounts and the tax bases
of existing assets and liabilities. The effect on deferred taxes of a change in
tax rates is recognized in income in the period that includes the enactment
date.
21
<PAGE> 22
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
EARNINGS PER SHARE
Basic earnings per share are based on the weighted-average number of common
shares outstanding adjusted for the following stock splits effected in the form
of a stock dividend.
January 20, 1998 Three-for-two
April 30, 1997 Five-for-four
The following table summarizes information relating to the calculation of basic
and diluted earnings per share of common stock:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------- ------------------------------ -----------------------------
INCOME SHARES INCOME SHARES INCOME SHARES
(NUMERATOR) (DENOMINATOR) (NUMERATOR) (DENOMINATOR) (NUMERATOR) (DENOMINATOR)
----------- ------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Data for Basic
EPS calculation $ 7,327,945 6,341,393 $ 7,240,585 6,410,345 $ 6,304,558 6,400,145
Effect of dilutive
securities:
Options -- 35,953 -- 70,768 -- 82,023
Restricted stock -- 66,856 -- 81,257 -- 94,068
------------ ------------ ------------ ----------- ------------ -----------
Data for Diluted
EPS calculation $ 7,327,945 6,444,202 $ 7,240,585 6,562,370 $ 6,304,558 6,576,236
============ ============ ============ =========== ============ ===========
</TABLE>
STOCK-BASED COMPENSATION
The Company accounts for its various stock-based compensation in accordance with
the provisions set forth in SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS No. 123 permits entities to recognize as expense over the
vesting period the fair value of all stock-based awards on the date of the
grant, or alternatively continue to apply the provisions of Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations and provide pro forma net income and pro
forma earnings per share disclosures for employee stock-based grants as if the
fair value-based method had been applied as defined in SFAS No. 123. In
accordance with APB Opinion No. 25, compensation expense is recorded on the
grant date only to the extent that the current market price of the underlying
stock exceeds the exercise price on the grant date. The Company has elected to
continue to apply the provisions set forth in APB Opinion No. 25 and follow the
disclosure provisions of SFAS No. 123. See note 8 for further information.
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted the provisions of SFAS No. 130,
Reporting Comprehensive Income. This statement establishes standards for
reporting and displaying comprehensive income and its components in a full set
of general purpose financial statements. SFAS No. 130 requires all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed in
equal prominence with the other financial statements. The term "comprehensive
income" is used in the statement to describe the total of all components of
comprehensive income including net income. "Other comprehensive income" refers
to revenues, expenses, gains, and losses that are included in comprehensive
income but excluded from earnings under current accounting standards, and
consists of items recorded directly in equity under SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities.
22
<PAGE> 23
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
SEGMENT DISCLOSURE
Also effective January 1, 1998, the Company adopted the provisions of SFAS No.
131, Disclosures about Segments of an Enterprise and Related Information. SFAS
No. 131 establishes new standards for the disclosures made by public business
enterprises to report information about operating segments in annual financial
statements and requires those enterprises to report selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. The operating results for the Company's
operating segments are contained in note 11.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. In June 1999, the FASB issued SFAS 137 which
changed the effective date of SFAS 133. As a result, the effective date of SFAS
133 was deferred for financial statements for all fiscal quarters of all fiscal
years beginning after June 15, 2000. The Company does not believe the provisions
of SFAS 133 will have a significant impact on the financial statements upon
adoption.
In December 1997, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants ("AICPA") issued Statement of Position
("SOP") 97-3, Accounting by Insurance and Other Enterprises of Insurance Related
Assessments SOP 97-3 is effective for all fiscal years beginning after December
15, 1998. The Company has adopted SOP 97-3, effective January 1, 1999 and there
was no impact on the Company's financial statements.
In March 1998, the AICPA Accounting Standards Executive Committee issued on SOP
98-1, Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use. SOP 98-1 is effective for all fiscal years beginning after
December 15, 1998. The Company has adopted SOP 98-1, effective January 1, 1999
and there was no impact on the Company's financial statements.
23
<PAGE> 24
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
(2) INVESTMENTS
The amortized cost and estimated market values of investments in debt
and equity securities as of December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999
---------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ---------- ---------- -----------
<S> <C> <C> <C> <C>
Held for investment:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 1,498,783 4,502 -- 1,503,285
Debt securities issued by
foreign governments 1,994,887 20,793 -- 2,015,680
Corporate securities 12,583,207 62,364 188,767 12,456,804
------------ ------- --------- -----------
Total $ 16,076,877 87,659 188,767 15,975,769
============ ======= ========= ===========
Available for sale:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 5,156,859 2,512 156,538 5,002,833
Corporate securities 86,908,334 64,094 6,161,734 80,810,694
Mortgage-backed securities 17,235,051 41,206 317,650 16,958,607
------------ ------- --------- -----------
Total $109,300,244 107,812 6,635,922 102,772,134
============ ======= ========= ===========
Equity securities $ 2,531,851 225,248 133,885 2,623,214
============ ======= ========= ===========
</TABLE>
<TABLE>
<CAPTION>
1998
---------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ---------- ---------- ------------
<S> <C> <C> <C> <C>
Held for investment:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 1,497,876 56,964 -- 1,554,840
Debt securities issued by
foreign governments 1,992,730 145,480 -- 2,138,210
Corporate securities 13,099,422 642,583 -- 13,742,005
----------- --------- ------- -----------
Total $16,590,028 845,027 -- 17,435,055
=========== ========= ======= ===========
Available for sale:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 4,247,714 72,156 32,957 4,286,913
Corporate securities 69,029,504 2,578,746 74,686 71,533,564
Mortgage-backed securities 24,375,455 657,844 -- 25,033,299
----------- --------- ------- -----------
Total $97,652,673 3,308,746 107,643 100,853,776
=========== ========= ======= ===========
</TABLE>
24
<PAGE> 25
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
The amortized cost and estimated fair value of debt securities at December 31,
1999, by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
------------ -----------
<S> <C> <C>
Held for investment:
Due in one year or less $ 880,019 881,124
Due after one year through five years 15,196,858 15,094,645
------------ -----------
Total $ 16,076,877 15,975,769
============ ===========
Available for sale:
Due in one year or less $ 3,502,362 3,497,308
Due after one year through five years 26,158,410 24,764,525
Due after five years through 10 years 34,069,543 32,149,377
Due after 10 years 28,334,878 25,402,317
Mortgage-backed securities 17,235,051 16,958,607
------------ -----------
Total $109,300,244 102,772,134
============ ===========
</TABLE>
Bonds with amortized cost of approximately $1,804,000 at December 31, 1999 were
on deposit with state regulatory authorities in accordance with statutory
requirements.
Realized and unrealized gains and losses on investments for the years ended
December 31, were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ---------- ----------
<S> <C> <C> <C>
Realized gains (losses) on sales and
redemptions of investments:
Fixed maturities held for investment:
Gross gains $ -- -- (18,719)
Gross losses -- -- --
------------ ---------- ----------
Net realized gains -- -- (18,719)
------------ ---------- ----------
Fixed maturities available for sale:
Gross gains 263,967 388,844 129,418
Gross losses (822) (24,109) --
------------ ---------- ----------
Net realized gains 263,145 364,735 129,418
------------ ---------- ----------
Equity securities:
Gross gains 244,159 -- --
Gross losses (32,676) -- --
------------ ---------- ----------
Net realized gains 211,483 -- --
------------ ---------- ----------
Total 474,628 364,735 110,699
------------ ---------- ----------
Changes in unrealized gains (losses):
Fixed maturities held for investment (946,135) 340,823 352,948
Fixed maturities available for sale (9,729,213) 848,053 1,802,499
Equity securities 91,363 -- --
------------ ---------- ----------
Net unrealized gains (losses) (10,583,985) 1,188,876 2,155,447
------------ ---------- ----------
Total realized and unrealized
gains (losses) $(10,109,357) 1,553,611 2,266,146
============ ========== ==========
</TABLE>
25
<PAGE> 26
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
Details of net investment income are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- --------- ---------
<S> <C> <C> <C>
Investment income:
Fixed maturities held for investment $1,104,486 1,181,695 1,244,735
Fixed maturities available for sale 7,241,794 6,619,801 5,917,054
First mortgage loans 259,558 333,870 395,235
Policy loans 600,219 576,800 527,493
Short-term investments 291,464 355,820 285,267
---------- --------- ---------
Total investment income 9,497,521 9,067,986 8,369,784
Less investment expenses 245,151 280,938 313,384
---------- --------- ---------
Net investment income $9,252,370 8,787,048 8,056,400
========== ========= =========
</TABLE>
(3) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable
to estimate that value:
CASH AND SHORT-TERM INVESTMENTS
The carrying amount of cash and short-term investments is a reasonable
estimate of fair value.
INVESTMENT SECURITIES
For investment securities (which include fixed maturities held for
investment, fixed maturities available for sale, and equity
securities), fair values are based on quoted market prices or dealer
quotes. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities.
MORTGAGE LOANS
The fair value of mortgage loans is estimated using the quoted market
prices for securities backed by similar loans, adjusted for differences
in loan characteristics.
POLICY LOANS
The carrying amount of policy loans is a reasonable estimate of fair
value.
UNIVERSAL LIFE AND ANNUITY BENEFITS
The carrying amount of universal life and annuity benefits is a
reasonable estimate of fair value since credited interest approximates
current market rates.
26
<PAGE> 27
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
The estimated fair values and carrying value of the Company's financial
instruments at December 31, 1999 and 1998 are the same except for
investment securities which are detailed in footnote 2 and mortgage
loans as follows:
<TABLE>
<CAPTION>
MORTGAGE LOANS
-----------------------------------
CARRYING FAIR
AMOUNT VALUE
-------------- ----------------
<S> <C> <C>
1999 $ 2,898,757 2,909,318
1998 $ 3,531,728 3,660,532
</TABLE>
(4) FUTURE POLICY BENEFITS AND REINSURANCE
The composition of future policy benefits, and the significant
assumptions used in their development, are as follows:
<TABLE>
<CAPTION>
FUTURE POLICY ASSUMPTIONS
BENEFITS -----------------------------------------------------------------
------------------ YEARS
LINE OF BUSINESS 1999 1998 OF ISSUE INTEREST RATES MORTALITY WITHDRAWALS
- ---------------- ---- ---- -------- -------------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Life:
Individual $ 3,932 4,076 l956-65 4% l955-60 Basic Table Company
Select and Ultimate experience
Individual 8,353 8,617 l966-79 6.5% - 5%(A) Same as above Same as above
Individual 5,447 5,553 l980-88 7.5% - 6%(A) l965-70 Basic Table Same as above
Select and Ultimate
Individual 14,845 10,977 1989-99 7.5% - 6%(A) 1975-80 Basic Table Same as above
Select and Ultimate
Individual 4,392 4,059 Various 3.5% - 2.5% Statutory -
Annuities and Accumulated -
universal life 85,599 79,097 Various 6.25% - 4.5% account value
Group 5 5 Various - Unearned premiums -
-------- ---------
122,573 112,384
Accident and health -
individual 33 40 Various 3% - -
-------- ---------
Total future
policy
benefits $122,606 112,424
======== ==========
</TABLE>
(A) Interest rates are graded to the ultimate rate in 25 years.
27
<PAGE> 28
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
The Company participates in certain business assumed from federally sponsored
group pools. Further, it is the Company's general policy to reinsure individual
life insurance in excess of $100,000, group life insurance in excess of $55,000,
major medical payments in excess of $75,000 annually per individual, accidental
deaths, and certain disability income coverage.
Amounts ceded under reinsurance agreements become liabilities of the Company
should the reinsurers be unable to meet their obligations under the reinsurance
agreements.
The effect of reinsurance assumed and ceded on certain financial statement
accounts is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ----------- ----------
<S> <C> <C> <C>
Premium income:
Direct premiums $ 13,412,582 10,931,789 8,816,115
Reinsurance assumed 667,688 672,153 666,034
Reinsurance ceded (1,582,832) (1,430,944) (1,292,779)
------------ ----------- ----------
Net premium income $ 12,497,438 10,172,998 8,189,370
============ =========== ==========
Mortality and expense charges ceded $ 2,336,875 2,119,851 1,818,826
============ =========== ==========
Benefits and claims:
Reinsurance assumed $ 660,555 662,918 641,005
============ =========== ==========
Reinsurance ceded $ 4,381,820 2,966,909 4,149,310
============ =========== ==========
</TABLE>
(5) INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying values of assets and liabilities for
financial reporting purposes and Federal income tax purposes. The net
deferred tax liability at December 31, 1999 and 1998 is composed of the
tax-effected temporary differences related to the following amounts:
<TABLE>
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C>
Deferred tax assets:
Fixed maturities available for sale $ 2,219,557 --
Deferred policy acquisition costs - tax 1,721,466 1,477,786
Life insurance reserves 5,145,152 4,802,693
Unearned mortality and expense charges 854,378 832,676
Postretirement health benefits liability 95,673 102,741
Deferred compensation 191,332 206,511
Other, net 205,445 111,386
----------- ----------
Total deferred tax assets 10,433,003 7,533,793
----------- ----------
Deferred tax liabilities:
Fixed maturities available for sale -- 1,088,375
Equity securities 31,064 --
Deferred policy acquisition costs - financial
statements 13,723,205 11,973,712
Due and unpaid premiums 80,717 67,221
Other, net 33,395 26,169
----------- ----------
Total deferred tax liabilities 13,868,381 13,155,477
----------- ----------
Net deferred tax liability $ 3,435,378 5,621,684
=========== ==========
</TABLE>
28
<PAGE> 29
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
SFAS No. 109, Accounting for Income Taxes specifically identifies
certain temporary differences for which deferred tax liabilities are
not recognized unless it becomes apparent that those temporary
differences will reverse in the foreseeable future. The Company has not
recorded a deferred tax liability for one such item entitled
"policyholders' surplus" created by Federal income tax regulations in
effect prior to 1984. Certain untaxed income accumulated in this
special memorandum tax account will become taxable if distributions,
other than stock dividends, are made in excess of certain amounts
accumulated in another special memorandum tax account entitled
"shareholders' surplus." The balance in the "policyholders' surplus"
account at December 31, 1999 was $4,203,000.
The balance in the "shareholders' surplus" account at December 31, 1999
was $41,602,000. The Company does not anticipate any of the
"policyholders' surplus" account becoming taxable in the foreseeable
future.
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. Management considers
the scheduled reversal of deferred tax liabilities, projected future
taxable income, and tax planning strategies in making this assessment.
Federal income tax expense is less than amounts determined by
multiplying earnings before Federal income taxes by the Federal tax
rate of 35%. The reason for such difference and the tax effect of each
are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Federal income tax expense at
statutory rate $ 3,564,167 3,634,870 2,966,983
Special deductions available to small
life insurance companies (572,553) (584,724) (565,318)
Net gains of subsidiaries not currently
includable -- -- (70,068)
Change in valuation allowance -- -- (81,000)
Surtax exemption (87,946) (92,581) (66,617)
Other, net (48,278) 187,193 (11,444)
----------- ---------- ----------
Total Federal income taxes $ 2,855,390 3,144,758 2,172,536
=========== ========== ==========
</TABLE>
(6) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company has a plan which provides for postretirement health care and
life insurance benefits for certain employees. These benefits include
major medical insurance with deductible and coinsurance provisions. The
Company accrues benefits on a current basis and the plan is not funded.
