<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):
September 29, 1994 (September 29, 1994)
TORCHMARK CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 1-8052 63-0780404
(State or other (Commission (IRS employer
jurisdiction of file number) identification no.)
incorporation)
2001 Third Avenue South, Birmingham, Alabama 35233
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code:
(205) 325-4200
Page 1 of __ sequentially numbered pages. The Index to Exhibits is located on
sequentially numbered page 3.
<PAGE>
Item 5. Other Events.
On September 15, 1994, Torchmark Corporation ("Torchmark") and American
Income Holding, Inc. ("American Income") signed a definitive Agreement and Plan
of Merger (the "Merger Agreement"), pursuant to which a Torchmark subsidiary has
commenced a cash tender offer for all of the outstanding common stock of
American Income for $35 in cash per share of American Income common stock. Any
shares of American Income common stock not tendered in the tender offer will be
purchased for cash at $35 per share pursuant to a statutory merger. The tender
offer is subject to a condition that Torchmark acquire at least 51% of the
outstanding shares of American Income common stock on a fully diluted basis. The
tender offer and merger are also subject to approval by all necessary insurance
regulatory authorities and other customary conditions. Holders of approximately
41% of the American Income shares, including Bernard Rapoport, the Chairman of
the Board of American Income, Charles B. Cooper, the President of American
Income, and Golder, Thoma, Cressey Fund III Limited Partnership, have agreed to
tender their shares to Torchmark and have granted Torchmark an option to acquire
their shares under certain conditions.
Torchmark intends to finance the acquisition with a combination of the
proceeds of a proposed public offering of monthly income preferred securities
and bank financing, as well as with internal funds.
Included as exhibits to this Current Report on Form 8-K are (i) historical
Consolidated Financial Statements of American Income as of December 31, 1992 and
1993 and for each of the three years ended December 31, 1993, (ii) historical
Consolidated Financial Statements of American Income as of June 30, 1994 and for
the three-month and six-month periods ended June 30, 1994 and (iii) Pro Forma
Consolidated Condensed Financial Statements (Unaudited) of Torchmark and
American Income. Information with respect to American Income and the historical
financial information of American Income was provided by American Income.
-2-
<PAGE>
ITEM 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Financial Statements of Business to be Acquired.
1. Consolidated Financial Statements of America Income as of December
31, 1992 and 1993 and for each of the three years ended December
31, 1993.
2. Consolidated Financial Statements of American Income as of June 30,
1994 and for the three-month and six-month periods ended June 30,
1994.
(b) Pro Forma Financial Information
1. Pro Forma Consolidated Condensed Financial Statements (Unaudited)
of Torchmark and American Income.
(c) Exhibits.
23. Consent of KPMG Peat Marwick LLP.
-3-
<PAGE>
SIGNATURE
Pursuant to the requirements 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.
TORCHMARK CORPORATION
Date: September 29, 1994 By: /s/ Carol A. McCoy
------------------------------
Name: Carol A. McCoy
----------------------------
Title: Secretary
---------------------------
-4-
<PAGE>
Item 7(a)(1)
AMERICAN INCOME HOLDING, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets as of December 31,
1992 and 1993....................................................... F-3
Consolidated Statements of Earnings for the years
ended December 31, 1991, 1992 and 1993.............................. F-4
Consolidated Statements of Stockholders' Equity for
the years ended December 31, 1991,
1992 and 1993....................................................... F-5
Consolidated Statements of Cash Flows for the years
ended December 31, 1991, 1992 and 1993.............................. F-6
Notes to Consolidated Financial Statements............................... F-7
Financial Statement Schedules
- - -----------------------------
I Summary of Investments.............................................. F-24
III Condensed Financial Information of Parent.......................... F-25
V Supplementary Insurance Information................................ F-29
VI Reinsurance........................................................ F-30
VIII Valuation of Qualifying Accounts and Reserves...................... F-31
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
American Income Holding, Inc.:
We have audited the consolidated financial statements of American Income
Holding, Inc. as listed in the accompanying index. In connection with our
audits of the consolidated financial statements, we also have audited the
financial statement schedules as listed in the accompanying index. These
consolidated financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of American
Income Holding, Inc. and subsidiaries as of December 31, 1992 and 1993, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1993, in conformity with generally accepted
accounting principles. Also in our opinion, the related 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.
KPMG Peat Marwick
Dallas, Texas
January 28, 1994
F-2
<PAGE>
AMERICAN INCOME HOLDING, INC. AND SUBSIDIARIES
December 31, 1992 and 1993
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
ASSETS 1992 1993
-------- --------
<S> <C> <C>
Investments (notes 3 and 15):
Fixed maturities, available for sale, at amortized cost
(market of $338,936 in 1992 and $367,282 in 1993)................................. $339,830 $355,846
Common stocks, at market (cost of $552 in 1992 and $497 in 1993).................... 654 772
Preferred stocks, at market (cost of $1,439 in 1992 and $439 in 1993)............... 1,552 500
Mortgage loans, less allowance for doubtful loans of $1,726 in 1992
and 1993)......................................................................... 18,427 16,271
Policy loans, secured by cash values................................................ 22,309 23,054
Other loans and investments......................................................... 11,400 7,914
Real estate......................................................................... 6,741 6,596
Cash and cash equivalents........................................................... 20,641 40,946
-------- --------
Total investments...................................................................... 421,554 451,899
Investment income due and accrued...................................................... 6,294 5,510
Agents' balances and accounts receivable, less allowance for doubtful
accounts of $6,094 in 1992 and $6,605 in 1993........................................ 43,098 43,100
Deferred acquisition costs (note 4).................................................... 61,318 83,842
Cost of insurance acquired (note 4).................................................... 105,434 97,366
Goodwill............................................................................... 6,957 6,531
Property and equipment, net............................................................ 1,778 1,751
Other assets........................................................................... 2,329 1,507
-------- --------
Total assets....................................................................... $648,762 $691,506
======== ========
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<S> <C> <C>
Liability for future policy benefits-life policies (note 4)............................ $225,234 $245,349
Liability for future policy benefits-accident and health policies (note 4)............. 26,055 26,702
Policy and contract claims............................................................. 15,920 15,965
Other policyholder funds............................................................... 49,767 57,530
Federal income taxes payable........................................................... 1,075 366
Deferred Federal income taxes (note 6)................................................. 57,867 61,253
Notes payable (note 5)................................................................. 100,000 80,000
Other liabilities...................................................................... 10,269 12,105
-------- --------
Total liabilities.................................................................. 486,187 499,270
-------- --------
Stockholders' equity (notes 2,3,9,12, and 13):
Common stock, $.01 par value, shares authorized-16,070,000 in 1992
and 1993, shares issued and outstanding-15,710,620 in
1992 and 15,736,566 in 1993........................................................ 157 157
Common stock, paid in excess......................................................... 93,626 93,859
Net unrealized investment gains...................................................... 215 336
Cumulative foreign currency translation adjustment................................... - (391)
Retained earnings.................................................................... 68,577 98,275
-------- --------
Total stockholders' equity....................................................... 162,575 192,236
-------- --------
Commitments and contingencies (notes 5,7,9,10 and 13)
Total liabilities and stockholders' equity......................................... $648,762 $691,506
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
AMERICAN INCOME HOLDING, INC. AND SUBSIDIARIES
Years Ended December 31, 1991, 1992 and 1993
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1991 1992 1993
---------- ---------- ----------
Revenues (notes 3 and 11): (Restated-
Note 15)
<S> <C> <C> <C>
Premiums........................................................... $129,922 $138,524 $151,612
Net investment income.............................................. 33,333 35,201 32,107
Net realized investment gains (losses)............................. 2,966 (304) (229)
Other.............................................................. 3,197 1,723 2,261
-------- -------- --------
Total revenues.................................................. 169,418 175,144 185,751
-------- -------- --------
Benefits and expenses:
Death benefits..................................................... 18,036 19,078 22,259
Accident and health benefits....................................... 15,210 15,760 15,217
Surrender benefits and other fund withdrawals...................... 13,320 13,269 12,693
Increase in reserves for life and accident and health policies
and contracts..................................................... 14,839 17,523 20,859
Interest and other payments on policies and contract funds......... 3,228 3,355 3,931
Amortization of deferred acquisition costs......................... 14,103 15,377 16,825
Amortization of cost of insurance acquired......................... 10,228 8,820 8,068
Commissions........................................................ 11,529 12,674 13,545
Other operating expenses........................................... 11,458 12,722 11,838
-------- -------- --------
Total benefits and expenses....................................... 111,951 118,578 125,235
-------- -------- --------
Earnings from insurance operations before Federal income taxes,
extraordinary charges and effect of change in accounting
principle........................................................ 57,467 56,566 60,516
Corporate expenses:
Amortization of goodwill........................................... 800 500 426
Interest expense................................................... 19,479 8,142 4,189
-------- -------- --------
Total corporate expenses.......................................... 20,279 8,642 4,615
-------- -------- --------
Earnings before Federal income taxes, extraordinary charges and
effect of change in accounting principle......................... 37,188 47,924 55,901
Federal income taxes (note 6):
Current............................................................ 10,939 15,983 18,059
Deferred........................................................... 747 (589) 3,417
-------- -------- --------
Total Federal income taxes........................................ 11,686 15,394 21,476
-------- -------- --------
Earnings before extraordinary charges and effect of change in
accounting principle.............................................. 25,502 32,530 34,425
Preferred stock dividends........................................... 842 187 -
-------- -------- --------
Net earnings applicable to common stock before extraordinary
charges and effect of change in accounting principle............... 24,660 32,343 34,425
Extraordinary charges, net of tax (note 14)...................... - (4,885) (638)
Effect of change in accounting principle (note 6)................ (4,624) - -
-------- -------- --------
Net earnings applicable to common stock..................... $ 20,036 $ 27,458 $ 33,787
======== ======== ========
Net earnings per common share:
Net earnings applicable to common stock before extraordinary
charges and effect of change in accounting principle.............. $ 2.14 $ 2.12 $ 2.14
Extraordinary charges, net of tax (note 14)........................ - (0.32) (0.04)
Effect of change in accounting principle (note 6).................. (0.40) - -
-------- -------- --------
Net earnings per common share................................... $ 1.74 $ 1.80 $ 2.10
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
AMERICAN INCOME HOLDING, INC. AND SUBSIDIARIES
Years Ended December 31, 1991, 1992 and 1993
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Class B Net Cumulative
Common Stock Common Stock unrealized foreign Total
---------------- ------------------
Paid Paid investment currency stock-
in in gains translation Retained holders'
Amount excess Amount excess (losses) adjustment earnings equity
------ -------- -------- -------- ----------- ------------ --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1990 $ 85 $11,165 $ 51 $ 3,964 $(44) $ - $23,412 $ 38,633
Conversion of Class B Common stock to
common stock 15 2,266 (29) (2,252) - - - -
Net earnings applicable to common
stock - - - - - - 20,036 20,036
Change in net unrealized investment