The components of the net periodic postretirement benefit cost for the
years ended December 31 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Service cost $ 394 439 351
Interest cost 12,541 13,808 13,631
Amortization of unrecognized gain (12,609) (9,425) (6,741)
-------- ------- -------
Net periodic postretirement benefit cost $ 326 4,822 7,241
======== ======= =======
</TABLE>
29
<PAGE> 30
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
The following tables set forth the plan's funded status, reconciles the
amounts shown in the Company's balance sheet, and reconciles the
accumulated postretirement benefit obligation at December 31, 1999 and
1998:
<TABLE>
<CAPTION>
1999 1998
--------- --------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $ 126,767 151,617
Other active participants 9,538 10,800
--------- --------
Accumulated postretirement benefit
obligation in excess of plan assets 136,305 162,417
Unrecognized net gain 145,087 139,761
--------- --------
Accrued postretirement benefit liability $ 281,392 302,178
========= ========
Accumulated postretirement benefit liability
at beginning of year $ 302,178 311,056
Net periodic cost 326 4,822
Amounts paid by Company (21,112) (13,700)
--------- --------
Accumulated postretirement benefit liability
at end of year $ 281,392 302,178
========= ========
Accumulated postretirement benefit obligation
at beginning of year $ 162,417 197,100
Service cost 394 439
Interest cost 12,541 13,808
Amounts paid by Company (21,112) (13,700)
Actuarial (gain) (17,935) (35,230)
--------- --------
Accumulated postretirement benefit obligation
at end of year $ 136,305 162,417
========= ========
</TABLE>
The postretirement benefit obligation was determined by application of
the terms of the plan using relevant actuarial assumptions. Health care
costs are projected to increase at annual rates ranging from 0% in 1999
up to 5% in 2006 and thereafter. A 1% annual increase in these assumed
cost trend rates would increase the accumulated postretirement benefit
obligation at December 31, 1999 by approximately $9,691 and the service
and interest cost components of the net periodic postretirement benefit
cost for 1999 by approximately $892. A 1% annual decrease in these
assumed cost trends would decrease the accumulated postretirement
benefit obligation at December 31, 1999 by approximately $8,724 and the
service and interest components of the net periodic postretirement
benefit cost by $803. The assumed discount rate used in determining the
accumulated postretirement obligation was 7.75% at December 31, 1999
and 6.75% at December 31, 1998.
(7) TRANSACTIONS WITH AFFILIATES
Cotton States Mutual Insurance Company ("Mutual"), through its wholly
owned subsidiary, Shield Insurance Company ("Shield"), controls
approximately 33% of the Company's outstanding common stock. Most
officers and directors of the Company hold similar positions with
Mutual.
30
<PAGE> 31
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
Certain general expenses are allocated to the Company by Mutual. These
expenses, such as salaries, advertising, rents, etc., represent the
Company's share of expenses initially paid by Mutual and are allocated
based on specific identification or, if undeterminable, generally on
the basis of each company's premium income. Expenditures allocated to
the Company amounted to $2,957,431 in 1999, $2,779,136 in 1998, and
$2,467,408 in 1997. At December 31, 1999 and 1998, the Company owed
Mutual $507,187 and $823,293, respectively.
The Company expensed pension costs and 401(k) matching costs of
$63,354, $36,148, $(6,517) and $36,451, $42,805, and $39,287 in 1999,
1998, and 1997 respectively.
Included in other assets are deferred software costs relating to
various system development projects of the Company and Mutual that were
amortized over five years, and were fully amortized as of December 31,
1996. Rent, for use of the software, of approximately $106,000 in 1999,
1998 and 1997 has been charged to Mutual and Shield.
(8) STOCK-BASED COMPENSATION
The Company has various stock option plans for the Company's officers
and key employees, as well as directors. Under the employee plan,
options may be granted to purchase up to 937,500 shares of the
Company's common stock at a per share price of not less than 100% of
fair market value at date of grant. Under the directors' plan, options
are granted based on the level of directors' fees at a per share price
of 50% of fair market value at date of grant. The employee and
directors' options have a term of 10 years and are not subject to any
vesting requirements. The weighted-average remaining contractual life
on options outstanding at December 31, 1999 is four years. The
weighted-average grant date fair value of options granted during 1999
and 1998 was $16.19 and $15.81, respectively. A summary of options
follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------- ------------------------ -------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE OPTION
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE PRICE
------- --------- ------- --------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Shares under option 91,544 $ 3.82 107,673 $ 3.32 128,124 $ 2.93 $1.92-7.63
Options exercisable 91,544 3.82 107,673 3.32 128,124 2.93 1.92-7.63
Options granted 8,736 7.44 8,949 7.63 13,991 3.80 1.92-7.63
Options exercised 24,865 2.96 29,400 2.96 934 2.96 2.96
====== ======= ======= ==========
</TABLE>
In addition to the stock options described above, the Company has
awarded nontransferable, restricted shares of Company common stock to
various key executives under key executive restricted stock bonus
plans. The market value of the common stock at the date of issuance is
recorded as compensation expense using the straight-line method over
the vesting period of the awards. The Company awarded 24,460, 22,857,
and 23,015 shares of restricted stock under such plans during 1999,
1998, and 1997, respectively. The weighted-average grant date fair
value of such shares was $11.41, $15.53, and $7.43, respectively.
Aggregate compensation expense with respect to the foregoing restricted
stock awards was approximately $308,000, $252,000, and $151,000, in
1999, 1998, and, 1997, respectively.
In accordance with APB Opinion No. 25, approximately $373,000,
$320,000, and $204,000, in compensation expense has been recorded in
1999, 1998, and 1997, respectively, for the various stock option and
restricted stock awards granted in 1999, 1998, and 1997. Had the
Company determined compensation cost based on the fair value at the
grant date for its stock options and restricted stock awards under SFAS
No. 123, the Company's net earnings, basic net earnings per share, and
diluted net earnings per share would have been reduced to the pro forma
amounts indicated below:
31
<PAGE> 32
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1999 1998 1997
----------- --------- ---------
<S> <C> <C> <C>
Net income:
As reported $ 7,327,945 7,240,585 6,304,558
Pro forma 7,272,938 7,215,424 6,258,403
Basic net earnings per share:
As reported 1.16 1.13 .99
Pro forma 1.15 1.13 .98
Diluted net earnings per share:
As reported 1.14 1.10 .96
Pro forma 1.13 1.10 .95
</TABLE>
The per share weighted-average fair value of stock options and
restricted stock granted was estimated using an option pricing model
with the following weighted-average assumptions: expected life of five
years for options and three years for restricted stock for all years,
expected dividend yield of 1.35% for 1999 grants and 1.0% for all other
years, risk-free interest rate of 5.5% for 1999, 1998, and 1997, and an
expected volatility of 52% for 1999 grants, 67% for 1998 grants, and
52% for 1997 grants.
(9) STATUTORY FINANCIAL STATEMENTS
Accounting practices used to prepare statutory financial statements for
regulatory filings of stock life insurance companies differ from GAAP.
Material differences resulting from these accounting practices include:
deferred policy acquisition costs, deferred Federal income taxes and
statutory non-admitted assets are recognized under GAAP accounting;
statutory investment valuation reserves are not recognized under GAAP
accounting; premiums for universal life and investment-type products
are recognized as revenues for statutory purposes and as deposits to
policyholders' accounts under GAAP; different assumptions are used in
calculating future policyholders' benefits; and different methods are
used for calculating valuation allowances for statutory and GAAP
purposes.
Net earnings and shareholders' equity, as reported to regulatory
authorities in conformity with statutory accounting practices for each
of the years in the three-year period ended December 31, 1999 is as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ----------- ----------
<S> <C> <C> <C>
Statutory net earnings $ 2,686,569 3,071,087 2,488,573
Statutory shareholders' equity $ 28,607,689 27,736,410 27,393,213
</TABLE>
The Georgia Insurance Code limits dividends in any one year to the
greater of statutory earnings, excluding realized capital gains, or 10%
of statutory surplus, unless the expressed permission of the Georgia
Insurance Department is obtained. Dividend payments to shareholders are
further limited by the Georgia Insurance Code to unassigned statutory
surplus, which at December 31, 1999 was approximately $24,000,000. The
excess of retained earnings determined in accordance with GAAP over
unassigned statutory surplus is not available for payment of dividends.
The Company may pay a dividend amounting to approximately $2,700,000 in
2000 without approval.
32
<PAGE> 33
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
(10) LITIGATION
The Company is a defendant in various actions incidental to the conduct
of its business. While the ultimate outcome of these matters cannot be
estimated with certainty, management does not believe the actions will
result in any material loss to the Company.
33
<PAGE> 34
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
(11) BUSINESS SEGMENTS
The Company's operations can be grouped into three major segments: (i)
individual life insurance, (ii) guaranteed issue and simplified issue
life insurance, and (iii) brokerage operations. These segments are
differentiated primarily by their respective methods of distribution
and the nature of related products, as the Company's operations in each
segment are concentrated within its southeastern states geographic
market. Individual life insurance products are distributed through the
Company's multi-line exclusive agents, guaranteed issue and simplified
issue products are distributed through independent agents as well as
exclusive agents, and brokerage operations involve third party products
distributed through the Company's exclusive and independent agents.
<TABLE>
<CAPTION>
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
Individual life insurance:
Premiums $ 5,848,804 5,572,243 5,426,473
Mortality and expense charges 10,804,659 9,762,356 9,430,814
Net investment income 8,837,008 8,461,988 7,860,143
Realized investment gains 254,052 358,000 109,881
------------ ----------- -----------
Total revenue 25,744,523 24,154,587 22,827,311
Policyholder benefits 12,173,031 10,429,767 9,964,268
Operating expenses 7,525,275 6,292,769 7,063,553
------------ ----------- -----------
Total benefits and expenses 19,698,306 16,722,536 17,027,821
------------ ----------- -----------
Operating profit 6,046,217 7,432,051 5,799,490
------------ ----------- -----------
Guaranteed and simplified life insurance:
Premiums 5,843,177 3,794,585 1,922,379
Net investment income 316,301 159,182 58,524
Realized investment gains 9,093 6,735 818
------------ ----------- -----------
Total revenue 6,168,571 3,960,502 1,981,721
Policyholder benefits 3,358,022 2,317,006 1,107,883
Operating expenses 1,616,158 890,787 388,653
------------ ----------- -----------
Total benefits and expenses 4,974,180 3,207,793 1,496,536
------------ ----------- -----------
Operating profit 1,194,391 752,709 485,185
------------ ----------- -----------
Brokerage:
Brokerage income 3,828,087 3,214,216 3,141,695
Net investment income 99,061 62,698 48,661
Realized investment gains 211,483 103,180 89,072
------------ ----------- -----------
Total revenue 4,138,631 3,380,094 3,279,428
Operating expenses 1,086,777 1,006,605 1,047,407
------------ ----------- -----------
Operating profit 3,051,854 2,373,489 2,232,021
------------ ----------- -----------
Combined operating profit 10,292,462 10,558,249 8,516,696
Group life insurance and individual
accident and health results (109,127) (172,906) (39,602)
------------ ----------- -----------
Earnings before Federal income taxes $ 10,183,335 10,385,343 8,477,094
============ =========== ===========
</TABLE>
34
<PAGE> 35
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND SHAREHOLDERS
COTTON STATES LIFE INSURANCE COMPANY:
We have audited the accompanying consolidated balance sheets of Cotton
States Life Insurance Company and subsidiaries (the "Company") as of
December 31, 1999 and 1998, and the related consolidated statements of
earnings, shareholders' equity, comprehensive income, and cash flows for
each of the years in the three-year period ended December 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Cotton
States Life Insurance Company and subsidiaries at December 31, 1999 and
1998, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 1999, in conformity
with generally accepted accounting principles.
/s/KPMG LLP
KPMG LLP
Atlanta, Georgia
February 22, 2000
35
<PAGE> 36
MANAGEMENT'S REPORT TO SHAREHOLDERS OF COTTON STATES LIFE INSURANCE COMPANY AND
SUBSIDIARIES
The accompanying consolidated financial statements for Cotton States Life
Insurance Company and subsidiaries (the "Company") were prepared by management,
which is responsible for the objectivity and integrity of these statements. The
consolidated financial statements have been prepared in conformity with
generally accepted accounting principles and, where appropriate, are based on
management's best estimates and judgements. Other financial data about the
Company contained in this annual report is consistent with that presented in the
consolidated financial statements.
The Company's consolidated financial statements have been audited by independent
auditors, KPMG LLP. Their role is to audit the consolidated financial statements
in accordance with generally accepted auditing standards and render an
independent and professional opinion on management's consolidated financial
statements. The auditors' report on the Company's consolidated financial
statements appears on the previous page.
The Board of Directors, through its audit committee composed of outside
directors, monitors management's financial reporting. The independent auditors
have direct access to the audit committee and meet with the committee
periodically to discuss the scope of each audit, the results of the audit and
other matters which they believe should be brought to the committee's attention.
J. Ridley Howard William J. Barlow, CPA
Chairman of the Board, Vice President and Controller
President and Chief
Executive Officer
36
<PAGE> 37
QUARTERLY RESULTS
The following is a summary of the unaudited quarterly results of operations for
the three years ended December 31, 1999.
<TABLE>
<CAPTION>
1999 quarter ended March 31 June 30 September 30 December 31
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premium income $2,727,101 2,947,335 3,059,654 3,763,348
Mortality and expense charges $2,629,226 2,685,147 2,753,853 2,736,433
Net investment income, realized
investment gains and brokerage income $3,289,533 3,078,423 3,460,705 3,726,424
---------- --------- --------- ----------
Total revenue $8,645,860 8,710,905 9,274,212 10,226,205
---------- --------- --------- ----------
Benefits and expenses $6,829,999 6,316,498 6,555,077 6,972,273
---------- --------- --------- ----------
Net earnings $1,207,422 1,681,506 2,103,386 2,335,631
========== ========= ========= ==========
- ----------------------------------------------------------------------------------------------------
Basic earnings per share of common stock $ .19 .26 .33 .37
Diluted earnings per share of common stock $ .19 .26 .32 .36
- ----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1998 quarter ended March 31 June 30 September 30 December 31
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premium income $2,167,228 2,349,560 2,495,269 3,160,941
Mortality and expense charges $2,464,809 2,522,743 2,670,654 2,104,150
Net investment income, realized
investment gains and brokerage income $2,909,654 2,969,254 3,213,171 3,273,920
---------- --------- --------- ---------
Total revenue $7,541,691 7,841,557 8,379,094 8,539,011
---------- --------- --------- ---------
Benefits and expenses $5,305,058 5,655,469 5,635,458 5,320,025
---------- --------- --------- ---------
Net earnings $1,556,251 1,572,097 2,023,381 2,088,856
========== ========= ========= =========
- ----------------------------------------------------------------------------------------------------
Basic earnings per share of common stock $ .25 .25 .31 .33
Diluted earnings per share of common stock $ .24 .24 .30 .32
- ----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1997 quarter ended March 31 June 30 September 30 December 31
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premium income $1,778,758 1,780,168 1,969,344 2,661,100
Mortality and expense charges $2,317,145 2,308,049 2,481,680 2,323,940
Net investment income, realized
investment gains and brokerage income $2,321,194 2,785,897 2,580,460 3,621,243
---------- --------- --------- ---------
Total revenue $6,417,097 6,874,114 7,031,484 8,606,283
---------- --------- --------- ---------
Benefits and expenses $4,606,463 4,774,836 5,008,764 6,061,821
---------- --------- --------- ---------
Net earnings $1,431,300 1,552,380 1,627,901 1,692,977
========== ========= ========= =========
- ----------------------------------------------------------------------------------------------------
Basic earnings per share of common stock $ .22 .24 .26 .27
Diluted earnings per share of common stock $ .22 .23 .25 .26
- ----------------------------------------------------------------------------------------------------
</TABLE>
Note - Failure of individual quarterly earnings per share to total annual
earnings per share results from the computation of weighted average number of
shares on an individual quarterly basis. Earnings per share amounts have been
adjusted for the April 1997 and January 1998 five-for four stock and
three-for-two stock splits, respectively.
The fourth quarter results for the three years include participation in
federally sponsored group pools as follows:
<TABLE>
<CAPTION>
1999 1998 1997
- -----------------------------------------------------------
<S> <C> <C> <C>
Premiums $667,616 672,153 666,034
Benefits $660,555 662,918 641,005
- -----------------------------------------------------------
</TABLE>
See previous discussion on Results of Operations.