gains (losses) - - - - 183 - - 183
---- ------- ------- ------- ---------- ----------- ------- --------
Balance, December 31, 1991 100 13,431 22 1,712 139 - 43,448 58,852
Issuance of Common Stock 40 70,157 - - - - - 70,197
Conversion of Class B common stock to
common stock 11 1,723 (22) (1,712) - - - -
Conversion of preferred stock to
common stock 3 6,438 - - - - - 6,441
Exercise of stock options 3 587 - - - - - 590
Tax benefits related to stock options
exercised - 1,290 - - - - - 1,290
Net earnings applicable to common
stock - - - - - - 27,458 27,458
Change in net unrealized investment
gains (losses) - - - - 76 - - 76
Dividends to stockholders ($.15/share) - - - - - - (2,329) (2,329)
---- ------- ------- ------- ---------- ----------- ------- --------
Balance at December 31, 1992 157 93,626 - - 215 - 68,577 162,575
Exercise of stock options - 170 - - - - - 170
Tax benefits related to stock options
exercised - 63 - - - - - 63
Net earnings applicable to common
stock - - - - - - 33,787 33,787
Change in net unrealized investment
gains (losses) - - - - 121 - - 121
Change in cumulative foreign currency
translation adjustment - - - - - (391) - (391)
Dividends to stockholders ($.26/share) - - - - - - (4,089) (4,089)
---- ------- ------- ------- ---------- ----------- ------- --------
Balance, December 31, 1993 $157 $93,859 - - $336 $(391) $98,275 $192,236
==== ======= ======= ======= ========== =========== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
AMERICAN INCOME HOLDING, INC. AND SUBSIDIARIES
Years Ended December 31, 1991, 1992, and 1993
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
1991 1992 1993
-------------- ------------ ------------
Cash flows from operating activities: (Restated-
Note 15)
<S> <C> <C> <C>
Earnings before extraordinary
charges and effect of change in
accounting
principle.......................... $ 25,502 $ 32,530 $ 34,425
Adjustments to reconcile earnings
to net cash provided by operating
activities
Amortization of deferred policy
acquisition costs................ 14,103 15,377 16,825
Amortization of cost of insurance
acquired......................... 10,228 8,820 8,068
Deferred policy acquisition
costs............................ (31,929) (34,440) (39,517)
Increase in future policy
benefits......................... 14,839 17,523 20,859
(Increase) decrease in agents'
balances and accounts
receivable....................... (1,068) (3,482) (2)
Decrease (Increase) in Federal
income tax payable............... - - (709)
Amortization of discount on
investments...................... (2,429) (4,718) (2,076)
Amortization of goodwill.......... 800 500 426
Net realized investment losses
(gains).......................... (2,966) 304 229
Deferred Federal income taxes..... 747 (589) 3,417
Depreciation on property,
equipment and real estate........ 220 416 352
Interest on policy loans.......... (1,213) (1,379) (1,424)
Decrease (increase) in accrued
investment income................ 1,513 (1,255) 784
Increase in claims and other
policyholder funds............... 4,581 7,043 7,808
Increase (decrease) in other
liabilities...................... 2,750 (1,054) 1,363
Decrease (increase) in other
assets........................... 1,647 626 513
Tax benefit related to
extraordinary charges (note 14).. - 2,516 344
Tax benefit related to stock
options exercised................ - 1,290 63
Other noncash charges in income,
net.............................. (457) 495 (663)
--------- --------- ---------
Net cash provided by
operating activities......... 36,868 40,523 51,085
--------- --------- ---------
Cash flows from investing activities:
Purchases of fixed maturities....... (266,857) (179,206) (102,224)
Purchases of equity securities...... (149) (3,900) -
Sales of fixed maturities........... 223,370 69,229 9,852
Maturities, calls and repayments of
fixed maturities................... 35,867 79,570 76,750
Sales of equity securities.......... 166 3,683 1,480
Funding of loans.................... (465) (367) (422)
Real estate and other investments
acquired........................... (6,999) (84) (55)
Real estate and other investments
sold............................... - - 3,500
Repayment of loans and other
investments........................ 2,167 3,762 3,423
Purchase of property and equipment.. (163) (137) (233)
Change in policy loans.............. (381) 177 679
--------- --------- ---------
Net cash used in investing
activities.................... (13,444) (27,273) (7,250)
--------- --------- ---------
Cash flows from financing activities:
Debt issuance costs................. - (1,712) -
Prepayment penalty-subordinated
debt............................... - (1,000) -
Proceeds from long-term debt........ - 105,000 13,500
Cash dividends paid................. - (1,543) (3,616)
Proceeds from issuance of common
stock.............................. - 70,197 -
Exercise of stock options........... - 590 170
Repayment of long-term debt......... (8,000) (184,600) (33,500)
--------- --------- ---------
Net cash used by financing
activities.................... (8,000) (13,068) (23,446)
--------- --------- ---------
Effect of exchange rate changes on
cash: - - (84)
--------- --------- ---------
Net increase (decrease) in cash and
cash equivalents: 15,424 182 20,305
Cash and cash equivalents:
Beginning of period................ 5,035 20,459 20,641
--------- --------- ---------
End of period...................... $ 20,459 $ 20,641 $ 40,946
========= ========= =========
Supplementary disclosures of cash
flow information:
Interest paid....................... $ 18,955 $ 9,699 $ 3,913
========= ========= =========
Income taxes paid................... $ 7,226 $ 13,073 $ 18,361
========= ========= =========
Noncash financing activities:
Conversion of redeemable preferred
stock to common stock.............. - $ 6,441 -
========= ========= =========
Conversion of Class B common stock
to common stock.................... $ 2,281 $ 1,734 -
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
AMERICAN INCOME HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1991, 1992 and 1993
(1) Summary of Significant Accounting Policies
(a) Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of American
Income Holding, Inc. (Company) and its wholly-owned subsidiaries, Trust Life
Insurance Company (TLIC) and American Income Life Insurance Company (AILIC).
All significant intercompany accounts and transactions have been eliminated.
The Company is an insurance holding company engaged through its
subsidiaries, TLIC, a Texas domiciled stock life company, and AILIC, an Indiana
domiciled stock life company, in the marketing, underwriting and issuing of
individual life and accident and health insurance. Through an agency force
which sells exclusively for the Company, it markets policies principally to
members of labor unions, credit unions and other employment related
associations.
(b) Cash and Cash Equivalents
For the statements of cash flows, cash and cash equivalents include cash on
hand and in banks, and all time and certificates of deposit with original
maturities of three months or less.
(c) Investments
Investments are recorded on the following basis except when an investment's
decline in value is other than temporary, at which time the decrease in value is
recognized currently as a realized investment loss. Realized gains or losses on
sales of investments, determined on a specific identification basis, are
included in revenue.
. Management generally acquires fixed maturities with the intention to hold
such investments to maturity. The investment strategies of the Company are
developed based on many factors including rate of return, maturity, credit
risk, tax considerations and regulatory requirements. Although the Company
has the ability and intent to hold all of its investments to maturity,
effective December 31, 1992, all fixed maturities are considered as held
available for sale (carried at the lower of the aggregate amortized cost or
market value as of the balance sheet date) to preserve management's
prerogative to sell individual securities if deemed necessary to support the
Company's investment strategies.
. Common stocks and nonredeemable preferred stocks are carried at market. Net
unrealized gains (losses) (differences between cost and market) are
reflected in stockholders' equity.
. Mortgage loans on real estate are carried at amortized cost, less allowance
for doubtful loans.
. Policy loans are carried at unpaid principal balances.
. Other loans and investments are carried at unpaid principal balances.
. Real estate is carried at the lower of cost less accumulated depreciation or
fair value and consists of in-substance foreclosures and real estate
acquired through foreclosure.
F-7
<PAGE>
AMERICAN INCOME HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(d) Policy Acquisition Costs and Cost of Insurance Acquired
The costs of acquiring new business, principally commissions and certain
policy underwriting and issue costs, all of which vary with and are primarily
related to the production of new business, have been deferred. Deferred
acquisition costs for ordinary life policies are being amortized in proportion
to the premium income over the lives of the related policies. Deferred
acquisition costs relating to accident and health policies are being amortized
over 20 years or the benefit period, if shorter.
The value of insurance acquired at May 1, 1989, which is included in the
cost of insurance acquired in the accompanying consolidated financial
statements, was based upon the defined valuation premium method with the defined
premium equal to 90% of the gross premium. The cost of insurance acquired for
ordinary life policies is being amortized in proportion to the premium income
over the lives of the related policies. The cost of insurance acquired relating
to accident and health policies is being amortized over 20 years or the benefit
period, if shorter.
Deferred acquisition costs and cost of insurance acquired are reviewed for
recoverability from future premium income and such capitalized costs that are
deemed not recoverable are expensed in the period in which the determination is
made.
(e) Goodwill
Goodwill is being amortized on a straight-line basis over 20 years.
(f) Future Policy Benefits
The liability for future policy benefits is computed by the net level
premium method, based upon estimated future investment yield, mortality and/or
morbidity and withdrawal rates.
(g) Policy and Contract Claims
The liability for policy and contract claims is based on the estimated
ultimate cost of settling the claims, using past experience adjustments for
current claim trends.
(h) Foreign currency translation
For foreign operations (Canada), the balance sheet accounts are translated
into U.S. Dollars at the period end exchange rate and income and expense items
are translated at the average exchange rate for the period. The resulting
translation adjustments are included as a separate component of stockholders'
equity. Exchange gains and losses are not material.
(i) Premium Revenue
Premiums are recognized as revenue over the premium paying period. Benefits
and expenses are matched with earned premiums so as to result in the recognition
of income over the term of the contract. This matching is accomplished by means
of the provision for liabilities for future policy benefits and the amortization
of deferred policy acquisition costs.
F-8
<PAGE>
AMERICAN INCOME HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(j) Income Taxes
The Company files a separate Federal income tax return whereas the
subsidiaries, TLIC and AILIC, file a consolidated tax return. In February 1992,
the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." Statement 109
requires a change from the deferred method of accounting for income taxes of APB
Opinion 11 to the asset and liability method of accounting for income taxes.
Under the asset and liability method of Statement 109, deferred tax asset and
liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates in effect for the
year in which those temporary differences are expected to be recovered or
settled. Under Statement 109, the effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes the
enactment date.
The Company adopted Statement 109 in 1992 and has applied the provisions of
Statement 109 retroactively to January 1, 1991. The cumulative effect of the
change in the method of accounting for income taxes as of January 1, 1991 is
reported separately in the 1991 consolidated statement of earnings (see note 6).
(k) Net earnings per common share
Net earnings per common share are computed by dividing net earnings
applicable to common stock by the weighted average number of common shares and
dilutive common stock equivalents outstanding during each period. The weighted
average number of common shares and dilutive common stock equivalents used in
the calculation of net earnings per common share was 11,507,019, 15,219,826 and
16,077,516 for the years ended December 31, 1991, 1992 and 1993, respectively.
(2) The Offering and the Recapitalization
In March 1992, the Company completed an initial public offering of 4,000,000
shares of its common stock for $19.00 per share (the Offering), resulting in net
proceeds of $70,197,000. Concurrent with the Offering, the Company's 15%
redeemable preferred stock and accumulated dividends of $6,441,000 were
converted into common stock at the public offering price ($19.00) and all shares
of Class B common stock were converted into shares of common stock, resulting in
the Company having only one class outstanding, the voting common stock. The
Company also entered into a new credit facility (the New Credit Facility) with a
syndicate of lending institutions (collectively, the Banks), pursuant to which
the Banks provided an aggregate of $105.0 million under a new secured revolving
loan facility, which, together with the proceeds of the Offering and additional
corporate funds, enabled the Company to retire (i) the Subordinated Notes at
104.0% of the aggregate remaining principal amount thereof and (ii) the
indebtedness under the then existing credit agreement. These various
recapitalization transactions (collectively, the Recapitalization) were
consummated simultaneously with each other and simultaneously with the Offering
(see note 5).
F-9
<PAGE>
AMERICAN INCOME HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(3) Investments
Net realized investment gains (losses) consist of the following (in
thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1991 1992 1993
---------- ---------- ---------
Fixed maturities: (Restated)
<S> <C> <C> <C>
Gains...................................... $ 8,413 $ 2,409 $ 1,923
Losses..................................... (5,843) (205) (155)
Collateralized Mortgage Obligations-Planned
Amortization Class Interest Only
Certificates (PAC-IO Certificates):
Gains...................................... 721 - -
Losses..................................... - (2,567) (2,400)
Equity securities:
Gains...................................... 987 96 212
Losses..................................... (561) - -
Other investments:
Gains...................................... 654 310 244
Losses..................................... (1,405) (347) (53)
------- ------- -------
$ 2,966 $ (304) $ (229)
======= ======= =======
</TABLE>
Net unrealized gains (losses) consist of the following (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1991 1992 1993
------- ------- -------
<S> <C> <C> <C>
Equity securities: (Restated)
Gains...................................... $ 149 $ 224 $ 357
Losses..................................... (10) (9) (21)
------- ------- -------
$ 139 $ 215 $ 336
======= ======= =======
</TABLE>
Net investment income consists of the following (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1991 1992 1993
------- ------- -------
<S> <C> <C> <C>
Investment income: (Restated)
Fixed maturities........................... $26,046 $28,363 $27,160
Collateralized Mortgage Obligations-
PAC-IO Certificates....................... 2,028 1,724 497
Equity securities.......................... 354 109 77
Mortgage loans............................. 2,501 2,591 1,973
Policy loans............................... 1,274 1,379 1,455
Other investments.......................... 2,349 2,437 2,298
------- ------- -------
Subtotal................................ 34,552 36,603 33,460
Investment expenses......................... (1,219) (1,402) (1,353)
------- ------- -------
Net investment income..................... $33,333 $35,201 $32,107
======= ======= =======
</TABLE>
The Company's insurance subsidiaries have on deposit with the various
regulatory authorities securities with aggregate carrying values of $9.7 million
at December 31, 1993.
F-10
<PAGE>
AMERICAN INCOME HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The amortized cost and estimated market values of investments in fixed
maturities at December 31, 1993 are as follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. Government
agencies........................ $ 4,021 $ 189 $ - $ 4,210
U.S. Government agencies
mortgage-backed securities...... 37,979 1,408 (147) 39,240
Debt securities issued by
foreign governments............. 9,539 439 - 9,978
Corporate securities............. 93,858 4,092 (1,707) 96,243
Corporate mortgage- and asset-
backed securities............... 191,124 9,810 (310) 200,624
Collateralized Mortgage
Obligations -
PAC-IO Certificates............. 19,325 - (2,338) 16,987
-------- ------- ------- --------
Total fixed maturities....... $355,846 $15,938 $(4,502) $367,282
======== ======= ======= ========
</TABLE>
The amortized cost and estimated market values of investments in fixed
maturities at December 31, 1992 are as follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. Government
agencies...................... $ 4,600 $ 290 $ - $ 4,890
U.S. Government agencies
mortgage-backed securities..... 24,285 797 (120) 24,962
Debt securities issued by
foreign governments............. 8,720 145 (18) 8,847
Corporate securities............. 72,788 3,118 (3,377) 72,529
Corporate mortgage- and asset-
backed securities.............. 204,489 5,764 (778) 209,475
Collateralized Mortgage
Obligations -
PAC-IO Certificates............ 24,948 - (6,715) 18,233
-------- ------- -------- --------
Total fixed maturities....... $339,830 $10,114 $(11,008) $338,936
======== ======= ======== ========
</TABLE>
At December 31, 1992 and 1993, the Company had investments in collateralized
mortgage obligations-PAC-IO certificates of $24,948,000 and $19,325,000,
respectively, that are considered high risk because there is potential for loss
of a significant portion of the original investment due to changes in interest
rates and the prepayment rates of the underlying assets. The weighted average
effective yield that has been used to establish carrying values for these
securities at December 31, 1992 and 1993 was 3.1% and 1.7%, respectively.
During 1992 and 1993, proceeds from sales of investments in fixed maturities
were approximately $69,229,000 and $9,852,000, respectively.
Market values for fixed maturities and equity securities at December 31, 1992
and 1993 were obtained from National Association of Insurance Commissioners
valuation designations, independent brokers and published securities valuation
guides.
F-11
<PAGE>
AMERICAN INCOME HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The amortized cost and estimated market values of fixed maturities at December
31, 1993, by contractual maturity, are shown below (in thousands). 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>
Estimated
Amortized market
cost value
---- -----
<S> <C> <C>
Due in one year or less................ $ 9,951 $ 10,181
Due after one year through five years.. 27,641 27,727
Due after five years................... 41,443 43,286
Due after ten years.................... 28,383 29,237
-------- --------
107,418 110,431
Mortgage- and asset-backed securities.. 229,103 239,864
Collateralized Mortgage Obligations -
PAC-IO Certificates................ 19,325 16,987
-------- --------
Totals......................... $355,846 $367,282
======== ========
</TABLE>
As of December 31, 1992 and 1993, investments which were non-income producing
during the previous twelve months included fixed maturities aggregating $242,000
and $0, respectively. At December 31, 1992 and 1993, there were approximately
$3,824,000 and $3,824,000, respectively, of mortgage and other loans categorized
by management as nonaccrual loans because collection of interest was not
certain.
In May 1993, the FASB issued Statement No. 114, "Accounting by Creditors for
Impairment of a Loan" which is effective for the Company's fiscal year ended
December 31, 1993. The effect of the provisions of this statement is not
significant to the consolidated financial statements.
In May 1993, the FASB issued Statement No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" (FASB 115). FASB 115 will change the
Company's method of accounting for available for sale securities from the lower
of cost or market method to the fair value method. Unrealized holding gains and
losses on the Company's fixed maturity investments, all of which are classified
as available for sale, shall be reported as a net amount in a separate component
of shareholders' equity until realized. The Company intends to adopt FASB 115
in Fiscal 1994. Thus, on January 1, 1994, the effect of applying this new
accounting standard will increase stockholders' equity by $7.4 million, or $0.47
per share and cause a charge to net earnings by $1.5 million or $0.10 per share
reported as a cumulative effect of a change in accounting principle.
(4) Deferred Policy Acquisition Costs, Cost of Insurance Acquired and Future
Policy Benefits
Deferred policy acquisition costs are summarized as follows (in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------
1991 1992 1993
---- ---- ----
(Restated)
<S> <C> <C> <C>
Balance at beginning of period....... $ 24,429 $ 42,255 $ 61,318
Acquisition costs capitalized........ 31,929 34,440 39,517
Amortization, net of interest added.. (14,103) (15,377) (16,825)
Currency translation adjustment...... - - (168)
-------- -------- --------
Balance at end of period............. $ 42,255 $ 61,318 $ 83,842
======== ======== ========
</TABLE>
F-12
<PAGE>
AMERICAN INCOME HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Commissions comprise the majority of the additions to deferred policy
acquisition costs. Interest is added to deferred policy acquisition costs at a
rate of 8% (the initial rate) graded linearly to 6% (the ultimate rate) in 20
years. This corresponds to the interest rate assumptions used for the future
policy benefit reserve liabilities related to policies issued after May 1, 1989.
Cost of insurance acquired is summarized as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1991 1992 1993
---- ---- ----
(Restated)
<S> <C> <C> <C>
Balance at beginning of period............ $ 87,832 $114,254 $105,434
Effect of change in accounting principle.. 36,650 - -
Interest added (9%)....................... 10,742 9,886 9,126
Amortization, net......................... (20,970) (18,706) (17,194)
-------- -------- --------
Balance at end of period.................. $114,254 $105,434 $ 97,366
======== ======== ========
</TABLE>
Interest is added to cost of insurance acquired at a rate of 9% which
corresponds to the interest rate assumption used for the future policy benefit
reserve liabilities related to policies issued prior to May 1, 1989. Estimated
amortization, excluding interest, for the five years following December 31, 1993
is (in millions): 1994-$15.8, 1995-$14.5, 1996-$13.3, 1997-$12.3 and 1998-$11.3.
Actual future amortization will differ from these estimates due to variances
from estimated future withdrawal assumptions.
The liabilities for future policy benefits at December 31, 1992 and 1993 and
the significant assumptions pertinent thereto are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
1992 1993
---------------------- ----------------------
Mortality Future Future
Interest or Insurance policy Insurance policy
Years of issue rates morbidity in-force benefits in force benefits
-------------- -------- --------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Life and annuity
-After May 1, 1989 8.0% -6.0%(B) Modified 1965-70 Select and $4,073,630 $ 26,248 $5,299,957 $ 42,432
Ultimate Basic Tables(A)
-Prior to May 1, 1989 9.0% Modified 1965-70 Select and 2,839,639 198,986 2,507,077 202,917
Ultimate Basic Tables ---------- -------- ---------- --------
-Total life and annuity 6,913,269 225,234 7,807,034 245,349
Accident & health
-After May 1,1989 8.0% -6.0%(B) (C) - 3,019 - 4,252
-Prior to May 1, 1989 9.0% (D) - 23,036 - 22,450
---------- -------- ---------- --------
-Total accident and health - 26,055 - 26,702
---------- -------- ---------- --------
Total $6,913,269 $251,289 $7,807,034 $272,051
========== ======== ========== ========
</TABLE>
- - ------------------
(A) Male mortality for policies issued after May 1, 1989 is 150% in the first
year, 130% in the second year and 110% thereafter of the modified 1965-70
Select and Ultimate Basic Tables while female mortality for policies issued
after May 1, 1989 is 95% of such Tables.
(B) Interest rate is graded linearly from the initial rate to the ultimate rate
in 20 years.
(C) The morbidity rates for cancer policies are from the 1985 NAIC Cancer
tables, while the rates for hospital policies are from the 1973-74
Intercompany Experience and 1983 Report tables, both published by the
Society of Actuaries.
(D) The morbidity rates for cancer policies are from the 1974 Nelson and Warren
Cancer tables, while the rates for hospital policies are from the 1973-74
Intercompany Experience tables published by the Society of Actuaries.
Withdrawal assumptions are based on AILIC experience.
F-13
<PAGE>
AMERICAN INCOME HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(5) Notes Payable
The debt at December 31, 1992 and 1993 is summarized as follows (in
thousands):
<TABLE>
<CAPTION>
1992 1993
---- ----
<S> <C> <C>
Revolving credit agreement to banks, original principal
amount of $105,000,000, which bears interest at the
Company's option of (1) 1.5% per annum over the
Interbank Eurodollar rate or (2) the greater of 1.5%
per annum over the Federal Funds Effective Rate or 1.0%
per annum over the base rate of the banks. At
December 31, 1993, the interest rate was 4.8%. Interest
payments are due monthly while principal payments are due
annually in varying amounts until maturity, April 1, 1998.
The Agreement is secured by the pledge of all outstanding
stock of TLIC and the TLIC surplus debenture............... $100,000 $ 80,000
======== ========
</TABLE>
In March 1992, the Company replaced its senior and subordinated borrowings
outstanding with the New Credit Facility totaling $105,000,000 along with the
proceeds of the Offering (see note 2). On December 30, 1993, the Company signed
a commitment letter committing the Company to sign an agreement (the Revolving
Credit Agreement) with a group of banks to refinance the New Credit Facility
(see note 14). On January 11, 1994, the Revolving Credit Agreement was signed.