37
<PAGE> 38
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
NONE.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
IDENTIFICATION OF DIRECTORS
The By-laws of the Company provide that the Board of Directors shall be divided
into three classes with approximately one-third of the Board of Directors
elected each year. Each director is elected to hold office for a term of three
years or until his or her successor has been duly elected and has qualified or
until he or she attains the age of 72.
TERMS EXPIRING 2000 ANNUAL MEETING - NOMINATED FOR RE-ELECTION
ROBERT C. McMAHAN
Director Since 1987
Age 59
Since 1994, Mr. McMahan has been President and Chief Executive Officer of Golden
Point Group, Inc. Mr. McMahan was President and CEO of Fernbank, Inc., d/b/a
Fernbank Museum of Natural History through November, 1994. Mr. McMahan was Vice
Chairman of First Union National Bank of Georgia through September 1993. Mr.
McMahan was Chairman, Chief Executive Officer and a director of DF Southeastern
Inc., prior to January 15, 1993 and of Decatur Federal Savings & Loan
Association prior to March 1, 1993, and was President of each entity prior to
April, 1989. Mr. McMahan is Chairman of the Compensation Committee and serves as
a member of the Executive Committee of the Board of Directors of the Company.
Mr. McMahan also is a member of the Board of Directors of Mutual, CSMR, First
Union National Bank of Georgia, First Southern Bank, Nova Financial Corporation,
Legacy Homes, Inc., and Golden Point Group, Inc., and Integration Solutions
Group, LLC.
THOMAS A. HARRIS
Director Since 1995
Age 51
Since 1987, Mr. Harris has been the President and Chief Executive Officer of
Merchant Capital Investments, Inc., a Montgomery, Alabama investment and
merchant banking firm. Mr. Harris is Chairman of the Investment Committee and a
member of the Executive Committee and the Audit Committee of the Board of
Directors of the Company. Mr. Harris also serves on the Board of Directors of
Mutual, Corral Southeast, Eufaula Bancorp and is Chairman of Southern Bank of
Commerce in Montgomery, Alabama.
38
<PAGE> 39
TERMS EXPIRING 2001 ANNUAL MEETING
J. RIDLEY HOWARD
Director Since 1989
Age 52
Since 1998, Mr. Howard has been the Chairman of the Board of Directors of the
Company, Mutual, CSI, CSMR and Shield. He has served as President and Chief
Executive Officer since 1989. Mr. Howard held various other offices with the
Company and its affiliates prior to January 1, 1989. Mr. Howard is a member of
the Executive Committee of the Board of Directors of the Company.
CAROL D. CHERRY
Director Since 1996
Age 52
Since 1976, Ms. Cherry has been Chairman of the Board of Directors of Shop'n
Chek, Inc., an international marketing service company providing clients with
information relative to the verbal and physical presentation of their products
and/or services at the retail level. From 1976 to 1998, Ms. Cherry was also the
President of Shop'n Chek, Inc. Ms. Cherry also is a member of the Compensation
Committee and the Investment Committee of the Board of Directors of the Company.
Ms. Cherry also is a member of the Board of Directors of Mutual, CSI, and Cherry
Convention Services, Inc.
F. ABIT MASSEY
Director Since 1965
Age 72
Since 1988, Mr. Massey has been Chairman of the Board of Directors of
Gainesville Bank and Trust. Since 1960, Mr. Massey has been Executive Director
of Georgia Poultry Federation, Inc., a trade association working to improve the
competitive position of the Georgia poultry industry. Mr. Massey is also
Chairman of the Board of Directors of GB&T Bancshares, Inc. Mr. Massey retired
as a member of the Board of Directors of the Company and Mutual on December 1,
1999 having reached mandatory retirement age. Until his retirement, Mr. Massey
was a member of the Audit Committee and the Investment Committee of the Board of
Directors of the Company.
39
<PAGE> 40
TERMS EXPIRING 2002 ANNUAL MEETING
GAYLORD O. COAN
Director Since 1995
Age 64
Since 1995, Mr. Coan has been Chief Executive Officer of Gold Kist, where he
also serves as the Chairman of the Management Executive Committee. Mr. Coan is
Chairman of the Executive Committee and serves as a member of the Audit
Committee and the Compensation Committee of the Board of Directors of the
Company. Mr. Coan also is a member the Board of Directors of Mutual, SunTrust
Banks of Georgia, Inc., SunTrust Bank, Atlanta, and Archer-Daniels-Midland
Company.
E. JENNER WOOD, III
Director Since 1991
Age 48
Since 1993, Mr. Wood has been Executive Vice President, Trust and Investment
Services, of SunTrust Banks, Inc. Mr. Wood was the Executive Vice President,
Trust and Investment Management, of SunTrust Bank, Atlanta prior to October,
1993. Mr. Wood is Chairman of the Audit Committee and serves as a member of the
Executive Committee of the Board of Directors of the Company. Mr. Wood also is a
member of the Board of Directors of Mutual, CSI, Oxford Industries and Crawford
& Company.
MATHEWS D. SWIFT
Director Since 1997
Age 52
Since 1997, Mr. Swift has been the President and Chief Operating Officer of W.
C. Bradley Co., Real Estate Division and President of Developers-Investors,
Inc., a subsidiary of W. C. Bradley Co. From 1986 to 1997, Mr. Swift was the
Vice President and General Manager of W. C. Bradley Co., Real Estate Division.
Mr. Swift serves as a member of the Audit Committee and the Investment Committee
of the Board of Directors. Mr. Swift also is a member of the Board of Directors
of Mutual, CSMR, Swift-Illges Foundation, Northstar Industries, Inc., and serves
as a director of the Advisory Board of Columbus Bank & Trust Company, an
affiliate of Synovus Financial Corporation.
There are no family relationships among the directors or between any director
and any executive officer of the Company. All directors have served continuously
since their first election or appointment.
40
<PAGE> 41
OTHER INFORMATION ABOUT THE BOARD AND ITS COMMITTEES
During 1999, the Board of Directors held four meetings. Each Director
attended at least 75% of the aggregate meetings of the Board of Directors and
meetings of committees of which he or she was a member. The Board of Directors
has four standing committees. Certain information regarding the function of the
Board's committees, and the number of meetings held by each committee during
1999 is presented below.
AUDIT COMMITTEE
The Audit Committee annually reviews and recommends to the Board of
Directors the firm to be engaged as independent auditors of the Company for the
next calendar year, reviews the plan and results of the audit engagement with
the independent auditors, inquires as to the adequacy of the Company's internal
accounting controls, and considers each professional service provided by the
independent auditors and whether the providing of each service impairs the
independence of the auditors. During 1999, the Audit Committee held three
meetings.
COMPENSATION COMMITTEE
The Compensation Committee periodically reviews the compensation and
other benefits provided to officers of the Company and advises the Board of
Directors with respect to compensation for the officers of the Company. During
1999, the Compensation Committee held two meetings.
INVESTMENT COMMITTEE
The Investment Committee reviews the Company's investments and advises
the Board of Directors with respect to such investments. During 1999, the
Investment Committee held four meetings.
EXECUTIVE COMMITTEE
The Executive Committee is authorized to act on behalf of the Board of
Directors on all matters that may arise between regular meetings of the Board of
Directors upon which the Board of Directors would be authorized to act,
including the nomination of directors. During 1999, the Executive Committee held
five meetings.
IDENTIFICATION OF EXECUTIVE OFFICERS
The executive officers of the Company, their respective ages and all
positions and offices with the Company held by each are as follows:
<TABLE>
<CAPTION>
YEAR ELECTED
NAME AGE AS AN OFFICER POSITION OR OFFICE
---- --- ------------- ------------------
<S> <C> <C> <C>
J. Ridley Howard 52 1984 Chairman of the Board/President
and Chief Executive Officer
Robert L. Fincher 57 1979 Senior Vice President
Gary W. Meader 53 1976 Employee
</TABLE>
Each of the foregoing executive officers has been an officer with the
Company or its affiliates, Mutual and Shield, during the previous five years.
41
<PAGE> 42
Officers are elected at the meeting of the Board of Directors following
the Annual Meeting of Shareholders to serve for one year or until their
successors are elected.
Gary W. Meader was Chief Financial Officer and was an officer with the
Company or its parents, Mutual and Shield, during the previous five years. Mr.
Meader's service as Chief Financial Officer for the Company ended on August 13,
1999. Mr. Meader now serves in a consulting capacity for the Company.
ITEM 11. EXECUTIVE AND OTHER HIGHLY COMPENSATED EMPLOYEES
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
ANNUAL COMPENSATION(1)
NAME AND RESTRICTED ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS STOCK AWARDS(2) COMPENSATION(3)
- ------------------ ---- ------ ----- --------------- ---------------
<S> <C> <C> <C> <C> <C>
J. Ridley Howard, CEO 1999 $ 42,370 $ 83,723 $ 203,015 $ 558
1998 $ 32,400 $115,255 $ 205,145 $ 513
1997 $ 33,000 $ 75,150 $ 88,092 $ 564
Robert L. Fincher,
Senior Vice President 1999 $ 24,697 $ 40,612 $ 50,875 $ 558
1998 $ 18,630 $ 57,405 $ 60,108 $ 513
1997 $ 18,700 $ 32,630 $ 33,534 $ 564
Gary W. Meader, 1999 $ 22,858 $ 34,364 $ 49,459 $ 558
Employee 1998 $ 17,640 $ 36,490 $ 55,614 $ 513
1997 $ 18,830 $ 32,630 $ 32,241 $ 564
Norma Y. Christopher, 1999 $117,500 $ 18,744 $ 10,895 $5,000
Vice President and Actuary 1998 $111,000 $ 24,920 $ 11,799 $5,700
1997 $104,000 $ 27,000 $ 8,421 $5,700
</TABLE>
(1) The salaries of executive officers of the Company are prorated among
the Company, Mutual and Shield, based upon the premium income of each
entity. Ms. Christopher's compensation is allocated entirely to the
Company. Total compensation of the Company's executive officers for
1999 from all affiliated corporations was $1,715,243 of which the
Company paid $756,492.
(2) The aggregate restricted stock holdings at the end of 1999 for Messrs.
Howard and Fincher were 41,207 and 12,338 shares with values of
$355,616 and $106,477, respectively, based upon the value of the
Company's Common Stock at December 31, 1999. Dividends on stock awards
are paid at the same rate as paid to all share owners.
(3) This amount equals the Company's 401(k) matching contribution, which is
allocated on the same prorated basis as salaries.
42
<PAGE> 43
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND
FISCAL YEAR END OPTION VALUES
The following table shows stock options exercised by the named
executive officer during 1999, including the aggregate value of gains on the
date of exercise. In addition, this table includes the number of shares covered
by both exercisable and non-exercisable options as of December 31, 1999. Also
reported are the values for "In-the-Money" options, which represent the positive
spread between the exercise price of any such existing options and the year end
price of the Common Stock of the Company.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
NUMBER OF VALUE OPTIONS AT OPTIONS AT
SHARES REALIZED 12/31/99 12/31/99
ACQUIRED ON UPON EXERCISABLE/ EXERCISABLE/
NAME EXERCISE EXERCISE UNEXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ------------- -------------
<S> <C> <C> <C> <C>
J. Ridley Howard -- -- 10,769/0 $ 61,060/0
Robert L. Fincher -- -- 22,887/0 $129,769/0
Gary W. Meader 19,865 $161,885 0/0 $ 0/0
Norma Y. Christopher 5,000 $ 45,200 4,894/0 $ 27,749/0
</TABLE>
COMPENSATION PURSUANT TO PLANS
PENSION PLAN
The Company is a participating employer in the Cotton States Employee
Retirement Income Plan (the "Plan"), which is a qualified pension plan sponsored
jointly with Mutual. The Plan covers all of the Company's salaried employees.
The Plan provides a retirement income benefit at age 65 which is based
on the employee's number of years of service (maximum 35 years) and average
earnings during the five consecutive years (in the last ten years of employment)
in which the earnings are highest. Age 65 retirement benefit is derived as the
sum of (i) the product of the number of years of service times 85% of average
earnings and (ii) the product of the number of years of service times 55% of
"excess average earnings." Excess average earnings is the amount, if any, by
which the average earnings for a participant exceeds the 35 year average maximum
social security taxable wage base for all persons born in the same year as the
participant. The Plan also provides an early retirement benefit after age 55,
with no reduction in benefit entitlement due to age, when the sum of the
employee's age and years of credited service equals or exceeds 80. If the
employee has not obtained 80 points at retirement, the benefits are reduced 5%
for each year the retiree's age is less than 65. The Plan also contains a death
benefit for the surviving spouse of an employee (who had at least five years of
credited service) which is equal to 50% of the deceased employee's accrued
benefit. If the death occurs after termination from employment and prior to an
early retirement date, the spouse's benefit is reduced as for early retirement
income benefits. Accrued benefits under the Plan vest after the employee accrues
five years of service.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
The Company adopted the Cotton States Supplement Executive Retirement
Plan ("SERP") effective January 1, 1992 in order to provide for a supplement
pension plan to replace pension benefits which were affected as a result of
amendments to the Internal Revenue Code of 1986, as amended ("IRC").
43
<PAGE> 44
The SERP is an agreement between the Company and employees meeting the
qualification provisions of the SERP in which the Company provides benefits in
excess of the limitations on benefits imposed by the IRC regarding highly
compensated employees. The SERP also replaces the pension accruals set forth
under the Plan as a result of the new benefit formulas mandated by the IRC which
resulted in amendments to the Plan. The SERP incorporates all of the terms and
conditions of the Plan and future amendments to the Plan.
The following table sets forth the estimated annual benefits payable
upon retirement at age 65 under the plans.
PENSION PLAN AND SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN INCOME
ANNUAL BENEFITS PAYABLE UPON RETIREMENT AT AGE 65
<TABLE>
<CAPTION>
FINAL AVERAGE REMUNERATION FROM
THE COMPANY AND MUTUAL FOR THE YEARS OF SERVICE WITH THE
HIGHEST FIVE YEARS COMPANY AND MUTUAL
------------------ ------------------
15 20 25 30 35
-- -- -- -- --
<S> <C> <C> <C> <C> <C>
$125,000 27,218 36,171 45,213 54,256 54,886
$150,000 33,378 44,504 55,630 66,756 67,136
$175,000 39,628 52,837 66,047 79,256 79,386
$200,000 45,878 61,171 76,463 91,756 91,756
$225,000 52,128 69,504 87,880 104,256 104,256
$250,000 58,378 77,837 97,297 116,756 116,756
$300,000 70,878 94,504 118,130 141,756 141,756
$350,000 83,378 111,171 139,963 166,756 166,756
$400,000 95,878 127,837 159,797 191,756 191,756
$450,000 108,378 144,504 180,630 216,756 216,756
$500,000 120,878 161,171 201,463 241,756 241,756
</TABLE>
The Benefits reflected in the proceeding table are in addition to an
employee's social security benefits. The Company has allocated its proportionate
share of retirement costs for the officers it shares with Mutual and Shield.
The estimated annual retirement benefits under the plans for all
executive officers of the Company as a group from the participating companies
aggregate $398,136. This estimate assumes no change from 1999 salaries,
retirement at age 65, and continuous employment with the Company. Estimated
annual retirement benefits under the plans attributable solely to service with
the Company cannot be stated due to the allocation of service and compensation
among the Company and its affiliates.
The Company is allocated its proportionate share of retirement costs
for the officers it shares with Mutual and Shield.