The Revolving Credit Agreement has an original principal amount of $80,000,000
and bears interest at the Company's option of (i) 0.75% per annum over the
Interbank Eurodollar rate or (ii) the greater of 0.75% per annum over the
Federal Funds Effective Rate or .25% per annum over the base rate of the banks.
Aggregate scheduled principal payments of the Revolving Credit Agreement for
the next five years and thereafter are as follows (in thousands):
<TABLE>
<S> <C>
1994........................... $ 0
1995........................... 12,000
1996........................... 13,000
1997........................... 15,000
1998........................... 20,000
1999........................... 20,000
-------
$80,000
=======
</TABLE>
There are various debt covenants associated with the Revolving Credit
Agreement noted above. These covenants require, among other things, that the
Company and its subsidiaries maintain certain levels of statutory surplus and
comply with certain debt to equity and operating ratios. The Company is in
compliance with these covenants. Additionally, the Company has the option to
temporarily reduce the amount outstanding on the note at any time, subject to
certain limitations. The Company pays a 1/4% commitment fee on the average
daily unused portions of the Revolving Credit Agreement.
(6) Federal Income Taxes
As discussed in note 1, the Company adopted Statement 109 as of January 1,
1991. The cumulative effect of this change in accounting for income taxes of
$4,624,000 is determined as of January 1, 1991 and is reported separately in the
consolidated statement of earnings for the year ended December 31, 1991.
F-14
<PAGE>
AMERICAN INCOME HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following summarizes the impact of applying Statement 109 on net
earnings (in thousands) and earnings per share for the year ended December 31,
1991:
<TABLE>
<S> <C>
Net earnings-as previously reported............ $24,298
Cumulative effect as of January 1, 1991........ (4,624)
Effect of Statement 109........................ 362
-------
Net earnings-as restated....................... $20,036
=======
Net earnings per share-as previously reported.. $ 2.11
Cumulative effect as of January 1, 1991........ (0.40)
Effect of Statement 109........................ 0.03
-------
Net earnings per share-as restated............. $ 1.74
=======
</TABLE>
On August 10, 1993, the Omnibus Budget Reconciliation Act of 1993, (the Act)
was enacted. The Act retroactively increased the Company's marginal Federal
income tax rate from 34% to 35% beginning January 1, 1993. One effect of this
retroactive change in tax law was a charge of $1.7 million, reflected in Federal
income taxes for the year ended December 31, 1993, to adjust the net deferred
tax liability as required by Statement 109.
Total income tax expense for the years ended December 31, 1991, 1992 and
1993 was allocated as follows (in thousands):
<TABLE>
<CAPTION>
1991 1992 1993
---------- -------- --------
<S> <C> <C> <C>
(Restated)
Income from operating activities............... $11,686 $15,394 $21,476
Extraordinary items............................ - (2,516) (344)
Additional paid-in capital for compensation
expense for tax purposes in excess of amounts
recognized for financial reporting purposes... - (1,290) (63)
------- ------- -------
Total income tax expense....................... $11,686 $11,588 $21,069
======= ======= =======
</TABLE>
A reconciliation of the difference between the Federal income tax rate and
the Company's effective tax rate is as follows (in thousands):
<TABLE>
<CAPTION>
1991 1992 1993
---------- ----- -----
<S> <C> <C> <C>
(Restated)
Federal income tax rate................................ 34.0% 34.0% 35.0%
Change in the valuation allowance for deferred
tax assets........................................... (2.1) (2.8) -
Amortization of goodwill............................... 0.4 0.3 0.3
Adjustment to deferred tax assets and liabilities for
enacted increase in tax rates........................ - - 3.0
Other, net............................................. (0.9) 0.6 0.1
---- ---- ----
Effective tax rate................................... 31.4% 32.1% 38.4%
==== ==== ====
</TABLE>
F-15
<PAGE>
AMERICAN INCOME HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The significant components of deferred Federal income tax expense (benefit)
attributable to income from operations for the years ended December 31, 1991,
1992 and 1993 are as follows (in thousands):
<TABLE>
<CAPTION>
1991 1992 1993
---------- --------- --------
(Restated)
<S> <C> <C> <C>
Deferred policy acquisition costs.............. $ 3,209 $ 3,769 $ 5,523
Cost of insurance acquired..................... (3,478) (2,999) (2,824)
Discount on fixed maturities................... 746 1,310 515
Debt issue costs............................... 159 (454) -
Liability for future policy benefits........... (360) (1,030) (1,242)
Charge in lieu of taxes resulting from:
Extraordinary item........................... - 428 -
Utilization of purchase capital loss
carryforwards that are allocated to reduce
goodwill.................................... 872 - -
Adjustment to deferred tax assets/liabilities
for enacted increase in tax rates........... - - 1,702
Decrease in valuation allowance for deferred (771) (1,320) -
tax assets....................................
Other, net..................................... 370 (293) (257)
------- ------- -------
Deferred Federal income tax expense $ 747 $ (589) $ 3,417
(benefit)............................... ======= ======= =======
</TABLE>
The effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1992 and
1993 are presented below (in thousands):
<TABLE>
<CAPTION>
1992 1993
------- -------
Deferred tax assets:
<S> <C> <C>
Fixed maturities........................ $ 287 $ -
Mortgage loans.......................... 1,608 1,504
Other................................... 479 823
------- -------
Net deferred tax assets............... 2,374 2,327
------- -------
Deferred tax liabilities:
Fixed Maturities........................ - 219
Deferred policy acquisition costs....... 14,592 20,546
Cost of insurance acquired.............. 35,848 34,078
Liability for future policy benefits.... 9,293 8,288
Other................................... 508 449
------- -------
Total gross deferred tax liabilities.. 60,241 63,580
------- -------
Net deferred tax liability.............. $57,867 $61,253
======= =======
</TABLE>
Federal income tax benefits related to realized investment gains (losses)
were $140,000, $889,000 and $81,000 for the years ended December 31, 1991, 1992
and 1993, respectively.
Prior to the Tax Reform Act of 1984 (1984 Act), a portion of a life
insurance company's income was not subject to tax until it was distributed to
stockholders, at which time it was taxed at the regular corporate tax rate. In
accordance with the 1984 Act this income, referred to as policyholders' surplus,
would not increase, yet any amounts distributed would be taxable at the regular
corporate rate. The balance of this account as of December 31, 1993 is
approximately $8,000,000. No provision for deferred Federal income taxes has
been made on this amount, as management is of the opinion that no distribution
to stockholders will be made from policyholders' surplus in the foreseeable
future.
F-16
<PAGE>
AMERICAN INCOME HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(7) Reinsurance
AILIC reinsures portions of certain life insurance policies that it
underwrites to limit disproportionate risks. AILIC retains varying amounts of
individual insurance up to a maximum retention on any one life of: (i) the face
amount of the policy if less than $160,000 or (ii) $150,000 for all policies
having a face amount of $160,000 or more. Amounts not retained are ceded to The
Lincoln National Life Insurance Company on an automatic or facultative basis.
Although the reinsurance of risk does not relieve the ceding insurer of its
original liability to its policyholder, it is the industry practice of insurers
for financial statement purposes to treat the reinsured risks as though they
were risks for which the ceding insurer was only contingently liable. A
contingent liability exists with respect to the aforementioned reinsurance
arrangements which may become a liability of AILIC in the event the reinsurers
are unable to meet obligations assumed by them under the reinsurance contracts.
At December 31, 1992 and 1993, the amount of life insurance in force ceded was
not significant.
In December 1992, the FASB issued Statement No. 113, "Accounting and
Reporting for Reinsurance of Short-Duration and Long-Duration Contracts" which
is effective for the Company's fiscal year ended December 31, 1993. The
provisions of this Statement are immaterial to the accompanying consolidated
financial statements of the Company and, accordingly, have not been applied.
(8) Redeemable Preferred Stock
At December 31, 1991, the Company had 425 shares of nonvoting 15% Cumulative
Preferred Stock ("preferred stock") with a par value of $.01 per share issued
and outstanding and a liquidation preference of $10,000 per share plus accrued
and unpaid dividends. Dividends were cumulative and accrued semi-annually, from
the date of issuance, on each share of preferred stock at an annual rate of
$1,500.
On the consummation of the Offering in March 1992 (see note 2), the
aggregate redemption price of the preferred stock ($6,441,000) was converted
into 338,976 shares of common stock at the public offering price of $19.00 per
share. The Company presently has 425 authorized shares of preferred stock, none
of which is issued.
(9) Stockholders' Equity
On December 16, 1991, the Board of Directors of the Company approved a 1,000
to 1 stock split of each share of the Company's common stock and Class B common
stock. The stock split was consummated simultaneously with the Offering and
other related transactions (see note 2). The accompanying financial statements
have been retroactively restated to reflect the results of this stock split.
In conjunction with the 1989 acquisition of AILIC, 2,569,600 shares of Class
B common stock were issued to the creditors. This stock was convertible to
common stock based on a ratio that yielded approximately one share of common
stock for every share of Class B common stock. On September 10, 1991, a holder
of Class B common shares exercised its right to convert 1,460,000 shares to
common stock. In March 1992, the remaining 1,109,600 shares of Class B common
stock were converted into shares of common stock simultaneously with the
Offering and other related transactions (see note 2).
F-17
<PAGE>
AMERICAN INCOME HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In 1989, the Company granted options to an officer to purchase 584,000
shares of common stock at an exercise price of $2.14 per share. In 1991, the
Company granted options to another officer to purchase 117,980 shares of common
stock at an exercise price of $7.00 per share. Both options vest evenly over a
five-year period of continuous employment, although the options with the $7.00
per share exercise price required a period of one year before the beginning of
the five year vesting period. During 1992, options for 275,644 shares
(including nonqualified options for 210,216 shares) were exercised at $2.14 per
share. During 1993, options exercised were for 23,596 shares at $7.00 per share
and 2,350 shares at $2.14 per share. The Company derives a tax deduction
measured by the excess of the market value over the option price at the date
nonqualified options are exercised. The related tax benefit of $1,290,000 and
$63,000 in 1992 and 1993, respectively, have been credited to additional paid in
capital. Options to purchase 189,206 shares at $2.14 per share are exercisable
at December 31, 1993.
Under prior Indiana State Insurance law, all dividends on capital stock
could be paid only to the extent that assets exceed liabilities and the dividend
payment does not reduce statutory surplus below 50% of stated capital.
Furthermore, without prior approval, dividends could not be declared or
distributed that exceeded the greater of ten percent (10%) of AILIC's surplus,
as shown by its last annual statement, or the net gain from operations for such
period. Effective July 1, 1991, Indiana state laws were amended. Under the
current law, unless the Indiana Department of Insurance approves an
extraordinary dividend in a greater amount, Indiana law limits dividend payments
by insurance companies to their holding companies in any twelve month period to
the lesser of statutory gain from operations for the preceding year or 10% of
statutory surplus at the end of the preceding year. During 1992 and 1993, AILIC
paid dividends of $20,075,000 and $25,541,223, respectively, which were approved
by the Indiana Department of Insurance. AILIC has obtained approval from the
Indiana Department of Insurance to pay dividends of up to $25.5 million during
calendar year 1994.
(10) Pension Plan
The Company has a noncontributory defined benefit plan for all hourly
employees who have completed one year of service with the Company. The benefits
are set as a monthly benefit for each year of service with the Company. The
Company's funding experience has been to contribute annually the maximum amount
that can be deducted for Federal income tax purposes. The Company does not
provide post-retirement or post-employment benefits to its employees other than
through this pension plan.
Statement of Financial Accounting Standards No. 87, "Employers' Accounting
for Pensions," was effective in 1987. Management is of the opinion that the
change in assumptions required to comply with Statement No. 87 would not have a
material financial impact on the Company and, therefore, has not valued the Plan
in accordance with this Statement.
F-18
<PAGE>
AMERICAN INCOME HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The last valuation was January 1, 1993. Following is a summary of plan
information as of that date:
<TABLE>
<S> <C>
Actuarial present value of accumulated plan benefits:
Vested................................................ $1,005,000
Nonvested............................................. 36,000
----------
Total.............................................. $1,041,000
==========
Net assets available for benefits:...................... $1,145,000
==========
</TABLE>
The unfunded liability for past service cost was $156,000 as of January 1,
1993 and is being amortized over 10 years. The assumed rate of return used in
determining the present value of accumulated plan benefits was 8% in all years.
Total pension expense was $53,000, $54,000 and $54,000, respectively, for the
years ended December 31, 1991, 1992 and 1993.
(11) Lines of Business
The Company operates primarily in two lines of business within the life
insurance industry: life insurance and accident and health insurance. Financial
data with respect to these lines of business and corporate operations is set
forth below (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1991 1992 1993
---------- --------- ---------
Life: (Restated)
<S> <C> <C> <C>
Revenues.................................. $129,500 $134,787 $144,577
Earnings before Federal income taxes...... 44,420 44,196 46,587
Identifiable assets....................... 526,565 566,915 611,341
Accident and Health:
Revenues.................................. 39,918 40,357 41,174
Earnings before Federal income taxes...... 13,047 12,370 13,929
Identifiable assets....................... 67,975 73,514 73,120
Corporate:
Revenues.................................. - - -
Loss before Federal income taxes.......... (20,279) (8,642) (4,615)
Identifiable assets....................... 13,858 8,333 7,045
Total:
Revenues.................................. 169,418 175,144 185,751
Net earnings before Federal income taxes.. 37,188 47,924 55,901
Identifiable assets....................... 608,398 648,762 691,506
</TABLE>
Identifiable expenses are charged directly to the appropriate line of
business. The remaining expenses are allocated to the lines based primarily on
commissions or premiums within the respective lines.
Net investment income and identifiable assets are allocated to the lines of
business in proportion to the net liabilities of each line. The Company also
writes business in Canada. Revenues from Canadian operations included in Total
Revenues above were $2,676,000, $4,211,000 and $5,584,000 for the years ended
December 31, 1991, 1992 and 1993, respectively (in U.S. dollars).
F-19
<PAGE>
AMERICAN INCOME HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(12) Statutory Capital and Surplus
The Company's insurance subsidiaries are required to file statutory financial
statements with state regulatory authorities. Accounting principles used to
prepare the statutory statements differ from the generally accepted accounting
principles used to prepare these consolidated financial statements. These
differences relate primarily to deferred acquisition costs expensed for
statutory purposes but deferred under generally accepted accounting principles
and surplus debentures accounted for as surplus for statutory purposes and as
intercompany indebtedness that is eliminated for generally accepted accounting
principles.
Reconciliations of statutory net income as determined using statutory
accounting principles, to the amount included in the accompanying consolidated
financial statements for the years ended December 31, 1991, 1992 and 1993 are
shown below (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1991 1992 1993
---------- --------- ---------
<S> <C> <C> <C>
(Restated)
Statutory net income of insurance subsidiaries. $ 36,934 $ 38,972 $ 48,456
Net income for parent only..................... 20,219 27,534 33,517
-------- -------- --------
Combined net income............................ 57,153 66,506 81,973
Increases (decreases)
Deferred policy acquisition costs and cost
of insurance acquired....................... 7,598 10,243 14,624
Reserve for future policy benefits and
deferred premiums........................... (345) (2,561) (6,223)
Loading...................................... 1,643 2,141 4,331
Extraordinary item, net of tax............... - (4,885) (638)
Deferred Federal income taxes................ (743) 572 (3,394)
Realized gains (losses) on investments....... 2,375 3,506 1,599
Elimination of dividends and equity in
earnings from subsidiaries.................. (42,017) (49,137) (59,077)
Amortization of goodwill..................... (800) (500) (426)
Net effect of other purchase adjustments..... (185) (428) 609
Prepayment penalty........................... - 1,000 -
Effect of change in accounting principle..... (4,643) - -
Debt issue costs capitalized, net of
amortization................................ - 1,377 (86)
Current Federal income taxes................. - (2,088) (344)
Reclassification of realized investment
gains/losses to Interest Maintenance Reserve,
net of amortization......................... - 1,712 839
-------- -------- --------
Net earnings as reported herein.......... $ 20,036 $ 27,458 $ 33,787
======== ======== ========
</TABLE>
F-20
<PAGE>
AMERICAN INCOME HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Reconciliations of statutory capital and surplus, as determined using statutory
accounting principles, to the amounts included in the accompanying consolidated
financial statements are as follows (in thousands):
<TABLE>
<CAPTION>
As of December 31
--------------------
1992 1993
---- ----
<S> <C> <C>
Statutory capital and surplus of insurance subsidiaries..... $ 108,213 $ 109,764
Stockholders' equity for parent only........................ 162,575 192,236
--------- ---------
Combined capital and surplus................................ 270,788 302,000
Increases (decreases):
Deferred policy acquisition costs and cost of insurance
acquired................................................ 166,752 181,208
Reserve for future policy benefits and deferred premiums.. 47,793 45,070
Deferred Federal income taxes............................. (57,907) (61,272)
Agents' balances and account receivables.................. 41,954 42,550
Goodwill.................................................. 6,957 6,531
Asset Valuation Reserve................................... 4,616 5,662
Interest Maintenance Reserve.............................. 1,712 2,550
Net effect of other purchase adjustments.................. (5,301) (3,910)
Surplus debentures........................................ (100,000) (80,000)
Eliminate investment in subsidiaries...................... (216,053) (247,931)
Debt issue costs, net of amortization..................... 1,377 309
Non-admitted assets and other adjustments, net............ (113) (531)
--------- ---------
Stockholders' equity as reported herein............... $ 162,575 $ 192,236
========= =========
</TABLE>
(13) Contingencies
The Company is a defendant in various lawsuits arising in the ordinary
course of operations. Also, the Internal Revenue Service has completed its
examination of the Company's Federal income tax returns through 1988 and has
proposed certain tax adjustments. Management is of the opinion, after reviewing
these matters with legal and tax counsel, that the ultimate liability, if any,
resulting from these matters would not have a material adverse effect on the
Company's consolidated financial position.
(14) Extraordinary Charges
The completion of the Recapitalization (see note 2) resulted in an
extraordinary charge of $4,885,000 (net of the income tax benefit of $2,516,000)
consisting of (i) the write-off of unamortized expenses capitalized and included
with goodwill in connection with debt financing incurred to acquire American
Income Life Insurance Company in 1989 and (ii) the prepayment premium of $1.0
million on the 13.25% subordinated notes paid in March 1992.
The signing on December 30, 1993 of the commitment letter for the Revolving
Credit Agreement resulted in an extraordinary charge of $638,000 (net of the
income tax effect of $344,000) consisting of the write-off of the unamortized
portion of the expenses incurred and capitalized in connection with the securing
of the New Credit Facility in March, 1992.
F-21
<PAGE>
AMERICAN INCOME HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(15) Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments" (Statement 107), requires that the Company
disclose estimated fair value for its financial instruments. Where estimation of
fair value is not practicable, the reasons for not estimating fair value and
certain additional information regarding the financial instrument is to be
disclosed. Statement 107 specifically excludes non investment type insurance
contracts from fair value disclosure requirements.
As discussed in note 3, fair values for fixed maturities and common and
preferred stocks were obtained from National Association of Insurance
Commissioners valuation designations, independent brokers and published
valuation guides.
Mortgage and other loans are secured principally by commercial real estate
and equity securities, respectively, and generally have interest rates that
float with the prime lending rate. The weighted average interest rate for these
loan portfolios as of December 31, 1992 and 1993 was 8.2% with maturities
ranging from 1994 to 2022, as of December 31, 1993. Current market conditions
in real estate and commercial lending preclude the estimation of fair value
based on comparable portfolio sales or on discounted cash flows for similar
loans. Management believes that reported amounts approximate fair value due to
the floating interest rates on most of the loans.
Policy loans have weighted average interest rates of 6.4% and 6.5% as of
December 31, 1992 and 1993, respectively, and have no specified maturity dates.
These loans are an integral part of the life insurance policies which the
Company has in force and cannot be valued separately.
At December 31, 1992 and 1993, other policyholder funds included interest
bearing deposit type accounts of $49.8 million and $57.5 million, respectively,
representing amounts payable on demand. Under Statement 107, the fair value of
such deposit type accounts is equal to the amount payable on demand.
Notes payable are discussed in note 5. Management believes that the
reported amounts as of December 31, 1992 and 1993 approximate fair value due to
the floating interest rates that approximate available interest rates on
currently offered debt with similar remaining maturities.
For cash and cash equivalents, agents' debit balances and accounts
receivable, receivables and payables included in other assets and liabilities
and Federal income taxes payable, the carrying amounts approximate fair value
because of the short maturity of these instruments.