44
<PAGE> 45
INCENTIVE SAVINGS PLAN
The Company participates in the Cotton States Incentive Savings and
Investment 401(k) Plan (the "401(k) Plan"). The 401(k) Plan is a qualified
savings incentive plan sponsored by the same companies that sponsor the
Company's Plan. The 401(k) Plan is open to all employees who have completed one
year of service and have reached their twenty-first birthday. Eligible employees
may contribute from 2% to 10% of their compensation to the 401(k) Plan. The
Company's contribution will not be less than 20% nor more than 60% of the
employees contribution eligible for matching. Employees are fully vested in the
Company's contribution after five years of service. Employees are not permitted
to withdraw their account before age 59 1/2 except in the event of death,
disability, termination of employment or financial hardship.
INCENTIVE STOCK OPTIONS
The Company has a qualified incentive stock option plan for its
officers and key employees and those of its subsidiaries, CSI and CSMR (the "ISO
Plan"). During 1999, no options were granted under the ISO Plan.
During 1999, 24,865 options were exercised pursuant to the ISO Plan. At
December 31, 1999, options to purchase 38,550 shares at $2.96 per share were
outstanding.
As of December 31, 1999, the following executive officers held options
with regard to the stated number of shares:
<TABLE>
<CAPTION>
NUMBER OF
NAME OPTIONS (SHARES)
---- ----------------
<S> <C>
J. Ridley Howard 10,769
Robert L. Fincher 22,887
Gary W. Meader 0
Norma Y. Christopher 4,894
</TABLE>
DIRECTORS' DISCOUNTED STOCK OPTION PLAN
The Company has a Directors' Discounted Stock Option Plan (the "DSOP").
The DSOP is designed to assist the Company in attracting, retaining and
compensating highly qualified individuals who are not employees of the Company
for service as members of the Board and to provide them with a proprietary
interest in the common stock of the Company. The Board believes the DSOP will be
beneficial to the Company and its shareholders by encouraging and enabling
non-employee directors to have a personal financial stake in the Company, in
addition to emphasizing their common interest with the shareholders in
increasing the value of the common stock of the Company in the long term.
The DSOP provides for automatic yearly grants of options to purchase
shares of common stock of the Company to each director who elects to participate
in the DSOP. Each director who is not an employee of the Company or any of its
subsidiaries or affiliates may participate by filing with the Company an
irrevocable election to receive the grant of a stock option in lieu of part or
all of the fees which the director would have been entitled to receive for the
immediately preceding year for his or her service on the Board. Options will be
granted automatically on the date of the annual meeting of the Board as to any
director who, prior to the date of such annual meeting, has filed with the
Company an irrevocable election to participate in the DSOP.
The number of shares of common stock of the Company subject to each
option granted to a director shall be determined by dividing (i) the director's
fee due to a director, by (ii) the fair market value of the common stock of the
Company on the date of grant, minus the option exercise price. The fair market
value of the common stock of the Company under the DSOP shall be the closing
price as reported on the Nasdaq National Market and the option exercise price
for each option granted shall be 50% of the fair market value, to be paid in
cash by the director upon exercise. All options granted under the DSOP will
expire ten years after the date of grant, subject to DSOP provisions relating to
the retirement of the director because of death, disability, or age. That
portion of an option granted under the DSOP which is
45
<PAGE> 46
attributable to any portion of the directors' fees which is not earned due to
termination as a director, shall automatically abate and be canceled. In the
event of the death of the holder of any unexercised option, all of the holder's
outstanding options will become immediately exercisable upon the date of death
by his or her legal representative. No option may be exercised under the DSOP
before the 12 month anniversary of the date of grant.
A total of 281,250 shares of Company common stock is reserved for
issuance under the DSOP (subject to adjustment for subsequent stock splits,
stock dividends and certain other changes in the common stock of the Company).
The Company has granted 52,994 options under the DSOP, including 8,736 options
to be granted automatically at the 2000 Annual Meeting. Upon the exercise of an
option, the Company will issue authorized but previously unissued shares. If an
option issued under the DSOP is terminated or canceled without having been
exercised, the shares which were not purchased thereunder will again become
available for issuance under the DSOP.
Adjustments will be made in the number of shares subject to the DSOP
and in the purchase price of outstanding options in the event of any change in
the number of shares of common stock of the Company outstanding as a result of a
stock split or stock dividend, recapitalization, merger, consolidation, or other
similar corporate change.
PERFORMANCE SHARE AWARDS PLAN
The Company has adopted a Performance Share Awards Plan (the "PAR
Plan"). The PAR Plan is designed to reward employees of the Company, its
subsidiaries and affiliates for services performed on behalf of the Company, to
stimulate employees' efforts on behalf of the Company, to encourage such
employees to remain with the Company, and to provide them with an ownership
interest in the common stock of the Company. The Board believes the PAR Plan
will be beneficial to the Company and its shareholders by encouraging and
enabling employees to have a personal financial stake in the Company.
The PAR Plan authorizes the Compensation Committee of the Board of
Directors to grant awards of shares of common stock of the Company to employees
of the Company designated by the Compensation Committee. The Compensation
Committee may grant performance share awards in shares of the common stock if
the performance of the Company, or any subsidiary, division or affiliate of the
Company selected by the Compensation Committee meets certain goals established
by the Compensation Committee during an award period. The Compensation Committee
would determine the goals, the maximum payment value of an award, and the length
of an award. In order to receive payment, a recipient of a performance share
award must remain in the employ of the Company until the completion of the award
period, except that the Compensation Committee may provide for a partial payment
if it determines that an exception is appropriate.
An aggregate of 281,250 shares of common stock of the Company are
subject to the PAR Plan. Adjustments will be made in the number of shares
subject to an award in the event of any change in the number of shares of common
stock outstanding as a result of a stock split or stock dividend,
recapitalization, merger, consolidation, or other similar corporate change. The
Company has granted 137,750 shares under the PAR Plan of which 32,966 vested in
1999. In the event of a change of control of the Company, as defined in the PAR
Plan, all awards granted prior to the change of control shall immediately vest
and the shares subject to the award shall be issued to the recipient of the
award.
Awards granted under the PAR Plan provide the recipients with the right
to acquire shares of Common Stock as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES DATE GRANTED EARLIEST VESTING LATEST VESTING
---------------- ------------ ---------------- --------------
<S> <C> <C> <C>
23,015 2/24/97 2/23/00 2/23/04
22,857 2/25/98 2/24/01 2/24/05
24,460 2/24/99 2/23/02 2/23/06
</TABLE>
46
<PAGE> 47
As of December 31, 1999, the following executive officers had been
granted awards to receive shares pursuant to the PAR Plan:
<TABLE>
<CAPTION>
NUMBER OF SHARES VESTED
NAME (1) INCLUDING DIVIDENDS NUMBER OF SHARES UNVESTED
-------- ----------------------- -------------------------
<S> <C> <C>
J. Ridley Howard 11,712 41,207
Robert L. Fincher 4,453 12,338
Gary W. Meader 4,284 -
Norma Y. Christopher 1,114 2,734
</TABLE>
OTHER COMPENSATION
Each executive officer is provided the use of one automobile by the
Company, Mutual and Shield, but is required to reimburse the Company, Mutual and
Shield for the personal use of the automobile. Two officers are reimbursed for
club dues. The Company, Mutual and Shield are allocated these expenses under the
same formula on which salaries are prorated. The total cost of these expenses
does not exceed 10% of any executive officer's salary and bonus compensation.
COMPENSATION OF DIRECTORS
During 1999, no director of the Company received any remuneration from
the Company in his capacity as a director except for fees, or options to receive
common stock in lieu of fees pursuant to the DSOP, and reimbursement for
expenses incurred in connection with attending directors' and committee
meetings. No director received cash compensation in excess of $18,125 for his
services as a director during 1999. Each director, other than J. Ridley Howard
is paid an annual stipend of $6,600. Mr. Howard did not receive an annual
stipend in 1999. In addition, each director was paid $750 plus travel expenses
for each meeting of directors and $600 for each committee meeting of directors
attended. Each committee member receives an additional $1,200 as an annual
stipend and each committee chairman receives $1,925 as an annual stipend. The
aggregate directors' fees for 1999 totaled $156,565. There were no retirement
benefits accrued or set aside during the year for any director for his services
as director. Upon reaching the mandatory retirement age of 72, directors of the
Company become directors emeritus and receive stipends ranging from $600 to
$11,000 annually for periods ranging from 15 years to life after the date of
retirement.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee of the Board of Directors
during the fiscal year were Messrs. McMahan and Coan and Ms. Cherry. None of
these directors are or have been officers or employees of the Company or its
subsidiaries. No executive officer of the Company serves on the board of any
other company other than an affiliate of the Company.
CONSULTING AGREEMENT
Gary W. Meader's service as Chief Financial Officer of the Company
ended on August 13, 1999. On August 31, 1999, Mr. Meader entered into an
agreement with the Company. Pursuant to the terms of the agreement, Mr. Meader's
service with the Company will cease on May 31, 2001. In the interim, Mr. Meader
will receive predetermined bi-weekly payments, as well as other compensation and
stock grants as detailed further in Exhibit 10.4.
47
<PAGE> 48
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The table below sets forth certain information about persons or
entities known by the Company to own beneficially more than 5 percent of the
Company's common stock, as of December 31, 1999. Except as noted below, the
Company believes that each of the persons or entities listed has sole investment
and voting power with respect to the shares included in the table.
<TABLE>
<CAPTION>
PERCENT
NAME AND ADDRESS NUMBER OF SHARES OWNED(1) OF CLASS
- ---------------- ------------------------- --------
<S> <C> <C>
Shield Insurance Company 2,102,385(2) 33.3
244 Perimeter Center Parkway
Atlanta, Georgia 30346
Marvin Schwartz 477,982 7.6
605 Third Avenue
New York, New York 10158
Fidelity Management & Research Company,
a wholly owned subsidiary of
FMR Corporation
82 Devonshire Street
Boston, Massachusetts 02109 420,200 6.6
</TABLE>
(1) Under the rules of the U. S. Securities and Exchange Commission, a person
is deemed to be beneficial owner of a security if he or she has or shares
the power to vote or to direct the voting of such security, or the power to
dispose or to direct the disposition of such security. A person is also
deemed to be a beneficial owner of any securities that such a person has
the right to acquire beneficial ownership of within 60 days as well as any
securities owned by such person's spouse, children or relatives living in
the same household. Accordingly, more than one person may be deemed to be a
beneficial owner of the same securities.
(2) Shield is a wholly owned subsidiary of Mutual. The Board of Directors
of Mutual is identical to the Board of Directors of the Company.
48
<PAGE> 49
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth certain information about beneficial
ownership of the Company's common stock of each director and executive officer
of the Company and directors and officers as a group as of January 1, 2000. All
shares are owned outright without shared voting and investment power except as
set forth below.
<TABLE>
<CAPTION>
NAME OF BENEFICIAL OWNER: AMOUNT AND NATURE OF
DIRECTORS BENEFICIAL OWNERSHIP PERCENT OF CLASS
- --------- -------------------- ----------------
<S> <C> <C>
Carol D. Cherry 375(1) *
Gaylord O. Coan 500(2) *
Thomas A. Harris 3,187(3) *
J. Ridley Howard 65,070(4) 1.0
Robert C. McMahan 2,109(5) *
Mathews D. Swift 875(6) *
E. Jenner Wood, III 1,405 *
EXECUTIVE OFFICERS
Robert L. Fincher 15,369(7) *
All Officers and Directors as a Group(9)
(13 persons) 111,595(8) 1.8
</TABLE>
(*) Less than 1% not applicable
(1) Does not include options to acquire 3,662 shares previously granted or
options to acquire 966 shares to be granted automatically at the 2000
Annual Meeting under the DSOP.
(2) Does not include options to acquire 10,862 shares previously granted or
options to acquire 2,194 shares to be granted automatically at the 2000
Annual Meeting under the DSOP.
(3) Does not include options to acquire 7,100 shares previously granted or
options to acquire 1,057 shares to be granted automatically at the 2000
Annual Meeting under the DSOP.
(4) Does not include options to acquire 10,769 shares previously granted
under the ISO Plan or 41,207 shares plus accrued dividends awarded
under the PAR Plan that have not vested.
(5) Does not include options to acquire 6,961 shares previously granted or
options to acquire 1,950 shares to be granted automatically at the 2000
Annual Meeting under the DSOP.
(6) Does not include options to acquire 3,030 shares preciously granted or
options to acquire 795 shares to be granted automatically at the 2000
Annual Meeting under the DSOP.
(7) Does not include options to acquire 22,887 shares under ISO Plan or
12,338 shares plus accrued dividends awarded under the PAR Plan that
have not vested.
(8) Does not include either options to acquire 38,550 shares under ISO
Plan, which would increase the percentage of outstanding shares for all
officers and directors as a group to 2.4%, or 62,724 shares plus
accrued dividends awarded under the Par Plan that have not vested which
would increase the percentage of outstanding shares for all officers
and directors as a group to 3.4%. Also does not include options to
acquire 31,615 shares previously granted or options to acquire 6,962
shares to be granted automatically at the 2000 Annual Meeting under the
DSOP.
(9) Includes only those officers and directors serving the Company in that
capacity at December 31, 1999.
49
<PAGE> 50
CHANGES IN CONTROL
None.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH MANAGEMENT AND OTHERS
Shield, which is wholly owned by Mutual, owns 2,102,385 shares or 33.3
% of the outstanding common stock of the Company. See Item 12.
Certain general expenses are allocated to the Company by Mutual. These
expenses such as salaries, advertising, rents, and related expenses, represent
the Company's share of expenses initially paid by Mutual and are allocated based
on specific identification or, if indeterminable, generally on the basis of each
company's premium income. Expenditures allocated to the Company amounted to
$2,957,431 in 1999. See Item 1.
Gaylord O. Coan, a director of the Company, is CEO of Gold Kist, where
he also serves as the Chairman of the Management Executive Committee. Gold Kist
owns no stock of the Company. The Company shares offices with Mutual and Shield
in a building owned by a partnership of Mutual and Gold Kist. The Company is not
a partner in the partnership which owns the building and has no equity interest
in the building.
Gaylord O. Coan, a director of the Company, serves as a director of
SunTrust Banks, Inc. E. Jenner Wood, III, a director of the Company, serves as
an executive officer of SunTrust Banks, Inc. SunTrust Banks, Inc. received fees
from the Company in 1999 for services rendered as the transfer agent of the
Company. SunTrust Bank, Atlanta, a subsidiary of SunTrust Banks, Inc., received
fees from the Company in 1999 for investment and custodial services and leases
of computer hardware.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS
The following consolidated financial statements and independent auditors'
report have been incorporated by the reference in Part II, Item 8 of this
report:
Independent Auditors' Report
Consolidated Balance Sheets, December 31, 1999 and 1998
Consolidated Statements of Earnings, Years ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Shareholders' Equity, Years ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Comprehensive Income, Years ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows, Years ended
December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
50
<PAGE> 51
FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statement schedules and
independent auditors' report thereon are included herein:
Independent Auditors' Report on Financial Statement Schedules
Schedule I - Consolidated Summary of Investments,
December 31, 1999
Schedule IV - Reinsurance, Years ended December 31, 1999,
1998 and 1997
Schedule V - Supplementary Insurance Information,
Years ended December 31, 1999, 1998 and 1997
All other schedules are omitted as the required information is
inapplicable, or the information is presented in the consolidated financial
statements or related notes.
EXHIBITS
- --------
3.1 Amended and Restated Articles of Incorporation of the Registrant
(incorporated by reference to Exhibit 3 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1994, File No.
95074277).
3.2 Bylaws, as amended, of the Registrant (incorporated by reference to
Exhibit 3 to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1994, File No. 95074277).
10.1.1 Amended and Restated Directors' Discounted Stock Option Plan.
10.2 Performance Shares Awards Plan (incorporated by reference to Exhibit
10.2 to the Registrant's Registration Statement on Form S-8,
Registration No. 333-00795).
10.3.1 Amended and Restated 1983 Incentive Stock Option Plan.
10.3.2 Form of Incentive Stock Option Agreement pursuant to the 1983 Incentive
Stock Option Plan.