F-22
<PAGE>
AMERICAN INCOME HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(16) Selected Quarterly Data (Unaudited)
The following is a summary of quarterly results (in thousands, except per
share amounts) for the two years ended December 31, 1993. The information is
unaudited but includes all adjustments (consisting of normal accruals) that
management considers necessary for a fair presentation of the results of
operations for these periods.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------------- -------------- -------------- ---------------
1992 1993 1992 1993 1992 1993 1992 1993
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Premiums and other revenues........................... $42,461 $44,126 $44,030 $46,116 $44,753 $47,135 $43,900 $48,373
Net earnings applicable to common
stock before extraordinary charges.................. 5,710 7,915 8,400 9,013 9,443 7,185 8,790 10,312
Extraordinary charges, net of tax..................... (4,885) - - - - - - (638)
------- ------- ------- ------- ------- ------- ------- -------
Net earnings applicable to common stock............... $ 825 $ 7,915 $ 8,400 $ 9,013 $ 9,443 $ 7,185 $ 8,790 $ 9,674
======= ======= ======= ======= ======= ======= ======= =======
Net earnings per common share:
Net earnings applicable to common
stock before extraordinary charges 0.44 0.49 0.52 0.56 0.59 0.45 0.55 0.64
Extraordinary charges, net of tax..................... (0.38) - - - - - - (0.04)
------- ------- ------- ------- ------- ------- ------- -------
Net earnings applicable to common
stock................................................ $ 0.06 $ 0.49 $ 0.52 $ 0.56 $ 0.59 $ 0.45 $ 0.55 $ 0.60
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
F-23
<PAGE>
SCHEDULE I
AMERICAN INCOME HOLDING, INC. AND SUBSIDIARIES
SUMMARY OF INVESTMENTS
(Dollars in thousands)
December 31, 1993
<TABLE>
<CAPTION>
Amount at
which shown
Amortized Market in the
Type of Investment Cost Value balance sheet
- - ------------------ ---- ----- -------------
<S> <C> <C> <C>
Fixed maturities:
United States Government and government agencies
and authorities $ 42,000 $ 43,450 $ 42,000
Foreign governments 9,539 9,978 9,539
Corporate securities 93,858 96,243 93,858
Corporate mortgage- and asset-backed securities 191,124 200,624 191,124
Collateralized Mortgage Obligations-PAC-IO
Certificates 19,325 16,987 19,325
-------- -------- --------
Total fixed maturities 355,846 $367,282 355,846
-------- ======== --------
Equity securities:
Common stock:
Banks, trust and insurance companies
Industrial, miscellaneous and all other 497 772 772
Nonredeemable preferred stocks 439 500 500
-------- -------- --------
Total equity securities 936 $ 1,272 1,272
-------- ======== --------
Mortgage loans on real estate 17,997 16,271
Policy loans 23,054 23,054
Other loans 7,914 7,914
Real estate 6,596 6,596
Cash and cash equivalents 40,946 40,946
-------- --------
Total investments $453,289 $451,899
======== ========
</TABLE>
F-24
<PAGE>
SCHEDULE III
AMERICAN INCOME HOLDING, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Parent Company Only Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
ASSETS
Year Ending December 31,
------------------------
1992 1993
-------- --------
<S> <C> <C>
Investment in subsidiaries $162,504 $193,291
Due from subsidiaries (note 2) 100,141 80,021
Cash and cash equivalents 827 201
Other assets 47 4
-------- --------
Total assets $263,519 $273,517
======== ========
<CAPTION>
LIABILITIES
<S> <C> <C>
Notes payable (note 4) $100,000 $ 80,000
Other liabilities 944 1,281
-------- --------
Total liabilities 100,944 81,281
-------- --------
<CAPTION>
STOCKHOLDERS' EQUITY
<S> <C> <C>
Common stock 157 157
Common stock - paid in excess 93,626 93,859
Retained earnings 68,792 98,220
-------- --------
Total stockholders' equity (notes 5,6 and 7) 162,575 192,236
-------- --------
Total liabilities and stockholders' equity $263,519 $273,517
======== ========
</TABLE>
See accompanying notes to Schedule III
F-25
<PAGE>
SCHEDULE III (Continued)
AMERICAN INCOME HOLDING, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Parent Company Only Statements of Earnings
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1991 1992 1993
---------- ------- --------
Revenues: (Restated)
<S> <C> <C> <C>
Net investment income $19,737 $10,317 $ 7,094
Equity in earnings of subsidiary (note 7) 20,791 26,788 30,787
------- ------- -------
Total revenues $40,528 $37,105 $37,881
------- ------- -------
Expenses:
Interest expense 19,479 7,985 4,155
Other expense 11 127 124
------- ------- -------
Total expenses 19,490 8,112 4,279
------- ------- -------
Net earnings before Federal income taxes 21,038 28,993 33,602
Federal income expense (benefit) (4) 1,272 85
------- ------- -------
Net earnings before effect of change in 21,042 27,721 33,517
accounting principle
Preferred stock dividends 842 187 -
------- ------- -------
Net earnings applicable to common stock
before effect of change in accounting principle 20,200 27,534 33,517
Effect of change in accounting principle 19 - -
------- ------- -------
Net earnings applicable to common stock $20,219 $27,534 $33,517
======= ======= =======
Net earnings per common share (note 7):
Net earnings applicable to common stock
before effect of change in accounting principle $1.76 $1.81 $2.08
Effect of change in accounting principle - - -
------- ------- -------
Net earnings per common share $1.76 $1.81 $2.08
======= ======= =======
</TABLE>
See accompanying notes to Schedule III.
F-26
<PAGE>
SCHEDULE III (Continued)
AMERICAN INCOME HOLDING, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Parent Company Only Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
1991 1992 1993
---------- ---------- ----------
Cash flows from operating activities: (Restated)
<S> <C> <C> <C>
Earnings before change in accounting principle $ 21,042 $ 27,721 $ 33,517
Equity in earnings of subsidiary (20,791) (26,788) (30,787)
Adjustment to reconcile net earnings to net cash
provided by operating activities - increase
(decrease) in other assets and liabilities (272) (1,642) 444
-------- --------- ---------
Net cash provided by (used in) operating
activities 523 (709) 3,174
-------- --------- ---------
Cash flows from investing activities:
Decrease in due from subsidiaries 7,477 12,892 20,119
-------- --------- ---------
Net cash flows provided by investing 7,477 12,892 20,119
activities -------- --------- ---------
Cash flows from financing activities:
Prepayment penalty-subordinated debt - (1,000) -
Proceeds from issuance of common stock - 70,197 -
Proceeds from issuance of long-term debt - 105,000 80,000
Cash dividends paid - (1,543) (4,089)
Stock options exercised - 590 170
Repayment of note payable (8,000) (184,600) (100,000)
-------- --------- ---------
Net cash used in financing activities (8,000) (11,356) (23,919)
-------- --------- ---------
Net change in cash and cash equivalents - $ 827 $ (626)
Cash and cash equivalents at:
Beginning of year - - 827
-------- --------- ---------
End of year - $ 827 $ 201
======== ========= =========
</TABLE>
See accompanying notes to Schedule III.
F-27
<PAGE>
SCHEDULE III (Continued)
AMERICAN INCOME HOLDING, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO SCHEDULE III
(1) General
The accompanying condensed financial information of American Income Holding,
Inc. (parent company only) should be read in conjunction with the
consolidated financial statements and notes thereto of American Income
Holding, Inc. and Subsidiaries.
(2) Related Party
Due from subsidiaries consists primarily of the surplus debenture payable by
Trust Life Insurance Company.
(3) Recapitalization
See note 2 in the notes to the consolidated financial statements.
(4) Notes Payable
See note 5 in the notes to the consolidated financial statements.
(5) Stockholders' Equity
See note 9 in the notes to the consolidated financial statements.
(6) Restatement of 1991 Financial Statements
See note 6 in the notes to the consolidated financial statements.
(7) Equity in Earnings of Subsidiary
Equity in earnings of subsidiary include net change in unrealized investment
gains of $183,000, $76,000 and $121,000 for the years ended December 31,
1991, 1992 and 1993, respectively, and cumulative foreign currency
translation loss of $391,000 for the year ended December 31, 1993. These
amounts are reflected in stockholders' equity in the consolidated financial
statements.
F-28
<PAGE>
SCHEDULE V
AMERICAN INCOME HOLDING, INC. AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
(Dollars in thousands)
<TABLE>
<CAPTION>
Other Amortization
Deferred policy of deferred Commissions
policy Future claims and Net Benefits policy and
acquisition policy Unearned benefits Premium investment and acquisition operating
costs (A) benefits premiums payable revenue income claims costs (A) expenses
------------ -------- -------- ---------- -------- ---------- -------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Year ended December 31,
1991:
Life $143,793 $208,332 $ - $ 6,389 $ 94,656 $29,407 $48,904 $22,594 $13,582
Accident and health 12,779 25,434 362 8,861 35,266 3,926 15,729 1,737 9,405
Corporate - - - - - - - - 800
-------- -------- ---- ------- -------- ------- ------- ------- -------
Total $156,509 $233,766 $362 $15,250 $129,922 $33,333 $64,633 $24,331 $23,787
======== ======== ==== ======= ======== ======= ======= ======= =======
Year ended December 31,
1992:
Life $150,205 $225,234 $ - $ 6,453 $102,265 $31,262 $52,604 $22,456 $15,533
Accident and health 16,547 26,055 361 9,106 36,259 3,939 16,381 1,741 9,863
Corporate - - - - - - - - 500
-------- -------- ---- ------- -------- ------- ------- ------- -------
Total $166,752 $251,289 $361 $15,559 $138,524 $35,201 $68,985 $24,197 $25,896
======== ======== ==== ======= ======== ======= ======= ======= =======
Year ended December 31,
1993:
Life $164,751 $245,349 $ - $ 6,864 $114,027 $28,731 $59,083 $22,702 $16,205
Accident and health 16,457 26,702 370 8,731 37,585 3,376 15,876 2,191 9,178
Corporate - - - - - - - - 426
-------- -------- ---- ------- -------- ------- ------- ------- -------
Total $181,208 $272,051 $370 $15,595 $151,612 $32,107 $74,959 $24,893 $25,809
======== ======== ==== ======= ======== ======= ======= ======= =======
</TABLE>
- - ---------------------
(A) Includes cost of insurance acquired and amortization of cost of insurance
required, as applicable.
F-29
<PAGE>
SCHEDULE VI
AMERICAN INCOME HOLDING, INC. AND SUBSIDIARIES
REINSURANCE
(Dollars in thousands)
<TABLE>
<CAPTION>
Ceded to Assumed
Gross other from other Net
amount companies companies amount
---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Year ended December 31, 1991:
Life insurance in-force $6,424,428 $38,434 $781 $6,386,775
========== ======= ==== ==========
Premiums:
Life insurance 94,742 96 10 94,656
Accident and health insurance 35,268 2 - 35,266
---------- ------- ---- ----------
Total premiums $ 130,010 $ 98 $ 10 $ 129,922
========== ======= ==== ==========
Year ended December 31, 1992:
Life insurance in-force $6,961,710 $48,441 $707 $6,913,976
========== ======= ==== ==========
Premiums:
Life insurance 102,367 112 10 102,265
Accident and health insurance 36,262 3 - 36,259
---------- ------- ---- ----------
Total premiums $ 138,629 $ 115 $ 10 $ 138,524
========== ======= ==== ==========
Year ended December 31, 1993:
Life insurance in-force $7,866,899 $59,865 $686 $7,807,720
========== ======= ==== ==========
Premiums:
Life insurance 114,149 127 5 114,027
Accident and health insurance 37,588 3 - 37,585
---------- ------- ---- ----------
Total premiums $ 151,737 $ 130 $ 5 $ 151,612
========== ======= ==== ==========
</TABLE>
F-30
<PAGE>
SCHEDULE VIII
AMERICAN INCOME HOLDING, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(Dollars in thousands)
<TABLE>
<CAPTION>
Year ended December 31, 1991
----------------------------
Additions
Balance at Charged to Charged to Balance
beginning costs and other accounts Deductions at end
Descriptions of period expenses describe describe (A) of period
------------ --------- -------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Agents' balances-allowance
for doubtful accounts $4,999 $827 - - $5,823
Mortgage loans-allowance
for doubtful loans 1,380 728 - 728 1,380
Year ended December 31, 1992
----------------------------
Additions
Balance at Charged to Charged to Balance
beginning costs and other accounts Deductions at end
Descriptions of period expenses describe describe (A) of period
------------ --------- -------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Agents' balances-allowance
for doubtful accounts $5,823 $271 - - $6,094
Mortgage loans-allowance
for doubtful loans 1,380 346 - - 1,726
Year ended December 31, 1993
----------------------------
Additions
Balance at Charged to Charged to Balance
beginning costs and other accounts Deductions at end
Descriptions of period expenses describe describe (A) of period
------------ --------- -------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Agents' balances-allowance
for doubtful accounts $6,094 $511 - - $6,605
Mortgage loans-allowance
for doubtful loans 1,726 - - - $1,726
</TABLE>
- - -----------------------------------
(A) Accounts charged off.
F-31
<PAGE>
Item 7(a)(2)
AMERICAN INCOME HOLDING, INC.