10.4 Agreement and General Release between the Company and Gary W. Meader.
21. Subsidiaries of the Registrant.
23. Consent of experts.
27. Financial Data Schedule (for SEC only)
All other exhibits are omitted as the required documents are
inapplicable.
REPORT ON FORM 8-K
No report on Form 8-K was filed for the fourth quarter of 1999.
51
<PAGE> 52
THE BOARD OF DIRECTORS AND SHAREHOLDERS
COTTON STATES LIFE INSURANCE COMPANY
Under date of February 22, 2000, we reported on the consolidated balance sheets
of Cotton States Life Insurance Company and subsidiaries (the "Company") as of
December 31, 1999 and 1998, and the related consolidated statements of earnings,
shareholders' equity, comprehensive income and cash flows for each of the years
in the three year period ended December 31, 1999, as contained in the 1999
annual report to shareholders. Those consolidated financial statements and our
report thereon are incorporated by reference in the annual report on Form 10-K
for the year 1999. In connection with our audits of the aforementioned
consolidated financial statements, we also have audited the related financial
statements and schedules as listed in item 14. The financial statement schedules
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statement schedules based on our audits.
In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
/s/KPMG LLP
KPMG LLP
Atlanta, Georgia
February 22, 2000
52
<PAGE> 53
SCHEDULE I
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED SUMMARY OF INVESTMENTS
DECEMBER 31, 1999
<TABLE>
<CAPTION>
AMOUNT AT WHICH
SHOWN ON THE
TYPE OF INVESTMENTS COST VALUE BALANCE SHEET
- ------------------- ---- ----- ---------------
<S> <C> <C> <C>
Fixed maturities, held for investment:
Bonds:
United States government and government
agencies and authorities $ 1,498,783 1,503,285 1,498,783
Foreign governments 1,994,887 2,015,680 1,994,887
Public utilities 4,848,930 4,741,444 4,848,930
All other corporate bonds 7,734,277 7,715,360 7,734,277
------------ ----------- -----------
Total fixed maturities held for investment 16,076,877 15,975,769 16,076,877
Fixed maturities, available for sale:
Bonds:
United States government and government
agencies and authorities 22,146,049 21,711,039 21,711,039
Foreign governments 3,880,477 3,851,506 3,851,506
Public utilities 15,975,025 14,588,145 14,588,145
All other corporate bonds 67,298,693 62,621,444 62,621,444
------------ ----------- -----------
Total fixed maturities available for sale 109,300,244 102,772,134 102,772,134
Equity securities 2,531,851 2,623,214 2,623,214
First mortgage loans on real estate 2,898,757 2,909,318 2,898,757
Policy loans 8,591,609 8,591,609 8,591,609
Short-term investments 5,494,839 5,494,839 5,494,839
Other investments 1,000,000 1,000,000 1,000,000
------------ ----------- -----------
Total investments $145,894,177 139,366,883 139,457,430
============ =========== ===========
</TABLE>
See accompanying independent auditors' report.
53
<PAGE> 54
SCHEDULE IV
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
REINSURANCE
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
GROSS OTHER FROM OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES(1) AMOUNT TO NET (1)
------ --------- ----------- ------ ----------
Year ended December 31, 1999
<S> <C> <C> <C> <C> <C>
Life insurance inforce $4,444,114,000 1,113,206,000 733,058,000 4,063,966,000 18.0
============== ============= =========== ============= =========
Premiums:
Life insurance(2) $ 24,045,964 1,549,324 667,631 23,164,271
Accident/health insurance 171,334 33,508 -- 137,826
------------- ------------- ----------- -------------
Total $ 24,217,298 1,582,832 667,631 23,302,097
============= ============= =========== =============
Year ended December 31, 1998
Life insurance inforce $4,130,933,000 1,013,619,000 725,749,000 3,843,063,000 18.9
============== ============= =========== ============= =========
Premiums:
Life insurance(2) $ 20,516,628 1,387,444 672,153 19,801,337
Accident/health insurance 177,517 43,500 -- 134,017
-------------- ------------- ----------- -------------
Total $ 20,694,145 1,430,944 672,153 19,935,354
============== ============= =========== =============
Year ended December 31, 1997
Life insurance inforce $3,845,361,000 936,616,000 700,173,000 3,608,918,000 19.4
============== ============= =========== ============= =========
Premiums:
Life insurance(2) $ 18,027,701 1,248,034 666,034 17,445,701
Accident/health insurance 219,228 44,745 -- 174,483
------------- ------------- ----------- -------------
Total $ 18,246,929 1,292,779 666,034 17,620,184
============= ============= =========== =============
</TABLE>
(1) All reinsurance assumed results from participation in federally
sponsored group pools.
(2) Includes mortality and expense charges earned on universal life contracts.
See accompanying independent auditors' report.
54
<PAGE> 55
SCHEDULE V
COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
DEFERRED POLICY
POLICY FUTURE CLAIMS AND
ACQUISITION POLICY BENEFITS
COSTS BENEFITS PAYABLE
----------- -------- -------
Segment
- -------
<S> <C> <C> <C>
At December 31, 1999
Individual $ 41,263,817 122,562,510 1,249,914
Group -- 43,467 205,163
------------ ----------- ---------
Total $ 41,263,817 122,605,977 1,455,077
============ =========== =========
At December 31, 1998
Individual $ 34,950,104 112,380,211 860,126
Group -- 43,667 192,935
------------ ----------- ---------
Total $ 34,950,104 112,423,878 1,053,061
============ =========== =========
</TABLE>
See accompanying independent auditors' report.
55
<PAGE> 56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
COTTON STATES LIFE INSURANCE COMPANY
J. Ridley Howard 02/22/00 William J. Barlow 02/22/00
- --------------------------------------- -------------------------------
Chairman of the Board of Directors/ Vice President/Controller
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Carol Cherry 02/22/00 Robert McMahan 02/22/00
- --------------------------------------- -------------------------------
Director Director
Gaylord Coan 02/22/00 Mathews Swift 02/22/00
- --------------------------------------- -------------------------------
Director Director
Thomas Harris 02/22/00 Jenner Wood, III 02/22/00
- --------------------------------------- -------------------------------
Director Director
J. Ridley Howard 02/22/00
- ---------------------------------------
Director
56
<PAGE> 1
EXHIBIT 10.1.1
AMENDED AND RESTATED
DIRECTORS' DISCOUNTED STOCK OPTION PLAN
1. PURPOSE
The purpose of this Directors' Discounted Stock Option Plan ("Plan")
of Cotton States Life Insurance Company, a Georgia corporation, is to permit
the granting of stock options to Directors of Cotton States Life Insurance
Company and its direct and indirect subsidiaries, who are not employees of any
such corporations ("Directors" or a "Director") at an exercise price less than
market value at the date of grant as an alternative to the payment of
Director's retainer fees in cash, thereby advancing the interest of Cotton
States Life Insurance Company by encouraging and enabling the acquisition of
its Common Stock by Directors, upon whose judgment and ability Cotton States
Life Insurance Company depends for its long term growth and development.
Accordingly, the Plan is intended to promote a close identity of interests
among Cotton States Life Insurance Company, the Directors, and its
shareholders, as well as to provide a means to attract and retain outstanding
management.
2. EFFECTIVE DATE AND TERM OF PLAN
The Plan shall become effective upon such date as it may be approved
by the shareholders of Cotton States Life Insurance Company and shall remain in
effect for ten years from the date on which it is so approved or until
termination by the Board of Directors of Cotton States Life Insurance Company
(the "Board"), whichever occurs first.
3. STOCK SUBJECT TO THE PLAN
There are authorized for issuance or delivery upon the exercise of
options to be granted from time to time under the Plan an aggregate of 150,000
shares of Cotton States Life Insurance Company Common Stock, $1.00 par value,
subject to adjustment as provided hereinafter in Section 6. Such shares may be,
as a whole or in part, authorized by unissued shares, whether now or
hereinafter authorized, or issued shares which have been reacquired by Cotton
States Life Insurance Company. If any option issued under this Plan shall
expire, terminate or be cancelled for any reason without having been exercised
in full, the shares which have not been purchased thereunder shall again become
available for the purposes of this Plan.
4. PLAN ADMINISTRATION
a. The Plan shall be administered by the Compensation Committee
(the "Committee"), which shall consist of not less than three Directors
appointed by the Board.
b. Grants of stock options under the Plan and the amount and
nature of the awards shall be automatic in accordance with Section 5. However,
the Committee shall have full and final authority to interpret the Plan, adopt,
amend and rescind rules and regulations relating to the Plan, and make all
other determinations and take all other actions necessary and advisable for the
administration of the Plan.
c. Decisions and determinations of the Committee on all matters
relating to the Plan shall be in its sole discretion and shall be conclusive.
No member of the Committee shall be liable for any action taken or decision
made in good faith relating to this Plan or any grant hereunder.
1
<PAGE> 2
d. An Administrator of the Plan shall from time to time be
appointed by the Plan Committee. Such Administrator shall be responsible for the
general administration of the Plan under the policy guidance of the Committee.
The Administrator shall be in the employ of Cotton States Life Insurance
Company, and shall be compensated for services and expenses by Cotton States
Life Insurance Company according to its normal employment policies, without
special or additional compensation, other than reimbursement of expenses, for
his or her services as the Administrator.
5. TERMS AND CONDITIONS: STOCK OPTION AWARDS
Each option granted under the Plan shall be evidenced by a written
award document in such form, not inconsistent with this Plan, as the Plan
Committee shall approve from time to time, which document shall comply with and
be subject to the following terms and conditions:
a. OPTION GRANT DATES Options shall be granted automatically on
the date of the annual meeting of the Board of the Company and its direct and
indirect subsidiaries, effective as of January 1 of the immediately preceding
Plan Year, with such annual meeting being held following the annual meeting of
the Shareholders, to any Director who, prior to the date of such annual meeting
of the Board, has filed with the Company an irrevocable election to receive a
stock option in lieu of the Director's Fees (as defined in subsection 5.b.), or
part thereof, to be earned by such Director for a 12 month period beginning
January 1 and ending on the last day of December (hereinafter referred to as
the "Plan Year").
b. OPTION FORMULA The number of shares of common stock subject
to each option granted to any Director for a Plan Year shall be equal to the
nearest number of whole shares, with cash payment for fractional shares,
determined in accordance with the following formula:
Director's Fees
---------------------------------- = Number of Shares
Fair Market Value minus
Option Exercise Price
"Option Exercise Price" and "Fair Market Value" shall be defined as
set forth in Subsection 5(c). "Director's Fees" shall mean the amount of fees
which the Director will be entitled to receive during a Plan Year for serving
as a Director of Cotton States Life Insurance Company or its direct and
indirect subsidiaries; provided, however, that if a Director elects to receive
a stock option in lieu of only a portion of the Director's Fees, the Director's
Fees for purposes of the foregoing formula shall equal the portion of the
Director's Fees so elected. For purposes of this Plan, "Director's Fees" does
include fees, but not expenses for attendance at meetings of the Board of
Directors or any committee of the Board of Directors or for any other services
to be provided to the Company and/or its direct and indirect subsidiaries.
c. OPTION EXERCISE PRICE The Option Exercise Price for each
option granted under the Plan shall be fifty percent (50%) of the fair market
value of shares of the Company's Common Stock on the date the option is
granted. "Fair Market Value" shall be the closing price as reported on the
NASDAQ National Market for the last trading date prior to the effective date of
grant (January 1), or the first date thereafter on which a minimum of 100
shares of the Common Stock are traded on the NASDAQ National Market. If the
Company's Common Stock is not traded on the date the option is granted, then
"Fair Market Value" shall be the average of the bid price and the ask price on
the date of reference.
d. TERM AND EXERCISE OF OPTION Options may be exercised only by
written notice to the Secretary of Cotton States Life Insurance Company,
accompanied by payment in cash or check payable to Cotton States Life Insurance
Company of the full exercise price for the shares as to which they are
exercised. No option granted under the Plan may be exercised before the
twelve-month anniversary of the date upon which it was granted; provided,
however that any option granted under the Plan shall become immediately
exercisable upon the retirement of the Director because of age, death or
disability. No option granted under the Plan shall be exercisable after the
expiration of ten years from the date upon which it is granted. Each option
shall be subject to termination before its date of expiration as hereinafter
provided in Subsections 5(e) and 5(f).
2
<PAGE> 3
e. TERMINATION OF DIRECTORSHIP Except as herein provided, the
rights of a Director in an option granted under the Plan shall not terminate
upon such Director's termination as a Director for any reason (including
retirement because of age, death or disability). That portion of an option
granted under the Plan which is attributable to any portion of the Director's
Fees which is not earned due to termination as a Director (for any reason)
shall automatically abate and be cancelled.
f. DEATH OF DIRECTOR Any option granted to a Director and
outstanding on the date of his or her death may be exercised by the
administrator of such Director's estate, the executor under his or her will, or
the person or persons to whom the option shall have been validly transferred by
such executor or administrator pursuant to the will or laws of intestate
succession, but not beyond the first to occur of (i) the expiration of twelve
months from the date of the Director's death, or (ii) the specified expiration
date of the option. Upon the first to occur of said two events, the option
shall terminate.
6. CHANGES IN CAPITALIZATION
If the outstanding shares of Cotton States Life Insurance Company Common Stock
are increased, decreased or exchanged for a different number or kind of shares
or other securities, or if additional shares or other property (other than
ordinary cash dividends) are distributed with respect to such shares of Cotton
States Life Insurance Company Common Stock or other securities, through merger,
consolidation, sale of all or substantially all of the assets of Cotton States
Life Insurance Company reorganization, recapitalization, reclassification,
dividend, stock split, reverse stock split, spin-off, split-off or other
distribution with respect to such shares of common stock, or other securities,
an appropriate and proportionate adjustment may be made in (i) the maximum
number and kind of shares reserved for issuance under the Plan; (ii) the number
and kind of shares or other securities subject to then outstanding options
under the Plan; and (iii) the price for each share subject to any then
outstanding options under the Plan. No fractional shares will be issued under
the Plan on account of any such adjustments.
7. WITHHOLDING TAXES
Whenever shares of Cotton States Life Insurance Company Common Stock
are to be issued or delivered, the Committee shall have the right, at or prior
to the delivery of any certificate or certificates for shares, to require the
recipient to remit to Cotton States Life Insurance Company in the form of cash
or check payable to the order of Cotton States Life Insurance Company in an
amount sufficient to satisfy withholding requirements with respect to federal,
state and local income and employment taxes.
8. LIMITATION OF RIGHTS
a. No Right to Continue as a Director. Neither the Plan, nor the
granting of an option, nor any other action taken pursuant to the Plan, shall
constitute evidence of any agreement or understanding, express or implied, that
Cotton States Life Insurance Company will retain a participant as a Director
for any period of time, or at any particular rate of compensation.
b. No Stockholders' Rights for Options. The holder of an option
granted under the Plan shall have no rights as a stockholder
with respect to the shares covered by his or her options
until the date of the issuance of such holder of a stock
certificate therefor, and no adjustment will be made for
dividends or other rights for which the record date is prior
to the date such certificate is issued.
3
<PAGE> 4
9. TRANSFERABILITY
a. Options are not transferable other than by will or the laws
of intestate succession. No transfer by will or by the laws of intestate
succession shall be effective to bind Cotton States Life Insurance Company
unless the Committee shall have been furnished with a copy of the deceased
participant's will or such other evidence as the Committee may deem necessary
to establish the validity of the transfer.
b. Only the participant or his or her guardian, or in the event
of death, his or her legal representative or beneficiary, may exercise options
and receive deliveries of shares.