INDEX
-----
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
. Consolidated Balance Sheets
June 30, 1994 and December 31, 1993............ 2
. Consolidated Statements of Earnings
Quarters ended June 30, 1994 and 1993 and
Six months ended June 30, 1994 and 1993........ 3
. Consolidated Statements of Cash Flows
Six months ended June 30, 1994 and 1993........ 4
Notes to Consolidated Financial Statements............. 5
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
American Income Holding, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1994 1993
------------ ------------
Assets (Unaudited)
<S> <C> <C>
Fixed maturities, available for sale, at amortized cost in
1993 and at market in 1994...................................... $ 357,674 $ 355,846
Equity securities, at market..................................... 758 1,272
Mortgage loans, net.............................................. 15,531 16,271
Policy loans, secured by cash values............................. 23,550 23,054
Other loans and investments...................................... 1,885 7,914
Real estate...................................................... 6,576 6,596
Cash and cash equivalents........................................ 35,161 40,946
----------- -----------
Total investments.............................................. 441,135 451,899
Investment income due and accrued................................ 5,802 5,510
Agents' balances and accounts receivable, net.................... 45,465 43,100
Deferred acquisition costs....................................... 98,558 83,842
Cost of insurance acquired....................................... 93,587 97,366
Goodwill......................................................... 6,318 6,531
Property and equipment, net...................................... 1,764 1,751
Other assets..................................................... 1,317 1,507
----------- -----------
Total assets.................................................. $ 693,946 $ 691,506
=========== ===========
Liabilities
Liability for future policy benefits-life policies............... $ 257,607 $ 245,349
Liability for future policy benefits-accident & health policies.. 27,039 26,702
Policy and contract claims....................................... 16,373 15,965
Other policyholder funds......................................... 61,306 57,530
Federal income taxes payable..................................... - 366
Deferred Federal income taxes.................................... 59,277 61,253
Note payable..................................................... 58,000 80,000
Other liabilities................................................ 10,605 12,105
----------- -----------
Total liabilities.............................................. 490,207 499,270
----------- -----------
Stockholders' equity
Common stock, $.01 Par Value..................................... 157 157
Common stock-paid in excess...................................... 93,859 93,859
Net unrealized investment gains (losses), net of tax effect....... (5,067) 336
Cumulative foreign currency translation adjustment............... (864) (391)
Retained earnings................................................ 115,654 98,275
----------- -----------
Total stockholders' equity..................................... 203,739 192,236
----------- -----------
Total liabilities and stockholders' equity..................... $ 693,946 $ 691,506
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
American Income Holding, Inc. and Subsidiaries
Consolidated Statements of Earnings
(Dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
For Three Months Ended For Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
1994 1993 1994 1993
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Premiums.......................................... $ 42,326 $ 37,539 $ 82,928 $ 73,436
Net investment income............................. 8,756 8,287 17,258 16,273
Net realized investment gains (losses)............ 105 (171) 239 (516)
Other............................................. 683 461 1,258 1,049
----------- ----------- ----------- -----------
Total revenues.................................. 51,870 46,116 101,683 90,242
----------- ----------- ----------- -----------
Benefits and expenses:
Death benefits.................................... 5,988 5,578 12,628 11,475
Accident and health benefits...................... 3,736 3,659 7,526 7,433
Surrender benefits and other fund withdrawals..... 3,224 3,732 6,503 6,757
Increase in reserves.............................. 6,536 4,217 12,721 9,403
Interest and other payments on policies and
contract funds................................... 1,112 1,006 2,144 1,879
Amortization of deferred acquisition costs........ 4,357 4,342 8,833 8,147
Amortization of cost of insurance acquired........ 1,882 2,294 3,779 4,281
Commissions....................................... 3,801 3,566 7,288 6,789
Other operating expenses.......................... 2,815 2,849 5,466 5,827
----------- ----------- ----------- -----------
Total benefits and expenses..................... 33,451 31,243 66,888 61,991
----------- ----------- ----------- -----------
Earnings from insurance operations before
Federal income taxes and effect of change in
accounting principle........................... 18,419 14,873 34,795 28,251
Corporate expenses:
Amortization of goodwill.......................... 106 106 213 213
Interest expense.................................. 753 1,048 1,494 2,182
----------- ----------- ----------- -----------
Total corporate expenses....................... 859 1,154 1,707 2,395
----------- ----------- ----------- -----------
Earnings before Federal income taxes and effect of
change in accounting principle....................... 17,560 13,719 33,088 25,856
Federal income taxes:
Current........................................... 5,231 4,461 10,063 8,221
Deferred.......................................... 947 245 1,609 707
----------- ----------- ----------- -----------
Total Federal income taxes...................... 6,178 4,706 11,672 8,928
----------- ----------- ----------- -----------
Earnings before effect of change in accounting
principle............................................ 11,382 9,013 21,416 16,928
Effect of change in accounting principle.......... - - (1,519) -
----------- ----------- ----------- -----------
Net earnings applicable to common stock............... $ 11,382 $ 9,013 $ 19,897 $ 16,928
=========== =========== =========== ===========
Net earnings per common share:
Earnings before effect of change in accounting
principle...................................... $0.71 $0.56 $1.33 $1.05
Effect of change in accounting principle.......... - - (.09) -
----------- ----------- ----------- -----------
Net earnings applicable to common stock......... $0.71 $0.56 $1.24 $1.05
=========== =========== =========== ===========
Weighted average shares outstanding................... 16,088,081 16,072,977 16,087,701 16,073,216
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
American Income Holding, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For Six Months Ended
June 30,
----------------------------
Cash flows from operating activities: 1994 1993
----------- -----------
<S> <C> <C>
Earnings before effect of change in accounting principle.................... $ 21,416 $ 16,928
Adjustments to reconcile earnings to net cash provided by operating
activities:
Amortization of deferred policy acquisition costs....................... 8,833 8,147
Amortization of cost of insurance acquired.............................. 3,779 4,281
Deferred policy acquisition costs capitalized........................... (23,762) (18,536)
Increase in future policy benefits...................................... 12,721 9,403
Increase in agents' balances and accounts receivable.................... (1,203) (1,628)
Amortization of discount on investments................................. (1,570) (743)
Amortization of goodwill................................................ 213 213
Net realized investment losses (gains).................................. (239) 516
Deferred Federal income taxes........................................... 1,609 707
Depreciation on property, equipment and real estate..................... 174 134
Interest on policy loans................................................ (737) (712)
Increase (Decrease) in accrued investment income........................ (292) 9
Increase in claims and other policyholder funds......................... 4,185 3,380
Increase (Decrease) in Federal income taxes payable and other
liabilities............................................................ (3,029) (2,424)
Decrease in other assets................................................ 500 273
Other noncash charges in income, net.................................... 7 -
----------- -----------
Net cash provided by operating activities................................. 22,605 19,948
----------- -----------
Cash flows from investing activities:
Purchases of fixed maturities............................................... (53,836) (41,615)
Sales of fixed maturities................................................... 4,885 11,386
Maturities, calls and repayments of fixed maturities........................ 42,936 27,714
Sales and calls of equity securities........................................ 500 1,162
Funding of loans............................................................ (246) (221)
Real estate and other investments acquired.................................. (32) (20)
Real estate and other investments sold...................................... - 3,050
Repayments of loans and other investments................................... 2,223 1,232
Purchase of property and equipment.......................................... (139) (52)
Change in policy loans...................................................... 241 587
----------- -----------
Net cash provided (used) in investing activities.......................... (3,468) 3,223
----------- -----------
Cash flows from financing activities:
Debt issuance costs......................................................... (310) -
Proceeds from issuance of long-term debt.................................... 80,000 -
Cash dividends paid......................................................... (2,518) (1,571)
Repayment of long-term debt................................................. (102,000) (23,500)
----------- -----------
Net cash used in financing activities..................................... (24,828) (25,071)
----------- -----------
Effect of exchange rate changes on cash....................................... (94) -
----------- -----------
Net decrease in cash and cash equivalents..................................... (5,785) (1,900)
Cash and cash equivalents:
Beginning of period......................................................... 40,946 20,641
----------- -----------
End of period............................................................... $ 35,161 $ 18,741
=========== ===========
Supplementary disclosures of cash flow information:
Interest paid............................................................... $ 1,358 $ 2,115
=========== ===========
Income taxes paid........................................................... $ 11,590 $ 10,420
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
American Income Holding, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The financial statements included herein have been prepared by the
Registrant, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally required under generally accepted accounting
principles have been omitted pursuant to such rules and regulations. It is
suggested that these financial statements be read in conjunction with the
consolidated financial statements and the notes thereto contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 1993.
However, this information reflects all adjustments (consisting solely of
normal recurring adjustments) that are, in the opinion of management,
necessary for a fair statement of the results of the interim periods. The
results of operations for the six month period ended June 30, 1994, are not
necessarily indicative of the results to be expected for the full year.
2. Federal Income Taxes
On August 10, 1993, the Omnibus Budget Reconciliation Act of 1993 (the
"Act") was enacted. The Act retroactively increased the Company's marginal
Federal income tax rate from 34% to 35% beginning January 1, 1993. The
effect of this retroactive change in tax law was reported as a charge of
$2.0 million reflected in Federal income taxes for the quarter ended
September 30, 1993. Previous quarters have not been restated to give effect
to this retroactive tax rate increase. Therefore, for financial reporting
purposes, the applicable U.S. Federal income tax rate for the first and
second quarters of 1993 was 34.0% as compared to 35.0% for subsequent
periods.
3. Change in Accounting Principle
In May 1993, the FASB issued Statement No. 115 "Accounting for Certain
Investments in Debt and Equity Securities" (FASB 115). Beginning January 1,
1994, FASB 115 changed the Company's method of accounting for fixed
maturity investments that are available for sale from the lower of cost or
market method to the fair value method. Unrealized investment gains and
losses (net of tax effect) on the Company's fixed maturity investments, all
of which are classified as available for sale, are now reported as a net
amount in a separate component of stockholders' equity. Thus, on January 1,
1994, the net unrealized investment gain of applying this new accounting
standard increased stockholders' equity by $7.4 million, or $0.47 per
share. As of June 30, 1994, due to an increase in the market level of
interest rates, the net unrealized investment loss was $5.1 million, or
$0.32 per share.
Prior to 1994, generally accepted accounting principles required that
whenever the future undiscounted cash flows of certain investments,
including the Company's investment in "planned amortization class interest
only certificates" ("PAC-IO certificates"), are expected to be less than
book value, the book value of such investments must be written down to an
amount equal to the sum of undiscounted future cash flows, thereby
producing
5
<PAGE>
no yield in future periods unless actual future cash payments received
exceed the expected cash flow estimated in computing the write down. FASB
115 changed this rule to require that such investments should be carried at
values that produce the same yields as risk-free investments with
comparable maturities. Since the PAC-IO certificates had been yielding less
than the risk free rate, it was necessary to reduce their carrying value by
$2.3 million ($1.5 million, net of tax effect), causing a charge to net
earnings on January 1, 1994 of $1.5 million or $0.09 per share reported in
the first quarter of 1994 as a cumulative effect of a change in accounting
principle.
4. Stockholders' Equity
Foreign currency translation: For foreign operations (Canada), the balance
sheet accounts are translated at the current period exchange rate and
income statement items are translated at the average exchange rate for the
period. The resulting translation adjustments are made directly to a
separate component of stockholders' equity. Exchange gains and losses are
not material.
Net unrealized investment gain/loss, net of tax effect: See discussion
concerning implementation of FASB 115 in note 3 above.
5. Contingencies
In 1992, when the Internal Revenue Service (IRS) completed its examination
of the Company's federal income tax returns through 1988 and proposed
certain tax adjustments, the Company protested the proposed adjustments to
the IRS Regional Appeals Office. All issues, except one that will now be
litigated, were settled during the appeal process. The Company's tax
advisor has indicated that the Company's position should prevail. An
unfavorable decision would result in a charge to earnings, but would not
have a material effect on the Company's financial position. Since the
matter involves, in essence, the timing for a deduction, an adverse
judgement would delay deductibility, resulting in a net effect equal to the
interest rate/opportunity cost during the period from the Company's
original deduction to the date of actual deduction. The net present value
of such effect would not be material.