10. AMENDMENT, MODIFICATION AND TERMINATION
The Board at any time may terminate and in any respect amend or modify
the Plan; provided, however, that no such action by the Board, without approval
of Cotton States Life Insurance Company shareholders, may (i) increase the
total number of shares of common stock available under the Plan in the
aggregate (except as otherwise provided in Section 6); (ii) extend the period
during which any option may be exercised; (iii) extend the term of the Plan;
(iv) change the option price; or (v) alter the class of persons eligible to
receive options. No amendment, modification or termination of the Plan shall in
any manner adversely affect the rights of any participant with respect to an
option previously granted, without the consent of such participant. The
provisions of Section 1, Section 4 and Section 5 of the Plan shall not be
amended more than once every six months, except to comport with changes in the
Internal Revenue Code or regulations thereunder.
11. NOTICE
Any written notice to Cotton States Life Insurance Company required by
any of the provisions of the Plan shall be addressed to the Corporate Secretary
of Cotton States Life Insurance Company and shall become effective when it is
received.
12. GOVERNING LAW
The validity and construction of the Plan and any agreements entered
into thereunder shall be governed by the laws of the state of Georgia.
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<PAGE> 1
EXHIBIT 10.3.1
AMENDED AND RESTATED 1983 INCENTIVE STOCK OPTION PLAN
COTTON STATES LIFE AND HEALTH INSURANCE COMPANY
200,000 Shares of Common Stock $1.00 Par Value
Issuable Pursuant to the
Cotton States Life and Health Insurance Company
1983 Incentive Stock Option Plan
Cotton States Life and Health Insurance Company, a Georgia corporation
(the "Company") whose address is 244 Perimeter Center Parkway, Atlanta, Georgia
30346 and whose telephone number is (404) 391-8600, adopted the Cotton States
Life and Health Insurance Company 1983 Incentive Stock Option Plan (the "Plan")
effective April 25, 1983 under which shares of the Company's $1.00 par value
common stock (the "Common Stock") may be issued to eligible employees of the
Company and its subsidiaries. The Company currently has one subsidiary, CSI
Brokerage Services, Inc.
This Prospectus may be used only in connection with offers and sales
by the Company of shares of Common Stock pursuant to options granted under the
Plan. It is not available to any person to use for any reoffer or resale of
shares of Common Stock purchased pursuant to such options.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
No person has been authorized by the Company to give any information
or to make any representations other than those contained in this Prospectus
and, if given or made, such information or representations must not be relied
upon as having been authorized by the Company.
-----------------------------------------------------------
THE DATE OF THIS PROSPECTUS IS SEPTEMBER 13, 1989.
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<PAGE> 2
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934 and in accordance therewith files, reports and
other information with the Securities and Exchange Commission ("SEC"). Reports
and information statements, and other information, filed by the Company can be
inspected and copied at the public reference facilities maintained by the SEC
at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Regional Office
of the SEC, 1375 Peachtree Street, N.E., Suite 788, Atlanta, Georgia 30367.
Copies of such material can be obtained from the Public Reference Section of
the SEC, Washington, D.C. 20549 at prescribed rates.
Upon written or oral request of an employee, a copy of any and all of
the documents referred to under the heading "Information Incorporated by
Reference" on page 10 of this Prospectus and the Company's latest annual report
to shareholders will be provided to the employee. Such request should be made
to the Secretary of the Company, whose address is 244 Perimeter Center Parkway,
N.E., Atlanta, Georgia 30346 and whose telephone number is (404) 391-8600.
2
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DESCRIPTION OF THE PLAN
- -----------------------
PURPOSE AND ADOPTION ................................................................ 4
AMENDMENTS .......................................................................... 4
ADMINISTRATION ...................................................................... 4
SHARES SUBJECT TO PLAN .............................................................. 5
ELIGIBILITY ......................................................................... 5
TERMS OF OPTIONS .................................................................... 5
TRANSFER OF OPTIONS; TERMINATION OF EMPLOYMENT ...................................... 6
CORPORATE REORGANIZATION ............................................................ 6
TERMINATION AND AMENDMENT ........................................................... 6
FEDERAL INCOME TAX CONSEQUENCES ..................................................... 6
ERISA ............................................................................... 7
RESTRICTION ON RESALE ............................................................... 8
DESCRIPTION OF COMMON STOCK ......................................................... 8
INDEMNIFICATION OF DIRECTIONS AND OFFICERS .......................................... 8
INFORMATION INCORPORATED BY REFERENCE ............................................... 9
EXPERTS ............................................................................. 9
</TABLE>
3
<PAGE> 4
DESCRIPTION OF PLAN
PURPOSE AND ADOPTION
On February 28, 1983, The Board of Directors of the Company adopted
the Plan. The Plan was approved by the Company's shareholders on April 25,
1983. The Plan is intended to advance the interests of the Company by
encouraging ownership of the Company's Common Stock by key employees and
thereby to give such key employees an additional inducement to remain in the
incentive to work for the Company's success.
AMENDMENTS
The Board of Directors of the Company amended the plan effective July
1, 1987 in order to include certain provisions of the Tax Reform Act of 1986
("TRA 1986") to the Internal Revenue Code of 1986, as amended ("Code"). For a
further description of the amendment to the Plan incorporating provisions of
TRA 1986 see -- "FEDERAL INCOME TAX CONSEQUENCES" herein. The Plan was also
amended effective July 1, 1987 to incorporate amendments to the indemnification
provisions contained in the Company's By-Laws. The shareholders of the Company
further amended the By-Laws regarding indemnification at the annual meeting
held April 24, 1989. The current provisions of the By-Laws of the Company
regarding indemnification are set forth in ARTICLE NINE, a copy of which is
attached hereto as Exhibit "A" and incorporated herein by reference.
The Plan originally provided for the issuance of 100,000 shares of
Common Stock. The Company filed a Registration Statement on Form S-8 with the
SEC on December 29, 1983 in order to register such shares. The Plan provides
that these shares are subject to appropriate adjustment in the event of a stock
split, and, as a result of the two-for-one stock split of Common Stock on July
1, 1985, the Company was authorized to grant options in the manner provided by
the Plan in an amount not to exceed 200,000 shares. On February 23, 1989, the
Board of Directors of the Company recommended that the shareholders of the
Company amend the Plan in order to provide for the ability to issue options on
an additional 200,000 shares. At the annual meeting of the shareholders held
April 24, 1989, a majority of the shareholders of the Company voted for a
proposal to amend the Plan in this manner.
ADMINISTRATION
The Plan is administered by the Compensation Committee (the
"Committee") of the Board of Directors. Members of the Committee are elected by
the Board of Directors for a term of one year and serve at the pleasure of the
Board of Directors.
Currently members of the Committee are:
C. C. Dockery
William W. Gaston, III
T. Harvey Mathis
The Committee, from time to time, will recommend to the Board of
Directors for its approval the selection of key employees who will be granted
options under the Plan and the number of shares subject to each option and the
duration and other terms and conditions of each option. The Committee will make
any other determinations or interpretations necessary or advisable for the
administration of the Plan and unless otherwise determined by the Board of
Directors, such determinations and interpretations by the Committee will be
final and conclusive.
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<PAGE> 5
SHARES SUBJECT TO PLAN
The Plan was amended effective April 24, 1989 to provide that 400,000
shares of the Company's Common Stock may be issued pursuant to the terms of the
Plan. The Company registered 200,000 shares of Common Stock to be issued
pursuant to the Plan pursuant to a registration statement on Form S-8 as filed
with the SEC on December 29, 1983. The remaining 200,000 shares were registered
pursuant to a Registration Statement on Form S-8 as filed with the SEC on
August 24, 1989. Shares issued under the Plan may either be treasury shares or
authorized but unissued shares. The number of shares of the Company's Common
Stock available under the Plan and the number of shares and the option prices
under outstanding options are subject to appropriate adjustment by the
Committee to prevent dilution in the event of a stock split, stock dividend, or
certain other events. Shares of the Company's Common Stock subject to
unexercised options that expire or are terminated will be restored to the
number of shares available for issuance under the plan.
ELIGIBILITY
Options may be granted under the Plan only to key employees (including
key senior officers and key officers) of the Company and any of its
subsidiaries. A member of the Board of Directors of the Company is eligible to
receive an option under the Plan unless his vote is required to secure a
majority vote in favor of the grant of his option. As a result of TRA 1986 and
for Plan years after December 31, 1986, no employee may be granted options which
are exercisable for the first time in any one calendar year relating to more
than $100,000 in fair market value of the Company's Common Stock valued on the
date of the grant of the option. Currently there are approximately 26
individuals eligible to participate in the Plan. The following options have been
granted pursuant to the Plan: (I) On July 27, 1983, the Committee granted
options on 44,995 shares to 12 officers at an option price of $9.00 per share.
Pursuant to the July 1, 1985 two-for-one stock split, the holders of these
options may acquire 89,990 share of Common Stock at $4.50 per share. Options to
purchase 76,658 of these shares have been exercised. The remaining options to
purchase 13,332 shares of Common Stock expired unexercised due to the
termination of employment of the holders of such options; (ii) On June 1, 1985,
the Committee granted options on 27,765 shares at an option price of $16.75 per
share. Pursuant to the July 1, 1985 two-for-one stock split, the holders of
these options may acquire 55,530 shares of Common Stock at $8.375 per share.
Options to purchase 11,348 of these shares have expired unexercised due to the
termination of employment of the holders, leaving options to purchase 44,182
shares outstanding; and, (iii) On February 3, 1988, the Committee granted
options on 79.160 shares at an option price of $5.56 per share. None of these
options have been exercised.
It is the Company's intention to update this Prospectus from time to
time to reflect changes in the number of shares under option and option prices.
Such changes will be made by way of appendix which will be distributed to
option holders when issued in lieu of a completely revised prospectus.
TERMS OF OPTIONS
In recommending the grant of an option, the Committee will fix the
number of shares of the Company's Common Stock that the grantee may purchase on
exercise of the option of the price at which the shares may be purchased. The
option price under each option may not be less than 100% of the fair market
value of the Company's Common Stock on the date of grant of the option, except
that in the event of an employee who owns 10% or more of the total combined
voting power of all classes of stock of the Company, the option price shall not
be less than 110% of the fair market value of the Company's Common Stock on the
date of grant of the option. The Committee, in its discretion, may recommend
the granting of options subject to such terms and conditions as the Committee
in its discretion deems consistent with the terms of the Plan and not
inconsistent with applicable provisions of the Code. In any event, each option
shall expire (to the extent not fully exercised) on or before the first to
occur of (I) the date that is specified in the option agreement, which date
shall be no later than the tenth anniversary of the date the option is granted
or the date that is the fifth anniversary of the date the option granted in the
event that the option is granted to a key employee who owns stock that
possesses more than 10% of the total combined voting power of all classes of
stock of the Company or any subsidiary; or (ii) the date on which the
5
<PAGE> 6
employee terminates his employment with the Company, unless the Board of
Directors, upon recommendation by the Committee, elects to provide certain more
liberal provisions in the option agreement. (See "Transfer of Options;
Termination of Employment" below). Upon exercise of an option, the holder must
make payment in full of the option price for the shares of the Company's Common
Stock purchased payable in cash, by check, or if provided in the option
agreement, in shares of the Company's Common Stock already owned by the
grantee, or in a combination of such forms of payment.
TRANSFER OF OPTIONS; TERMINATION OF EMPLOYMENT
Options granted under the Plan are non-transferable and non-assignable
except by the laws of descent and distribution and may be exercised during the
lifetime of the holder of such option only by such holder. Under the terms of
the plan, any option will terminate upon an employee's termination of
employment, unless otherwise provided in the option agreement. The Company's
Board of Directors can provide in the option agreement that in the event an
option holder's employment is terminated (except by reason of death), the
grantee may exercise an option within a period of up to three consecutive
months after the date of termination of employment or within a period of up to
12 months if employment is terminated due to the grantee's permanent
disability. Also, the Board of Directors can provide in the option agreement
that upon the death of an option holder, the option holder's personal
representative may exercise the option within a period of up to 12 months after
the death of the option holder.
CORPORATE REORGANIZATION
If the Company is a party to any agreement pursuant to which it agrees
to sell all or substantially all of its assets for cash or property or for a
combination of cash or property or agrees to any merger, consolidation,
reorganization, division or other corporate transaction in which Common Stock
is converted into another security or into the right to receive securities or
property and such agreement does not provide for the assumption or substitution
of options granted under the Plan, each option agreement, at the direction and
discretion of the Committee, may be declared immediately exercisable
notwithstanding the terms of the respective stock option agreements and such
options not exercised will terminate 30 days after the giving of such notice.
TERMINATION AND AMENDMENT
The Plan will terminate on February 28, 1993, but may be terminated by
the Board of Directors at any time before that date. The Plan may be amended at
any time by the Board of Directors provided that the Plan may not be amended
without the approval of the shareholders of the Company if such amendment would
(I) increase the number of shares of the Company's Common Stock reserved for
issuance pursuant to options under the Plan, (ii) extend the maximum ten-year
term of the Plan or the maximum ten-year term of any option, (iii) change the
minimum option price under options, or (iv) change the class of eligible
employees. The termination or any amendment of the Plan may not impair the
rights of holders of outstanding options.
FEDERAL INCOME TAX CONSEQUENCES
THE FEDERAL INCOME TAX CONSEQUENCES REGARDING THE TREATMENT OF
INCENTIVE STOCK OPTIONS ARE COMPLEX. BECAUSE NO RULING HAS BEEN SOUGHT OR
RECEIVED FROM THE INTERNAL REVENUE SERVICE AND BECAUSE NO EVALUATION OF THE
STATE INCOME TAX CONSEQUENCES OF THE GRANT OF SUCH OPTIONS HAS BEEN PRESENTED
HEREIN, SHAREHOLDERS AND INCENTIVE STOCK OPTION GRANTEES ARE STRONGLY URGED TO
CONSULT THEIR OWN TAX ADVISORS REGARDING HOW THE TRANSACTIONS WILL AFFECT THEM
INDIVIDUALLY.
6
<PAGE> 7
An option granted under the Plan is intended to qualify as an
incentive stock option ("ISO") under Section 422A of the Code. Code Section
422A provides that the employee/holder of an ISO does not recognize gain or
loss, and an employer is not entitled to a business expense deduction, at the
time of its grant or exercise.
Upon sale of stock acquired through the ISO, gain must be recognized
to the extent of the amount realized on disposition over the adjusted basis of
the stock. This gain will be treated as long term capital gain if three
requirements are met. First, the employee must retain the shares for at least
two years after the date the option was granted. Second, the employee must
retain the shares for at least one year after receipt of the stock through
exercise of the option. If these requirements are not satisfied, the employee
must recognize as ordinary income in the year the option is exercised the
portion of the gain representing the excess of the fair market value of the
stock over the option price on the date the option is exercised. The employer
is entitled to a corresponding business expense deduction for the amount an
employee must report as ordinary income. For alternative minimum tax purposes,
the ISO creates an item of tax preference when the option is exercised to the
extent the fair market value of the stock at the time the ISO is exercised
exceeds the option price.
Third, in addition to the two holding period requirements, in order to
avoid income recognition at the date of exercise as set forth above, an option
holder must remain an employee of the granting employer from the time of the
grant of the option until three months before the date of exercise. If an
option holder becomes permanently and totally disabled, the required employment
period ends twelve months, and not three months, prior to exercise of the
option.
In exercising options, employees should be aware of the "sequential
exercise rule" which also must be complied with to avoid income recognition at
the time of exercise. The sequential exercise rule requires that previously
granted options be exercised in full before subsequent options may begin to be
exercised. Section 321(a) of the TRA 1986 repealed the sequential exercise rule
applicable to ISOs for tax years beginning after December 31, 1986. However,
this rule remains applicable to all options granted in prior tax years that
this Plan was in effect. For instance, all 1984 options must be exercised
before any 1985 or 1986 options may be exercised. Due to the sequential
exercise rule's repeal for tax years beginning after December 31, 1986, options
issued in tax years after this date do not need to comply with this
requirement. Therefore, options granted under this Plan in the 1987 tax year
and thereafter may be exercised at any time regardless of any options
outstanding from prior years.
Code Section 422A sets forth an additional requirement limiting the
dollar amount of stock options available to each employee in order to avoid
income recognition at the time of exercise. Prior to 1986, employees could not
receive, in any calendar year, options to purchase more than $100,000 of stock
plus any carryover amount. The carryover amount equaled one-half of any unused
limitation amounts from a prior year and such carryover was carried forward for
three consecutive years. TRA 1986 liberalized the limitation requirements to
permit employees to receive options to purchase more than $100,000 of stock in
a single calendar year provided the employee is not able to purchase more than
$100,000 of stock in a given calendar year, such value being determined at the
time the option is granted. Since an ISO may be exercised up to ten years after
its grant, an employer could grant to each employee the option to purchase
$1,000,000 worth of stock limited to $100,000 in each of the succeeding ten
years, provided no other options were outstanding for those years.
ERISA
The Plan is not subject to any provisions of the Employee Retirement
Income Security Act of 1974.
7
<PAGE> 8
RESTRICTIONS ON RESALE
The Plan contains no provisions restricting the resale of shares of
Common Stock acquired by participants under the Plan.
Restrictions on resale are imposed upon all persons who may be deemed
to be "affiliates" (as such term is defined by Rules of the SEC) of the
Company. The most probable method of resale available to affiliates is an
unregistered resale in a broker's transaction that satisfies all of the
applicable conditions of Rule 144 of the SEC. Persons who are not affiliates of
the Company should generally be able to resell shares of Common Stock acquired
upon exercise of options without federal securities law restrictions pursuant
to an exemption from the registration provisions of the Securities Act of 1933,
as amended.
DESCRIPTION OF COMMON STOCK
Holders of $1.00 par value Common Stock of the Company are entitled to
dividends when and as declared by the Board of Directors out of funds legally
available therefore. There are no limitations in any indentures or agreements
upon the payment of dividends. All voting rights are vested in the holders of
the Common Stock and they are entitled to one vote per share. The holders of
Common Stock do not have cumulative voting rights, which means that the holders
of more than 50% of the shares voting for the election of directors can elect
all of the directors if they so choose, and in such event, the holders of the
remaining shares will not be able to elect any person to the Board of
Directors.
Upon liquidation, each share participates ratably in the net assets
available for distribution after payment of all liabilities. The holders of the
Common Stock have no preemptive rights or conversion rights. The Common Stock
is not redeemable. All of the outstanding shares of Common Stock are fully paid
and nonassessable and the additional shares offered hereby, when delivered
against payment therefore as provided in the option agreements, will be fully
paid and nonassessable.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 14-2-156 of the Georgia Business Corporation Code authorizes
indemnification of directors and officers of the Company for liability and
expense incurred by them in connection with any civil, criminal or
administrative claim or proceeding in which they may become involved by reason
their having been a director, officer, employee or agent of the Company or
having served in a similar capacity with another entity at the Company's
request. Article Nine of the Company's By-Laws indemnifies officers and
directors of the Company to the extent permitted by Georgia law. The Article
applies to both civil and criminal actions (including civil actions brought as
a derivative action by or in the right of the Company) and permits
indemnification if the director or officer acted in a manner which he believed
to be in or not opposed to the best interests of the Company and, in addition,
in criminal actions if he had no reasonable cause to believe his conduct to be
unlawful. If the required standard of conduct is met, indemnification may
include counsel fees and disbursements of the director or officer, and
judgments, fines, penalties and settlement payments. Directors and officers who
are successful with respect to any claim against them are entitled to
indemnification for expenses as of right. Unless indemnification is ordered by
a court either (i) the Board of Directors, acting by majority vote of a quorum
consisting of disinterested members, (ii) special legal counsel, or (iii) the
holders of stock acting by affirmative vote of a majority of the shares
entitled to vote, will determine whether the required standard of conduct has
been met.
8
<PAGE> 9
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, may be permitted to directors, officers and
controlling persons of the Company pursuant to the foregoing provisions, the
Company has been informed that in the opinion of the SEC such indemnification
is against public policy as expressed in the Securities Act of 1933, as
amended, and is, therefore, unenforceable.
INFORMATION INCORPORATED BY REFERENCE
The following documents are incorporated herein by reference:
(a) The Company's Annual Report on Form 10K for the year ended
December 31, 1988; and
(b) All other reports filed by the Company pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934, as amended, since the end of
the fiscal year covered by the Annual Report referred to in (a) above.
In addition, all documents subsequently filed by the Company pursuant
to Sections 13, 14, and 15(d) of the Securities Exchange Act of 1934, as
amended, prior to the filing of a post-effective amendment, which indicates
that all securities offered have been sold or which deregisters all securities
then remaining unsold, shall be deemed to be incorporated by reference herein
and to be a part hereof from the date of filing of such documents.
EXPERTS
The consolidated financial statements and schedule of Cotton States
Life and Health Insurance Company and subsidiary as of December 31, 1988 and
1987 and for each of the years in the three-year period ended December 31,
1988, incorporated by reference, have been incorporated herein and in the
Registration Statement in reliance upon the reports of Peat Marwick Main & Co.,
independent certified public accountants, incorporated by reference herein, and
upon the authority of said firm as experts in accounting and auditing.
The legality of the shares of Common Stock to be issued pursuant to
the Plan will be passed upon by Peterson Young Self & Asselin, Atlanta,
Georgia, general counsel to the Company.
9
<PAGE> 10
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 19. Indemnification of Directors and Officers
Incorporated by reference to the description of indemnification
provisions set forth in the Prospectus under the heading "Indemnification of
Directors and Officers."
Item 20. Exhibits
The following exhibits are filed as part of this Registration
Statement:
5 The opinion of Peterson Young Self & Asselin as to the
legality of the securities being registered.
24 Consent of Independent Certified Public Accountants.
Item 21. Rule 415 Offering
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement (or the most
recent post-effective amendment thereof) that, individually or in the
aggregate, represent a fundamental change in the information set forth in the
registration statement;
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the registration statement
or any material change to such information in the registration statement;
provided, however, that paragraphs (a)(1)(I) and (a)(1)(ii) do not apply if the
registration is on Form S-3 or Form S-8, and the information required to be
included in a post-effective amendment by those paragraphs is contained in
periodic reports filed by the registrant pursuant to Section 13 or Section
15(d) of the Securities Exchange Act of 1934 that are incorporated by reference
in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be in the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered that remain unsold at the
termination of the offering.
(b) Filings incorporating subsequent Exchange Act documents by
reference
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 3(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
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<PAGE> 11
(f) Employee Plans on Form S-8
(1) The undersigned registrant hereby undertakes to deliver or
cause to be delivered with the prospectus to each employee to whom the
prospectus is sent or given a copy of the registrant's annual report to
stockholders for its last fiscal year, unless such employee otherwise has
received a copy of such report, in which case the registrant shall state in the
prospectus that it will promptly furnish, without charge, a copy of such report
on written request of the employee. If the last fiscal year of the registrant
has ended within 120 days prior to the use of the prospectus, the annual report
of the registrant for the preceding fiscal year may be so delivered, but within
such 120 day period the annual report for the last fiscal year will be
furnished to each such employee.
(2) The undersigned registrant hereby undertakes to transmit or
cause to be transmitted to all employees participating in the plan who do not
otherwise receive such material as stockholders of the registrant, at the time
and in the manner such material is sent to its stockholders, copies of all
reports, proxy statements and other communications distributed to its
stockholders generally.
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<PAGE> 1
EXHIBIT 10.3.2
FORM OF INCENTIVE STOCK OPTION AGREEMENT
PURSUANT TO THE 1983 INCENTIVE STOCK OPTION PLAN
COTTON STATES LIFE INSURANCE COMPANY
INCENTIVE STOCK OPTION AGREEMENT
This Incentive Stock Option Agreement ("Agreement"), dated as of
____________, (the "Date of Grant"), is made and entered into by COTTON STATES
LIFE INSURANCE COMPANY, a Georgia corporation (the "Company"), and <<Name>>
(the "Grantee"), who is an employee or officer of the Company or one of its
subsidiaries.
WHEREAS, the Board of Directors of the Company (the "Board") has
adopted the Cotton States Life and Health Insurance Company 1983 Incentive
Stock Option Plan, as amended, (the "Plan") and the shareholders of the Company
have approved the Plan.
WHEREAS, the Plan provides for the granting of incentive stock options
by the Compensation Committee of the Board (the "Committee") to key employees
of the Company or any subsidiary of the Company to purchase shares of the
common stock of the Company, par value One Dollar ($1.00) per share (the
"Stock"), in accordance with the terms and provisions thereof; and
WHEREAS, the Committee considers the Grantee to be a person who is
eligible for a grant of incentive stock options under the Plan and has
determined that it would be in the best interest of the Company to grant the
incentive stock options documented herein.
NOW, THEREFORE, the parties hereto, intending to be legally bound
hereby, agree as follows:
1. GRANT OF OPTION
Subject to the terms and conditions hereinafter set forth, the Company,
with the approval and at the direction of the Committee, hereby grants to the
Grantee, as of the Date of Grant, an option to purchase up to shares of Stock at
a price of $____ per share. Such option is hereinafter referred to as the
"Option," and the shares of Stock purchasable upon exercise of the Option are
hereinafter sometimes referred to as the "Option Shares". The Option is intended
by the parties hereto to be, and shall be treated as, an incentive stock option,
as such term is defined under section 422 of the Internal Revenue Code of 1986,
as amended (the "Code"). Subject to such further limitations as are provided
herein, the Option is exercisable commencing on the Date of Grant.
2. TERMINATION OF OPTION
The Option and all rights hereunder with respect thereto, to the
extent such rights shall not have been exercised, shall terminate and become
null and void upon the earlier of: (i) ten years after the Date of Grant; or
(ii) the date on which the Grantee terminates his employment with the Company
of malfeasance or wrongdoing adversely affecting the Company or any parent or
subsidiary of the Company.
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<PAGE> 2
3. EXERCISE OF OPTION
[(a) At any time during the period of this Option
commencing with the ___ anniversary of the Date of Grant, the Grantee may
purchase up to % of the shares covered by this Option and may purchase up to an
additional 33 1/3 % on each of the second and third anniversaries from the Date
of Grant so that this Option will be fully vested on the third anniversary of
the Date of Grant.]
(b) The Grantee may exercise the Option with respect to
all or any part of the number of Option Shares to the extent then exercisable
hereunder, by giving the Secretary of the Company written notice of intent to
exercise. The notice of exercise shall specify the number of Option Shares as
to which the Option is to be exercised and the date of exercise thereof.
(c) Upon a termination of the Grantee's employment for
any reason other than as set forth in Section 2(ii) of this Agreement, the
Option may be exercised during the following periods, but only to the extent
that the Option was outstanding and exercisable on any such date of
termination: (i) the one-year period following the date of the Grantee's death,
in the case of the Grantee's death during his employment by the Company, or the
one-year period following the termination of employment due to permanent
disability (as determined by the Plan) and (ii) the three-month period
following the date of such termination in the case of termination of his
employment for any reason other than the death or permanent disability of the
Grantee or pursuant to Section 2(ii) of this Agreement. A transfer of the
Grantee's employment between the Company and any subsidiary of the Company, or
between any subsidiaries of the Company, shall not be deemed to be a
termination of the Grantee's employment.
(d) Full payment (in U.S. dollars) by the Grantee of the
option price for the Option Shares purchased shall be made (i) in cash or by
check, or (ii) by delivery of mature shares having a Fair Market Value,
determined as of the date of exercise, equal to the aggregate option price
payable by reason of such exercise, on or before the exercise date specified in
the notice of exercise.
(e) On the exercise date specified in the Grantee's
notice or as soon thereafter as is practicable, the Company shall cause to be
delivered to the Grantee a certificate or certificates for the Option Shares
then being purchased (out of unissued Stock or reacquired Stock, as the Company
may elect) upon full payment for such Option Shares. The obligations of the
Company to deliver the Stock shall, however, be subject to the condition that
if at any time the Committee shall determine in its discretion that the
listing, registration or qualification of the Option Shares upon any securities
exchange or under any state or federal law, or the consent or approval of any
governmental regulatory body, is necessary or desirable as a condition of, or
in connection with, the Option or the issuance or purchase of the Stock
thereunder, the Option may not be exercised in whole or in part unless such
listing, registration, qualification, consent or approval shall have been
effected or obtained free of any conditions not acceptable to the Committee.
(f) If the Grantee fails to pay for any of the Option Shares
specified in such notice or fails to accept delivery thereof, the Grantee's
right to purchase such Option Shares may be terminated by the Company. The date
specified in the Grantee's notice as the date of exercise shall be deemed the
date of exercise of the Option, provided that payment in full for the Option
Shares to be purchased upon such exercise shall have been received by such
date.
4. ADJUSTMENT OF AND CHANGES IN STOCK OF THE COMPANY
(a) In the event of a reorganization, recapitalization,
change of shares, stock split, spin-off, stock
dividend, reclassification, subdivision or
combination of shares, rights offering or any other
change in the corporate structure or shares of
capital stock of the Company, the Committee shall
make such adjustment as appropriate in the number
and kind of shares of Stock subject to the Option or
in the option price; provided, however, that no such
adjustment shall give the Grantee any additional
benefits under the Option.
2
<PAGE> 3
(b) In the event that the Company shall be a party to any
reorganization involving a merger, consolidation or acquisition of the Stock or
the assets of the Company, the Committee, in its sole discretion, may:
(i) declare that the Option granted hereunder shall
become exercisable immediately notwithstanding the provisions of this Agreement
regarding exercisability and that the Option shall terminate 30 days after the
Committee gives written notice to Grantee of his immediate right to exercise
the Option and of the Committee's decision to terminate the Option if not
exercised within such thirty-day period; or
(ii) notify the Grantee that the Option granted hereunder
shall apply with appropriate adjustments as determined by the Committee to the
securities of the resulting corporation to which holders of the number of
shares of Stock subject to the Option would have been entitled.
(c) The adoption of a plan of dissolution or liquidation by the
Board of Directors and the shareholders of the Company shall cause the Option
to terminate to the extent not exercised prior to the adoption of the plan of
dissolution or liquidation by the shareholders of the Company; provided,
however, that the Committee, in its discretion, may declare that the Option
shall become exercisable immediately notwithstanding the provisions of this
Agreement regarding exercisability; and provided further that in the event of
the adoption of a plan of dissolution or liquidation in connection with a
reorganization as described in the first sentence of subparagraph 4(b), the
Option shall be governed by and be subject to the provisions of such sentence.
(d) If any rights or warrants to subscribe for additional shares
are given pro rata to holders of outstanding shares of the Stock, the Grantee
shall be entitled to the same rights or warrants on the same basis as holders
of the outstanding shares with respect to such portion of the Grantee's Option
that may be exercised on or prior to the date of the expiration of such rights
or warrants.
5. FAIR MARKET VALUE
For purposes of the Plan, the "fair market value" of the shares of
Stock shall be the mean between the high "bid" and the low "asked" prices of
the Stock in the over-the-counter market on the day on which such value is to
be determined or, if no shares were traded on such day, on the first day
immediately preceding such day on which shares were traded. If the Stock is not
regularly traded in the over-the-counter market but is registered on a national
securities exchange, the "fair market value" of the shares of Stock shall mean
the closing price of the Stock on such national securities exchange on the day
on which such value is to be determined or, if no shares were traded on such
day, on the first day immediately preceding such day on which shares were
traded. If the Stock is not regularly traded in the over-the-counter market or
registered on a national securities exchange the Committee shall determine the
fair market value of the Stock in good faith in accordance with Code section
422(c)(1) and accompanying Treasury Regulations.
6. NO RIGHTS OF SHAREHOLDERS
Neither the Grantee nor any personal representative shall be, or shall
have any of the rights and privileges of, a shareholder of the Company with
respect to any shares of Stock purchasable or issuable upon the exercise of the
Option, in whole or in part, prior to becoming the holder of record of such
shares.