6. Refinancing
On December 30, 1993, the Company committed to a new revolving credit
agreement that provided for the refinancing of the Company's $80 million of
outstanding indebtedness on more favorable terms, including a reduction in
interest rate by 75 basis points, increased flexibility for common stock
dividend payments and lower recurring annual fees.
7. Reclassification
Certain amounts in the accompanying 1993 interim financial statements have
been reclassified to conform with the 1994 presentation.
6
<PAGE>
Item 7(b)
TORCHMARK CORPORATION
AND
AMERICAN INCOME HOLDING, INC.
PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
The following unaudited pro forma consolidated condensed balance sheet as of
June 30, 1994 and the unaudited pro forma consolidated condensed statements of
income for the year ended December 31, 1993 and the six month period ended
June 30, 1994 give effect to the acquisition of American Income by Torchmark
and to the related pro forma adjustments described in the notes to such pro
forma financial statements. This transaction will be accounted for as a
purchase by Torchmark and will be reported from the date of acquisition of
control of American Income in Torchmark's consolidated financial statements.
These pro forma financial statements do not purport to be indicative of the
results which would actually have been obtained if the acquisition had been
effected as of the beginning of the periods for which the statements are shown
or which may be obtained in the future.
These pro forma financial statements have been prepared based on estimates
and assumptions deemed appropriate at the present time. The final
determination of the effect of the purchase on Torchmark's earnings and
balance sheet will be based on a more exact calculation of the value of
American Income's net assets as of the actual purchase date, and other
relevant factors, including refinements of estimates resulting from further
analyses. These pro forma financial statements should be read in conjunction
with the historical financial statements of Torchmark and American Income
incorporated by reference or included elsewhere herein.
<PAGE>
TORCHMARK CORPORATION
AND
AMERICAN INCOME HOLDING, INC.
PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET--(UNAUDITED)
AS OF JUNE 30, 1994
(AMOUNTS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
AMERICAN PRO FORMA
TORCHMARK INCOME PRO FORMA ADJUSTMENTS CONSOLIDATED
---------- -------- ---------------------- ------------
NOTES B & C
<S> <C> <C> <C> <C> <C>
Investments............. $5,141,285 $441,135 $ (196,775) $5,385,645
Investment in unconsoli-
dated subsidiaries..... 83,295 0 $ (565,000) 565,000 83,295
Deferred acquisition
costs.................. 943,683 98,558 (98,558) 943,683
Value of insurance pur-
chased................. 124,185 93,587 (93,587) 192,004 316,189
Goodwill................ 176,136 6,318 (6,318) 376,160 552,296
Other assets............ 985,031 54,348 1,039,379
---------- -------- ---------- ---------- ----------
Total assets........... $7,453,615 $693,946 $ (763,463) $ 936,389 $8,320,487
========== ======== ========== ========== ==========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C> <C> <C> <C>
Policy liabilities...... $4,084,505 $362,325 $ (362,325) $ 375,385 $4,459,890
Income taxes payable.... 267,511 59,277 (4,620) 322,168
Long-term debt.......... 792,550 58,000 175,000 1,025,550
Other liabilities....... 1,057,671 10,605 1,068,276
---------- -------- ---------- ---------- ----------
Total liabilities...... 6,202,237 490,207 (366,945) 550,385 6,875,884
Series A Preferred Secu-
rities................. 0 0 193,225 193,225
Shareholders' equity.... 1,251,378 203,739 (203,739) 1,251,378
---------- -------- ---------- ---------- ----------
Total liabilities and
shareholders'
equity................ $7,453,615 $693,946 $ (570,684) $ 743,610 $8,320,487
========== ======== ========== ========== ==========
</TABLE>
See the Notes to Pro Forma Financial Statements.
2
<PAGE>
TORCHMARK CORPORATION
AND
AMERICAN INCOME HOLDING, INC.
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF INCOME--(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1994
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
AMERICAN PRO FORMA PRO FORMA
TORCHMARK INCOME ADJUSTMENTS CONSOLIDATED
--------- -------- ----------- ------------
NOTES B & D
<S> <C> <C> <C> <C>
Premium............................ $688,314 $82,928 $ 771,242
Net investment income.............. 164,893 17,258 $ (7,019) 175,132
Other income....................... 109,903 1,497 111,400
-------- ------- -------- ---------
Total revenue..................... 963,110 101,683 (7,019) 1,057,774
Policy benefits.................... 455,406 41,522 584 497,512
Acquisition expenses............... 89,928 12,612 102,540
Other expense...................... 176,572 12,754 189,326
Interest expense................... 36,156 1,494 4,813 42,463
Amortization of goodwill........... 2,508 213 4,427 7,148
-------- ------- -------- ---------
Total expense..................... 760,570 68,595 9,824 838,989
-------- ------- -------- ---------
Pretax income..................... 202,540 33,088 (16,843) 218,785
Income taxes....................... (66,212) (11,672) 4,346 (73,538)
Equity in earnings of
unconsolidated subsidiaries....... 4,147 0 4,147
-------- ------- -------- ---------
Earnings before effect of change
in accounting principle.......... 140,475 21,416 (12,497) 149,394
Effect of change in accounting
principle......................... 0 (1,519) (1,519)
-------- ------- -------- ---------
Net income........................ 140,475 19,897 (12,497) 147,875
Dividends to preferred
shareholders...................... (804) 0 (4,550) (5,354)
-------- ------- -------- ---------
Net income available to common
shareholders..................... $139,671 $19,897 $(17,047) $ 142,521
======== ======= ======== =========
Net income per share............... $1.92 $1.96
======== =========
Average shares outstanding......... 72,628 72,628
</TABLE>
See the Notes to Pro Forma Financial Statements.
3
<PAGE>
TORCHMARK CORPORATION
AND
AMERICAN INCOME HOLDING, INC.
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF INCOME--(UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1993
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
AMERICAN PRO FORMA PRO FORMA
TORCHMARK INCOME ADJUSTMENTS CONSOLIDATED
---------- -------- ----------- ------------
NOTES B & D
<S> <C> <C> <C> <C>
Premium......................... $1,492,910 $151,612 $1,644,522
Net investment income........... 372,470 32,107 $(12,350) 392,227
Other income.................... 311,455 2,032 313,487
---------- -------- -------- ----------
Total revenue.................. 2,176,835 185,751 (12,350) 2,350,236
Policy benefits................. 971,556 74,959 957 1,047,472
Acquisition expenses............ 187,073 24,893 211,966
Other expense................... 506,622 25,383 532,005
Interest expense................ 67,261 4,189 9,625 81,075
Amortization of goodwill........ 2,917 426 8,854 12,197
---------- -------- -------- ----------
Total expense.................. 1,735,429 129,850 19,436 1,884,715
---------- -------- -------- ----------
Pretax income.................. 441,406 55,901 (31,786) 465,521
Income taxes.................... (153,086) (21,476) 8,026 (166,536)
Equity in earnings of
unconsolidated subsidiaries.... 1,952 1,952
Minority interest in
consolidated affiliates........ (10,696) (10,696)
---------- -------- -------- ----------
Earnings before extraordinary
charge and effect of change in
accounting principles......... 279,576 34,425 (23,760) 290,241
Extraordinary charge............ 0 (638) (638)
Effect of change in accounting
principles..................... 18,403 18,403
---------- -------- -------- ----------
Net income..................... 297,979 33,787 (23,760) 308,006
Dividends to preferred
shareholders................... (3,289) (9,100) (12,389)
---------- -------- -------- ----------
Net income available to common
shareholders.................. $ 294,690 $ 33,787 $(32,860) $ 295,617
========== ======== ======== ==========
Net income per share:
Earnings before extraordinary
charge and effect of change in
accounting principles.......... 3.76 3.78
Extraordinary charge............ (0.01)
Effect of change in accounting
principles..................... 0.25 0.25
---------- ----------
Net income per share............ $4.01 $4.02
========== ==========
Average shares outstanding...... 73,502 73,502
</TABLE>
See the Notes to Pro Forma Financial Statements.
4
<PAGE>
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(UNAUDITED)
(a) The pro forma consolidated condensed balance sheet as of June 30, 1994
assumes that the acquisition of American Income has occurred as of June 30,
1994 and that as of such date American Income's assets and liabilities were
adjusted to fair value in accordance with generally accepted accounting
principles, and that such adjustments to fair value would have been equivalent
to the adjustments made as of the purchase date. The pro forma consolidated
condensed statements of income assume that the purchase of American Income and
the comparable adjustments were made as of the beginning of the pro forma
periods.
(b) The pro forma statements assume the issuance of $200 million of Series A
Preferred Securities, $175 million debt, and the sale of investments to
provide cash to purchase the stock.
(c) For purposes of determining the pro forma effect of the acquisition of
American Income on Torchmark's consolidated balance sheet, American Income's
net assets have been adjusted to fair value as follows:
(1) Investments were recorded at estimated market values.
(2) Policy reserves were adjusted based on actuarial estimates using
current assumptions (including provision for adverse deviation), as to
expected mortality, withdrawals, expenses and interest.
(3) The cost of insurance acquired, which represents the present value of
future profits or acquired insurance in force, was determined based on
assumptions consistent with those utilized in restating insurance reserves
as discussed in (2) above.
(4) Deferred acquisition costs were eliminated.
(5) Deferred income taxes were adjusted to reflect the revaluation of the
above items.
(6) The fair value of other assets and liabilities approximated book
value.
(7) Goodwill was recorded to represent the difference in the purchase
price and the fair value of net assets acquired.
(d) The principal adjustments in the pro forma statements of income
recognize the following items in adjusting American Income's historical
income:
(1) Additions to insurance reserves utilized assumptions described in
Note (c)(2) above.
(2) The cost of insurance acquired was amortized over the estimated
remaining premium-paying period of the insurance in force at the assumed
dates of the acquisition, which is substantially the same in amount as
historical policy acquisition costs.
(3) Additional interest expense, dividends, and reduced investment income
were recorded to give effect to the purchase. Torchmark anticipates
entering into interest rate swap agreements in the same amount as the
Series A Preferred Securities and interest has been assumed to be swapped
to a variable rate.
(4) Goodwill was amortized over a period of 40 years.
(5) Pro forma federal income tax adjustments were based on the above pro
forma adjustments.
5
<PAGE>
[LETTERHEAD OF KPMG PEAT MARWICK LLP APPEARS HERE]
The Board of Directors
American Income Holding, Inc.:
We consent to the inclusion of our report dated January 28, 1994, with respect
to the consolidated balance sheets of American Income Holding, Inc. and
subsidiaries as of December 31, 1993 and 1992, and the related consolidated
statements of earnings, stockholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1993, which report appears in
the Form 8-K of Torchmark Corporation dated September 29, 1994.
/s/KPMG Peat Marwick LLP
Dallas, Texas
September 29, 1994
<PAGE>
[LETTERHEAD OF KPMG PEAT MARWICK LLP APPEARS HERE]
The Board of Directors
American Income Holding, Inc.:
We consent to the incorporation by reference in the registration statement (No.
33-51963) of Form S-3 of Torchmark Corporation, as amended, of our report dated
January 28, 1994, with respect to the consolidated balance sheets of American
Income Holding, Inc. and subsidiaries as of December 31, 1993 and 1992, and the
related consolidated statements of earnings, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1993,
which report appears in the Form 8-K of Torchmark dated September 29, 1994. We
also consent to the reference to our firm under the heading "Experts" in the
prospectus.
/s/KPMG Peat Marwick LLP
Dallas, Texas
September 29, 1994