7. NON-TRANSFERABILITY OF OPTION
During the Grantee's lifetime, the Option hereunder shall be
exercisable only by the Grantee or a legal representative of the Grantee, and
the Option shall not be transferable except, in case of the death of the
Grantee, by will or the laws of descent and distribution, nor shall the Option
be subject to attachment, execution or other similar process. In the event of
(i) any attempt by the Grantee to alienate, assign, pledge, hypothecate or
otherwise dispose of the Option, except as provided for herein, or (ii) the
levy of any attachment, execution or similar process by any third party upon
the rights or interest hereby conferred, the Company may terminate the Option
by notice to the Grantee, and it shall thereupon become null and void.
3
<PAGE> 4
8. EMPLOYMENT NOT AFFECTED
Neither the granting of the Option nor its exercise shall be construed
as granting to the Grantee any right with respect to continuance of employment
by the Company. Except as may otherwise be limited by a written agreement
between the Company and the Grantee, the right of the Company to terminate at
will the Grantee's employment with it at any time (whether by dismissal,
discharge, retirement or otherwise) is specifically reserved by the Company, as
the Company or on behalf of the Company (whichever the case may be), and
acknowledged by the Grantee.
9. AMENDMENT OF OPTION
This Agreement and the terms of the Option may be amended by the Board
or the Committee at any time (i) if the Board or the Committee determines, in
its sole discretion, that amendment is necessary or advisable due to any
addition to or change in the Code or in the regulations issued thereunder, or
any federal or state securities law or other law or regulation, which change
occurs after the Date of Grant and by its terms applies to the Option; or (ii)
other than in the circumstances described in clause (i), with the consent of
the Company and the Grantee.
10. SECURITIES LAWS
This Option may not be exercised if the issuance of shares of Stock of
the Company upon such exercise would constitute a violation of any applicable
federal or state securities or other law or valid regulation. The Grantee, as a
condition to his exercise of this Option, shall represent to the Company that
the shares of Stock that he acquires under this Option are being acquired by
him for investment and not with a present view to distribution or resale,
unless counsel for the Company is then of the opinion that such a
representation is not required under the Securities Act of 1933, as amended, or
any other applicable law, regulation or rule of any governmental agency.
The Grantee represents and warrants that he will be acquiring the
Option Shares for investment purposes and not with a view to distribution. The
Grantee further represents and warrants that he is aware that the Option Shares
have not been registered under the Securities Act or under the provisions of
Georgia law and that the Option Shares may not be sold, transferred or
otherwise assigned without registration or an exemption therefrom. Grantee
acknowledges being informed by the Company that the Option Shares are
restricted securities and that each certificate for shares of Stock issued upon
exercise of the Option shall be stamped or otherwise imprinted with a
restrictive legend in form and context deemed necessary by the Company. The
undersigned further acknowledges that he is an officer and a shareholder of the
Company and is aware of the business and operations of the Company.
11. NOTICE
Any notices or other communications to any party pursuant to or
relating to this Agreement and the transactions provided for herein shall be
deemed to be given, delivered or received when delivered personally or three
days after being deposited in the United States Mail, registered or certified,
and with proper postage and registration and certification fees prepaid,
addressed to the parties for whom intended at the addresses indicated for each
party as set forth below:
Cotton States Life Insurance Company
If to the Company: 244 Perimeter Parkway, N.E.
Atlanta, Georgia 30346
Attention: __________________________
with a copy to: Thomas O. Powell, Esquire
Troutman Sanders LLP
600 Peachtree Street, N.E., Suite 5200
Atlanta, Georgia 30308
4
<PAGE> 5
Grantee:
[At the latest address listed for the Grantee in the
Company's records.]
12. INCORPORATION OF PLAN BY REFERENCE
The Option is granted pursuant to the terms of the Plan, the terms of
which are incorporated herein by reference, and the Option shall in all
respects be interpreted in accordance with the Plan. The Committee shall
interpret and construe the Plan and this Agreement, and its interpretations and
determinations shall be conclusive and binding on the parties hereto and any
other person claiming an interest hereunder, with respect to any issue arising
hereunder or thereunder.
13. GOVERNING LAW
The validity, construction, interpretation and effect of this
Agreement shall exclusively be governed by and determined in accordance with
the law of the State of Georgia.
14. COUNTERPARTS
This Agreement may be executed with counterpart signature pages, all
of which together shall constitute one and the same Agreement.
15. SUCCESSORS AND ASSIGNS
This Agreement shall inure to the benefit of and be enforceable by and
binding upon the permitted successors and assigns of each party, including the
personal or legal representatives, executors, administrators, heirs and
legatees of the Grantee.
5
<PAGE> 6
IN WITNESS WHEREOF, the Company has caused its duly authorized
officers to execute and attest this Agreement, and to apply the corporate seal
hereto, and the Grantee has placed his or her signature hereon, effective as of
the date first written above.
<TABLE>
<S> <C>
ATTEST: COTTON STATES LIFE INSURANCE COMPANY
By: By:
----------------------------------------- ------------------------------------
Its: Its:
------------------------------------- -------------------------------
[CORPORATE SEAL]
GRANTEE
- -------------------------------------------- ----------------------------------------
Witness
</TABLE>
6
<PAGE> 1
EXHIBIT 10.4
AGREEMENT AND GENERAL RELEASE
Cotton States Mutual Insurance Company and its parent corporation,
affiliates, subsidiaries, divisions, successors and assigns, and the employees,
officers, directors and agents thereof, including the trustees, administrators
and any other fiduciaries of the employee benefit plans of Cotton States mutual
Insurance Company (collectively "Cotton States"), and Gary Meader, ("Gary")
agree:
1. LAST DAY OF EMPLOYMENT. Gary's last day of employment with
Cotton States is May 31, 2001.
2. CONSIDERATION. In consideration for Gary's signing this
Agreement and General Release and his compliance with the promises made herein,
Cotton States agrees:
a. to pay Gary bi-weekly payment of Seven Thousand
Eight Hundred Eighty-four Dollars and Sixty-two Cents ($7,884.62), less lawful
deductions, through the period ending May 31, 2001;
b. to transfer to Gary the title to his Company car, a
1999 Lincoln, effective September 1, 1999, with the actual cost of this vehicle
to be added to Gary's 1999 W-2;
c. to pay the Company's portion of Gary's group health
and life insurance premium through the period ending May 31, 2001, unless Gary
obtains such group insurance through a new employer;
d. to pay Gary's monthly dues to Dunwoody Country Club
through the period ending until December 31, 1999;
e. to provide Gary with a six-month outplacement
program through The Mulling Group;
f. to allow Gary to receive his vested value (83%) of
his 1997 Phantom Stock Award equal to the aggregate increase in the fair market
value of the shares as of December 31, 1999; and
g. to allow Gary to receive his vested number (83%) of
his 1997 performance shares if the performance target of $1.13 cents per share
is achieved by December 31, 1999.
The payments in this paragraph shall begin after Cotton
States receives a letter from Gary in the form attached as Exhibit A.
3. NO CONSIDERATION ABSENT EXECUTION OF THIS AGREEMENT. Gary
understands and agrees he would not receive the monies and/or benefits
specified in paragraph "2" above except for his execution of this Agreement and
General Release and his fulfillment of the promises contained herein.
4. REVOCATION. Gary may revoke this Agreement and General
Release for a period of seven (7) days following the day he executes this
Agreement and General Release. Any revocation within this period must be
submitted, in writing, to Wendy M. Chamblee and state, "I hereby revoke my
acceptance of our Agreement and General Release." The revocation must be
personally delivered to Wendy M. Chamblee or her designee, or mailed to Wendy
M. Chamblee and postmarked within seven (7) days of execution of this Agreement
and General Release. This Agreement and General Release shall not become
effective or enforceable until the revocation period has expired. If the last
day of the revocation period is a Saturday, Sunday, or legal holiday in
Georgia, then the revocation period shall not expire until the next following
day which is not a Saturday, Sunday, or legal holiday.
1
<PAGE> 2
5. GENERAL RELEASE OF CLAIMS. Gary knowingly and voluntarily
releases and forever discharges Cotton States of and from any and all claims,
known and unknown, which against Cotton States, Gary, his heirs, executors,
administrators, successors, and assigns (collectively "Gary") have or may have
as of the date of execution of this Agreement and General Release, including,
but not limited to, any alleged violation of:
- The National Labor Relations Act, as amended;
- Title VII of the Civil Rights Act of 1964, as amended;
- Sections 1981 through 1988 of Title 42 of the United States
Code, as amended;
- The Employee Retirement Income Security Act of 1974, as
amended;
- The Immigration Reform Control Act, as amended;
- The Americans with Disabilities Act of 1990, as amended;
- The Age Discrimination in Employment Act of 1967, as amended;
- The Fair Labor Standards Act, as amended;
- The Occupational Safety and Health Act, as amended;
- The Family and Medical Leave Act of 1993;
- The Georgia Equal Employment for Persons with Disabilities
Code, as amended;
- The Georgia Equal Pay Act;
- any other federal, state or local civil or human rights law
or any other local, state or federal law, regulation or
ordinance;
- any public policy, contract, tort, or common law; or
- any allegation for costs, fees, or other expenses including
attorney's fees incurred in these matters.
6. NO CLAIMS EXIST. Gary confirms he has no claim, charge,
complaint, or action against Cotton States in any forum or form. In the event
any such claim, charge, complaint or action is filed, Gary shall not be
entitled to recover any relief or recovery therefrom, including costs and
attorney's fees.
7. CONFIDENTIALITY. Gary agrees not to disclose any information
regarding the existence or substance of this Agreement and General Release,
except to an attorney with whom he chooses to consult regarding his
consideration of this Agreement and General Release.
8. NO FUTURE APPLICATION FOR EMPLOYMENT. Gary shall not apply in
the future for employment with Cotton States.
2
<PAGE> 3
9. GOVERNING LAW AND INTERPRETATION. This Agreement and General
Release shall be governed and conformed in accordance with the laws of the
State of Georgia without regard to its conflict of laws provision. Should any
provision of this Agreement and General Release be declared illegal or
unenforceable by any court of competent jurisdiction and cannot be modified to
be enforceable, excluding the general release language, such provision shall
immediately become null and void, leaving the remainder of this Agreement and
General Release in full force and effect.
10. NONADMISSION OF WRONGDOING. Gary agrees neither this
Agreement and General Release nor the furnishing of the consideration for this
Release shall be deemed or construed at any time for any purpose as an
admission by Cotton States of any liability or unlawful conduct of any kind.
11. AMENDMENT. This Agreement and General Release may not be
modified, altered or changed except upon express written consent of both
parties wherein specific reference is made to this Agreement and General
Release.
12. ENTIRE AGREEMENT. This Agreement and General Release sets
forth the entire agreement between the parties hereto and fully supersedes any
prior agreements or understandings between the parties. Gary acknowledges he
has not relied on any representations, promises, or agreements of any kind made
to him in connection with his decision to sign this Agreement and General
Release except for those set forth in this Agreement and General Release.
GARY HAS BEEN ADVISED IN WRITING HE HAS UP TO TWENTY-ONE (21) DAYS TO
CONSIDER THIS AGREEMENT AND GENERAL RELEASE. GARY ALSO HAS BEEN ADVISED IN
WRITING TO CONSULT WITH AN ATTORNEY PRIOR TO EXECUTION FO THIS AGREEMENT AND
GENERAL RELEASE.
GARY AGREES ANY MODIFICATIONS, MATERIAL OR OTHERWISE, MADE TO THIS
AGREEMENT AND GENERAL RELEASE DO NOT RE-START OR AFFECT IN ANY WAY THE ORIGINAL
TWENTY-ONE DAY CONSIDERATION PERIOD.
HAVING ELECTED TO EXECUTE THIS AGREEMENT AND GENERAL RELEASE, TO
FULFILL THE PROMISES SET FORTH HEREIN, AN TO RECEIVE THEREBY THE SUMS AND
BENEFITS SET FORTH IN PARAGRAPH "2" ABOVE, GARY FREELY AND KNOWINGLY, AND AFTER
DUE CONSIDERATION, ENTERS INTO THIS AGREEMENT AND GENERAL RELEASE INTENDING TO
WAIVE, SETTLE AND RELEASE ALL CLAIM HE HAS OR MIGHT HAVE AGAINST COTTON STATES.
IN WITNESS WHEREOF, the parties hereto knowingly and voluntarily
executed this Agreement and General Release as of the date set forth below:
/s/ Gary Meader
------------------------------------------------
Gary Meader
August 31, 1999
------------------------------------------------
Date
Cotton States Mutual Insurance Company
By: /s/ Wendy M. Chamblee
-----------------------------------------
[name] Wendy M. Chamblee
[title] Vice President/Secretary
August 18, 1999
------------------------------------------------
Date
3
<PAGE> 4
EXHIBIT A
MS. WENDY CHAMBLEE
Vice President of Human Resources
Cotton States Mutual Insurance Company
244 Perimeter Center Parkway, N.E.
Atlanta, Georgia 30346
Re: Agreement and General Release
Dear Wendy:
On August 31, 1999 I executed an Agreement and General Release between
Cotton States and Me. I was advised by Cotton States, in writing, to consult
with an attorney of my choosing prior to executing this Agreement and General
Release.
More than seven (7) days have passed since I executed the Agreement
and General Release. I have at no time revoked my acceptance or execution of
that Agreement and General Release and reaffirm my acceptance of it. Therefore,
in accordance with the terms of our Agreement and General Release, I request
payment of the monies described in paragraph 2 of that Agreement.
Very truly yours,
/s/ Gary Meader
Gary Meader
4
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
CSI was organized in the State of Georgia and is doing business in various
states under the name of CSI Brokerage Services, Inc.
CSMR was organized in the State of Florida and is doing business in various
states under the name of CSMRI.
1
<PAGE> 1
EXHIBIT 23
THE BOARD OF DIRECTORS
COTTON STATES LIFE INSURANCE COMPANY
We consent to the incorporation by reference in the registration statements
(No. 333-00793 and No. 333-00795) on Form S-8 of Cotton States Life Insurance
Company of our report dated February 22, 2000, relating to the consolidated
balance sheets of Cotton States Life Insurance Company and subsidiaries as of
December 31, 1999 and 1998, and the related consolidated statements of
earnings, shareholders' equity, comprehensive income and cash flows for each of
the years in the three-year period ended December 31, 1999, and all related
schedules, which report appears in the December 31, 1999, annual report on Form
10-K of Cotton States Life Insurance Company.
/s/ KPMG LLP
KPMG LLP
Atlanta, Georgia
March 22, 2000
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF COTTON STATES LIFE INSURANCE COMPANY FOR THE TWELVE
MONTHS ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<DEBT-HELD-FOR-SALE> 102,772,134
<DEBT-CARRYING-VALUE> 16,076,877
<DEBT-MARKET-VALUE> 15,975,769
<EQUITIES> 2,623,214
<MORTGAGE> 2,898,757
<REAL-ESTATE> 0
<TOTAL-INVEST> 139,457,430
<CASH> 610,695
<RECOVER-REINSURE> 4,038,669
<DEFERRED-ACQUISITION> 41,263,817
<TOTAL-ASSETS> 190,516,318
<POLICY-LOSSES> 124,061,054
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 6,754,504
<OTHER-SE> 48,032,573
<TOTAL-LIABILITY-AND-EQUITY> 190,516,318
23,302,097
<INVESTMENT-INCOME> 9,252,370
<INVESTMENT-GAINS> 474,628
<OTHER-INCOME> 3,828,087
<BENEFITS> 16,435,928
<UNDERWRITING-AMORTIZATION> 3,041,566
<UNDERWRITING-OTHER> 7,196,353
<INCOME-PRETAX> 10,183,335
<INCOME-TAX> 2,855,390
<INCOME-CONTINUING> 7,327,945
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,327,945
<EPS-BASIC> 1.16
<EPS-DILUTED> 1.14
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
